Q2 2023 PENN Entertainment Inc Earnings Call
Greetings and welcome to the Pan 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.
At that time, if you have a question. Please press the one followed by the four on your telephone.
At any time during the conference you need to reach an operator. Please press star Zero I would now like to turn the conference over to Mr. Joe <unk> Investor Relations. Please go ahead.
Thank you Frank Good morning, everyone and thank you for joining Penn Entertainments second quarter, and ESPN transaction conference call, we'll get to management's presentation and comments momentarily as well as your questions and answers during the Q&A. We ask that everyone. Please limit themselves to one question and one follow up now I'll review the Safe Harbor disclosure.
Excuse me. 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 for more information. Please see our press release 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.
Thanks, Joe and good morning, and thank you for joining US last night, we announced.
Long term agreement with you back online sports betting with worldwide worldwide leader in sports excuse me ESPN.
Im here. This morning in New York City, with my Executive management team, including our CFO Felicia Hendrix, our head of operations talk George and Chris Rogers, who overseas business development and strategy at patented worked very closely with me on the establishment and structure of its partnership with ESPN.
I plan to focus my comments. This morning, primarily talking about this transformational agreement and the future launch of ESPN.
So we will take questions when I conclude my prepared remarks about any and all aspects of our business.
We look forward to combining patent operational expertise wholly owned and cutting edge proprietary tech stack expansive market access and rapidly growing 10 play database with the number one sports brand in both the U S and Canada with ESPN in the score.
This powerful new strategic alliance with ESPN will create a best in class user experience and allow us to significantly expand our digital footprint and online market share while simultaneously in efficiently growing our customer database.
We are particularly excited about the level of integration ESPN bet will has and the broader ESPN ecosystems with $105 million plus monthly unique digital visitors an audience of more than $370 million across social platforms over over 25 million ESPN plus subscribers and the nation's number one.
Tennessee database ESPN has unparalleled reach within the world of sports.
We look forward to receiving an exclusive promotional services across all of the ESPN platforms programming and content, including access to ESPN popular roster of sports media personalities.
I'd like to spend a bit of time talking about what makes this deal so unique and special.
It really starts with the brands.
SPN had buildup decades of brand affinity towards 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 bidders with the <unk>.
Menu of promotion and integration across all of ESPN platforms, including one traditional linear advertising to digital media three and program integration for that contribution.
Contribution five database marketing opportunities and access to some of the biggest personalities and sports media.
This is not a typical media sports book 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 once this ESPN bad at the time.
We have seen firsthand the power of integrating <unk> with.
With data from our experience with the score about in Ontario.
Quite 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 legalization. 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.
Digital sports media brand score and utilizing our best in class technology, which has been built from the ground up with the North American market and comprehensive media integrations, not only in mind, but as top priorities.
This is a proven playbook and will be effective here in the United States as well between ESPN portfolio of Premier Sports rights massive social media following deep fantasy database and best in class Sports Media App.
Opportunity to dramatically transform the way fans engage with sports content and betting here in the U S markets.
Importantly, what this deal ESPN now becomes a highly aligned long term strategic partner for patent as outlined on slide 10 in our Investor presentation, which was posted on our website last night, along with our 8-K tender transit ESPN approximately $500 million.
Warrants to purchase $31 8 million 10 common shares that will vest ratably over 10 years upon ESPN that meeting certain U S online sports betting market share performance thresholds ESPN should receive bonus warrants to purchase up to an additional $6 4 million 10 common shares.
ESPN will also have the option to designate a nonvoting board observer and upon completion of year three of our agreement they will be able to designate at their discretion a member to our corporate board of directors subject of course to regulatory approvals.
Over the last several years we.
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 debt 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 a 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 eight in our investor presentation. It all starts with brand recognition amongst sports fans and as I noted earlier, there is not a brand more powerful in this space with ESPN. We also know that access to customers as vital between.
Sps is unrivaled reach including the largest fantasy database as I mentioned earlier in the U S and our casino database of over 27 million customers, we certainly check that box.
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 two across the United States last months.
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 lost all of this will lead to compelling cross sell opportunities and to online casino.
Retail gaming and more in short we believe we have all the necessary ingredients to win.
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, we will be focused on launch execution sustainable market share growth and continuing to iterate upon our best in class technology.
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 back sometime this fall around the middle of football season, certainly before Thanksgiving.
We are committed to spending $150 million 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 medium outside of ESPN. We also anticipate an additional amount of promotional spending as we launched the ESPN bad products and welcome newly engaged fans as first time and reactivated depositors in the ecosystem.
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During the product launch, we anticipate our leverage to increase slightly to approximately five times over the next several quarters after which time you should expect us to quickly de lever 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 what 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 guidance for our retail segment remains unchanged for the remainder of the year. So even with additional investment in our interactive segment. We will continue to generate positive free cash flow as a company and remain focused on maintaining a healthy balance sheet and leverage ratio. It does not.
The company type of transaction, but we are extremely excited about this partnership and strongly believe it will be a transformational one for Ken.
As highlighted on slide nine looking out a few years. We believe this business can generate an incremental adjusted EBITDA in our interactive segment of approximately 500 million to well over $1 billion per year I would like to point out that these EBITDA ranges include the $150 million in annual cash payments to ESPN, which in our view is that.
Very efficient allocation of marketing dollars, we would have otherwise spent to support the sports book.
The online sports betting and online casino space, the sizable opportunity and we're fully committed to leveraging our numerous built in advantages now, including the power of ESPN media assets to help fully realize this opportunity we plan to host an investor in Investor day before the end of this calendar year, but we will provide you with more color regarding our near term.
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 towards founder, Dave Portnoy, Dave Erica Big Kat and everyone at Barstool have been great to work with over the last three and a half years and we are the ideal partners to help us launch and rapidly scale, our digital footprint across 16 jurisdictions in the U S. With the sale of Barstool will now be able to return to work.
What it does best provide unique and authentic entertainment content, they're loyal fan base without the restrictions environmental that come from being owned by a publicly traded licensed regulated gaming company.
I really can't thank Dave Erika and Dan and the rest of our full team enough for their partnership in helping us to get to where we are today in terms of online sports betting.
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 one 5 million people since launching the Barstool sports book three years ago.
Our new relationship with ESPN will enable us to build on the successful foundation as we move forward, it's truly a momentous day for us and 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.
Before opening the line for questions. A few words about our second quarter earnings we continued to see solid and stable property level performance across our portfolio with each months showing sequential improvement second 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.
During the quarter as I briefly mentioned earlier.
First we completed the full scale migration of our U S digital sports spoken online casino offerings to our proprietary in house technology platform, which was a huge milestone achievement for our company with state of the Art Tech platform continues to drive strong results for the score Baton, Ontario, and our improved product will provide the foundation for meaningful growth in the U S.
Once we rebrand to ESPN debt later this year I want to thank and congratulate the nearly 500 members of our interactive team who seamlessly executed this massive technology projects with a lot of skeptics.
More than 18 months following more than 18 months of hard work and as always I want to give a special thanks to all of our property 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 that come with our new online products and with that.
I'm happy to open up the lines for questions.
Thank you.
If you would like to register a question. Please press the one four on your telephone you will hear a three pronged technology request a pure question has been answered and you would like to withdraw your registration. Please press. The one followed by the three we ask that you limit to one question and one follow up one moment. Please for the first question.
Our first question comes from Barry Jonas with Trust Securities. Please proceed.
Hey, good morning, guys and congrats on the deal change is it possible to give a little more color about how this came together.
Overall.
Not really.
I prefer not to get on the inside baseball of 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.
We've met a lot of people at ESPN, and what I've been blown away by the folks that we've spent time with us they share a passion for wanting to be the best at everything that they do.
ESPN bed is no different 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.
Understood and then I guess just from a demographic perspective, how does the new ESPN back positioning compare to what you previously had with Barstool I guess I'm just trying to understand how to think about your overall omnichannel strategy there.
Yes, no. It's a great question obviously.
SPN brand compared to the bar soap brand Barstool Skus on the younger side, the average age and our digital database is around 29 years old I think thats, great. We have $1 5 million people in that database that werent. There before we launched Barstool Sports book. So we've got a great foundation of younger customers that are also.
Frequently at our casinos on the land based side and we've been able to cross sell into ICC now and I think with ESPN Youre talking about a brand that everybody in the world knows about it's not an old brand is not a young brand. It's in everything brands. There's a lot of affinity for that brand and so we think that's going to be extremely complementary.
So what we've built over the course of the last three years and.
Yes. We're excited we think this is 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 three years, we've all watched market share in online sports betting continue to consolidate.
Amongst the top two players and you got to have scale to compete and there are certain there are certain recipe to get to scale, which I laid out in my prepared remarks and on one of our slides in the presentation and we think that we check the boxes with that recipe and we're ready to compete at a scaled level.
Our next.
She comes from Carlo Santarelli with Deutsche Bank. Please proceed.
Hey, Jay Thank you for taking my question.
Im just going back to the comment that you made about kind of leverage topping out at five times.
It would imply that maybe spend this year is not as significant on the initiative and clearly if youre 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.
Our guidance that you could perhaps give that would give us maybe a better sense of what we're thinking about on a 2024 basis.
Yes.
I don't want to get into too much detail on 2004, yet Carla we will hold an investor day before the end of the year and give you a lot more detail on that.
Getting to launch is really important to us and we want to launch flawlessly and probably hold that investor day. After we launched it may have some more visibility as to how things are trending but I would say in terms of the promotional spend is.
Sort of think about it this way that.
Youre going to have let's call it.
In November launch whenever that data is we don't have the firm date, yet obviously the team's working really hard on this re skinning of the app to ESPN debt, but.
But as you think about it there's going to be.
That's where the lion's share of your promotional expense is going to be as youre, bringing a lot of new people into the ecosystem with the first time deposit match and the like and so.
That usually takes approximately two months to burn through that deposit match and so in November and December I think on the promo side would be 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 in March So I think from a promo perspective youre looking at.
Lion's share is going to be in that Q4 and Q1 timeframe.
As it relates to general marketing spend you should.
Think about us sort of as I mentioned earlier matching and 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 that's all of those assumptions that I laid out for you still get us comfortable being around five times, even as we're at the peak level.
Of our spend and that'll come down obviously as you had deeper into 2024 with a free cash flow that we generate and organically, we will be able to delever that back down into the fours pretty quickly, but we're going forward, we're certainly not going to be cheap about our approach and be focused on.
<unk>.
Not we don't want to have regrets about how we launched the products and how we launched the brands and we have a lot of alignment with ESPN on on doing that in a way that's going to be right for the consumer and people are going to know that we're alive. When we're lives I feel very comfortable saying that.
Got it and Jay just just you've kind of answered my follow up within there. So the $150 million committed marketing through yes, we will.
Bye.
<unk> hundred $50 million through other vendors other customer acquisition channels et cetera.
And then promotions will be a separate bucket to that correct.
That's all correct Carlo in the 150 is not a perfect number but just to say roughly yes.
Okay.
And then if I could.
Just just one follow up kind of on the core business.
Keep your margins broadly held in fairly well.
Probably up a little bit.
Obviously, there's some seasonality there, but kind of continued to hover around this 36 level.
And clearly our topline has had seen some pressures.
How do you guys kind of think about I.
I heard you say early youre kind of the retail brick and mortar guidance for the balance of the year etcetera is unchanged.
Is this kind of margin level fairly sustainable and the climate that you see right now as we move through the back half of this year.
Seasonality aside.
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, Thanks, Jay and thanks Carlo.
Yeah 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, so looking at where we are from a labor standpoint, looking at where we are from a marketing standpoint, not just for us but for the competitive set is.
More rational.
Its entitlement programs have kind of fallen away. So we're very comfortable as we move forward with those being the two expense drivers that we are in a good place and then with our technology enhancements, we think that'll continue to add to our margin profile. So very comfortable with where we were before that these margins are what we can look to.
The future, obviously there'll be some seasonality here and there.
Our next question comes from Bernie Mcternan with Needham and company. Please proceed.
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 from them hearing is just a market share and the thought that other.
Partnerships between media operators and online sports Betters Hasnt worked historically, so what gives you confidence that.
That you will be able you know Jay you talked about pole position and really driving market share driving scale. What gives you some of the confidence that youll be able to achieve those market share expectations.
Yes.
Fair question.
I love addressing it because theres really no comparison to ESPN in the world. So that's number one I think.
This relationship that we've spent some time talking about last night in the materials in this morning.
Here's the reasons as I think about it why I know, it's going to work one is exclusive to.
It's ESPN branded which I think is very very important it's fully integrated.
It includes access and endorsement from top ESPN talent.
And I think really importantly is that this is a strategic relationships. So you think about.
How is this going to be more more valuable for ESPN over time is helping us achieve higher levels of market share.
The higher levels of market shares make the warrants that they own a pen valuable and you get over 20% and they become much many more warrants and much more valuable so.
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.
We're very focused with ESPN.
Long term getting to those levels. So.
It's interesting.
Oftentimes look back to the UK market and you just look at what market share looks like in the first three years versus the middle three years versus the last three years, it's going to shift around it's not done I think that narrative are this notion that the market share that is established as sort of permanent here in the U S. That's to me that's crazy talk.
Saying that it's going to be wildly different from what it is today, but it's going to ebb and flow, it's going to move around it's going to be it's going to it's going to be fluid and.
What we announced this morning or last night and this morning is as something new and different to think about that probably wasn't in the consideration set of for antibody.
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.
Great. Thank you and then just a follow up to slide nine.
Cause out expectations for EBITDA margins and are in the high teens would love to just get your thoughts in terms of what you think how that how this operating plan is different from the prior one 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 in bounds in terms of that that years three termination just how investors should should think about.
Our market share required to keep this partnership going for both sides.
Let me hit the margin question first and most importantly, you need scale to drive margins in this space, we don't know that trying to drive.
20% margins at 5% market share is going to be impossible and online sports betting so.
That's number one I think most important.
And we also keep in mind on that slide nine that you are referencing in case, there's any confusion on this the margin assumptions we have there in the footnotes. This is based on G. G. R. K. 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 if not all of the analysis that they're showing you is on MGR net net gaming revenue. So if you extrapolate the margin assumptions, we have here on a <unk> basis and look at it what would that mean on an NCR 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.
If we're at scale and were 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 other others have said that they can get to on an NPR basis, but we'll take a conservative path for now.
I think as it relates to.
Market share assumptions.
Repeat that part of the question I'll make sure I'll tackle that one frankly Bernie.
Theres a year, it's a 10 year partnership.
Potential termination rights after year, three a certain market share threat.
Thresholds aren't met and so we've been getting some inbound for investors asking what those market share thresholds are got.
Got it sorry.
We haven't disclosed it and we're not going to that's in our agreement with ESPN, but I would just say that.
Probably safe to assume that the bottom end of the range on slide nine.
It's going to be a level that.
We're starting to get it.
Cited about both ESPN in 10 and below there's not really exciting so just sort of think about it that way.
Our next question comes from Chad Beynon with Macquarie. Please proceed.
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 Theres been some other companies.
Companies buying up rights to different <unk>.
Porting events in different contracts, what gave you the confidence that ESPN will continue to be a leader with the content that they currently offer thanks.
Yes.
I'm not going to sit here and speak on ESPN the half with regard to 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 or for the success long term.
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 and NBA.
Looks really good and it goes out pretty far and so you can do your own research on that but I think most importantly is theres 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.
Thanks, and then on the Tech side, you mentioned up in Ontario, your double digit market share leader in sports betting and gaming so that clearly speaks to the brand but also the Tac.
You recently adjusted the tact out 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 launch just being better November kind of how your tech stands against some of the other market share leaders in North America.
Thanks.
Yes happy to.
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.
Parlay in in game.
The UI UX is fantastic. We think it is very competitive with other top tier online sports betting platform offerings and we felt like when we go live here in November with ESPN that 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.
Oregon markets.
And we're gonna be able to continue to iterate obviously, we've also.
Proven out and we have the capability to do a lot of full integration on the media side.
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 in placer wagers and soon as Youre ready to actually make the wager. It seamlessly takes you into the score Beth It sounds 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. As well it was <unk> 10 better than that in.
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 felt great about where we are at launch and we feel really great about where we're going to be six months later 12 months later.
Our next question comes from Joe Greff with JP Morgan. Please proceed.
Good morning, Jay.
Or do you guys have a <unk>.
Minimum investments for advertising on ESPN beyond $150 million per year.
And is there anything that precludes.
SPN from taking advertising across its platforms from your OSB competitors.
There is no obligations other than the 150, a year, we can 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 can be very clear if you're tuned into ESPN programming.
They are fully behind ESPN bet.
Great.
I'm not sure if you answered it exactly and maybe you don't want 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.
We did not Joe.
And 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 nine in our investor presentation and we.
We can go beyond their long term.
Our next question comes from Orion signal with Craig Hallum Capital. Please proceed.
Good morning, Jay curious will ESPN, but offer I gaming in states where legal.
Average that OSB I gaming cross sell the pure spread so much success with.
Well the answer is that we will have a Hollywood branded casino offering within the ESPN sports betting, yes, again that 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. So the west on the online casino side. We're of the opinion is I think most are by the way that you really need multiple brand long term.
Some might cater more to a slot player somebody cater more and appeal more to a table game player. So we thought a lot about that we thought it was a good time for us to pivot to really focusing on Hollywood casino in the Hollywood brand the Hollywood brand for us on the brick and mortar side is roughly two thirds of our properties we've.
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 five 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.
Some really nice cross sell opportunity not just digitally but also on the brick and mortar side.
Jay just clarification I do have a separate follow up you said within the within something is it within the app. So it'll be a cohesive experience or is it.
Will they be separate apps.
No no we will have at some point, a standalone Hollywood Casino App, we're not there yet but.
But it'll be integrated so if youre in the state of Pennsylvania for example in Europe within ESPN betting on sports.
You'll be able to wager by clicking on the casino icon and go to a Hollywood casino seamlessly within the same app and platform. The way that you can today between Barstool sports book in Barstool Casino.
Our next question comes from Shaun Kelly with Bank of America. Please proceed.
Hi, good morning, everyone and thanks for taking my questions to J I just wanted 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 Barstools, maybe the initial budgets that we were given was there some amount of marketing and buildup already contemplated and sort of how you were building to 2023, just as you knew you were moving back onto your tech platform.
I'm 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 million are certainly some of the big spending in the fourth quarter was already contemplated how much is incremental and how much was sort of already built in to what you were expecting before.
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 bad so.
I don't know maybe a third of it was already built in and two thirds of it now incremental when you consider the ESPN investment in some of the additional off channel marketing investments something like that.
That's helpful. And then maybe sort of a strategic question behind that as we think out to 'twenty four and beyond.
You kind of mentioned you're in this for the long haul and Youre certainly going pretty big here. So can you just help us think about that.
Maybe the depth and duration. So can you talk about let's call. It five times parameter, which I assume is lease adjusted net debt.
We think about that does that hold throughout 2024 and sort of how long in your own mind do you need to kind of start to see cost leverage on this I mean, historically you know maybe we've seen 12 to 24 month paybacks I think those have actually accelerated a little bit on promotions.
In more recent cohorts of states, but how do you think about it and when do you think you start to really show we're turning the corner here for what you want this business to be.
Yes, it's a great question will cover a lot of that chart 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 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 fourth quarter.
Second quarter was profitable for a lot of operators not a ton of money, but profitable, but I think youre going to see people at least based on what they've committed to show some real profit in the fourth quarter of this year, we obviously will not as we are 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 make sure. If we feel like we've left anything out there on the on the acquisition side, we're continuing to be aggressive going into football season, given that we're going to Miss the first couple of months of football season. This year, but I think things will start to settle out for us.
We will have a good handle on how things are going to look in 2025 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 25 and beyond look like but that will certainly be the year, where you really start to see the returns.
Starting to come through the P&L.
Our next question comes from Steve was in ski with Stifel. Please proceed.
Yeah, Hey, guys good morning.
So Jay you kind of just touched on my first question, but it's something we know.
One of the questions. We've got from investors over the last you know call. It 16 or 18 hours are you guys.
You know late to the game, meaning if you don't launch until the middle of the NFL season, how difficult is it going to be for you guys to gain market share.
Maybe not so much this year, but over time, given a lot of potential customers will.
Already be tied into other platforms.
Yes look.
We received that question a lot before we launched an ox.
October of 2000 and <unk> with.
With Barstool sports book 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.
So I don't.
We've been at the past, though was overturned five years ago.
And in the online sports betting space for three or four years, a lot of markets, it's been a year or two.
It's not been decades I.
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 football season is so noisy everybody's spending like crazy trying to drive top of funnel on the acquisition side I like how this plays out and how it is a product led the decision for us to launch.
With ESPN 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 burn through those promotional dollars on first time deposit match and we're gonna 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 of what we'll be happy to share results and youre going to see those real time.
November December heading into 2024, and we'll have a lot more to share on our overall thoughts, but we felt like the launch timeline is actually really good in this case.
Okay, Gotcha, and then Jay if.
If we sat here a couple of I think it was three years ago you originally invested in to.
Barstool and if I remember correctly when you did when you did that call it to compete.
Some claims about how great of a partnership.
Barstool was was going to be.
And so I guess I'm just trying to understand why this deal is so much different versus barstow and look I understand ESPN is a whole different animal 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 I said it nicely with like Ken as you look back on that deal.
<unk>.
Probably assume you are somewhat restricted in terms of how you can answer that.
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 we've had a great three and a half year run with our partners at Barstool.
Sure most if not all of you watched Steve's Emergency Press conference on this last night I thought you summed it up really well it just it became obvious to both parties that.
There's probably long term only one natural owner of Barstool sports and Thats, Dave Portnoy, and Barstool sports and being part of a publicly held highly regulated license gaming company. It became clear that we were an unnatural owner and so.
I think today is a real it's a great day, it's great for Dave and Barstool sports, it's great for <unk>, It's great for Penn is great for ESPN everyone's feeling great about the future and where we're headed and we're not really focused are going to spend too much time talking about the past, we're going to always stay focused on where we're headed.
Our next question comes from Joe Stauff with Susquehanna. Please proceed.
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 partly product.
That does that product something that you are pricing 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.
How far or how long it will take if you were able to integrate ESPN, maybe streaming signal within the app.
Things like that.
Yes, there's a lot there Joe.
I'll try to tackle those and if I don't address your question. 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 re skinning of the App to ESPN debt 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 we already had hardware, but we're gonna be ordering more servers to handle more volume and I think those are good problems to have but.
Stress tested we've gotten through.
A full year of operating in Ontario, and putting Super Bowl, We've got I think best in.
<unk> technology and products and engineering team and 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.
Nothing really changes, we have our own risk and trading team.
<unk> been built out proven we're very happy with the progress that we've made in Ontario, as well as 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 bats, and at what levels and so feel really good about that of course, you are taking some of your feeds from third parties everybody does that to some.
But I think the value of 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 and how you price your parlays both in game.
As well as just general parlays, so that Hasnt changed, but we certainly are getting better and better at that all the time and seeing really good progress as it relates to overall whole percent is trends.
And I think with regard okay.
I was going to address your last one and then feel free to jump in there.
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 now some states. There is limited licenses and things of that nature, but there is I think where there's a will there's a way and there is 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 ESPN and we'll continue to make that a high priority.
I see that makes a lot of sense and and again like I'm sure it's something.
That's on the come but.
Is there plans eventually to maybe integrate the signal.
ESPN some particular within your App.
I don't know 24, how long does that would that take in theory.
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 towards the end of this year.
We're really focused on.
Launch and ramping and getting through football season, but we will have a lot more to share with you of how we're thinking about product roadmap and enhancements in media integrations between ESPN at ESPN bad and our feeds and the other questions. You have we will be happy to address all of those or as many of those as we can later this year.
Yeah.
Okay.
Our next question comes from Brad <unk> with Barclays. Please proceed.
Thanks, everybody for taking my question. So we've covered a lot and my first question is the.
The retail sports book, the Barstool branded retail sports book.
<unk> been rolling out what happens to those and can you do you have access to.
To the ESPN bet.
Brand in sort of potentially rebranding nos ESPN that sports books.
Yeah. Good question, so we have invested pretty.
Pretty significant capital I think we have best in class retail sports books across the portfolio today, which is awesome.
Management that we have with Dave and team at <unk> stores that we've got a period of time to.
They need some support from us as we transition and we're going to need to have some time to obviously get the ESPN app launched as well as take down some of the barstool specific branding inside of our retail sports books, but we're working cooperating so cooperatively together on a number of issues and transition issue.
<unk> and <unk>.
With regards to what does that end up being are looking like.
TBD, we're still working through ESPN folks have not had a chance to visit our properties yet and so we're going to go through a process and there can be some potentially some ESPN branded retail sports books on plan and if not we still have what we believe to be best in class destinations on the retail sports betting side in sports bars connected to almost all of them.
Okay. Thanks for that and then just as a follow up.
Went over this a little bit, but the extra 150 ish off channel marketing.
We recognize that.
You know that.
It's not you have a 150 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 youre going to be doing this.
Off channel marketing just to support the product is their connectivity with broader Disney assets.
That you could utilize to spend that and then where did you just how did you come up with that level.
Where do you why do you think that's the right the right number.
Yes, I mean, we put a lot of thought into what we believe are.
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 felt 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 deal. There is no commitment to your first part of your question brands on how much we will or won't spend it off channel.
As 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 so.
We're both excited about the market.
Marketing spend both within the ESPN ecosystem as well as outside of that.
Yeah.
Our next question comes from John Decree with CBRE. Please proceed.
Hi, Jay Thanks for taking the questions.
Maybe one I think you.
In Joe's question, you kind of talked about the incremental spending for Q, but I was wondering if you could give us some parameters.
On what the annual kind of marketing spend $1 15, ESPN and roughly $1 50 off channel compares to.
What you were doing prior using the barstool brand and how much of an uptick.
Is this relative to say the last year or two in terms of total marketing dollars.
Yeah.
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.
Our prepared remarks, and so we were very careful not to be aggressive in marketing spend.
Outside of the things that we're doing on an integration basis organically with our our friends and partners at Barstool 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 S. In a matter of 24 hours, so again hats off to benzene and the team at Penn Interactive on that.
So.
I think generally speaking we feel we feel really good about where things are as it sits today and you know, we obviously can can pivot and.
Whenever we want to do on a go forward basis, but we felt good.
Okay got it.
Fair enough maybe.
One question you touched on earlier.
About I think some of the ESPN, maybe emails fantasy database.
Scriber list.
Are you able to directly market to cause those emails or are there restrictions around that and then I guess the second part of that question would be ESPN that customers.
Is that are those customers and customer information owned by Penn or ESPN or shared.
Well.
Ultimately anyone who is in the ESPN, but specifically the ESPN bad ecosystem is owned by pen you have to be fully regulated and license 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 were 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 is comprehensive.
<unk>.
It's exciting and they also if you read that which I'm sure I'm sure. Most of you did if you read the release that he is.
SPN put out yesterday, one of the things that we have a tremendous amount of alignment on and they take very seriously is around responsible gaming and.
They are putting together a committee within ESPN and we'll work very closely with the folks that are on our committee here.
Here at Penn and we feel like we've got a path forward and a roadmap on how to how to market to the database in a very responsible way and make sure that those we're marketing to and certain ways. We have age verification completed and all the things that we would typically think about on the gaming side.
Yeah.
Okay.
Our next question comes from Stephen Grambling with Morgan Stanley . Please proceed.
Thanks.
Are the other media partnerships I think ultimately acquired customers that then lost them or.
Tell them dwindle, one year or two how will you measure conversion effectiveness with ESPN and to attract kpis to ensure that youre acquiring beyond that kind of first task and as it relates to 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.
Good questions Steven.
But I would say with regards to some of the Kpis, we will get into more of that at the end of the year and 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 eight plants.
People go to ESPN two.
To consume sports content.
Every day all day scores stat stories, I mean, they're the best in the World.
So.
We're gonna be able to retain people because they love the brand they have an affinity for it.
And class a products.
And we're gonna 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 <unk>.
Be reminded in case, they forgot that we're still there and we feel great about what our year to retention capabilities will be cross sell opportunities.
Such a great brands.
And with regards to cash.
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.
Being customer acquisition costs, and 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 are better than I think it gives us a great opportunity to spend and feel good about.
LTV and how youre thinking about returns on those customer acquisition cost.
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 five turns of leverage or is there a way to get additional capital infused into this to pursue market share even more aggressively.
Yes, I mean look like 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 giving you some parameters on 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 since I think has some really good information to share on how we're thinking about some of the topics that you've raised but I think it would be premature to get into that now we feel good about the plan in front of us.
Our next question comes from David Katz with Jefferies. Please proceed.
Hi, good morning, everyone. Thanks for taking my questions Congrats.
Congrats on your deal I wanted to ask.
A J 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, youre thinking about defining.
Yours in a differentiated way, but we've seen over the past.
Several months to a year or that.
There are some differences in the kinds of offerings.
Matter in which apps are defining themselves.
To capture not only share, but do so profitably.
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 and media integration.
Video and maybe potentially live streaming there's a lot of things that we can do because of who our partner is here that others won't be able to do in the same way I think you know there's been a lot of attention as I should've been.
Given to same game parlays and who's best of those and to me those are going to end up being largely commoditized, because they're betting betting offerings that we're all going to be at the same level in a very short period of time, but there are certain things that we're going to be able to do because of the media partnership and who ESPN has that others just won't be able to.
To emulate.
Understood and if I may just follow up quickly with respect to the cross selling opportunities here.
Talked about.
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, our ESPN people and or vice versa.
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.
This is a huge opportunity to partner with ESPN and.
Yeah, I think most of that's going to be incremental to what we have today.
Frankly, if we can maybe just do one more question that would be great.
Yeah.
Our next question comes from adjacent Tillson with Canaccord Genuity. Please proceed.
Great Yeah, Thanks for taking the question.
Just curious in terms of.
You mentioned market access earlier.
Pacifically, but it when it comes to Connecticut, given rough streets plans to exit there given that ESPN. Some state how you would handicap your chance to obtaining that third license and where that process currently stand.
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.
If we're fortunate to be.
New operator, and Connecticut, and we've talked before about New York I don't know 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 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 to have access to the <unk>.
States that matter and I don't think its really making money in New York today, but I think from a database cultivation and hopefully down the road there is 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 are thinking about market access we could have some updates potentially by the time, we have our investor day.
Yeah.
Great. Thank you.
Yeah.
Alright. Thank you everyone for joining this morning, very excited and look forward to continuing to connect with you on this.
What we view to be such a amazing strategic alliance and the future looks bright so look forward to continuing to talk thanks for spending time with US This morning and for all the analysts are having great questions as always I will talk to you soon.
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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