Penn National Gaming released its Q1 results this morning in a conference call with company executives.
Much of the presentation centered around the group’s blockbuster acquisition of Pinnacle Entertainment. Shareholders overwhelmingly approved the $2.8 billion deal, which is expected to close later this year. In addition, Penn National has also been awarded two PA satellite casino sites since its last report.
Sports betting came up in conversation again, too. Although the financials don’t mention it, the group is clearly interested in exploring the vertical. President and COO Jay Snowden reinforced that Penn National is “very supportive” of legalization, though he did suggest caution over potential revenue.
Snowden expects plans to come together during the next quarter, provided there’s favorable movement at the federal level.
Penn posts strong Q1 numbers
The financial report is quite good for Penn National, and forward-looking statements are optimistic.
Total Q1 net revenue came to $816.1 million, a 5.1 percent increase from last year. Thanks to an ongoing cost-cutting initiative, income grew 22.7 percent to $172.1 million. That’s a new quarterly record for Penn.
Bringing Pinnacle’s operations in-house will occupy the majority of the group’s resources in the immediate future. Penn has 130 people working on the transition, with the streamlining expected to unlock $100 million in synergies over the next two years.
Some of the future outlook hinges on sports betting, too.
Sports betting comes up in conversation
During the Q&A portion of the call, attorney David Katz brought up the issue of sports betting. The group had discussed it at some length during the 2017 Q4 call, indicating a strong appetite.
This time around, Katz was interested in how Penn might handle the logistics of sports betting.
Q: Can you comment at all on what roles you might keep in-house otherwise and — specifically what I’m asking is are you potentially going to be in the bookmaking business if that becomes an opportunity for you? Or what sort of capabilities you would farm out. And obviously how big an opportunity — is this really a game changer for you, is it an incremental amenity, or somewhere in between?
Sports betting not yet in focus
Regarding the first question, Snowden said it’s too early to start putting logistics in place:
Snowden: We are still evaluating how we are going to take advantage of this potential opportunity — either to self-manage, or completely farm out in a tenant-landlord relationship, or do something in between.
We have not made any decisions on how we’re going to handle the management of sportsbook operations. It’s premature until we see what the Supreme Court does and how states evolve their legislation, as well, before we put a stake in that ground on how we’re going to manage the opportunities.
On the brick-and-mortar side, Penn National owns properties in several states with sports betting laws or active sports betting bills. Two of those are tracks in PA, with existing horse betting facilities that could be expanded to accommodate other sports.
In the digital realm, Penn National doesn’t have a public deal with any iGaming providers, but there are rumors of a partnership with Scientific Games. That union would likely be geared toward online casino, but SG’s platform does have sports betting capabilities, as well.
Again, this partnership is merely a rumor for the time being.
Penn National manages expectations
Large casino operators have the best perspective on the position of sports betting within their empires. In previous comments, Penn executives made an effort to manage expectations regarding potential revenue.
Snowden echoed those thoughts in the second part of his response to Katz. As he’s done before, he highlighted the effect of taxes on Penn’s plans:
Snowden: We see a state like West Virginia that puts in a very appropriate tax rate of 10 percent, and that gives us encouragement. On the contrary, we see a state like Pennsylvania that has a mid-30s tax rate. That gives us pause. So we’re taking a full view of how this is going to play out.
Although Penn’s portfolio spans the country, sports betting might not make sense in some markets. PA sports betting has the highest tax rate imaginable, effectively 36 percent of revenue. It’s a huge hurdle for operators, who will struggle to turn a direct profit under that burden. Some may choose not to offer sports betting at all.
Ancillary benefits provide incentive
As Snowden pointed out, the primary incentive for an operator to offer sports betting is not the direct revenue it generates, but the ancillary benefits.
Snowden: I said previously that we are excited about this opportunity. It’s not a significant revenue opportunity for us, specifically, as a standalone business of sports betting. But we do see the benefit of driving incremental visitation to our properties…
We are very supportive of this, and there’s a lot of work that’s going on within Penn and within the American Gaming Association on this subject right now. Once the Supreme Court rules, and we know what the new game and changes will take place that will or will not allow the state to participate, we’ll have more color to offer hopefully by our second-quarter call.
Having a large portfolio gives Penn incentive to offer sports betting, even if it has to do so at break-even in PA. Whether or not it actually launches, however, hinges on both state legislation and the pending decision from the US Supreme Court.
Snowden told investors to stay tuned for more information during Q2.
