PENN Entertainment CEO Jay Snowden tried to remain upbeat on Thursday in spite of a disappointing quarter last fall when the company launched a transformative sports betting partnership with ESPN.
On one hand, the launch of ESPN BET in November resulted in a wave of registrations that far exceeded the company’s expectations. The addition of more than one million new customers over a six-week period enabled PENN to expand its digital database by approximately 50%, the company disclosed in a presentation. On the other, a spike in promotional intensity associated with the launch drove a considerable net loss over the company’s fourth quarter of 2023.
For the quarter, PENN Entertainment reported a net loss of $358.8 million, driven by an adjusted EBITDA loss of $333.8 million from PENN Interactive, the company’s digital segment. High customer acquisition rates pushed up the losses, well above PENN’s guidance of negative-$100 million to negative-$150 million. The losses from PENN Interactive more than doubled analysts’ expectations of negative-$151 million for the three-month period ended on Dec. 31, 2023.
“ESPN BET attracted significantly more first-time depositors (FTDs) than we anticipated, which drove higher than expected promotional expense,” Snowden wrote in an earnings release.
Deeper integrations with ESPN 5hj3p
Last week, in the lead-up to the Erin Dolan, one of the network’s top sports betting analysts, also did a series of spots from Allegiant Stadium on the morning of the big game.
Despite the elevated losses, Snowden remained pleased with several key metrics over the quarter. Beyond the wave of new registrants, PENN saw a four-fold increase in a metric known as “average monthly active s.” On the quarter, PENN averaged about 771,000 monthly s over the period, up from approximately 189,000 in the fourth quarter of 2022. PENN defines monthly active s as the “number of unique paid s per month that had at least one real money paid engagement across the company’s Online Sports Betting (OSB) and Online Casino products.”
Over the last two months, PENN has consistently ranked third nationally in OSB weekly s, according to Sensor Tower data. Sensor Tower defines the metric as a who has “one or more sessions” on an app within a week.
NBA wagers.
“ESPN BET has attracted the mass market sports fan, highlighting the potential to expand the appeal of sports betting and grow the overall market,” he said. “This foundation sets the stage for continued growth and market share gains as we introduce further product enhancements and deeper integrations into the ESPN media ecosystem.”
A closer look at promotional intensity 4f484z
Upon the launch of ESPN BET, leading Wall Street analysts vowed to closely monitor levels on promotional spending at the new venture. After all, the new operator was late to the game entering the U.S. market, five years after the historic PASPA decision. The top performers in the market received a considerable head start.
The analysts who predicted ESPN would spend heavily out of the gate largely proved to be right. Last November, ESPN BET in Maryland reached 39%. For comparison, three other major operators all exceeded 30% in their first month of operations in the state.
PENN provided additional commentary on Thursday. Across the nation, promotional expenses fell to 10.7% in December, PENN stated in the presentation. By January, the start of the NFL playoffs, promotional levels dipped below double digits, according to the company.
Since few states release figures on promotional expenses to the public, it can be difficult to internal reporting methodologies from sportsbook operators.
“We expect the company to scale back on its spending, and for commentary around losses to now be first-half weighted over the course of the first three-year period of operations,” JMP Securities analyst Jordan Bender wrote in a research note.
Promotional expenses have begun to normalize, Snowden noted.
Reminders of Caesars’ pullback 2e2p3h
The initial period of heavy promotional spending may remind analysts of Caesars Sportsbook’s ramp several years ago. Just after rebranding from William Hill U.S. in 2021, Caesars unleashed an aggressive plan to spend around $1 billion to grow its digital sports and online casino wagering division.
By early-2022, Caesars achieved a 21% share of the U.S. sports betting market in the states in which it operated. The benchmark is oddly familiar given that PENN has set a long-term target of 20% market share by 2027. On Thursday, some analysts reiterated that Caesars Entertainment CEO Tom Reeg pivoted after determining that the reckless spending patterns could not be sustained.
“We have accomplished what we set out to do. We set out to become a significant player, and it’s happened significantly quicker than we thought,” Reeg said at the time. “I think most of you know me as someone who’s not one to spend any money needlessly.”
Caesars abruptly ceased several costly promotional offers and pulled a popular ad series featuring the Manning brothers. Reeg’s U-turn reset the market, as several competitors also reduced spending in response to the pull-back. Now, the operator has fallen far behind OSB leaders DraftKings with single-digit market share on the national level.
Turning back to PENN, the digital losses are not surprising based on consensus estimates. PENN, however, missed expectations on the revenue side, which many analysts attribute to underperformance from the digital segment. PENN Interactive generated $31.5 million in online revenue, considerably missing analysts’ consensus estimates of $210 million.
“We think investors were bracing for a wide range of interactive losses, but the magnitude of the absolute dollar value is, we think, surprising,” JP Morgan analyst Joe Greff wrote in a research note.
Market share projections 583q30
For the month of January, PENN indicated that it achieved 7% OSB market share despite the pullback in promo spending. The quarterly miss notwithstanding, PENN still estimates that it will break even for full-year 2025. Based on his models, Greff indicated that a 7% market share will result in a full-year 2025 loss of around $75 million. If ESPN BET attains a market share of around 10%, the prospects for profitability are more certain.
The market largely scoffed at the quarterly results. At session-lows, PENN traded below $19 a share, down more than 15% on the session. PENN’s session low of $18.95 approached its 52-week low. PENN will pay ESPN approximately $1.5 billion if the long-term partnership lasts the full 10 years.
Another analyst, David Katz of Jefferies, said he expects PENN will continue to ESPN BET as its “customer base and products evolve.” The factors could enable PENN to challenge the “upside to the shares” upon near-term progress updates this year. By the spring, investors will monitor a bid by activist investor H.G. Vora to shake up the complexion of the board. Last month, Katz maintained a “hold” rating on PENN with a $30 price target.
After PENN announced plans to swap Barstool Sportsbook to ESPN BET in August, its stock jumped 20% to $29 a share. PENN traded around $24 when ESPN BET launched in November, as investors had already baked in the debut.
