Rush Street Interactive - Q4 2022

Transcript

Moderator (participant)

Good afternoon, and thank you for attending today's Rush Street Interactive fourth quarter and year-end 2022 earnings call. My name is Jason, and I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I'll now pass the conference over to our host, Kyle Sauers.

Kyle Sauers (CFO)

Thank you, operator, and good afternoon. By now, everyone should have access to our fourth quarter 2022 earnings release. It can be found under the heading Financials Quarterly Results in the Investors 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. 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.

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. A reconciliation of these measures to the most directly comparable GAAP measure is available in our fourth quarter 2022 earnings release and our investor deck, which is available in the Investors section of the RSI website at rushstreetinteractive.com. 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, welcome to our fourth quarter and year-end 2022 earnings call. Last year was a terrific year, having made great strides towards our long-term objective of building a sustainable, profitable business. We are well-positioned as we enter 2023 to continue striking the right balance between top-line growth and delivering on our profitability goals, while also continuing to balance investments between online casino and online sportsbook. Specifically, during 2022, we grew our top line by 21% year-over-year. We did so while maintaining our disciplined approach to investing in customer acquisition and retention. We launched our platform into five new jurisdictions, including Ontario, Mexico, New York, Maryland, and Louisiana. During the fourth quarter, we've maintained one of the leading monthly revenue per user rates of $327 while achieving growth of 22% in our monthly active users.

We made significant improvements in our proprietary technology and platform, particularly in our online betting user interface, features, and functionalities, where we've been recognized as having one of the leading products in the industry. We ended the year in a strong cash position with $180 million of unrestricted cash on the balance sheet and no debt. We believe that this leaves us more than fully funded to reach sustained profitability. We finished 2022 with record revenues of $592 million. For those who have followed us over time, you will appreciate that our top-line growth is not growth at all costs. Rather, it is purpose-driven as the results reflect our demonstrated ability to acquire and retain customers at sensible investment levels.

We lead with a product offering that offers a best-in-class user experience designed to engage and delight players by delivering friendly, fun, and fair betting experiences. When evaluating our results, we see the combination of solid revenue growth plus disciplined marketing spend, improving gross margins, and modest growth in corporate G&A costs. We remain firmly on our path, moving closer to profitability. As we've stated on prior calls, we expect to achieve positive adjusted EBITDA for the back half of 2023. Kyle will provide further details, but we initiated 2023 full-year revenue guidance in the range of $630 million and $700 million. With that, I want to provide some thoughts on our markets. In aggregate, across our U.S. markets, we continue to see solid revenue growth. Strong volumes continue for online casino and sports betting in the markets where we are live with both.

In fact, in our Latin American and new North American markets launched after 2020, we saw 95% revenue growth during the year. This demonstrated our ability to grow nicely in new markets where, at the time of launch, we have no existing player databases and limited brand awareness. In our newest sports-only states of Maryland and Ohio, we have evolved our approach and invested less in early marketing initiatives relative to our previous sports-only market launches. We expect this level of investment to be reflected in our market share, but we also expect faster recovery of our initial investment in these market launches. Internationally, our current results continue to be anchored by Colombia, where revenue continues to expand at very substantial growth rates year-over-year.

In the fourth quarter, on a year-over-year basis, Colombia grew a remarkable 89% in Colombian pesos, which amounts to 53% growth in our reported U.S. dollars. During the fourth quarter, we announced the opening of new offices in Bogota and Medellin to support the expansion of our Latin America presence. In Bogota, we opened a new location to serve as the headquarters for our Latin America operations team, while in Medellin, we expanded our technology hub to house a team of the area's top tech talent to support our global technology platform and maintain our healthy roadmap of product development. Moving to Ontario, we remain pleased with our progress and performance. Ontario is obviously a competitive market, with an additional 26 sites either launching or transitioning to regulated during the fourth quarter, up over 60% from the end of the third quarter.

However, our strength in online casino is certainly helping us during these early days. Handle is continuing to grow nicely, evidenced by sequential growth of almost 30% during the fourth quarter as we continue in ramp-up mode. In a rapidly expanding market due to transitioning operators, our market share remains in the mid-single digits for online casino and low single digits for online sportsbook. Turning to Mexico, we remain very deliberate and measured in our ramp. The focus continues to be on building the foundation that will support stable long-term growth and profitability. We are continuing to work with and leverage our media partner to build brand awareness and further localize our platform and user experience. As we have said prior, we expect to see a more significant contribution from Mexico beginning towards the back half of this year.

That said, we are pleased with the foundation we have established thus far. Looking forward, there are more conversations across our industry about online casino legislation than we've ever before witnessed. Our count is that five online casino bills have been introduced already this year. Regardless of the outcomes, this demonstrates a greater legislative effort being made in this area. As we have mentioned prior, the facts are straightforward. The online casino market, and even the online slot market by itself, has the potential to be significantly larger than the sports betting market, more importantly, could benefit RSI in an outsized way, given that we often earn 3x-5x the market share in iCasino compared to sports betting in those same states. On the marketing front, we increased spend heading into the winter months, specifically in our iCasino markets.

We also increased spend in New Jersey, specifically supporting our rebranding of BetRivers in the state. I remind investors that we have previously pulled back spend there in anticipation of the rebrand. For the full year, marketing spend was down about 140 basis points compared to last year when measured as a percentage of net revenue. This is with an investment-heavy first quarter this year. If we were to look at marketing spend as a percentage of net revenue over the last three quarters, we've seen an improvement of 560 basis points year-over-year. Looking forward, we remain disciplined in our approach. We see this in our results. Marketing efficiency, as measured by our cost to acquire players, improved by one-third in the second half compared to the same period last year. We are data-driven and focused on what we get for the spend.

We continue to focus on earning and retaining customer loyalty by treating them well, being thoughtful, and by leveraging our development expertise to create seamless experiences and reduce friction at every possible touch point. We will remain efficient in both existing and any new markets we enter. We have built our platform and culture around this operating philosophy, and we believe it is imperative to achieving sustained long-term profitability. Turning to product and innovation, our teams have made tremendous progress once again this quarter. Many of the improvements we make each quarter are building on efficiencies and making the user experience more seamless. Things like player onboarding and payment options and speed, areas where we've been leaders in the industry. We also continue to innovate and bring new features to market. Our casino lobby now supports custom lobby layouts for different player segments.

This allows us to provide a more personalized experience and curate the games and banners displayed in the lobby according to players' game preferences and lobby usage behavior. We've also introduced machine learning to further advance our recommendation engines to improve the lobby experience for our players and get them to the games that excite them and improve their entertainment experience. In sports, our single-game parlay product is dramatically better, and we've significantly improved the merchandising of our parlay products to put options front and center for our players and offer a chance for larger payouts. These efforts have translated nicely as our percentage of single-game parlay bets this NFL season increased by 30%. On our last call, we previewed a new feature that was soon to be released, our proprietary Squares game, something akin to what you all likely participated in at your Super Bowl parties.

This new, fully integrated feature allows us to offer free randomized Squares to our players for games they bet on and to boost the size of the winnings based on betting criteria we can configure for each promotion. In the case of NFL games, single-game parlay wagers trigger the boost to payouts. Squares have been tremendously well-received. Subsequently to launching Squares, which was partway through the football season, 25% of our football bettors who had never placed a single-game parlay did so. Our average bet size on football is up 10%, and we saw strong reactivation activity. On the heels of this success, the Squares innovation has been transitioned to basketball, where we just launched the functionality for NBA games. With that, I'll turn the call over to Kyle.

Kyle Sauers (CFO)

Thanks, Richard. Fourth quarter revenue was $165.5 million, up 27% year-over-year and up 12% quarter-over-quarter. Full year 2022 revenue was $592.2 million, up 21% year-over-year. This marks our 15th consecutive quarter of revenue growth. For the full year, we experienced solid revenue growth in all of our markets, except for one of our smaller U.S. states. As a result, we grew nicely in both online casino and online sports during the year. We continue to see positive signs in our player acquisition and retention as measured through monthly active users. Fourth quarter North American MAUs were 149,000, up 22% year-over-year. The increase reflects our successful efforts in player acquisition and retention across online casino and sports betting, plus the addition of new jurisdictions compared to the same period last year.

In terms of player engagement and monetization, average revenue per monthly active user was $327 during the fourth quarter, which is stable compared to the same period last year. We remain very pleased with our healthy ARPMAU as we continue to attract and retain high-quality players to the platform. As a reminder, the new states we launched last year required various levels of investment during 2022. We're beginning to see some benefits. As Richard touched on, we continue to target adjusted EBITDA profitability for the second half of this year. Our fourth quarter adjusted EBITDA loss was $17.3 million, which is a 45% improvement from the fourth quarter last year.

For the year, our EBITDA loss was $91.8 million, which is an increase over 2021, primarily due to the new market investments we made in the 11 markets that launched during 2021 and 2022. In fact, those 2021 and 2022 vintage launches accounted for about $80 million of our $92 million loss during this past year. As these markets mature and build, our marketing expenses come down and our margins improve, our anticipation is that these 11 market launches in aggregate will be contribution positive for 2023. Advertising and promotions expense was $63.2 million for the fourth quarter, down slightly from last year's fourth quarter. As we previewed on our last call, our marketing spend for the fourth quarter was up sequentially from the third quarter.

That being said, we expect this figure to go lower over the coming quarters as we move closer to adjusted EBITDA profitability. For 2023, marketing costs should be lower than 2022, both as a % of revenue and in absolute dollars. We expect to spend more during the first half than the second half as a result of the recent launches in Mexico, Maryland and Ohio, an Ontario market that is still less than a year old, and the rebranding efforts in New Jersey that Richard mentioned earlier. We remain committed to spending rational amounts to acquire players, monitoring the value of those players and the channels through which we acquire them, investing more when we see solid returns, and reducing or eliminating marketing where it doesn't make economic sense. Gross margins improved sequentially again in the fourth quarter and ended the full year at 30.1%.

Gross margins should improve again in 2023, where we expect to see a full year benefit of several 100 basis points. G&A costs increased slightly in the fourth quarter to $13.3 million, up from $12.7 million in the third quarter. We continue to make prudent investments in the growth of corporate and our technology and product teams, we expect G&A to continue to grow modestly over the coming quarters. Our balance sheet remains pristine, As Richard highlighted, we believe we are fully funded to profitability. We ended the year with $180 million in unrestricted cash and no debt. We've initiated full-year revenue guidance for 2023. We currently expect revenue to be between $630 million and $700 million. As a reminder, our guidance includes only those markets that are live as of today.

We continue to execute well on our growth strategy while managing our costs appropriately. We have a strong balance sheet, no debt, and a strong position in our new and existing markets. As such, we have the flexibility to make investments where we can generate the best possible returns for our shareholders and reducing or eliminating initiatives where we don't see solid returns. All this gives us a continued clear path to profitability. With that, operator, please open the line for questions.

Moderator (participant)

If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that, please press star two. Once again, to ask a question, it is star one. Our first question is from Chad Beynon with Macquarie. Your line is now open.

Sam Ghafir (Senior Analyst)

Hi, good evening. This is Sam on for Chad. Thanks for taking our questions. First question, want to touch on the World Cup and what you guys saw in Latin America as it relates to customer engagement, acquisitions, and how it played out relative to your expectations, and if there was any major differences with what you saw in North America during that same time period.

Richard Schwartz (CEO)

Sure, Sam. Hey, this is Richard. Yes, as you can imagine, the impact for our business was much stronger in Latin America, particularly Colombia, where the interest in the sport of soccer was tremendous. It was a great opportunity for us to acquire a large number of new players and engage existing customers, and it was a very successful World Cup for us. We feel we're running on all cylinders in the Colombian market. In fact, we would say that the quality of the customers were strong, and everything about it was a real positive experience.

I think I just wanna caution, as we have once before, that during the World Cup, the rest of the soccer leagues take a break for several weeks or, you know, multiple weeks, and that does impact also, has an impact on some of the revenues because you're not having the same schedule you normally would have. Having said that, the strength and the growth of the World Cup does make up that difference. Overall, it was a real positive for us in that business, in that market. In the U.S., it was a lesser impact for us, but still positive.

Sam Ghafir (Senior Analyst)

Okay, awesome. Thank you for that. As a follow-up, just wanted to touch on hold, generally for both iGaming and sports. Wondering how much of an impact it had on your quarter, positive or negative, and if you see hold as a potential upside opportunity for the business over the next couple years as it relates to single-game parlays for sports, and just sort of how you're thinking about it long term and balancing customer retention and so forth?

Kyle Sauers (CFO)

I'll take the first part just on the specific impact or really, lack thereof in Q4. Then maybe Richard will weigh in on longer term and strategies and player experience. As I alluded to, we really didn't have much of an impact, positive or negative from hold in the Q4, either in casino or sports. They both fell into the range of possibilities that we expect when we're doing our planning and when we offer guidance. Nothing real exciting to share there.

Richard Schwartz (CEO)

In terms of the long-term goal, there's always an opportunity to look at margin opportunities for improvement. I think we've always been very clear, though, that we think there's limits to how aggressive you wanna be with some customers. Certainly, we value the long-term value of the customer, the retention for years, not months. We do think that with experience brings awareness that for some customers and if you're too aggressive towards the setting of the margins, then you end up having a shorter life cycle with you, which actually diminishes the amount of profits from those customers. I think it's a item to balance. We look at it very carefully, and it's a subject that we often talk about, and there are opportunities certainly to increase some betting on some higher margin sports products, in particular the parlays.

The ceiling parlays is something that we focus a lot of energy on. We're starting to see some positive results in that area from our efforts.

Sam Ghafir (Senior Analyst)

Awesome. Thanks for the color.

Moderator (participant)

Our next question is from Jed Kelly with Oppenheimer. Your line is now open.

Jed Kelly (Managing Director and Senior Analyst)

Hey, great. Thanks. Thanks for taking my question. Just circling back to online or iCasino, could you give us an update on the legislative, potential legislative? I think New York's having, like, a potential meeting, I know, in Midwest. Could we get an update on that? Then just going into your Latin American growth strategy, can you just give us an update on how your share gains are progressing in Mexico relative to competitors? Thank you.

Richard Schwartz (CEO)

Sure. I'll talk about online casino legislation and then share some color on the Mexico question as well. In terms of the online casino, the industry is aligned in a way that I haven't seen before, and you're starting to see a lot of investments being made and lobbying efforts to legalize online casino in a way that you haven't seen over the last decade. That's extremely exciting. I think it's clear why. Casino is a larger, more profitable category. The industry and legislator are realizing the value of the combination, how effective it is. While it's, you know, tricky to predict exact timelines for when legislation may drop, there is clear movement. As an example of that, I'll share that, you know, conversations are now turning into drafts.

Drafts in five cases have actually turned into introduction of bills. In the states of New York, Illinois, Indiana, Maryland, New Hampshire is, like, the fifth one. We've had legislation introduced this year so far, as we mentioned. There's enthusiasm, there's opportunity. Now, is it gonna happen overnight? Probably not. The first step is to get a sponsor of the bill excited, interested in introducing a bill, and we're starting to see that. You're starting to see a lot of effort being made and lobbying dollars being applied towards this goal. I think you're starting just to really get momentum being built, which of course is outstanding for us because of all the companies in the industry, we think we may be one of the ones that have a disproportionately large share of casino revenues, and we do particularly well in the casino markets.

For us, this type of momentum is very welcomed. In terms of Mexico.

Kyle Sauers (CFO)

Yeah, maybe I'll jump in on the, on the Latin American question, Jed. In Colombia, obviously Richard highlighted just the fantastic success we've been having down there in the fourth quarter. We get sporadic information on our market data. The last data we had, we were approaching 20% share, solid third place down there. It'd be hard to imagine that with close to 90% growth in the fourth quarter in the Colombian currency that we lost any, that we lost any momentum there. In Mexico, it's still early days. No changes from what we said before, that we're expecting to see kind of more meaningful and increasing contributions from Mexico towards the back half of this year.

Really nothing to share on market share there yet. Maybe just for a little more color, with respect to the growth plans there, the opportunity that we see is very, very large. You know, comparing that to Colombia, first year in Colombia, we did something like $4 million in revenue. Second year was $15 million. We expect a faster pace in Mexico. It's a bigger market. Demographics are more favorable. We feel like we've got an advantage launching in that market with our media partner that we didn't have when we started off in Colombia. Even though we're really just getting going in Mexico, when you look at it, relative to the early growth pattern at Colombia or in Colombia, we're well ahead of that. We're really excited about Mexico.

Richard Schwartz (CEO)

Just to add on one quick thing on Mexico. Our focus really, as I've said before, is to localize the user experience to make it a top-rated experience 'cause the quality really matters. So we've been doing that very effectively. In fact, our ratings in our app and our feedback from our customers has gone extremely improved dramatically since we've entered the market. We've been putting the effort in to make sure we do the little things that matter to the customer. We feel we're in a very strong position there to be able to take that effort and start to deliver some long-term value from it in the future.

Jed Kelly (Managing Director and Senior Analyst)

Thank you.

Kyle Sauers (CFO)

Thanks, Jed.

Moderator (participant)

Our next question is from Bernie McTernan with Needham & Co. Your line is now open.

Bernie McTernan (Senior Research Analyst)

Thanks for taking the questions. Maybe to start to dovetail off the last one, just any additional color you could provide on the guidance between international versus domestic growth? I know international or at least Colombia is gonna have some pretty significant headwinds on FX for the rest of the year. Maybe any thoughts on U.S. market share versus market growth. Second, Richard, you called out market efficiencies improving by a third. How much of that was just lower cost to acquire customers versus, you know, anything you guys are doing differently, whether it be, you know, data science or change in strategy, just any additional insights there would be helpful.

Kyle Sauers (CFO)

Yeah. I'll take the first part, in thinking about just kind of our revenue build and the growth in revenue this year and where we expect that to come from. I'll probably stop short of just breaking it down international versus U.S. or North America. We talked a little bit about this in the opening remarks. I think something in the range of 80%-90% of our growth is likely to come from the markets that have been live for more than a year. If you're thinking about kind of same store basis, that's a rough guideline. Most of the growth in 2023 is gonna come from our North American markets that launched after 2020 and Latin America.

You know, I think in prepared remarks, Richard mentioned that group of markets grew 95% last year. At the midpoint of our guidance, Latin America and then these later U.S. markets, after 2020, those could grow, you know, in the neighborhood of 35% this upcoming year. I know a lot of you estimate closely from the state data that's reported, you know, a very nice portion of our revenue, about 2/3 of our revenue last year came from Pennsylvania, Illinois, New Jersey. Pennsylvania and Illinois are both markets where we had a really strong start after the launch. All three of those markets have continued to get more competitive. Our expected growth in those markets is more modest.

I think the takeaway from all of that is the markets where we didn't enter with a known brand or a casino database to leverage, those are growing really nicely, and that's a great sign for new markets that are newer markets, but also new markets that launch over the coming years.

Richard Schwartz (CEO)

In terms of your second question, you know, our maturity as an organization, as a marketing team allows us to know what works better and what doesn't work. Obviously we're applying more efforts towards the marketing strategies and marketing channels that deliver the best results. We've also always been very disciplined, and that continues to be the case where we have defined paybacks for each market and each vertical. While it is true that we are getting some opportunities back from other operators who maybe were investing in certain channels and have no longer continued investing there, many times when those opportunities come back to us, they're still at a higher rate than what we were willing to pay at the highest level for that market.

I would say that there is a combination of some things becoming more affordable, but a lot of it is investment we've made in data science, as you referenced.

Combined with our team developing the maturity and experience to know what works and doesn't work, and continuing to be disciplined and making sure that we only invest in the markets that are gonna give us the best return on our capital.

Jed Kelly (Managing Director and Senior Analyst)

Great. Thank you both.

Kyle Sauers (CFO)

Thank you.

Richard Schwartz (CEO)

Thank you.

Moderator (participant)

Our next question is from Daniel Politzer with Wells Fargo. Your line is now open.

Daniel Politzer (Executive Director of Equity Research in Gaming and Lodging)

Hey, good afternoon, Richard and Kyle. I just wanted to piggyback on the guidance a bit on revenue. Can you talk maybe about some of the moving pieces between the low end and the high end of the range? Is it new competition coming in these markets? Is it the level of promotions? Is it the ramp in Mexico? Just kind of, you know. That way we can kind of better think about kind of the low end and the high end of the range and what the moving pieces might be to get us there. Thanks.

Kyle Sauers (CFO)

Sure. Thanks, Dan. It's, I think you called out some of the things that we model. Obviously, competition's a little harder to model, other than the way you apply that to what you think a market size might be, and what your share of that's gonna be. It's really about, you know, the cost that we're gonna acquire players for, which we've got some standards for. The value that those players are going to produce, the new players, the retention that we have with our existing players and the value that those players bring.

Then another piece that impacts us and others in the space is gonna be hold, which can have a, you know, a difference in any given quarter, more volatile in sports, as I'm sure you're aware. Then probably the other piece is in newer markets, you mentioned Mexico, I think that's a fair example. We probably don't have as strong a visibility into how that could turn out, relative to a market that's been around for a couple of years that we've been operating into. The variability on a market like Mexico, we could do far better, or maybe not quite as well as we'd expect to.

All of those factor into this range and the different inputs that go in.

Daniel Politzer (Executive Director of Equity Research in Gaming and Lodging)

Got it. On the marketing, advertising and marketing stuff, I know some of your peers have mentioned that they have some, you know, sponsorships and things like that that may not be economical and that would roll off in the coming years. Can you just give some color on, you know, the extent of, you know, do you have mostly short-term or medium-term contracts? And the extent, you know, over the next few years as we're trying to think about the EBITDA ramp, what the benefit might be from, you know, some reduced or more rational, you know, advertising and marketing?

Kyle Sauers (CFO)

It's a good question. It's obviously been a hot topic in the industry. We've tended not to make really large or long-term investments in those types of partnerships that I think are often talked about. I think we've been more strategic and localized with the endorsers, the ambassadors that we're bringing in and the sponsorship deals we do with local teams. None of which are individually or even in aggregate, a really big part of our marketing spend. You know, our commitments for next year, or I shouldn't say for next year, for 2023, in kind of those areas are sub-$20 million. It's not a huge piece of our spend.

I wouldn't think about it as something that's going to roll off in a dramatic way. I'd also think about it that we have a lot of flexibility in the way we put marketing dollars to work and can be nimble, you know, doubling down in places where we're seeing good results or pulling back in other areas because we do have most of our marketing spend is variable.

Daniel Politzer (Executive Director of Equity Research in Gaming and Lodging)

Understood. Thanks for all that.

Kyle Sauers (CFO)

Thanks, Dan.

Moderator (participant)

Our next question is from David Katz with Jefferies. Your line is now open.

David Katz (Managing Director)

Hi. Evening, gentlemen. Thanks for all the detail. I wanted to maybe just take a little longer term view. You know, looking at the revenues growing, right, in the, in the double digits, you know, out for a couple of years, and I know you're on the cusp of pivoting to profitability, but is there an aspirational margin level you think you can get to for this business one day? Like, people look in, you know, Europe, right, 25%. I mean, are those kinds of things achievable, and do you have what you need over time to get to that place?

Kyle Sauers (CFO)

Yeah, David, thanks for the question. I think the We do see a real opportunity to have this business drive long-term, consistent and sustainable profitability, and I think the range you talk about is not unreasonable. You know, I think our view is we're in the very early innings still of this industry, our company's growth profile, so we're gonna get leverage over time. You know, we're, as we've talked about, we've continued to invest in our technology team and our corporate infrastructure, and we're doing that still this year, but we'll get leverage over those costs over time. You know, our ramp, a ramp in marketing costs over the last couple of years has been really significant.

That's for the industry, but it's been significant because we've had so many new market launches and so many new market launches relative to the total markets that we had live at the time. That's impactful on the revenue relative to or the marketing spend relative to your net revenue. That, that headwind decreases as each market launch becomes less impactful in total cost base. I think you'll see marketing as a percentage of revenue decline as the markets mature and as you have less new markets launching relative to the total. We've also talked about gross margins should continue to improve over the coming years due to scale and cost improvements. As our revenue mix changes, and we grow more in some of our higher-margin states.

Some of our earlier states that are larger for us have lower gross margin profiles. That, you know, an example, and, no surprise to you, Pennsylvania has a very, very high tax rate, of course. I think all those things give us a lot of excitement about the leverage we'll get in driving stronger EBITDA margins over the long term.

Daniel Politzer (Executive Director of Equity Research in Gaming and Lodging)

Okay, perfect. Thank you.

Kyle Sauers (CFO)

Thanks, David.

Moderator (participant)

Our next question is from Ryan Sigdahl with Craig-Hallum. Your line is now open.

Will Yager (Equity Research Analyst)

Good afternoon, guys. This is Will on for Ryan. Thanks for taking our questions. First I wanted to touch on, you talked a bit about parlay mix and it being up 30% year-over-year. I was wondering if you had any insight into how in-play mix trended during the quarter.

Kyle Sauers (CFO)

Yeah, we haven't typically disclosed that one. I'd actually have to look. I don't know if it was a huge difference for us in NFL. It's generally trending up, but I don't have that number in front of me. We can get back to you on that.

Will Yager (Equity Research Analyst)

Perfectly fine. One more for me. With the potential for new competitors in Pennsylvania, especially in the iGaming market, there's been a bit of talk about, them opening up, bidding to new operators. Curious what you guys are going to do to defend your leading share there.

Richard Schwartz (CEO)

Yeah, I'll take that one. You know, we've since we started this business over 10 years ago, we faced consistent competition, new and existing competition coming in markets, leaving markets. I think we've done a really nice job of maintaining our share well above our fair share based on our invested capital in these markets. I think and Pennsylvania is a great example where for years, you know, we've had a large share as we got to the market early, have a great brand there, and been able to develop a great experience for the players. We've been able to retain market-leading share, for example, the online slots in that market, despite constant new entrants coming into the marketplace. I do agree that the intensity of Pennsylvania will continue to be there from a competitive standpoint.

you know, online casino, I think there's unlimited licenses there. There's something that there's a relatively high tax rate, as Kyle Sauers has alluded to. At the end of the day, what we do is we make sure that we stay ahead by constantly innovating and developing a better user experience. That's what we can control. We can't control what competitors do. We can control how well we execute and how well we innovate to create experiences that players want to stay with us. We've been very successful delivering that over the years. We're actually very focused on that now and have a lot of great ideas we're working on that we think are gonna really help us in that area.

Will Yager (Equity Research Analyst)

Great. Thanks, guys.

Richard Schwartz (CEO)

Thanks, Will.

Moderator (participant)

Our next question is from Jordan Bender with JMP. Your line is now open.

Jordan Bender (Senior Equity Research Analyst of Gaming and Leisure)

Great. Thanks for taking my question. You know, with all the talk around iGaming legalization coming up, these states are primarily states that already have online sports betting. With your established footprint in these states, can you just kind of remind us the payback period if we were to get iGaming introduced into an existing OSB state?

Kyle Sauers (CFO)

Jordan, thanks. You're right. All the talk is around, for the most part, it's around states where we're already active. Certainly it's gonna depend on the state, right? On tax rate and the competitive landscape and maybe even, you know, if we're in there with a partner or a market access partner or if it's a, you know, an open opportunity. I think that there's a huge advantage to already being open in the market. We've got a database of players. We've got, you know, we've got a brand that people are aware of. Those are big advantages.

You know, if you just look at the two recent U.S. states, most recent U.S. states that launched with casino, it was Michigan and West Virginia that we participated in, and both of those were profitable after four quarters for the entire market. I don't know that I'd want to necessarily commit to that if New York or Illinois or one of the Iowa or Indiana, wherever it is, were to launch. I think we've got a lot more advantages than we do starting cold like we did in Michigan and West Virginia. Those are some of the history on how it's played out. I think we'd be pretty excited about that opportunity.

I think one thing to remember is in most markets that have both casino and sports, we typically carry three to five times the share in casino that we do in sports. If we've got, you know, in Illinois, if you've got double-digit share in an Indiana or a New York, we've got, you know, low-single to mid-single-digit share in sports. If we could get three times that in any of those states, that's pretty darn meaningful for us. We're obviously very excited about the legislation and the movement by the industry to be talking about iCasino a lot more.

Jordan Bender (Senior Equity Research Analyst of Gaming and Leisure)

Great. My follow-up, looking at the MAU number, I'm not sure if you'll give this, but I'll try it anyways. Are you able to parse out kind of the quarter-over-quarter growth in users from the U.S. versus what those contributed in Canada?

Kyle Sauers (CFO)

Yeah, I think we'll probably stop short of that one. It is a good try. You know, obviously, the growth in Q4 in Ontario is all incremental for us. Then just because you raised that, I think it's important to remind everyone, although we disclosed this, that those MAU numbers are only for North America or U.S. and Canada. It doesn't include our Latin American countries where the MAUs are much higher and the our MAUs lower than in our North American markets.

Jordan Bender (Senior Equity Research Analyst of Gaming and Leisure)

Great. Thank you.

Kyle Sauers (CFO)

Thanks, Jordan.

Moderator (participant)

Our next question is from Edward Engel with Roth. Your line is now open.

Edward Engel (Senior Research Analyst)

Hi. Thank you for taking my question. It looks like on the gross margin side, for the fourth quarter, there's a really nice sequential uptick Q-on-Q, and that's kind of despite 4Q being a pretty big OSB quarter. What's kind of driving that Q-on-Q increase? I guess, is that a kind of sustainable rate, kind of in the mid-30s, for next year, maybe excluding the 1st quarter when there's some new market launches?

Kyle Sauers (CFO)

Yeah, thanks, Ed. We talked about in our last call that we were expecting higher gross margins during the fourth quarter, and there's a lot of different things that can impact our margins from quarter to quarter. It's, you know, the geographic mix of business is a big one, since we've got different margins and it can vary quite a bit from one market to the next. The product mix is, I think you pointed out between OSB and casino, but we can also have product mix within casino that can impact it. You know, most of our costs are variable with revenue. We do have some fixed costs in that margin cost structure, so those can have an impact as well.

Margins in total for 2022 were 30.1%. I would not extrapolate Q4 out into the full year of 2023. What we had mentioned in the prepared remarks is we expect full year improvement in 2023 to get us a few hundred basis points over the full year of 2022. More in the 33% range, maybe a little higher than that. Obviously, there's gonna be some variability. I'd also think about, as you pointed out, we've got a couple of new market launches, early in the year, late last year and early this year. I think our gross margins, while I gave you what I think a full year 2023 target should be for gross margins, it'll probably build as the year goes on.

A little lower in the front half of the year, and stronger in the back half of the year on the back of some economies of scale and pricing benefits that we've got throughout that cost structure.

Edward Engel (Senior Research Analyst)

Really helpful. Thanks. On the marketing costs, $218 million for the full year, is there a way to break out, I guess, what percent of that is fixed marketing expense versus what percent is kind of your external, more discretionary, marketing expense? I guess what I'm trying to get at is in a scenario where we're entering a year, maybe not this year, but maybe next year or the year after, where there's no new states launching OSB or iGaming, I guess, how low could that go?

Kyle Sauers (CFO)

Yeah. A very small percentage is fixed. Just to make sure I understand, when you say fixed, you're referring to, multi-year commitments, with sponsorships or endorsers and things like that?

Edward Engel (Senior Research Analyst)

Yeah, even headcount within your marketing department.

Kyle Sauers (CFO)

Gotcha. Okay. Yeah, yeah. We certainly think about that as a pretty fixed cost. We've got a great marketing team here at RSI. The team and long-term commitments make up, you know, it's probably 10%-15% of our total costs. No, it's not even that much. I'm sorry. Yeah, no, it's in that range. 10%-15% is the right number. We've got a lot of flexibility in that spend to be able to be nimble and think about where we wanna spend more because we're getting good returns or back away.

Edward Engel (Senior Research Analyst)

That's it. I guess, is there a kind of way to think about how low that marketing cost can go during a year where there's no new state launches?

Kyle Sauers (CFO)

You're saying relative to revenue if we go out-

Edward Engel (Senior Research Analyst)

To-

Kyle Sauers (CFO)

three years from now? Yeah.

Edward Engel (Senior Research Analyst)

iGaming.

Kyle Sauers (CFO)

I don't-

Edward Engel (Senior Research Analyst)

Yeah, two years, three years. Yeah. Mm-hmm.

Kyle Sauers (CFO)

I don't, I don't think I'd wanna put a percentage or an absolute number on that one just yet, since we haven't offered long-term guidance in that, in that respect. I think that there's a lot of room for spend as a percentage of revenue to go down as markets mature. Obviously, some of that's gonna depend on the competitive environment. It's gonna depend on whether there's more legislation with sports or casino and how much we want to invest because we see the opportunity. I think we'll remain flexible on how we, how we invest in marketing, but I think we've proven that we've been modest with our investments and achieved a lot while doing so.

Edward Engel (Senior Research Analyst)

Great. Appreciate the color.

Kyle Sauers (CFO)

Thanks, Ed.

Moderator (participant)

There are no more questions. I'll pass the call back over to the management team for closing remarks.

Richard Schwartz (CEO)

Thank you again for joining us today. We look forward to updating you on our progress when we share our first quarter results in a couple of months.

Moderator (participant)

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.