Rush Street Interactive Inc (RSI) 2022 Q4 法說會逐字稿

Good afternoon, and thank you for attending today's Rush Street Interactive Fourth Quarter and Year-end 2020 Earnings Call. My name is Jason, and I'll be the moderator for today's call. (Operator Instructions)

I would now like to pass the conference over to our host, Kyle Sauers.

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. 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.

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.

Thanks, Kyle. Good afternoon, and 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 and did so while maintaining our disciplined approach to investing in customer acquisition and retention. We launched our platform into 5 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. And we ended the year in a strong cash position with $180 million of unrestricted cash on the balance sheet and no debt. We believe this leaves us more than fully funded to reach sustained profitability.

We finished 2022 with record revenues of $592 million. For those who 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 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 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. Also, 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 road map 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 though in 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. In fact, our count is that 5 online casinos 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 sports market by itself has the potential to be significantly larger than the sports betting market. But more importantly, it could benefit RSI in an outsized way given that we often earn 3 to 5x the market share in online casino compared to sports betting in those same states.

On the marketing front, we increased spend heading into the winter months, specifically in our casino 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, and this is with an investment-heavy first quarter of this year. If we were to look at marketing spend as a percentage of net revenue over the last 3 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 1/3 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, but 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 display 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 and 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 a 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 that came to what you all likely participate 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 wages 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 betters who never placed the single-game parlay did so. Our average bet size of football was 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.

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 ARPMAUs 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. However, 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 percentage 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, and 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 hundred 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. So we expect G&A to continue to grow modestly over the coming quarters.

Our balance sheet remains pristine. And 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 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.

(Operator Instructions) Our first question is from Chad Beynon with Macquarie.

This is Sam on for Chad. First question, I wanted 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.

Sure, Sam. This is Richard. Yes, as you could 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 workup for us. We feel we're running on all cylinders in the Colombian market. And in fact, we would say that the quality of the customers are strong and everything about it was a real positive experience. I think I just want to caution as we have once before that in during the World Cup, the rest of the soccer leagues take a break for several weeks or 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 set out the strength and the growth of the World Cup does make up that difference. So overall, it's 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.

As a follow-up, I 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 of years as it relates to single-game parlays or sports and just sort of how you're thinking about it long term and balancing customer retention and so forth?

Yes. So I'll take the first part just on the specific impact or really lack thereof in Q4 and then maybe Richard will weigh in on longer term and strategies and player experience. But 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. So nothing really exciting to share there.

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 want to be with some customers. Certainly, we value the long-term value of the customer and the retention for years, not months. And we do think that with experience brings awareness that for some customers, and if you're too aggressive towards the setting of the margins that you end up having a shorter life cycle with you, which actually diminishes the amount of profits from those customers. So I think it's an 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 and similarly in parlays is something that we focus a lot of energy on, and we're starting to see some positive results in that area from our efforts.

Our next question is from Jed Kelly with Oppenheimer.

Just circling back to online or iCasino, could you give us an update on the legislative -- potential legislative, I think New York is having like a potential meeting, I know of Midwest. So could we get an update on that? And 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?

Sure. I'll talk about online casino legislation and then Kyle will share some color on the Mexico comp question as well. In terms of online casino, the industry is aligned and in a way that I haven't seen before and you're starting to see a lot of investments being made in lobbying efforts to legalize online casino in the 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 legislators are realizing the value of the combination, how effective it is. While it's tricky to predict exact time lines for when legislation may drop, there is clear movement.

And as an example of that, I'll share that conversations are now turning in a draft and drafts in 5 cases that 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. So there's enthusiasm, there's opportunity now that's going to happen overnight, probably not. But the first step is to get a sponsor of the bill excited, interested in introducing a bill, and we're starting to see that. And you're starting to see a lot of effort being made and lobbying dollars being applied towards this goal. So I think you're starting 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 market. So for us, this type of momentum is very welcomed.

In terms of Mexico...

Yes, maybe I'll jump in on the Latin American question, Jed. So in Colombia, obviously, Richard highlighted just the fantastic success we've been having down there in the fourth quarter. There we get sporadic information on our market data. So 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 momentum there. In Mexico, it's still early days, really not -- 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. So 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 large. 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. And 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. So we're really excited about Mexico.

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 a top-rated experience because the quality really matters. And so we've been doing that very effectively. In fact, our ratings on our app and our feedback from our customers has gone extremely -- improved dramatically since we've entered the market, and we've been putting the effort in to make sure we do the little things that matter to the customer. And 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.

Our next question is from Bernie McTernan Needham & Co.

Maybe to start to dovetail with 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 going to have some pretty significant headwinds on FX for the rest of the year. And maybe any thoughts on U.S. market share versus market growth. And then second, Richard, you called out market efficiencies improving by 1/3. How much of that was just lower cost to acquire customers versus anything you guys are doing differently, whether it be data science or change in strategy? Just any additional insights there would be helpful.

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

I think in prepared remarks, Richard mentioned that group of markets grew 95% last year. So at the midpoint of our guidance, Latin America and then these later U.S. markets after 2020, those could grow in the neighborhood of 35% this upcoming year. And I know a lot of you estimate closely from the state data that's reported a very nice portion of our revenue, about 2/3 of our revenue last year came from Pennsylvania, Illinois and New Jersey. Pennsylvania and Illinois are both markets where we had a really strong start after the launch. All 3 of those markets have continued to get more competitive. So our expected growth in those markets is more modest. But I think the takeaway from all of that is the markets that we -- where we didn't enter with a known brand or a casino database to leverage 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.

In terms of your second question, our maturity as an organization, as a marketing team allows us to know what works better and what doesn't work. And so 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. And so 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 continue investing there, many times, 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. So I would say that there is a combination of some things becoming more affordable, but a lot of it is an investment we've made in data size, as you referenced, combined with our team, developing the maturity and experience to know works and doesn't work and continuing to be disciplined and making sure that we only invest in the markets that are going to give us the best return on our capital.

Our next question is from Dan Politzer with Wells Fargo.

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 what -- that way we can kind of better think about kind of the low end and the high end of the range and kind of what the moving pieces might be to get us there?

Dan, I think you called out some of the things that we model. Obviously, competition is 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 is going to be. But it's really about the cost that we're going to 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. And then another piece that impacts us and others in the space that's going to be hold, which can have a difference in any given quarter, more volatile in sports, as I'm sure you're aware.

And 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. So the variability on a market like Mexico, we could do far better or maybe not quite as well as we'd expect to. So all of those factor into this range and the different inputs that go in.

Got it. And then on the marketing -- advertising and marketing stuff, I know some of your peers have mentioned that they have some 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 to the extent that do you have mostly short-term or medium-term contracts and the extent over the next few years as we're trying to think about the EBITDA ramp what the benefit might be from some reduced or more rational advertising and marketing?

Yes. So 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. Our commitments for next year -- or I shouldn't say for next year, for 2023, in kind of those areas are sub-$20 million. So it's not a huge piece of our spend. So I wouldn't think about it as something that's going to roll off in a dramatic way. But 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 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.

Our next question is from David Katz with Jefferies.

I wanted to maybe just take a longer-term view and looking at the revenues growing, right, in the double digits 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 looking 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?

Yes, David, I think 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. We're -- I think our view is we're in the very early innings still of this industry, our company's growth profile. So we're going to get leverage over time. 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 that -- those costs over time. Our ramp in marketing costs over the last couple of years has been really significant, but it has 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. So that's impactful on the revenue relative to -- or the marketing spend relative to your net revenue.

So that headwind decreases as each market launch becomes less impactful in total cost base. So I think you'll see marketing as a percentage of revenue decline as these markets mature and as you have less new markets launching relative to the total. And we've also talked about gross margin should continue to improve over the coming years due to scale and cost improvements. And 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. An example and no surprise to you, but Pennsylvania has a very high tax rate, of course. So I think all those things give us a lot of excitement about the leverage we'll get and driving stronger EBITDA margins over the long term.

Our next question is from Ryan Sigdahl with Craig-Hallum.

This is Will on for Ryan. 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?

Yes, 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.

Perfectly fine. And 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?

Yes, I'll take that one. We've -- since we started this business over 10 years ago, we faced consistent competition new and existing competition coming in markets, leading markets. And 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. So I think in Pennsylvania is a great example where for years, we had a large share we got to the market early have a great brand there and been able to develop a great experience for the players. And we've been able to retain market-leading share, for example, the online sports in that market despite constant new entrants coming into the marketplace. So I do agree that the intensity of Pennsylvania will continue to be there from a competitive standpoint.

Online casino, I think there's unlimited licenses there. So there's something that does have a relatively high tax rate as Kyle just alluded to. But 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 the competitors do. We can't control how well we execute and how well we innovate to create experiences as the players want to stay with us. And we've been very successful at delivering that over the years. And we're actually very focused on that now and have a lot of great ideas we're working on that we think are going to really help us in that area.

Our next question is from Jordan Bender with JMP.

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

Yes, Jordan, you're right. It is -- all the talk is around -- or for the most part is around the states where we're already active. Certainly, it's going to depend on the state, right, tax rate and the competitive landscape and maybe even if we're in there with a partner or a market access partner or if it's 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 a brand that people are aware of. So those are big advantages. And if you just look at the 2 recent U.S. states -- most recent U.S. states that launched for -- with casino, it was Michigan and West Virginia that we participated in. And both of those were profitable after 4 quarters for the entire market. So I don't know that I want to necessarily commit to that if New York or Illinois or one of the Iowa or Indiana, wherever it is, we're to launch. But I think we've got a lot more advantages than we do starting cold like we did in Michigan and West Virginia. So those are some of the history on how it's played out. And 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 3 to 5x the share in casino that we do in sports. So if we've got in Illinois, if you've got double-digit share in Indiana or in New York, we've got low-single to mid-single digit share in sports. If we could get 3x that in any of those states, that's pretty darn meaningful for us. So we're obviously very excited about the legislation and the movement by the industry to be talking about iCasino a lot more.

Great. And then my follow-up, looking at the MAU number, I'm not sure if you'll give this, but I'll try it anyway. 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?

Yes. I think we'll probably stop short of that one. It is a good try. Obviously, the growth in Q4 in Ontario is all incremental for us. And then just because you raised it, 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, doesn't include our Latin American countries, where the MAUs are much higher and the ARPMAUs lower than in our North American markets.

Our next question is from Edward Engel with ROTH.

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? And I guess, is that a kind of sustainable rate kind of in the mid-30s for next year, maybe excluding the first quarter when there's some new market launches?

Yes. Thanks, Ed. So we talked about it on 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 the geographic mix of business is a big one since we've got different margins and that can vary quite a bit from one market to the next. The product mix, as I think you pointed out between OSB and casino, but we can also have product mix within casino that can impact it. And then most of our costs are variable with revenue. And -- but 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 '23. And 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 2022. So more in the 33% range, maybe a little higher than that. Obviously, there's going to 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. So I think our gross margins, while I gave you what I think a full year '23 target should be for gross margins, it will probably build as the year goes on. So 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.

Really helpful. And then 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? And I guess what I'm trying to get is, in a scenario where we're entering a year, maybe not this year but maybe next year or the year after, there's no new states launching OSB or iGaming, I guess, how low could that go?

Yes. So a very small percentage is fixed. And just to make sure I understand, when you say fixed, you're referring to multiyear commitments to -- with sponsorships or endorsers and things like that.

Yes, even headcount within your marketing department?

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

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

You're saying relative to revenue, if we go out 3 years from now.

Yes, 2, 3 years, yes.

Yes. I don't think I'd want to put a percentage or an absolute number on that one just yet since we haven't offered long-term guidance in that respect. So 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 going to depend on the competitive environment. It's going to depend on whether there's more legislation with sports or casino and how much we want to invest because we see the opportunity. So I think we'll remain flexible on 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.

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

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.

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