Golden Nugget Online Gaming, Inc.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Golden Nugget Online Gaming First Quarter 2021 Earnings Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sloan Bohlen, Investor Relations. Thank you. Please go ahead.

[Sloan Bohlen:]

Good afternoon, everyone. And thank you for joining us today to discuss our first quarter results for 2021. With me today our Chairman and Chief Executive Officer, Tilman Fertitta; and our President, Thomas Winter; and our Chief Financial Officer, Mike Harwell.

[Tilman Fertitta:]

Thank you, Sloane, and thank you to all the investors and analysts on the call. Before I turn the call over to Thomas and Mike, I will begin with a few high level points from the quarter. First, as you can see by revenue growth in the quarter, we feel increasingly confident about what Golden Nugget Online Gaming can be as we expand into our new geographic areas and continue to build our scale. I mentioned the significant and growing addressable market for iGaming last quarter. But seeing what our team has accomplished historic 2021 really emphasizes how well positioned we are with the right assets, people, and of course, execution. Second, as you will hear from Thomas, our state expansion plans are going extremely well and we’re now under agreements in geographies that represent nearly a third of the U.S. population. But very simply, we have a very strong playbook to run from based on our experience in New Jersey and it’s our aim to recreate that same success in more and more states across the country. In Michigan, our results have exceeded our own expectations. In April alone, we grew our casino revenues there by 14%. Also, I believe our results in Michigan next year will equal our 2019 New Jersey revenues and that will turn profitable they’re sometimes in the latter part of 2022 way ahead of our expectations. I really can’t help it but my DNA requires that we operate our business that makes money. I’ve got to generate EBITDA and we’re so happy about it in Michigan next year. Lastly, I’ll close by reiterating how powerful the Golden Nugget brand is combined with our broader businesses. A lot of our competitors have given up lots of equity or paid significant dollars to enhance media relationships. From a customer connectivity and royalty standpoint, ours is so strong, we already are able to go into markets and people know who we are. We definitely have our own strategic advantage.

[Thomas Winter:]

Thank you, Tilman, and welcome everyone. I’d like to begin by echoing Tilman’s comments. We are truly excited about the start of 2021 and have a lot of promising results that support our long-term view about the sizable growth opportunity. We’ll start with a quick review of our success quarter. In Q1, we generated $26.7 million in revenues, a 54% increase from a year ago and our largest quarter on revenue on record. We are especially pleased with this growth. A 60% came organically for New Jersey, while 40% came from Michigan, our first of many planned expansions across North America. Our growth was driven by continued strong player acquisition and retention, while operating in the competitive markets of New Jersey and Michigan. As you will see in our materials, the growth is broad-based and continues to expand beyond the COVID-related tailwinds we experienced early last year. In fact, we grew significantly in the quarter across both new and returning active depositors. Most encouraging, our first time deposit of grew by 386% over a year ago, mainly driven by our new market expansion, which I will elaborate on in a minute. While returning active deposits, growth of 49% is just as exciting and was driven by continuous strength in retention. Overall, our average monthly active deposits grew 126% over last year and 62% sequentially, which really shows how rapidly we can grow even earlier in new markets. Looking at New Jersey, major markets, our monthly net average revenue per user for the quarter was $550, compared to $613 in the first quarter of 2020, which was boosted in the early stages of the COVID-19 pandemic. Still our Q1 2021 net ARPU shows an increase of 6% of the first quarter in 2019, which we believe is a more meaningful comparison. In Michigan, earlier few numbers have been encouraging too, while median household income is 30% lower in Michigan than it is in New Jersey. The gross gaming revenue of Michigan’s first most depositors has been only 8% short of New Jersey’s over the last three months, which makes us confidence in the long-term value we can create in Michigan.

[Mike Harwell:]

Thank you, Thomas. Good afternoon, everyone. Revenues reported for the first quarter of 2021 totaled $26.7 million, representing a 54% increase on a year-over-year basis when compared to revenue of $17.3 million reported in the first quarter of 2020. Net income for the quarter totaled $69.6 million, which includes a number of non-cash discrete items, including a non-cash gain on warrant derivatives of $81.1 million and a non-cash gain on a tax receivable agreement liability of $1.3 million, both of which were based on a change in a fair value of these liabilities during the quarter. We also recorded debt extinguishment costs of $2.2 million, including $0.6 million in non-cash expense recorded as interest expense associated with the accelerated amortization of debt discounts and deferred debt issuance costs in connection with the repayment of $10.6 million of our term loan indebtedness.

[Operator:]

Your first question comes from David Katz from Jefferies.

[David Katz:]

Hi. Good afternoon, everyone. Thanks for all the detail. I just wanted to talk about the state rollouts so far. And the degree to which you’re finding landscape to be as you expect it, right, from a competitive, and ultimately, a cost perspective? And second, I wanted to ask about incremental state access where you’ve added a couple in the quarter, are the economics around those staying the same or how would you characterize whether they are or not becoming just a bit more expensive?

[Thomas Winter:]

Okay. David, thank you for your questions. I will -- this is Thomas. I will start with a second one on new market access. So, yeah, as you saw we are -- we’ve added two new states in terms of market access, Colorado and Iowa, and we are hopeful to announce more states in the coming weeks and months. We are working of course on that. In terms of the economics of new states, the first thing is that you really need to look at iGaming states versus sports in new states differently. One, because when you offer a new sports, it’s extremely difficult to get to profitability, the real profitability comes when you add iGaming to that. So when we have the opportunity to operate in an iGaming state, as this is really where we want to focus our marketing investments, because this is where we will get the higher return on investment. In states that our offering only sports at least at staff because we definitely believe that eventually, most if not all sports betting states will offer iGaming, it more for us a way to -- together presenting the state to start increasing our brand awareness, to build the player base. But that’s really ahead of an expected iGaming launch later on. So if we refocus on iGaming states, we believe that in all states we should see the same types of economics and return on investments as we saw in New Jersey. So the main difference from a state to another could be the tax rate. Of course, if you have a lower tax rate, you should expect a higher profit margin and conversely. But other than that, we think we will see the same time of -- type of returns. And what was your first question again?

[David Katz:]

I was asking about the rollout into new states and the degree to which you’re finding them competitively to be as expected plus or minus or any surprises there?

[Thomas Winter:]

So if we look at Michigan, of course, this is really early stage of that market, where we’ve been live for just three months or four months. But I would say, I haven’t seen any big surprise and if anything, I think, the KPI that we’ve seen were slightly better than what we would have expected. So the first thing that was a kind of a surprise to us, but I believe to everyone else was how quickly that market revenues ramped up. So you had a lot of pent-up demand and the fact that this market is already above $90 million in gross gaming revenue for line gaming, after four months it is just unbelievable. And that -- we think that is going to be the case in pretty much every new iGaming state moving forward, because we saw that in Pennsylvania, we saw that in Michigan. Of course, COVID-19 played its role in it, but we believe that it really depends on that. So that was really the first observation. The second is when we look at the average revenue per user. It’s an interesting point, because for instance, when you want to assess the total addressable market, if all state were to regulate, basically you have kind of two methods, if you take, a New Jersey as a proxy, the first method is to say, New Jersey accounts for X percent of the population of the U.S. and then you apply your formula. The other way to look at it is to, say, the median household income in New Jersey is a -- is that much higher than the average of the U.S. and that gives you another method. And when we did our budget, our forecast for Michigan, we said, Michigan is bigger by like 20%, 30% in population than the New Jersey, but the median household income is 30% lower than in New Jersey. And we saw that should have an impact on the average revenue per user, not to the extent of 30%, because we are going as the player with higher disposable income. But let’s say, about 15% was I think our assumption. And what we’ve seen so far, especially on first time depositors in their first month is that their gross spend is about 8% lower than what we see today in New Jersey. And that I think is pretty encouraging. In terms of churn rates of new players, we are seeing lower churn rates in Michigan than we see in New Jersey. You see is probably involved because it’s a new market, so the early adopters are probably the most motivated player. But definitely no bad surprise here either. And in terms of cost per acquisition, that certain things that we disclose, but what I can say that today, our cost per acquisition of new players is lower in Michigan than it is in New Jersey, even if the market has grown so fast. So, overall, really positive about the Michigan opportunity and we’ve seen other states. But I think globally, your economics are going to be pretty similar in terms of return on investment. I mean, the time it takes for your gross gaming revenue to recoup your cost per acquisition, for instance, I think, should be fairly similar, the churn rate should be fairly similar and the gradual increase in the average revenue per user and lifetime value we hope should be similar.

[David Katz:]

Understood. Helpful and interesting. If I can ask just one more, if you don’t mind.

[Thomas Winter:]

Sure.

[David Katz:]

Around, pardon me, the Live Dealer Studio expansion.

[Thomas Winter:]

Yeah.

[David Katz:]

Where a fair portion of it is for Golden Nugget and in other cases, if I’m correct, I think other operators are using that studio on a B2B basis.

[Thomas Winter:]

Yeah.

[David Katz:]

How do you -- what is your vision for that product specifically over time. Is -- are those other operators just sort of building a beachhead so they can do it themselves? How unique and proprietary is what you have and defensible, ultimately is, what you have with it, which obviously is going pretty well so far.

[Thomas Winter:]

Yeah. Sure. So I mean, if we go back to the genesis of that project for us. And at that time back in 2015, we really believe that Live Dealer was a big missing part in the offering of all online casinos in New Jersey. And we went to talk to a number of B2B suppliers who usually set up a studio and serve pretty much all brands in the market. And all of the big guys basically didn’t want to come to New Jersey because they thought the market was too small and it would be too hard for them to make money. So we decided to do it on our own and we did partnership with Ezugi and that’s really the reason why we did it in the first place to be honest. So the situation right now is a bit different, because the likes of Evolution Gaming today and Playtech tomorrow buildings studios in a number of states in the U.S. So we don’t have the need to build a studio in order to feel like. Still for us it’s good because we are controlling the operation. It is really, well, our start and our own studio. So we have some cost savings because of that. And also, because as you mentioned, we are acting here as a B2B supplier as well. We have six brands using that studio today. And the combination of all these brands means that the activity has grown tremendously, especially last year. And today we are close to reaching capacity in our existing studio. So we will increase our capacity for my 18 to 33 tables and out of the 15 additional tables, I think, we will have probably around 10 or 12 of them pre-booked already by some brands using the studio in short order. So it’s really a good asset. These are also tactical revenues for us that are good to have. And in other states, we will use as a studio of B2B provider. So that’s going to be Evolution Gaming for us in Michigan and Pennsylvania as a start. Right now, all the states have asked that they like our studio serving the local residents is located in the state. But it might change because I think that you used to have some uncertainty around the way like for iGaming. You don’t have that anymore. So if at any point in time, we are authorized by a regulator to use our own studio in other states, of course, we will do that and that would be a positive.

[David Katz:]

Perfect. Thank you very much.

[Operator:]

That was our last question. At this time, I will turn the call back over to Tilman Fertitta for closing remarks.

[Tilman Fertitta:]

Well, thank you very much. We very much feel great about the future and it’s a great industry to be in and we look forward to continuing to build this out. And we’re always available, Thomas or Mike or any of us, even myself if we can ever help you all or answer more questions. And we’re so excited about Michigan, like I said, it kind of validates our strategy and our conviction to how future the bright -- how bright the future is and that we can get to positive EBITDA in just 24 months now in a major state like Michigan. So thank you all very much and everybody have a great week.

[Operator:]

This concludes today’s conference call. Thank you for participating. You may now disconnect.