Rush Street Interactive - Q2 2024

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Rush Street Interactive Second Quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A Q&A session will follow the formal presentation. Please note that this conference call is being recorded today, July 31st, 2024. I will now turn the call over to Kyle Sauers, Chief Financial Officer. Kyle, you may proceed.

Kyle Sauers (CFO)

Thank you, Operator, and good afternoon. By now, everyone should have access to our Second Quarter 2024 earnings release. It can be found under the heading Financials Quarterly Results in the Investor section of the RSI website at rushstreetinteractive.com. Some of our comments will be forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are not statements of historical fact and are usually identified by the use of words such as will, expect, should, or other similar phrases, and are subject to numerous risks and uncertainties that could cause actual results to differ materially from what we expect. We assume no responsibility for updating any forward-looking statements. Therefore, you should exercise caution in interpreting and relying on them. We refer you to our SEC filings for a more detailed discussion of the risks that could impact our future operating results and financial condition.

Bernie McTernan (Senior Research Analyst)

During the call, we will discuss our non-GAAP measures, which we believe can be useful in evaluating the company's operating performance. These measures should not be considered in isolation or as a substitute for our financial results prepared in accordance with GAAP. In particular, we'll be discussing adjusted EBITDA, which we define as net income or loss before interest, income taxes, depreciation and amortization, share-based compensation, adjustments for certain one-time or non-recurring items, and other adjustments that are either non-cash or are not related to our underlying business performance. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measure is available in our Second Quarter 2024 earnings release and our Investor Deck, which is available in the Investor section of the RSI website at rushstreetinteractive.com.

For purposes of today's call, unless noted otherwise, when discussing profitability, EBITDA, or other income statement measures other than revenue, we're referring to those items on a non-GAAP adjusted EBITDA basis. With me on the call today, we have Richard Schwartz, Chief Executive Officer. We will first provide some opening remarks and then open the call to questions. With that, I'll turn the call over to Richard.

Richard Schwartz (CEO)

Thanks, Kyle. Good afternoon and welcome to our Second Quarter 2024 earnings call. Looking back at the past 12 months, our results have been a clear sign to us that our approach is working. We have consistently exceeded expectations, and this quarter is no exception. As we continue to innovate, grow, and deliver value to our customers, I remain confident that we are well on our way to achieving our goal of being a leader in online gaming across America. Second Quarter revenue was $220 million, up 34% year-over-year, and EBITDA was $21.4 million, representing a $20 million improvement year-over-year. Both of these were quarterly records, and I'm very proud of our team for continuing to generate these excellent results.

Bernie McTernan (Senior Research Analyst)

Consistent with trends from the last couple of quarters, we are adding new players to the platform faster, we are doing it more efficiently, and we are maintaining high player value by offering a differentiated experience that keeps players coming back time and again. All of this leads to solid top-line growth and strong flow-through to the bottom line. As we see in our recent quarterly results, we are continuing to post strong growth across both iCasino and sports, with iCasino revenue growing more than 40% year-over-year and online sports betting more than 25%. Underlying the growth is a solid mix of increasing player counts with improving player value trends that we attribute to our high-quality and differentiated user experience that engages and retains players on our platform. For the second quarter, MAU growth in the United States and Canada was 24% year-over-year.

This is the sixth consecutive quarter in which we have seen our year-over-year MAU growth in North America accelerate. In Latin America, rapid MAU growth continued during the second quarter, as we were up 79% year over year. It is noteworthy that this growth in users across our geographies did not come at the expense of player value. Specifically, we increased North American ARPMAU compared to last year by 6%, while Latin America ARPMAU was only modestly lower in the second quarter, despite the outsized MAU growth. With that overview, let's zoom into some key market highlights to provide added context on our results. We continue to diversify our revenue streams across markets. In Latin America and in U.S.

and Canadian markets launched since 2021, revenue was up 75% year-over-year in the second quarter, and the percentage of revenues generated from markets outside of Illinois and Pennsylvania is now 59%, the highest it's been since going public. Our ability to deliver much higher growth in our more profitable markets continues to drive higher incremental profitability. On our last quarterly call, I shared that each of Michigan, New Jersey, and Pennsylvania had the highest levels of year-over-year revenue growth in over two years. This trend continued again, as all three markets exhibited even higher growth during the second quarter. In fact, we had nine different markets with year-over-year online revenue growth rates of over 50%, again demonstrating the breadth of our success in growing the business. In Delaware, our performance continues to progress nicely, achieving total GGR of over $37 million during the first half of the year.

Our iCasino revenue during this period was more than four times what the previous operator had achieved in the same prior year timeframe. Toward the end of the second quarter, we added live dealer on the iCasino side, and we're excited to have our first football season approaching on the sportsbook side. We continue to steadily expand our customer base and remain very excited about where we see the opportunity progressing in Delaware. Certainly, our success has caught the attention of others in our industry who chose to bypass the Delaware RFP over a year ago. Many investors and analysts may be familiar with the recent lobbying and legislative efforts to alter the operating model that is delivering great results for the state. In the recently ended session, the proposed legislation was soundly defeated.

The bill failed to advance to a floor vote in either the House or the Senate before the legislative session adjourned on June 30th, as it was clear that the current industry framework is delivering better outcomes for the state. We continue to maintain our focus on exceeding expectations in Delaware. Turning to our Latin American operations, we continue to experience great momentum. Revenue in the region grew 73% year-over-year, and as noted earlier, that growth was driven by the substantial year-over-year MAU growth. While the vast majority of this revenue growth comes from Colombia, in Mexico, we continue to see solid growth and remain ahead of where we were at the same point in time post-launch to our start in Colombia. When it comes to marketing, we continue to refine our strategy and spend to target the highest value players and find them in unique ways.

In the United States, we added a record number of first-time depositors to the platform for our second quarter, while at the same time having our lowest second-quarter marketing spend since going public. This says a ton about our efficiency and the success of our marketing strategies and efforts, as it goes without saying that our cost of acquisition benefited significantly. In Latin America, we also added a record number of first-time depositors for our second quarter, beating our previous high by an impressive 71%, while at the same time reducing spend compared to that comparable quarter last year. To say it simply, we're spending less to acquire more customers, a result we're very proud of. We continue to use high-profile events to acquire new players, benefiting the second quarter in Latin America and continuing momentum into the third quarter with the Copa América and Euro Cup soccer tournaments.

Our teams use this unique opportunity to bring on a significant number of new players, introducing them to the RushBet brand and platform, with the goal of retaining them for years to come. We have a similar opportunity around these Olympics in North America, and we've been strategic about picking up unique media assets to drive user growth that should benefit both our iCasino and sports betting verticals. On the new markets front, we continue to pursue and evaluate a variety of opportunities across the Americas. Let's begin in Canada. Many of you may have seen that since we last spoke, the Alberta legislature passed a bill that was a step forward in efforts to launch commercial online gaming and sports betting in that province. From our vantage point, the momentum is beginning to point to a near-term launch as being a real possibility.

We will continue to monitor the opportunity as the province, according to the Canadian Gaming Association, has among the highest per capita spending on gaming in the country. This is a market that has great attributes, much like we've seen in other markets in North America. In Latin America, as we announced this week, we are now live in Peru with iCasino and online sports betting, marking the third country we've launched in Latin America. Peru is a market we are excited about. It is about two-thirds of the population of Colombia, with slightly higher GDP per capita. We believe we are well-positioned for success there, given the marketing adjacencies and overlap with Colombia, existing brand recognition, and the established teams in Latin America we will leverage. We're planning a modest launch period in Peru, so we don't expect a significant impact on either expenses or revenues in 2024.

We look forward to discussing our progress there on future calls. Our evaluation in Brazil is ongoing. We are awaiting clarity on several items, including the tax framework and how the grey market will be treated post-regulation. Again, our strategy has been to maintain certain levels of fiscal discipline in all of our markets, both new and existing. Brazil will be no different. We will continue to provide updates as appropriate on our plans. Lastly, I will add there are other markets in Latin that we continue to evaluate, and of course, we will provide updates on these markets when appropriate. With that, I'll turn the call over to Kyle.

Kyle Sauers (CFO)

Thanks, Richard. Second quarter revenue was $220.4 million, up 34% year-over-year, with balanced growth once again in both iCasino and online sports betting products. Our growth was also strong across our different geographies and market vintages. As the business continues to scale further, top-line expansion is resulting in growing profitability. We had record EBITDA again this quarter, coming in at $21.4 million, up over $20 million from last year's Q2 EBITDA of $1.2 million. As our business scales, we continue to drive improvements in profitability with strong flow-through. As Richard discussed, our revenue was driven by strong growth in our player base in combination with a nice improvement in player values in North America. In North America, MAUs were 164,000, up 24% year-over-year, while ARPMAU was up 6% year-over-year to $380.

Bernie McTernan (Senior Research Analyst)

In Latin America, MAUs were up 79% to $288,000, while ARPMAU was down 2% compared to the prior year period. We are bringing in players efficiently, retaining them well, and driving strong player value by offering them a unique and fun experience. In the second quarter, gross profit margin increased around 100 basis points sequentially to 34.6%. Revenue from markets other than Pennsylvania and Illinois accounted for 59% of revenue during the second quarter, while gross profit margin in markets other than Pennsylvania and Illinois reached 47% during the quarter, the highest point in our history. We're also very pleased with our marketing investments for the quarter. As Richard mentioned, we set records for new players in both the U.S. and Latin America, but we also did so while cutting our cost to acquire players by more than half compared to the year prior.

Marketing spend during the quarter was $36.3 million, down 10% compared to the prior year quarter, as a percentage of revenue, marketing was 16% during the quarter, down from 24% in the year-ago quarter. We expect marketing spend to increase sequentially into the third and fourth quarters, reflecting the increased investment Richard referenced for the Olympics, the start of football season, and capitalizing on our ability to acquire players at much better CPAs. As always, we'll stay flexible and dynamic with our marketing spend. G&A for the second quarter was $18.5 million, up 1% sequentially. We expect G&A to continue to increase sequentially throughout the remainder of the year as we make investments to support our growth.

Turning to the balance sheet, we ended the quarter with $194 million in unrestricted cash and no debt, and we've generated a $28 million increase in our net cash position through the first half of the year. Turning to our guidance, with a strong first half of the year behind us, we are raising both our full-year revenue and EBITDA guidance for 2024. We now expect full-year revenue to be between $860 million and $900 million, which increases the midpoint to $880 million, up $45 million from our prior guidance. We expect full-year EBITDA to be between $64 million and $72 million, which increases the midpoint to $68 million, up $13 million and 24% from our prior guidance.

As a reminder, our guidance includes only those markets that are live as of today, and we think it's noteworthy that we're raising EBITDA guidance despite the impact of the increased Illinois tax rate and the cost associated with the Peru launch. And with that, Operator, please open the line for questions.

Operator (participant)

We will now begin our Q&A session. At this time, if you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, it is star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. Our first question comes from Ryan Sigdahl with Craig-Hallum Capital Group. Ryan, your line is now open.

Ryan Sigdahl (Senior Research Analyst)

Good afternoon, Richard, Kyle. Nice job. Good quarter again. Maybe, Kyle, sticking on the last point, talking about Illinois and the tax increase. Can you talk through the puts, takes, and I guess who's ultimately burdened, given your managed service agreement with Rush Street Gaming, with ultimately the higher taxes in the state? And then secondly, how do you think about strategy as it relates to the competitive intensity and how the marginal tax rate may impact your larger competitors in the state relative to yourself?

Kyle Sauers (CFO)

Yeah, I'll go on that first part, Ryan, and then let Richard chime in. So the way that tax rate was finalized, being a graduated tax, was better for us. As you point out, more of the burden of that is on our partner in Illinois. The impact on us ends up being less than we originally expected under the construct that was put forward initially. So at current revenue levels, it's less than a $2 million annual impact on us. Obviously, we hope for that to increase as we increase the business there. And as I think I pointed out in the prepared remarks, we've built that impact into our guidance already.

Richard Schwartz (CEO)

From a competitive standpoint, it went from being one of the most reasonable tax rate markets in the market in the country to one of the more highest ones. You can imagine that there will be a change of effort and investment made in the state because of that. Therefore, I think the competitive intensity will decline. I think that actually probably bodes well for companies that are less aggressive in their spend in terms of just trying to create an experience that players like and treat them well and retain the customers, which is where we have done well historically.

Ryan Sigdahl (Senior Research Analyst)

Moving up north to Ontario, any comments on performance and if you're willing to comment on growth rates relative to the overall industry figures that we see?

Richard Schwartz (CEO)

Sure. We're really excited by a marketing campaign we're running right now during the Olympics, which is essentially exclusive around the entire country, really making sure our brand is front and center. During the Olympics, we're really the only brand that's in our category that's being broadcast in association with all the Olympic broadcasts. And so given a lot of interest in the basketball team up there with a lot of NBA, some star NBA players, and obviously sports like tennis and soccer perform really well for us outside of Olympics, and we're expecting it to do well for us during the Olympics. We think it's a great opportunity for us to head into the second half of the year to continue growing the way we have. We aren't going to really break out specific market performances, though, like we remember to.

Ryan Sigdahl (Senior Research Analyst)

Very good. I'll turn it over to the others. Thanks, guys. Good luck.

Kyle Sauers (CFO)

Thanks, Ryan.

Operator (participant)

Next question comes from Daniel Politzer with the company Wells Fargo. Daniel, your line is now open.

Daniel Politzer (Equity Research Analyst)

Hey, good afternoon, everyone. Thanks for taking my question. First one, on flow-through, the first half this year has been really strong. Obviously, you've been reflected profitably and positively in terms of your profitability. But as we think about the back half of the year, I think your guidance is implying something like 20% flow-through. To what degree is there some conservatism baked in there, or is that more reflective of market launches or Illinois or something else altogether?

Kyle Sauers (CFO)

Yeah, Dan, thanks for the question. This is Kyle. I'll take it. So some of the improvements in EBITDA compared to last year in the first half relates to lower marketing spend. And based on what we've indicated today, we're expecting to increase marketing spend year-over-year in the second half. So that impacts the flow-through during those quarters. I think it's probably more useful to look at the full year and takes out some of the seasonality of the business and seasonality of our marketing investments. And I think if you look at it that way, the guidance puts us in a low to mid-30% range for flow-through for the year.

Daniel Politzer (Equity Research Analyst)

Got it. And then in terms of the customer acquisition environment, have you seen any changes in terms of the cost to acquire sports betting customer versus iGaming?

Richard Schwartz (CEO)

Well, yeah, we've seen for us, we've been able to deliver reductions across all categories of marketing. I think we had a rational market for a period of time, and it's become a lot more rational. I think we've been improving quite a bit with our investments in technology marketing tools, as well as investing in capabilities to make sure that we find the right players in the right places that are valuable for us. Ultimately, you'll see in what I shared is that we're getting more players for less spend, which means we're becoming extremely efficient in what we do. We think there's opportunities to continue to improve in that area. So I would say we have seen some improvements, and we're excited by the opportunity to kind of invest more in marketing moving to the second half of this year.

Kyle Sauers (CFO)

Yeah, and just maybe put a fine point on it, Dan. It's improved very nicely in both sports-only markets and markets with both products.

Daniel Politzer (Equity Research Analyst)

Understood. Thanks so much.

Kyle Sauers (CFO)

Thanks, Dan.

Operator (participant)

Our next question comes from Bernie McTernan with the company Needham. Bernie, your line is now open.

Bernie McTernan (Senior Research Analyst)

Great. Thanks for taking the questions. Maybe just to start off on Ryan's question in Illinois, have you actually just, I know it's only been a month since the actual tax rate increases, but have you seen any change in behavior from any of the operators thus far as a result of the tax situation?

Richard Schwartz (CEO)

No, I think we really haven't seen anything that I would comment on here.

Bernie McTernan (Senior Research Analyst)

Okay. Understood. And then just given the success and the strong MAU trends that you've seen, would there be any thought of revisiting states that you aren't currently in where only online sports betting is legalized, like in North Carolina, for example? Does that make more sense now, given all the success that you're having?

Richard Schwartz (CEO)

Well, we look at those markets all the time. The ones that were in, the ones that were out, are always constantly evaluating where the opportunity is for the best ROI. We think the mix we have right now is really strong. What we're seeing is that a larger percentage of our overall market footprint are now moving to casino markets. In fact, nine out of our 19 states are now casino markets, I should say, globally have casino in it. So I think the combination really gives us twice the value of being able to acquire players for sports that cross the casino. So while it's possible, we are getting much better in sports constantly. Our product's improving, our user experience is improving. We're bringing some innovations to the market in the last year that have worked really well.

Bernie McTernan (Senior Research Analyst)

We have some additional ones we're working on for later this year. So I think it's never something we don't consider, but I would say that we're really glad that we are growing in the way that we are in all of our markets. We're very balanced in the casino and sports. And the sports is a big part of our business still, and it's something that we're excited to keep growing. But I don't think it's something that is pending for us to be jumping into another sports-only market.

Understood. That's all from me. Thanks, Richard.

Operator (participant)

Our next question comes from David Katz with the company Jefferies. David, your line is now open.

David Katz (Managing Director)

Evening, everyone. Thanks for taking my questions. I apologize if I missed it in your prepared remarks. I was on time. Delaware is a market really that has been one of the important engines of growth of late. Could you just give us some updated color on sort of how that's doing and put some context around just how big it is in the grand scheme of things potentially?

Richard Schwartz (CEO)

Sure. I mean, it continues to be a real strong performance for us. I think the quality of the technology and our user experience really has resonated with the audience there almost immediately. And we're continuing to improve our performance there to the point where we shared that we are generating four times more what the prior operator had achieved over the same prior year timeframe. So really a strong result. We are adding live dealer. We did add live dealer at the end of this last quarter. And as you know, it's a very popular product category, one that brings a lot of trust to the users and who like to play table games. And so we're excited for that to have been live.

Bernie McTernan (Senior Research Analyst)

We'll get the benefit of that, we think, during the football season when you have a lot of cross-sell between the sports and the live dealer type of products. We're just really excited for the first time to have ever in the state of Delaware to offer an online sports product at the beginning of football season. I think those two things, live dealer and football season, are going to be opportunities for us to continue to expand our customer base. We've been really excited by the opportunity in Delaware.

David Katz (Managing Director)

Is it fair to classify it as I assume it's outgrowing kind of the company as a whole at this point, so it's sort of accretive to the growth? Any context we could put around that?

Kyle Sauers (CFO)

Well, I want to make sure I answer your question, David. It's all new for us. So obviously, it's all growth. We did, as a reminder, exit Connecticut late last year, so that's a bit of an offset. But it's been a nice contributor for us. In the first half of the year, about $37 million in GGR. Obviously, there's some bonus in there that brings that number down to the financial statement revenue number. But we'd expect it to continue to grow nicely in the back half of the year, as Richard pointed out, for reasons being first football season and the addition of live dealer.

David Katz (Managing Director)

Okay. That'll work. I have more, but I'll come in the back end. Thanks.

Kyle Sauers (CFO)

Thanks, David.

Operator (participant)

Our next question comes from Chad Beynon with the company Macquarie. Chad, your line is now open.

Chad Beynon (Managing Director)

Afternoon. Thanks for taking my question and nice results. Wanted to ask about hold rates, I guess, related to both iGaming and OSB. Anything major to call out in the quarter? And then I guess going forward, there's a couple of things. Obviously, the Euro Copa finals were in the third quarter, so wondering if you could provide a little color around that. And then more importantly, as we kind of get into NFL season, kind of where's the product now and how are you thinking about potential hold rate increases versus what you had last football season or in Q4 2023? Thanks.

Kyle Sauers (CFO)

All right, Chad. I'll start. I think there's about six questions in there, so I hope I can get all of them. On Q2 hold, both iCasino and sports margins were within our expected range. Sports was probably at the lower end of our range. I'd point out that our expectation is that of our hold ranges for both iCasino and sports, that continues to improve, which I think answers another of your questions that we'd expect the improvements in our product, our new Prop Central that came in late last year, the Squares, the improvement in our parlay product and same-game parlay product should drive improvement in hold this year. But that's the same across the business. On the Copa and the Euros, I think Richard highlighted just how helpful that was for acquiring new players.

Bernie McTernan (Senior Research Analyst)

A lot of great activity both at the end of Q2 and the beginning of Q3. We'll probably wait until we release Q3 results to give a whole lot of details on the outcomes. I think, as you know, Argentina beat Colombia in the finals, so that was certainly a good outcome for us.

Chad Beynon (Managing Director)

Thanks. That's great. Appreciate all that on hold. Then separately, just on Mexico, I know you mentioned that the business is at a better point at its time since launch compared to where Colombia was. So how should we think about when a business like this scales up? Or could you just remind us how long it took for Colombia, which is still growing now, to really get to a significant amount of contribution? Thank you.

Richard Schwartz (CEO)

Well, I'll start, and then maybe Kyle can add in. So I mean, Mexico's growing very nicely. It's a really fun opportunity for us. You have to get all the localization customization right, which we're almost at the point in time where we have that. We have a couple more payment integrations we're finishing up that I think is going to make an improvement as well. But we're real excited for that. We have a casino audience down there that I think really understands the casino category. And obviously, it gets to appreciate the variety and the quality of our casino experience. So it is a market that we're investing more in because we do see larger opportunities for growth. In terms of the actual timeline of where we are, well, let's, yeah.

Kyle Sauers (CFO)

So I'll just, without absolute specifics, that it took Colombia several years before we started to really hit our stride and accelerate growth. But as you've seen over the last several years, once we got to - I don't know if tipping point would be the right term - but brand awareness, product was really where it needed to be in Colombia. Growth has really accelerated. And we think we have a similar opportunity in Mexico as we start to build that base and develop some brand awareness. Product is certainly in a better place today than it was in Colombia five years ago. So we think the opportunity is really, really nice for us there.

Chad Beynon (Managing Director)

That's great. Thank you both very much.

Kyle Sauers (CFO)

Thanks, Chad.

Operator (participant)

Next question comes from Jed Kelly with the company Oppenheimer. Jed, your line is now open.

Jed Kelly (Managing Director)

Hey, great, great for taking my questions and great quarter to get. Just a question on promotional velocity and iGaming. Have you seen a material difference in the industry? And then just on improving CAC trends, I think we've heard from multiple operators now they're seeing lower CAC on a similar level of marketing. So is there something in the industry that's going on that's driving lower CAC? And then I have a follow-up.

Richard Schwartz (CEO)

Right. So a couple of questions in there. First, as I referenced earlier, we're in a more rational market than we've been before. We sustained and grew in the prior irrational market, so it's easier for us to improve and perform, I think, in a rational market that we're experiencing now. In terms of our approach, we look for good value ourselves based on our own positioning in the marketplace. And we have a little less concern with what others are doing. Obviously, we pay attention, but we make our own decisions and strategies based on what's in our best interest. And so I'll say there's always going to be competitiveness there. There's always someone in there coming in aggressive, spending a lot.

Bernie McTernan (Senior Research Analyst)

We've, over many years now, been able to sustain and grow in that environment where others are outspending us because ultimately it comes down to putting players first and the quality of the user experience. I would say that the CAC for us, as we've shared, has continued to improve and reduce. I think it's possible that some other of our competitors are spending less than they did historically, lesser percentage of their revenues on marketing. I also think it's possible that some of the smaller operators that were still spending that exited the market. So that provides opportunity for those that are still here. I know we've improved massively in terms of our maturity as an organization and knowing where to get the players, what players are valuable, and how to make sure we're getting players that are long-term viable for us.

I think that investment we've made is really delivering for us the better value. I can't really speak to how others are doing it, but I would say that I think the whole industry is probably getting better as well.

Kyle Sauers (CFO)

Yeah. And the only thing I would add to that, Jed, is Richard's all of his points about our marketing and how much better we've gotten in finding high-value players in the right places and doing it at an appropriate cost. The same goes on the bonusing that you referenced is we've gotten a ton better at making sure that the right bonuses are going to the right players and that we're giving value to the players that deserve it most. I'm sure others in the industry have gotten better at that as well, but we're very pleased with how much better we are, both on the bonusing side and on the marketing efficiency. Having said that, I think we've got the ability to be even better still.

Richard Schwartz (CEO)

One thing to add on the marketing efficiency concept is that there were some recent articles about us that recently came out last day or two where we decided to pull back some affiliate spend in some markets. The reason why we did that is ultimately we want to have the flexibility to spend more with affiliates in other markets, make sure we focus on the markets where we get the best ROI. And secondly, there are other channels in the markets where we may have pulled back that we see opportunities to do other types of channels to acquire customers. So we're constantly looking at the data and evaluating the right opportunities to deliver the best ROI for us in those markets.

Jed Kelly (Managing Director)

Great. And then just real quick on the back half guidance, should we assume the fourth quarter is going to be your high watermark for EBITDA of the year?

Kyle Sauers (CFO)

Just maybe a couple of things. We expect marketing spend to be higher in Q3 and Q4 than it was in Q2 for all these reasons that Richard talked about. We just see a lot of opportunity to acquire more players at very reasonable prices. I'd expect that revenue in Q3, at our midpoint of guidance, the revenue in Q3 would be lower than Q2. Then Q4 would be the high watermark for revenue. Certainly possible that Q4 could be the high watermark in EBITDA for the year as well.

Jed Kelly (Managing Director)

Thank you.

Kyle Sauers (CFO)

Thanks, Jed.

Operator (participant)

Our next question comes from Jordan Bender with the company Citizens JMP. Jordan, your line is now open.

Jordan Bender (Equity Research Analyst)

Good afternoon, everyone. I want to follow up on Jed's question there around spending less to gain more customers. Is the talk around marketing increasing in the back half of the year just you being opportunistic based off of kind of some of those trends where you're acquiring easier, or was this planned spend just ahead of one of the more important periods of the year? Thank you.

Kyle Sauers (CFO)

Well, I think it's a combination of things. As you point out, some of it is kind of event and seasonally driven. Richard pointed out in his prepared remarks, and then I think we highlighted it again, the Olympic campaign that we have going on in Canada here in Q3. And so that's driving some increased costs. Obviously, there's a lot of opportunity around the start of football season to put money to work. And I'd say it's more dynamic than it is opportunistic. Our marketing team has done such a fantastic job of driving down costs and finding the right place to get new players that it makes sense for us to make some additional smart investments in marketing.

Bernie McTernan (Senior Research Analyst)

It's not in a response to any competitive forces as much as it is leaning into what's going really well for us and driving more user count for future year growth.

Richard Schwartz (CEO)

Just to add, Jordan, we keep things simple. We just modify based on the value of the players and the cost to attract them.

Jordan Bender (Equity Research Analyst)

Got it. Okay. And then for my question, just given the relative size and scale of the company now and the inflecting free cash flow, are you getting to a point where it makes sense to start bringing in some of your tech stack that you don't own in-house? Thank you.

Richard Schwartz (CEO)

Well, we actually own almost all the tech stack. We're really heavily invested in all kinds of technology and features from the apps, the player account management system. We built poker. We have our promotional rewards engine in-house that's really innovative and unique in the industry. The only thing we haven't brought in-house is sportsbook platform, which we integrate through Kambi for many years. And as I've shared previously, it's probably been a while. Our philosophy on that relationship is that we like to sort of get the bread and butter from Kambi, but we have a development team internally that adds our own flavor, our own twist, our own innovations on top of the sportsbook. So we get the benefit, I think, of a core fundamentally strong core technology.

Bernie McTernan (Senior Research Analyst)

And we differentiate by building our own features on top of it, which is things like the squares have worked and the player props, things we did last year really worked well as well. We have some new ones under development. So there really isn't a plan to bring in at the moment, certainly our sportsbook in-house, but everything else we have developed in-house. And as you may know, we have that poker platform that we've been developing as well. So again, we have almost all parts. We have our own jackpot system. Other companies have gone out and bought entire companies to have a jackpot system. We built it in-house. So we have a very robust, very thorough, very broad-based technology system in-house, really. I would say 95% of everything is in-house.

Really, the thing we don't have in-house, maybe some others do, is sports, whereas we have a lot more in-house in other areas than I think most of our competitors do.

Jordan Bender (Equity Research Analyst)

Understood. Thank you very much.

Kyle Sauers (CFO)

Thanks, Jordan.

Operator (participant)

Our next question comes from Mike Hickey with company Benchmark Company. Mike, your line is now open.

Mike Hickey (Equity Research Analyst)

Thank you. Hey, Richard, Kyle, great job on the quarter, guys. Two topics. I guess the first topic, Latin America. Kyle, sorry if I missed this, but can you give us some color on sort of LATAM as a segment in terms of revenue and EBITDA contribution, whether it's a quarter or the first half or maybe how you're thinking about it for the year?

Kyle Sauers (CFO)

Yeah.

Mike Hickey (Equity Research Analyst)

If you can't give EBITDA, obviously, maybe just if it's plus or minus would be helpful. Then before you jump in there, Kyle, just the last piece on Latin America, which you're kind of like maybe you're incrementally more cautious on entry into Brazil. Curious if that's the right read-through there and maybe any sort of updates on the regulatory framework and maybe the challenges that you see in that market. I'll follow up, guys.

Kyle Sauers (CFO)

Great. Thanks, Mike. So Latin America obviously been highly successful for us. We're really excited about the Peru launch that just happened here. But the main driver of our growth right now is Colombia and also very excited about Mexico. So today, or at least in Q2, I think Latin America makes up close to 15% of our revenue now. So a really nice contributor. That's been growing faster than our North American business. And I think that is likely to continue for some time, certainly given the launch of Peru and Mexico starting to pick up some momentum. In terms of profitability, Latin America absolutely is nicely profitable for us. Latin America in total has higher gross margins than most of our North American markets. So strong growth in Latin America is nicely incremental for us and incremental for the bottom line.

Bernie McTernan (Senior Research Analyst)

But I'll stop short of splitting out EBITDA by market or by territory. And then, Richard, do you want to comment on that question?

Richard Schwartz (CEO)

Sure. Yeah. For Brazil, Brazil is a large and exciting market. There's lots of moving parts there. It's very important that we sort of remain disciplined and more thoughtful about how we approach the market. I think we've demonstrated to have a very clear and proven approach for how and when we enter new markets. So we'll plan to update as time goes on on Brazil. I will say that being first to launch in that market as a regulated operator isn't like winning a gold medal in the Olympics because there's a lot of operators already operating there for many years that are already unregulated, gray market that are going to make the transition. Already we're the first ones in the market.

Rather than being first, it's important to us to be the best when we do decide to enter a market. We'll have to keep you updated on our plans.

Mike Hickey (Equity Research Analyst)

Nice. Very helpful. Second topic, just on the regulatory piece, thinking sort of Delaware and Illinois. Delaware, obviously, huge success for you guys. Do you feel like now, Richard, you sort of have a sustained licensing advantage? I mean, it was sort of challenged to bring in multiple operators. It looks like that was shot down. Do you feel like you're in a position here where you're comfortable, or are we going to have to worry about sort of a continual flow of challenges on sort of the monopoly that you have? And then on the Illinois side, I guess just more on the tax side, are you guys more comfortable today that the idea that there could be a contagion here with other states also raising taxes?

Bernie McTernan (Senior Research Analyst)

Do you think that's still a concern for investors, or do you think we're more in a comfortable spot than maybe a month or two ago? Thanks, guys.

Richard Schwartz (CEO)

I'll take, I guess, both those questions. And maybe Kyle can add in something else if there's something to add. In terms of Delaware, given our success, it's really prudent for us to anticipate that there'll be further lobbying efforts in the future. But we remain really confident that best and highest outcome for the state will be to continue along the current path. And we remain committed to working closely with the lottery and the other key stakeholders in the state to demonstrate that the current operating model there has been and continues to be in the best interest of Delaware. The bottom line is that if we continue to perform in the way we have and the way we believe we will in the future, it makes it that much more compelling for the same structure to remain in place for the future.

Bernie McTernan (Senior Research Analyst)

In terms of Illinois and the possibility that the impact of graduated tax could be trend as opposed to a sort of a one-off. I've been in this industry a long time, and every state is completely unique with their own set of political considerations, competitor strategies, financial needs, etc. So I think what I will say, though, is that I don't think it is, I think it's a one-off. And one of the concerns is that you will see in some states where when you raise taxes, it will have the opposite effect as impacted in that it will lead to less revenues in some cases by the state because you will empower the unregulated operators and the sweepstakes companies to be more aggressive in these markets, therefore really limiting the capital that the states generate. So it's very important to be very cautious when you do this.

I think as you start to look at this example, you might start to see that it doesn't deliver the outcome that everybody hopes it would. I would just say that every state is unique, and I don't think there's any trend that's been established. I think it's more of a one-off.

Mike Hickey (Equity Research Analyst)

Thanks, guys.

Kyle Sauers (CFO)

Thanks, Mike.

Operator (participant)

At this time, there are no other questions registered in queue. Again, if you'd like to ask a question, please press star followed by one. There are no questions registered in queue at this time. I'd like to pass the conference back over to our hosting team for closing remarks.

Richard Schwartz (CEO)

We appreciate the time today, and we'll look forward to having our next conference call for Q3.

Operator (participant)

That will conclude today's conference call. Thank you for your participation, and enjoy the rest of your day.