Yahoo Finance PENN Entertainment, Inc. (NASDAQ:PENN) Q1 2024 Earnings Call Transcript
PENN Entertainment, Inc. (NASDAQ:PENN) Q1 2024 Earnings Call Transcript May 2, 2024
PENN Entertainment, Inc. misses on earnings expectations. Reported EPS is $-2.37 EPS, expectations were $-0.59. PENN Entertainment, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the PENN Entertainment First Quarter 2024 Results Conference Call. I would now like to turn the conference over to Joe Jaffoni, Investor Relations. Please go ahead.
Joseph Jaffoni: Thanks, Shelby. Good morning, and thank you for joining PENN Entertainment's 2024 first quarter conference call. We'll get to management's presentation and comments momentarily, as well as your questions and answers. And during the Q&A session, we ask that everyone please limit themselves to one question and one follow-up. Now I'll read the safe harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which involve risks and uncertainties. These statements can be identified by these forward-looking terminologies such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words are by discussions of future events, strategies or risks and uncertainties.
Including future plans, strategies, performance developments, acquisitions, capital expenditures and operating results. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission including the company's reports on Form 10-K and Form 10-Q. PENN Entertainment assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will include non-GAAP financial measures within the meaning of the SEC regulation.
It require the reconciliation [indiscernible] non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on today's website. Thanks for your patience. With that, it's now my pleasure to turn the call over to PENN Entertainment, CEO, Jay Snowden. Jay, please go ahead.
Jay Snowden: Thanks, Joe. Good morning, everyone on the call. I'm joined here in Wyomissing by our CFO, Felicia Hendrix; and our Head of Operations; Todd George, as well as other members of the executive team. And I thought it best to take a step back and cover a few important topics related to the PENN digital and omnichannel journey. A few reminders and clarifications, as well as some facts that are sometimes missed. And most importantly, I wanted to spend some time talking about what you can expect from us later this year as we head into 2025 and beyond. When we announced the ESPN alliance in August of last year, we highlighted an exciting, differentiated vision and strategy for our digital and omnichannel future at PENN, the foundation of which has been consistent with our thinking since PASPA was overturned in 2018, which is to be at the forefront and to deliver on the powerful and inevitable convergence of sports media and sports betting in a way that no one else can replicate.
Building a significant database of younger, highly engaged online sports betting betters and fans, building long-term relationships via best-in-class product and experiences and eventually providing them with compelling cross-sell opportunities over time to other offerings throughout the PENN ecosystem, a truly unmatched omnichannel strategy. The path to getting to this point has not been without some bumps in the road, as no nascent digital strategy ever is, but we are now strongly positioned to deliver on our vision and deliver on the shareholder value that comes with it. We were introduced to our friends at ESPN at a critical time. Disney and ESPN had gone through a journey of their own over the last several years as it relates to the sports betting opportunity in the U.S., ultimately deciding in 2023 that they wanted to go all in with their brands and find the right partner.
They were looking for a partner that had relevant experience, access and relationships at the state level across the country, a proven and fully owned technology stack, which PENN had from its acquisition of theScore, experienced operators, a shared vision and a company culture that aligned with ESPN to ensure a productive long-term relationship. They, similar to PENN, had concluded that sports betting and sports media were rapidly converging and sports fans were looking for, even expecting, a fully integrated sports betting experience with ESPN. ESPN ultimately chose PENN, and the ESPN BET was subsequently launched in November of last year. On that same call in August of last year, we also provided an interactive financial outlook for 2027 that included market share scenarios of between 10% and 20% for online sports betting in the U.S., a range which we still feel very confident about.
And I'll break down the reasons for this confidence shortly. Though we were very excited about ESPN BET, we indeed knew it would take us time to build a sizable database, deliver on a best-in-class online sports betting and iCasino products, introduce deep, exclusive integrations with ESPN and build strong long-term relationships with our bettors, users and fans on ESPN BET. Our overall launch has gone very well in most areas, which I will cover in a bit. And there are also a couple of areas for improvement, as there always are, and we will spend some time covering those in the associated action items as well. We have built a very solid foundation. We are now live in 19 jurisdictions in North America, with New York coming before the start of this upcoming NFL season, and we have successfully built a database of over 3.5 million unique digital betters over the last 3.5 years, a number that we thought would take much longer to deliver.
With our primary acquisition and investment phase in today's available market is now largely behind us, our key focus is on monetization via engagement, retention and reactivation and making sure we deliver a best-in-class product. We are committed with our partners at ESPN to being the top player in online sports betting with ESPN BET, and we are also committed to being a top player in iCasino with Hollywood -- with the Hollywood iCasino brands and the industry's best in omnichannel execution, given our geographically diversified portfolio of premier regional casinos across the U.S. Combined with a rapidly growing and highly valuable database of PENN Play members that is currently expanding by well over 1 million new members per year over the last few years, a database that has quickly moved from 25 million total members to over 30 million members, and will continue to grow at a similar 1 million-plus annualized rate for the foreseeable future.
The things we are going to be able to do with this database, particularly with new AI tools and capabilities, is extremely exciting down the road, the conversation for another day. During the first quarter, we achieved record quarterly online sports betting iCasino handle. Our OSB results were negatively impacted by a slightly lower handle per user than we modeled and well-documented unfavorable hold in the quarter, which continued through March Madness with the favorite Yukon winning their matchups by large margins throughout the tournament and ultimately, the National Championship. Our hold percentage has been better to start Q2, with April coming in at over 8% in the aggregate across the U.S. We believe 7% to 8% is a good target range for us over the next few months as we continue to improve the product and operational performance and that we can grow our overall hold percentage from there as we get to the fall and introduce our enhanced home screen experience, parlay offerings and deep integrations with ESPN, which I'll cover in a bit.
Admittedly, we have not been as tight and accurate with our financial forecasting in the early days of ESPN BET, which is not representative of our long-term track record or internal expectations at PENN. You should expect that we are currently operationalizing our digital business at this stage with the same energy and focus as you have witnessed from us on the land-based side of the business for a long time. That is a track record we are very proud of. With that said, keep in mind, we are in the process of doing something that has never been done before in our space by launching in 17 states simultaneously with a new sports betting brand, and we are gathering real-time learnings and experiences that we can fine-tune and improve our assumptions and inputs as we go.
It is inherently more difficult, as most of you know, to forecast the digital business because of the number of variables, some of which like hold are oftentimes beyond our control. Nevertheless, we take pride in being best-in-class operators at PENN, and that is no different in the digital parts of our business. We are simply at a different stage in the cycle than others in OSB and iGaming given the timing of our ESPN BET launch. We hold ourselves to a very high standard and are committed to getting this forecasting tighter and more accurate as we move forward as we now have six months of ESPN BET data and results to reference and model off of. With all that said and at a high level, here are where things stand at PENN with regard to the digital business currently, all of which bode very well for the future.
We launched ESPN BET across 17 states simultaneously, and our technology platform performed near flawlessly. ESPN BET attracted significantly more registrations and first-time deposits than our internal assumptions and even the most bullish of predictions, garnering over 1 million new to PENN online sports betting first time deposits in just the first two months of operation, having done so with competitive at market promotional offers. We did not have to over reinvest to deliver these results. This speaks to the power of the ESPN brand. We continue to attract new first-time deposits at a healthy pace, showcasing the effectiveness of ESPN as an ongoing organic acquisition channel. ESPN BET has performed very well from a product stability perspective and has received over 140,000 ratings in the iOS App Store, more than all but three of our competitors who have all been live in the App Store for years longer than us, with a cumulative APRI store rating of 4.8. According to Sensor Tower data, ESPN BET has consistently been running in the mid- to high-teens in weekly active online sports betting users from a nationwide market share perspective, and we are not yet live in the most populous online sports betting legal state in the U.S., New York, which will happen, as I mentioned earlier, prior to the start of this upcoming NFL season.
All of this has been accomplished despite launching ESPN BET only three months after finalizing and announcing our strategic alliance with ESPN, and doing so with an app that we knew while competitive, had ground to quickly make up in a few key feature categories that we have covered, such as parlays and player props. Given our focus for the last 15-plus months has been on tech migrations, rebrands and new state launches. That is all changing now. And the primary focus for our engineering and product teams is on quickly closing the gap on competitors from a feature and UI/UX perspective. We have indeed been pleased with all these early data points and achievements, but we also recognize not all the results are where they need to be at this stage.
In addition to the impact of hold I've already discussed, we also know monetization is a huge opportunity for us. We have seen a lower spend per user so far with ESPN BET than market average and compared to our internal expectations. We believe we can chalk this up to two primary factors. Number one, we've grown the TAM and brought new betters into the ecosystem due to the broad reach and strong brand equity of ESPN, the #1 name in sports in the U.S. for decades, that are currently more casual betters. We should expect their engagement with the app and overall spend to grow over time as they become more comfortable, experienced and knowledgeable the app and sports betting in general and the integrations with ESPN become deeper and more seamless, so any friction between ESPN's ecosystem and ESPN BET is eliminated.
We are also seeing this new casual segment is much more likely to engage with parlayed bets, which bodes well for us as we expand our offerings. Number two, we are not yet generating our fair share of wallet with experience in VIP betters commensurate with our weekly active user share by virtue of our parlay, same-game parlay player prop and live betting features currently trailing the market. Here's the encouraging news in addressing these two items. We just announced last week that Aaron LaBerge will be joining us as our new Chief Technology Officer at PENN. Aaron comes to us from Disney, where he had an amazing career of over 20 years and where he had most recently -- was most recently the CTO for Disney Entertainment and ESPN. In addition to as many accomplishments in accolades, over the years, Aaron was deeply involved in the technology due diligence of PENN Interactive and felt that our new fully owned built for North America proprietary technology stack, along with our talented technology teams were what we would make PENN the perfect partner for ESPN to launch ESPN BET.
Now he gets to lead those efforts from inside PENN. He will be starting soon. In the meantime, continues to be deeply involved in our joint development plans from a product and the ESPN integration perspective. Aaron is not only 1 of the most accomplished and widely respected CTOs in the country. He's a strong leader, collaborator and business partner. He will act as an immediate accelerant, turbocharging everything we are working on with ESPN, and his expertise in sports betting, fantasy and media will be truly complementary to this extremely talented executive team I am already surrounded by at PENN. We will plan on hosting an Investor Day at G2E in Las Vegas later this year so you can get a chance to meet Aaron in person and hear from him and Todd and the rest of the senior team at PENN on where we're going in 2025 and beyond with many of the things we've covered this morning as well as many other forward-looking topics.
The bottom line is ESPN that will very soon be a best-in-class product, which is a perfect segue. We provided in the investor presentation this morning a sneak peak of what you can expect to see at the beginning of the NFL football season in early September from a product and feature enhancement perspective, which will include things like dark mode and improved home screen experience and navigation, and a much more competitive parlay, same game parlay and player pop market offering and overall experience. From an ESPN integration standpoint, our partners at ESPN are continuing to build deeper betting integrations into the ESPN sports media app. We've already seen the benefits of these integrations, as ESPN BET received nearly 300,000 unique visitors in March alone from ESPN media users who clicked on the deep links, and this number will go up over time, obviously, as we add additional integrations and connectivity.
We are especially excited about the upcoming account linking initiative between ESPN BET and ESPN later this fall, which, of course, unlocks the potential to deliver an unmatched level of personalization and user engagement in the industry. The initial benefits to account linking will include deeper and more customized integrations in the ESPN media app. Once accounts are linked and we know your favorite sports, sports teams and players, we can deliver personalized betting options only found on ESPN BET. And the same can be said about ESPN Fantasy app, the largest and most popular in the U.S., with 12 million active users and growing every year. When accounts are linked and we know the players on your fantasy roster, there are all sorts of unique and exciting offers, bespoke promotions and prepackaged betting options.
We can get in front of fantasy players on the app to drive highly engaging content and retention. You will start to see some of this at the start of the NFL season and additional features added throughout the football season and in 2025. And of course, a little further down the road, there are integrations with ESPN's new direct-to-consumer streaming offering later in 2025. More to come on that as we get closer, but you can start to imagine the possibilities with account linking and deeper integration. This is all happening in the coming quarters. These are initiatives our collective teams are working on together as we speak. We rolled in Bristol just a couple of weeks ago. Dozens of leaders from both PENN and ESPN and the collective teams cannot be more aligned and excited about how deep we can go and will go with all of these differentiated ESPN integrations.
ESPN has been and continues to be an amazing partner. Both sides have a shared vision and are laser-focused and deeply committed to making ESPN BET a top name an online sports betting over the coming years. So let me summarize strategically and financially how things are playing out at PENN. 2024 is going to be an investment year with ESPN BET and the groundbreaking of our 4 exciting retail growth projects. Leverage will peak in Q3 before coming -- quickly coming down, excuse me, once we get to Q4 and moving forward from there. We have a very solid balance sheet with nearly $1 billion in cash, a fully undrawn revolver of $1 billion, and we generate significant free cash flow, as all of you know, as a company. We are adding Aaron LaBerge to the team on July 1.
We will quickly get our online sports betting product to be closer to parity over the coming quarters, and 2025 will be a year of delevering the balance sheet as monetization improves with ESPN BET, we launched our stand-alone Hollywood iCasino app early in the year, which will drive improved results as we have seen from several of our competitors and also made significant progress on our 4 retail growth projects. And then you get to 2026, a little over 1.5 years from now. And that's incredibly exciting. We'll be going live with all four growth projects in the first half of the year, and we will also be generating positive cash flow from our Interactive unit, an Interactive unit that will be continuing to grow its database and market share efficiently and profitably by offering sports fans and iGaming customers unique features, offerings, integrations and experiences only found at ESPN BET and Hollywood online casino.
Please keep in mind that Disney and ESPN did not agree to this alliance with PENN to be #4 or #5 in the market. Aaron LaBerge joining the team, I think, certainly speaks to that. Or for the PENN annual marketing spend commitment. Neither of those are really needle-moving outcomes for ESPN. We are both in this to deliver best-in-class digital betting products and unique omnichannel experiences for our loyal customers, users and fans and to be on the podium competing long term for profitable market share, all of which will result in the delivery of significant value for our shareholders. The future is very promising. The two most challenging quarters from a digital P&L perspective are now behind us. We greatly appreciate the investors that have and continue to support us and trust us.
We don't take that lightly and are deeply committed to making sure you'll be rewarded for that decision. I covered a lot on the Interactive front, and I encourage you to spend time going through our investor presentation, which provides much greater detail on most, if not all of these topics. As you look at the retail business in Q1, our highly diversified retail segment was very resilient, improving sequentially each month despite the challenges of some pretty extreme weather across our portfolio in January and early February. However, visitation subsequently rebounded, with stable trends persisting into April. Notably, were it not for the weather impacts and low hold and slightly lower spend per user from OSB, we would have met or exceeded our guidance and consensus for the quarter.
Our best-in-class team of operators continue to drive strong performance by leveraging our industry-leading customer loyalty program, PENN Play, our highly efficient capital improvements and our market-leading retail sportsbook offerings. Speaking of which, on April 25, we successfully opened our first ESPN BET retail sportsbook at Hollywood Detroit for a multi-day NFL draft activation, including live draft coverage by ESPN at our casino. We look forward to additional ESPN BET retail launches at key properties as we continue to create meaningful cross-sell opportunities to capitalize on the incredible growth we have seen in our database. And with that, I'll now turn it over to Felicia.
Felicia Hendrix: Thanks, Jay. Overall, we were pleased with our property level results in the quarter despite challenging weather. Retail revenues of $1.4 billion and EBITDA of $479 million reflect the well-known impact of severe weather throughout our portfolio in January and early February, followed by resilient performance in March and April. For our Interactive segment, we reported revenues of $208 million and an EBITDA loss of $196 million, which is a significant improvement from the fourth quarter. The shortfall relative to our prior guidance is primarily due to lower-than-expected hold and spend per user. In the quarter, our expenses, including our marketing approach, remain disciplined as we continue to make improvements to our product offerings.
As usual, you will find on Page 8 of our earnings release a table that summarizes our cash expenditures in the quarter, including cash payments to our REIT landlords, cash taxes, cash interest and total CapEx. Of our total $41 million of CapEx in the quarter, $19 million was project CapEx primarily related to our 4 development projects. We ended the first quarter of 2024 with total liquidity of $1.9 billion, inclusive of $900 million in cash and cash equivalents. Our liquidity will remain strong through 2024. As you know, we have no debt maturities until 2026, which are a $330 million convertible notes. We continue to expect our lease-adjusted net leverage to peak in the third quarter of 2024, which is a function of our trailing 12 months net leverage calculation, including our continued investment in our Interactive segment this year as well as our investments in our 4 development projects.
As a reminder, on February 15, we received covenant relief under our credit agreement for the 4 quarters of 2024. As we anniversary the fourth quarter of 2023, we should quickly delever starting in the fourth quarter of 2024. By year-end 2025, we anticipate returning to pre-ESPN BET leverage levels and continuing to delever as we generate meaningful EBITDA and free cash flow in 2026 from the Interactive division. We continue to be excited about our path to record free cash flow given the high EBITDA to free cash flow conversion of our Interactive business. When combined with the free cash flow generated by our existing core business, plus the 4 retail growth projects that will be coming online in early 2026, we are extremely well positioned to drive shareholder value.
I will now provide guidance for our Retail and Interactive segments. We are updating our 2024 Retail guidance for the lower-than-expected first quarter results due to the severe January and early February weather. For the full year of 2024, we now expect Retail revenues to range from $5.61 billion to $5.76 billion and adjusted EBITDAR to range from $1.88 billion to $2 billion. Our new guidance continues to factor in stable customer demand, new supply in Nebraska, Illinois, Louisiana and road construction in a few markets. For the Interactive segment in 2024, we now expect to generate revenues of $1.02 billion to $1.07 billion and an adjusted EBITDA loss range of $475 million to $525 million. This guidance includes our New York launch prior to football season.
In addition to the pass-through of the shortfall in the first quarter relative to our previous guidance, our new guidance assumes current market share trends prior to our product improvements in the fall and similar holds to our April results. I'd like to talk for a moment about our quarterly Interactive segment cadence for the remainder of the year. As we have discussed previously, the first quarter will be the largest loss of the year. The fourth quarter will be the smallest. For the second quarter of '24, we expect to generate an EBITDA range of negative $115 million to negative $135 million. We expect 2024 corporate expense of roughly $105 million, inclusive of our cash settled stock-based awards. Total CapEx for 2024 will be approximately $500 million, inclusive of $275 million of project CapEx. For cash interest expense, we forecast approximately $175 million for the full year before roughly $15 million of interest income.
For 2024, we are -- for 2024 tax guidance, we are projecting a small tax refund. And as you think about our share count for 2024, our basic share count as of the end of the first quarter was 151.9 million shares, and we typically have roughly 15 million of dilutive shares, inclusive of the 14 million share dilution from the converts. And with that, I'll turn it back over to Jay.
Jay Snowden: All right. Thanks, Felicia. Before I open the line to questions, I wanted to note that on April 23 in conjunction with our proxy filing, we filed our 2023 CSR report, and I encourage you to take the time to download a copy from our website. It highlights the many ways our ESG efforts have continued to expand in the areas of sustainability, DE&I and supporting our team members and our communities. I want to thank the tireless efforts of our Board's Nominating and Corporate Governance Committee, our internal ESG and diversity committees and all of our corporate property and interactive leadership teams for continuing to raise the bar in this area. I couldn't be prouder of what we've accomplished and look forward to continuing to build upon this momentum in 2024 and beyond.
Finally, in addition to Aaron LaBerge joining PENN as our new CTO, we are fortunate to have recently added Anuj Dhanda to our Board of Directors to help guide and inform our growing technology initiatives. Anuj serves as EVP, Chief Technology and Transformation Officer for Albertsons Companies, and he brings extensive technology, cybersecurity and business transformation experience to our Board. His deep understanding of the rapidly evolving technology landscape, including areas such as AI, will be a tremendous resource and asset for us. We also recently announced in our proxy that John Jakeman [ph] will not be standing for reelection at our 2024 Annual Meeting. John is one of our original Board members who has been with PENN for over 30 years.
With John's retirement from the Board, we'll be losing 1 of the sharpest minds in business and a guy who always has his finger on the pulse of micro and macroeconomic trends. On behalf of all of us at PENN, I want to personally thank John for his dedication, friendship and support of our company for all these years. So thank you. And with that, Shelby, we'll open it up for our first question.
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