Caesars Earnings: Digital Posts Positive Quarter, Cyber Lawsuits Loom

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Caesars Digital managed to turn positive EBITDA in the third quarter as the company stayed true to its preferred promotional procedures.

Caesars Sportsbook and its online casino product reported $2 million in adjusted EBITDA for the third quarter. That is compared to a loss of $38 million for the same quarter last year.

The digital segment reported $215 million in net revenue compared to $212 million in 2022. Through the first nine months, digital net revenue is $669 million, or more than double the $331 million from last year.

Caesars Digital has been adjusted EBITDA-positive over the trailing 12 months ending September 30, CFO Eric Hession said on the company’s third quarter earnings call Tuesday evening.

CZR stock up and down since results

Caesars’ stock rose 2.5% in after hours and premarket trading, opening at $40.88 on Wednesday after the Tuesday night call.

But the stock closed down 3.4% Wednesday on more than three times its average daily volume.

Caesars returned to growth Thursday morning with the stock up more than 3% as of 11:30 am.

Staying sensible on promotions

Caesars handed out $52 million in digital promotions during the third quarter, which is up slightly from $48 million last year. Of those amounts, $4 million this year and $5 million last year were poker promotions.

Promo totals through the first nine months should please investors compared to last year. This year, Caesars has handed out $184 million in incentives compared to $487 million last year, driven by large promotions handed out for launches in New York and Louisiana.

Do not expect Caesars to overextend itself promotionally again:

We experienced negative net revenue in the first quarter of 2022 as a result of increased promotional offerings for new state launches in New York and Louisiana. We have refined our promotional intensity during the launch period in new jurisdictions based, in part, on prior experience and do not expect such investments to continue at elevated levels subsequent to initial launch periods.

Caesars 10-Q, page 41

Promotions should remain around 1.25% of handle, Reeg said. Right now, there is nothing that requires Caesars to respond promotionally, he added.

Caesars expects 50% digital flow-through

Now that the heavy lifting for the sports betting and online casino products is done, Caesars can finally start to talk about digital profit.

Hession expects about 50 cents of every digital revenue dollar to now flow through to the bottom line after tax rates, payment processing fees and other variable costs.

CEO Tom Reeg reiterated the expectation of about $500 million in annual digital EBITDA by 2025.

Caesars ready to spar with top ops?

Caesars’ digital product is comparable to the top products available from operators like DraftKings and FanDuel, just not quite at their level yet, Hession said.

“There are still some pieces of functionality that we just haven’t developed yet or focused on,” Hession added.

Caesars added same-game parlays for college football betting, live same-game parlays and alt-line same-game parlays. Soon, those will be available for the NBA and eventually the NHL, which will help close the gap, Hession said.

The benefits of the Caesars Rewards program will also help with customer retention, he added.

Watch and Bet stream positive so far

The new Watch and Bet product from Genius Sports that lets bettors watch NFL games through the Caesars app has so far resulted in an uptick of customers on the app.

Caesars is still awaiting from Genius the ability to overlay NFL betting opportunities while customers are watching the game, Hession said.

Caesars is interested in similar deals and products from other leagues, he added.

Quarterly handle, hold details

Sports betting handle grew 14.3% in the quarter to $2.3 billion, but a dip in hold is why that growth did not flow through to revenue.

Caesars held 6.5% in the quarter, down from 7.9% last year that was boosted by favorable September results. This quarter’s hold is within the expected range for now, but 7.5% to 8% is the end target.

Not included in figure is $205 million of additional handle from “select wholly-owned and third-party operations for which Caesars Digital provides services and we receive all, or a share of, the net profits.”

Those operations reported $220 million of handle last year. Hold from these operations was also impacted by lucky play last year as Caesars reported an 8.9% hold this year compared to 14% in 2022.

New iGaming app leads to bump

iGaming hold also dipped 0.4 percentage points to 3.1% for the quarter. The launch of the new Caesars Palace Online casino app helped handle jump 38.3% to $2.5 billion.

That implies $76.6 million in gross online casino revenue for the quarter, compared to $62.5 million last year. The new app led to a monthly record for gross revenue and net revenue in its first full month of operations, Hession said.

Much of Caesars online casino business before the launch was cross-sold sports bettors, as the casino was only available through the sportsbook. Caesars is starting to see more older women play on the standalone app, which is closer to the standard casino demographic.

Horse racing handle down slightly

Horse betting is included in sports betting handle, though it is quite a small part of the pie.

The operator took $11 million in horse racing and pari-mutuel bets in the quarter, down from $12 million last year.

Horse handle is $35 million through nine months, down from $39 million last year.

Caesars Digital investment on target

Caesars spent $77 million on capital expenditures related to the digital segment so far in 2023.

With expected investments of $25 million to $35 million left for this year, the company is right in the forecasted range at the beginning of the year to spend between $105 million and $115 million.

Net capital investments for Caesars digital were $106 million in 2022.

Facing lawsuits over data breach

Caesars has seen 13 class-action lawsuits filed against it in both federal and California, Nevada and New Jersey courts following the announcement of its data breach in September.

A third-party IT vendor was compromised through social engineering, which led to stolen data including a copy of the Caesars Rewards database.

The company is seeking consolidation of the cases and does not sugarcoat the potential outcome:

“While we believe it is reasonably possible that we may incur losses associated with the above described proceedings, it is not possible to estimate the amount of loss or range of loss, if any, that might result from adverse judgments, settlements, or other resolution given the stage of these proceedings, the absence of specific allegations regarding the alleged damages, the uncertainty as to the certification of a class or classes and the size of any certified class, if applicable, and/or the lack of resolution of significant factual and legal issues.”

Caesars 10-Q, page 17

There has been no material effect on the company’s financial condition so far and that is not expected in the future.