Greetings, and welcome to the Penn National Gaming first quarter conference call. [Operator Instructions] It is now my pleasure to turn the conference over to Joe Jaffoni. Please go ahead.

Thank you, Tina, and good morning, everyone, and thank you again for joining Penn National Gaming's 2021 First Quarter Conference Call. We'll get to management's presentation and comments momentarily as well as your questions and answers, but first, I'll review the safe harbor disclosure. In addition to historical facts or statements of current conditions, today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties. These statements can be identified by the use of forward-looking terminologies such as expects, believes, estimates, projects, intends, plans, seeks, may, will, should or anticipates or the negative or other variations of these or similar words or by discussions of future events, strategies or risks and uncertainties, including future plans, strategies, performance, developments, acquisitions, capital expenditures and operating results. Such forward-looking statements reflect the company's current expectations and beliefs but are not guarantees of future performance. As such, actual results may vary materially from expectations. The risks and uncertainties associated with the forward-looking statements are described in today's news announcement and in the company's filings with the Securities and Exchange Commission, including the company's reports on Form 10-K and Form 10-Q. Penn National Gaming assumes no obligation to publicly update or revise any forward-looking statements. Today's call and webcast will also include non-GAAP financial measures within the meaning of SEC Regulation G. And when required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. Thank you for your patience with that. And it's now my pleasure to turn the call over to Penn National's CEO, Jay Snowden. Jay, please go ahead.

Thank you, Joe. Good morning, everyone, and thanks for joining us. Here with me in Wyomissing for her first official Penn earnings call, at least on this side is our new CFO, Felicia Hendrix. So welcome, Felicia. We also have Todd George, our Head of Operations, here to help answer questions about our core business as well as other members of my executive team, who can help respond to your follow-up questions as needed. As you can see from our earnings release, our core business results are very strong and still ramping actually as we sit here in the second quarter. Meanwhile, our new online and retail Barstool Sportsbooks and iCasino offerings in Michigan and Pennsylvania, continue to perform very well. Further, we managed to fully integrate our industry-leading mychoice player loyalty program across all of our retail and digital offerings in time to take advantage of this momentum, which has significantly bolstered our unique omnichannel strategy and competitive advantages. At our land-based operations, the momentum has continued following the rollout of vaccines and the ongoing relaxation of COVID-19-related restrictions across the country. Our record first quarter results highlight the robust recovery in our land-based business. Benefiting from many actions taken in 2020, we generated adjusted EBITDAR growth of 7% on a revenue decline of 6% over 1Q '19, despite COVID-related property closures in January at a handful of our Midwest and Northeast properties, nearly a full closure of Zia Park in New Mexico and some harsh winter weather in the South in February. More impressive is our performance in March and April, which reflects the additional easing of restrictions and an increase in the percentage of people vaccinated. Revenues grew 8% over the same 2-month period in 2019, while adjusted EBITDAR accelerated 29% to $410 million and EBITDAR margins…

Thanks, Jay. It's great being here and being part of this tremendously talented team. Over the past few months, I've been asked by many of you what the biggest surprise was for me once I joined Penn. Having covered the company for over 20 years, I would say that there were more pleasant discoveries than surprises and 3 stand out. The first is the depth of the bench across the entire company. The level of talent, creativity and commitment to excellence at Penn is seen in every aspect of the company and at every level. The second is transparency. Jay's commitment to transparent communication is well-known and respected by the investment community and that ethos is no different internally. And finally, Penn's commitments to diversity and inclusion and community service is certainly inspiring. So with that being said, we're very proud of our first quarter results, especially given COVID-related closures in January and the late in the quarter reopening of Zia Park. Revenues of $1.27 billion and adjusted EBITDAR of $447 million after corporate overhead of $24 million, which, as you know, is reported in the other segment, represented 94% of 2019 revenues and 107% of 2019 EBITDAR pro forma for a full quarter of Greektown, which is above our previously stated goals. Pro forma margins increased 434 basis points. Adjusting for the COVID-related closures and excluding Penn Interactive, our EBITDAR flow-through was even more impressive as our adjusted EBITDAR increased 12% compared to the first quarter of '19 on a 9% decline in revenues. On this adjusted basis, pro forma EBITDA margins increased more than 700 basis points. Our Midwest and South regions reported record EBITDAR and margins in the quarter despite COVID-related closures in January and uncharacteristically harsh weather in the South in February. Our performance in the…

Thanks, Felicia. In addition to these impressive results, we had many other notable accomplishments in the quarter, including being added to the S&P 500. And just last week, Moody's upgraded our senior secured rating 1 notch and moved our outlook to stable. As I look ahead, I remain excited about really every aspect of our business. The recovery is well underway at our land-based casinos, as evidenced by the strong trends we saw in March, which continued into the second quarter. Meanwhile, at Barstool, they remain focused on driving top of the funnel growth. Our differentiated strategy has earned us market-leading positions in Michigan and Pennsylvania in terms of handle, GGR and NGR, and we remain on track to be live in 8 states by football season and 10 or more states before the end of this year. Further, we remain busy at work on a variety of growth initiatives, all with a focus on driving shareholder value well into the future. With that, Tina, I'd like to turn it over to you and open the line up for questions.

[Operator Instructions] And that first question comes from Joe Greff of JPMorgan.

Jay, on the digital side, maybe you can just kind of start with maybe what you have learned over the last several months here in the states in which you've launched with respect to customer engagement, acquisition and promotion, what have you learned about the technology component side of things and any views of acquiring or bringing that technology in house?

Sure thing, Joe. Thank you for the question. Look, there's been a lot of learnings. We just went live, as you know, in September. And so we got through our first football season, our first March madness, and we're now live in 3 states. We're going to be live in Indiana here in a couple of weeks in time for the Indy 500 and for the NBA playoffs, which we're really excited about and total of 8 states by football season. So we're going to be in a much different position by the time we get to football season '21 versus where we were in September of '20. Some of the learnings that come to mind. We know that based on our differentiated approach and our fully integrated media partnership with Barstool, we have the best CPAs in the industry, and it's not even close. Our CPAs are running well under $100 right now across all 3 states that we operate in, which sets you up so well for the long-term as it relates to having dry powder and we're going to be a lot more aggressive in terms of spending to acquire customers as we head into football season '21 than we were in football season '20 because we now have scale. We were launching in 1 state a year ago, football season start in September. And this year, we're going to be in 8 states. So we're going to take advantage of that great margin profile that we have. I think sometimes it gets lost with all the noise. I think all the focus right now is on monthly handle. And I think the focus should be much more focused on what is the real strategic differentiation between these approaches? What does that margin profile look like in…

Great. And then just a follow-up. You have $2.7 billion of liquidity, incredibly low leverage. How do you use that to your advantage? Are there larger scale acquisitions? I mean, not things like Perryville, but something that's more needle moving? In which areas are there potential external growth opportunities driven by M&A?

Yes. I -- and Felicia, feel free to jump in here as well. I love the position that we're in right now as it relates to the balance sheet. We've never been in a position like this, certainly, since we spun off our real estate. And to have net traditional leverage of like $300 million is amazing. And to have our leverage levels at 4.5x. So we have -- we're busy right now, Joe, and I think that there's a few boxes that we'd still like to check as it relates to technology stack, there's some opportunities that could be small, medium or large, depending on what you're looking at. We're looking at all right now. There could potentially be something that's international that comes along with that technology approach that could be compelling over the long term. And we're going to continue to look at if there's any other potential sort of widening, broadening of the funnel opportunities as it relates to acquisition, the Barstool partnership has paid in spades for us. And I think there's some other potential media organizations and offerings that could make a lot of sense if connected to us with what we're doing and just make that moat that we've built a little wider and a little deeper. So we're actively kicking tires on a lot of things. I think you should expect us to be relatively active this year heading into next year.

If I may add, and Joe, thanks for the question on our balance sheet because I mentioned in my prepared remarks, some things that were pleasant discoveries. And I do want to comment on one other that's been really evident to me in the short time that I've been here. And I just -- I also don't think it's something that the investment community is thinking enough about. And currently, that's the power of our operating leverage and our market-leading levels of free cash flow conversion, which is only going to get stronger as we grow revenues and EBITDA. So if you think about it, based on our minimal and stable cash needs today, as increasing revenue drives higher EBITDA, our free cash flow should grow even faster, and that further bolsters our balance sheet and puts us in even stronger position to both reinvest in our business and then to pursue the strategic growth opportunities that Jay just talked about.

The next question comes from Bernie McTernan of Needham & Co.

Just a follow-up. And Jay, you mentioned being more aggressive to acquire customers in the upcoming NFL season. I was wondering if you could just provide any color on what you expect it to mean. You mentioned the virtual sportsbook early on in your prepared remarks, but does this mean more promo, TV spots, other external marketing or something else?

Sure thing, Bernie. Look, I think less traditional is what you should continue to expect from us. I think they are, for us, unorthodox, but really effective ways. We talked about the Barstool-branded sportsbooks in the casino. We talked about stand-alone sports bars in key markets. TBD, we're going to have more to share on that very soon. Investing at Barstool and new talents, potentially new verticals and potential media partnerships and/or acquisitions, I think we're going to be more aggressive in how we think about locking up more influencers and affiliates. And I think there's some sponsorship and partnership opportunities out there that can make a lot of sense for us as it relates to both digital and our core business. That's the nice thing about having this omnichannel approach where you control and own 100% of it because we just want to get people into the ecosystem. And so you can invest in your core business, you can invest in stand-alone on-prem, you can invest in digital media. And as long as it widens the funnel and brings more people into the ecosystem, we just want to keep them there, and we're confident we're going to be able to drive really healthy margins in all aspects of our business. So we really don't care where people decide to spend the majority of their time and wallet with us. I would not, Bernie, expect us to be the linear TV and radio competitor to the others. I'm in Pennsylvania this week. And when I'm here, I listen to sports talk radio, and I'm a s*****, so I watch the Sixers, even though they let me down every year in the playoffs. And I will tell you that every commercial is noise about sports betting. I mean, it's overwhelming. You…

Great. Appreciate that. And I do think this is the year that the Sixers will probably get the better of my Celtics for what it's worth. And then just a follow-up on iGaming. Do you think there's the same opportunity to kind of, let's call it, Barstool iGaming? If we think about sports betting in Illinois, 54% of betters using the Barstool exclusives. So showing the content-driven acquisition strategy is working in sports betting. Is there that same opportunity at iGaming? Like I'd imagine some sort of live deal with Barstool personalities could be pretty interesting? Or is the opportunity really about converting the mychoice customers?

Yes. Well, Bernie, you could have been sitting in our boardroom as we had these conversations. And you saw late last week that we announced the formation of -- sorry, I think it was Monday, actually, the formation of Penn Studios and our acquisition of HitPoint, that's exactly what we have in mind, and we've been actually working with HitPoint while we were working on getting the deal done on developing really bespoke content with our partners at Barstool. So yes, you should anticipate Dave Portnoy, Blackjack games and Big Cat, craps and roulette and their dealers and their players and they're interacting and talking with you, and there's all sorts of fun stuff that we have planned. And I think the other thing to keep in mind is that we launched iCasino in Michigan because we didn't want to miss out, and we want to make sure that we're giving people an opportunity to convert from sports into casino. We would be the first to say, our iCasino product is not today where it needs to be. It's a little bit bare bones. I think we have 60 different titles and slot and table games that we offer, it's like 1/5 to 1/10 of what our competitors offer, and we're going to get that ramped up. I think, by football season, this upcoming, call it, September of this year, you're going to see the Barstool iCasino is going to be not just offering well-known content from the sci games and IGTs of the world, but you're going to see some content that we created ourselves through our studio. And I think case in point, if you heard BetMGM talk about how much -- what percentage of their sports betting audience, they've converted over to iCasino, we're not there yet. We're at 50%. I think they're at like 70% or 80% or 90% or so. It's a very high percentage. And we need to have better content, and that's what we're working on. But yes, you should expect us to do much like on the sports betting side. We're going to do things differently and really take advantage of tapping into that loyalty that comes with the Barstool name.

The next question comes from Shaun Kelley of Bank of America.

Welcome Felicia. Good to hear your voice.

Thanks, Shaun.

So Jay, 2 things I wanted to touch on. First, just to stick with online and digital. You talked about the low-teen market share. And I think we've all been kind of staring at some of the sequential market share patterns. And I just wanted to get your kind of thoughts on when you guys launch in some of these -- some of the new markets, you seem to do exceptionally well, given the Barstool penetration, then we tend to see things kind of level out a little bit over time just given that where you are in market versus not and probably some of the follow-through there. Just how are you kind of thinking about that pattern as it moves over time as you start to gain a little bit more scale across markets? And what should investors expect kind of as you look at it, what KPIs are you watching to really judge how your assets are performing?

Yes. No, it's a great question, Shaun. We obviously are -- we talk about this every day, and there's a couple of things to keep in mind. One, take Michigan as an example, it's Uber expensive from a marketing standpoint right now. Everybody is just -- it's a gold rush for how much you can spend to drive the more promiscuous customers around from app to app. And we're not playing in that game right now. And we obviously headed into football season '21 are going to have more scale, as I mentioned earlier. And so it makes a lot more sense for us to spend more and be more aggressive when you have scale and you can work on more regional and national marketing approaches as opposed to very localized, very expensive with very little long-term ROI. So that's one. Number two, I think every market is going to be a bit different. If you look at our results in Pennsylvania, they've been remarkably consistent. We've been in that low-teen 12% to 15% market share, whether you're looking at handle, GGR, NGR pretty much every month since we launched in September. And so you really don't see the volatility in Pennsylvania. It's been pretty much clock work month-to-month, for the most part. And the other thing that I would mention is that -- and I don't think this will surprise anybody, but the Barstool folks, especially when you're talking about Portnoy and Big Cat, their top sport is football. And I think that what hurt us in Michigan is we launched right at the very end of football season. We got basically the AFC, NFC championship weekend, a little bit in Super Bowl. And then we headed into basketball and hockey, which is going to be -- I think we're going to be competitive, but I think we're probably going to be most competitive during the September through January months because of football season. And so the drop-off in Michigan, I think you're going to see that start to self-correct as you get back into football season, especially with some more marketing spend and efforts to get it ramped up once we have more scale. So we're not -- I continue to go back to what matters over the long term. And I think that there seems to be an overreaction to monthly handle. And I think you need to take a step back and really look at the strategy, the margin profile, the business model and what does it look like over a period of much more than a month or 2 and let's get through another football season, give us a second full season to get through. We've learned a lot, and we're confident with where things are going to shake out.

And maybe just to switch gears, but we made it, I think, this far without talking too much about the kind of core brick-and-mortar business. I think, what investors are asking us a lot about is just trying to understand how much of what we're seeing in March and April is truly sustainable in our eyes versus a lack of entertainment options, some of the stimulus funding, possibly some sort of onetime pent-up demand. You guys seem to have a lot of data around that. You've broken it out by cohorts for us. So I just want to get your thoughts and if you kind of tailor it to both a little revenues and a little bit on the margin front, too, just trying to kind of get our arms around what's real and repeating versus what's onetime?

Yes. Todd, do you want to grab that one?

Thanks, Jay. Thanks, Shaun. Great question. And I think it's what everyone has been asked in our industry as we've kind of gone through this. So obviously, we're encouraged by the revenue and the EBITDA performance trends. Revenue, it's a combination of many things. There is obviously pent-up demand. There's stimulus money in the marketplace. There's a lot of things driving that as well as you acknowledge the lack of entertainment offerings. But I would also point to, we're seeing it across all different groups, and that's everyone from unrated all the way to the high end customers, which are more of your core gamers. Q1 and definitely March and April, the trends are even more encouraging. In the South, Mississippi as they removed really any restrictions, we're seeing volumes, visitation, handle drop well over 100% of 2019 numbers. And and similar, in Louisiana, there was a group of us last week that went to Louisiana and visited 4 of our properties in Louisiana. And it was amazing to see. It was -- there's -- in a big way, you wouldn't even realize that there was a pandemic going on. So it was really encouraging to see people out there and enjoying themselves, having a great time being at the pool, spending time at tables, dining in restaurants. So it was really where we see the rest of the country going. To your point on margin, in the past, we've kind of provided a framework of 9,100. And with a goal of saying that on 90% of 2019 volumes, we could get to 100% of 2019 EBITDA, which really, when you do the math, equates to about a 350 basis point margin improvement. We obviously feel that, that number is now a little conservative. This has been discussed internally, maybe more than any other performance metric coming out of the first quarter. I think, we all got to a point where we feel the margin performance will continue to be driven by volumes. And as we're holding on to the younger demographic, as we're seeing the 55-plus come in after vaccines, those volumes remain steady. And through the first now 5 days of May, the trend continues from April. So very optimistic, very encouraged as we move into the rest of the year.

Yes. Well said Todd. One thing I would add, and Todd sort of highlighted it is, you should anticipate our margin profile looking a lot like it does right now as long as the revenues continue to be what they've been in the last couple of months. And that's what we're seeing right now. It's tough to predict what's going to be in this environment, 3 months, 6 months, 12 months, 15 months from now. But the margin profile, thanks to Todd and the operations team out in the field, we feel great about how sustainable it is as well as long as the volumes are there.

The next question comes from John DeCree of Union Gaming.

Congratulations, Felicia, for hopping on the other side of this conference call.

Thanks, John.

Jay, there's a a slide in your deck that talks about your GGR market share at a couple of properties where you have a rebranded Barstool Sportsbook. And I was wondering if you could talk a little bit about, if you've seen anything early on, the crossover play from retail sports betting to online sports betting, places where you have a rebranded sportsbook. Are you seeing those customers play in the retail location? And then go home and play online? Or are they 2 very different customers? I know it's early, but I was wondering if you could kind of talk about the value of that retail sportsbook present.

Yes. And Todd, you can help me with this one. Here's what we're seeing is that customers that are coming in to bet in these Barstool-branded retail sportsbooks, many of them, most of them have never been to the property. And while they're on property, they're engaging in table games, mostly a little bit in slots actually and a lot in food and beverage, not surprisingly. I think what's most interesting for us is that one of the things we have not been able to do really at all since we acquired Barstool, and this is something that Dave and Erika and Big Cat and others and Barstool are the most excited about, as are we, is this on-prem activation of their audience. So even though we've opened these Barstool-branded sportsbooks, it's still with very limited capacity Blackjack games that are every other seat and slot through every other slot and bars are half shut down or entirely shut down. So when you think about we're seeing early results that are very encouraging, but I get a lot more excited thinking about how much stronger those volumes can be when we can really activate the audience. Todd?

Yes. Well said, Jay. The only thing I would add, John, really the stickiness to your question, now that everybody is in the mychoice program. So whether you're spending time with us online or actually at the property, you're earning loyalty, your earning rewards. So we've seen a nice uptick from there. So obviously, the brand loyalty, I think, as people find their way back into the casinos, they are over indexing, if they're gambling with us online as well as in the Sportsbook. So it's a really encouraging trend and definitely saw a nice increase after everything was folded into the loyalty program.

That's great. That's great, helpful color. If I could ask 1 more, Jay and Felicia on a high level, going back to one of Felicia's comments before as revenue ticks up in a recovery, EBITDAR will tick up and ultimately, your free cash flow accelerate and where the balance sheet is today in a position that it hasn't been as long as we can remember. Jay, I think you were pretty clear in where you would spend investment dollars in kind of unique kind of tuck-in acquisitions like your content acquisition earlier this week. But the big picture, the amount of cash flow that we see you guys being able to generate in our model. How do you think about uses of cash and deploying that cash, the different buckets? I mean, is there an opportunity to continue to grow and invest in your digital business and perhaps think about shareholder returns or dividends or even pay down a little bit of debt you have? Just want to kind of get your sense as cash flow accelerates here, how you'd look to deploy it in addition to reinvesting in the digital business?

Yes. Thanks, John. I think for now, you've all heard Jay talk many times and also today, right, about investing in the business, and that's inclusive of growing our online channel and solving for our tech stack. So that's really where we are today. Our cash balance certainly gives us a lot of dry powder to pursue a number of different growth strategies. But over time, regarding return of capital, that's definitely something we'll consider down the road. It's something discussed. But right now, we're very much focused on our growth.

I mean if you look at -- John, if you look at -- we don't provide this level of detail month by month, but the March-April results, we sort of provided a slide. You're looking at roughly a little over $200 million at the corporate level of EBITDAR, and close to $100 million of free cash flow each of those 2 months. I'm not saying you should run rate all of that because March is a strong month, and we don't know how long, what we're seeing now. But the operating leverage of this business is tremendous. And the EBITDAR to Felicia's point earlier, EBITDAR to free cash flow conversion, I think, is going to be maybe tops or close to tops in the industry.

The next question comes from Stephen Grambling of Goldman Sachs.

Jay, you gave the Sky Bet analogy on the online sportsbook. As you look at your metrics in that segment across things like size of bet frequency and customer concentration. Without perhaps disclosing those stats specifically, how do you think you compare to peers in the market? And can you provide any color on how you think about how fragmented your customer base is as we think about more of a mass market customer versus perhaps peers more concentrated?

Yes. Great question. And I sort of know what I know, just based on what we have visibility and what we hear from our competitors, Stephen, so some of this would just be speculation. But in terms of what we know ourselves is that I mentioned earlier, we know that the lion's share of the sports betters and our ecosystem are young. They're younger than 30, call it, 21 to 29. They over-index there more than what I'm hearing competitors say about where their average age is maybe more in the 30 to 35, ours is 25 as an average age. And the average bet size, not surprisingly, for us, is a bit lower, especially in Michigan, we're seeing there. It's -- Illinois and Pennsylvania is sort of where we thought it would be, Michigan, the average bet size has been lower. But you're seeing our hold rates in Michigan higher. And so we're getting a lot of parlay bets in Michigan, a lot of casual betting, recreational betting. And I think that's great. That's what Sky Bet has been doing in the U.K. for a long time. And if you look at Sky Bet's hold percentage over the last 7 or 8 years, they tend to over-index on hold and GGR versus handle. It's still early to say exactly how that's all going to play out for us, but based on sort of life-to-date in the states that we've been in and now including Illinois, our hold rates are higher than the competition. And I think that's because we have a younger, more casual better. And when you think about lifetime value, I'd rather have an average better at 25 than anything older than 25 because they're in the ecosystem. So I don't know exactly how that compares to everybody else, but just based on what I've heard, what I've read from our competitive set and then what we've seen internally, that's what I think the difference is and how we really do line up quite well to the Sky Bet model in the U.K.

That's helpful. And then as a follow-up, this is perhaps asking Shaun's question on the sustainability of results in a different way. I think you had previously talked about achieving 2019 levels of EBITDA, 10% lower revenues. Is that still how we should think about maybe sustainable levels of margin improvement? Or has your view changed longer term, given what you've seen in the business?

I think Todd said it pretty well, Stephen, earlier. That now feels conservative based on what we're seeing in the business. And if revenue levels are sort of at where they're at now, and that's sustained, I think you're going to see us pumping out margins like we're pumping out now. That's the way you should think about it.

The next question comes from Barry Jonas of Truist.

I had a question about Vegas. With the sale of Tropicana to another operator, how do you think about the need to be back in that market longer term, specifically the Strip?

Yes. We -- I think Vegas Strip is a great market. And I think when you look at the Penn story, could you envision down the road there being a sort of hub-and-spoke as it relates to our on-prem retail strategy? Absolutely. It has to be the right asset at the right location, and it has to be an asset that we feel like is representative of a destination that we want to send people to. And we have some struggles with trough, and that's in the rearview mirror. And it wasn't for a lack of trying and database conversion and all of that. And I think we actually executed quite well. But at the end of the day, you need to have a property that's at a great location and is competitive from an amenity standpoint. So I would say, based on everything that we have going on as a company, it's not imperative. It's not something that we feel like has to be done, and we have a time line associated with that. But we will absolutely be taking a look if there's quality assets for sale in Vegas and with our balance sheet and with our database, I think we feel very comfortable making an investment if it was the right opportunity for us, but not something that is imminent. We're not out there making offers to people. But if there's a good asset on the market, we'll definitely be taking a look.

Okay. Great. And then just as a follow-up, I think a few quarters ago, you mentioned live in-game betting was lagging some of your internal goals out. Actually, I think it was Felicia's question. But curious where that is now.

I didn't make that out, Barry, I'm sorry, can you repeat that?

Yes. I said a few quarters ago, you mentioned live in-game betting was lagging your internal goals. I'm just curious where you think that stands now?

Yes. So I think probably for the market, as you look at how popular in-game betting is over in Europe. And I don't think we get to those levels in the U.S. and part of why in-game is so popular there because soccer is the most popular sport, which is -- lends itself to in-game betting, basketball would blow your head off trying to do in-game and football with hurry-up offense can be more challenging as well. But I do think that you're probably going to end up somewhere north of 50% in-game, and we're not there. We're more in that 35% right now, which is a little higher than the last time we reported. But I think it's going to take a little bit of time. And honestly, I think it's going to take having great content and great product. And we talked about creating more specialized bespoke content both within iCasino and sports, now that we have created a studio and so that's going to be very focused on in-game over time. And I think you'll see those numbers continue to grow.

The next question comes from Ryan Sigdahl of Craig-Hallum Group.

Jay, you mentioned sub-100 CPA, very impressive there relative to the industry. I guess, I just want to break that down. I know we've talked a lot about this be very clear, I guess, because there's a lot of misinformation, I think, about promotions reported by states on a monthly basis versus external marketing. So how do you think about spend between those 2 promotions and external marketing? And then has your strategy changed there versus your initial expectations kind of from your early learnings in Pennsylvania, Michigan, Illinois, et cetera?

Yes. No, happy to share that. I mean, look, I I view those 2 as very different. I mean, by definition, CPA is cost per acquisition. And so that's very much focused on how much did you have to spend to get that customer to download your app and to place a bet. And I think that from our standpoint, the promotional spend is much more about retention. We are laser-focused on retention. And that's why I think you'll see us maybe spend a little bit more on promos as it relates to a percentage of GGR. It's also very tax-efficient in a number of these markets. And as you're looking at spending hard cash on paid media that maybe is attracting a little bit more of a promiscuous customer versus investing in somebody who's already in your ecosystem and making sure they have compelling reasons and compelling content and compelling promotions to stay within the ecosystem. We view those 2 things very differently. So CPA for us, obviously, being as low as it is, begs the question of, well, what should it be? I think it should be higher, but we just want to make sure that we're being thoughtful around what we spend, where we spend it and that it's going to create long-term ROI. We'll be as aggressive as we need to be as long as we believe we're attracting customers that we can keep within our ecosystem.

Great. And then just on New York, mobile sports betting, a fairly complex and confusing licensing structure there, also expensive. I guess, do you think there's an ROI opportunity for a competitive bid in the state?

I think you said it well, Ryan. We view it the same way. It's a conundrum, and we'll have to see how this plays out. We're very active right now. And talking to a number of our comps there because the way that this was structured, you can actually go in on bids with multiple platform providers. And so it is complicated. I think money can be made, but the tax rate, obviously, is going to be hugely important, and we'll have to see how that plays out. I would say that if anybody can sort of monetize in an environment like that, I think that we're set up better than anybody because of our low CPAs and the fact that we have such a loyal audience that we don't have to spend money attracting to get into our ecosystem. So I don't want a high tax rate, trust me, and I don't think a high tax rate benefits the state at all. But if it's a higher-than-average tax rate, I think that is an environment we know we can still create long-term value and profitability.

Our final question comes from Steve Wieczynski of Stifel.

Felicia, welcome. I mean I'm shocked, you don't want to talk about cruise operators anymore in this environment. So anyway, Jay, I want to ask a bigger picture question around sports betting. And there's obviously TAM estimates out there that are -- I mean, they're all over the map. And my question specifically around the gray market money. My question actually is, how do you guys think about attacking that gray market and converting those folks from a gray market type of setup into a legal entity like yourselves or somebody else. And do you see this as a risk longer-term that converting those folks might be more difficult than originally expected?

It's a great question. And I think that's an industry question even more than it is a Penn question. And I think that certainly, our competitors are doing their part by advertising all day every day in the markets that are legal to make sure people understand that it is now legal and pretty easy. As I mentioned, it's a 3 minute transaction. So I think we all have to -- some of those illegal operators have really good products. They've had them out there for decades. And so we all collectively have to continue to create a really good UI/UX and make sure that we have features and functionality that are as good, if not better, than some of those offshore operators. And I think, when you pull people, AGA has done this, we've done it internally at Penn as well. And you ask people, would you prefer to bet with legal versus illegal. It's not like people want to bet, a lot of people don't know. And so I think some of this over time, Bovada, is that an option? And I think people over time are going to realize that which ones are legal and regulated and which ones aren't. But it's not going to happen overnight. I just think what you're going to see is our ability to convert sort of gray market betters into black market, you're going to see that just continue to grow and get better over time, especially as more states legalize, we have more scale. The industry has more scale and it becomes more sort of common knowledge as to where it's legal and where it's not. But I think that's an industry effort more so than it is even necessarily a Penn effort.

Got it. And then, Jay, I thought it was -- and if you talked about this earlier, I apologize if I missed it, but I thought it was interesting you talked about or you guys wrote in the release about being -- you talked about being a disruptor to the gaming industry. And to me, that almost sounds like a threat. So I guess, can you expand a little bit more about what you guys actually meant by that statement?

Well, I don't view it as a threat. So I'll be clear on that. I view it as the way that we look at the space. And we were a first mover in a lot of areas. We were a first mover in creating the industry's first REITs. We were a first mover on investing in social casino businesses. We were a first mover in pursuing route operations when it was at its infancy. When we acquired Barstool, that raised a lot of eyebrows as wow, is that going to work? And so I think what we're saying, Steve, or attempting to say is that we've been disruptive. We're going to continue to be disruptive. And I think this current environment of convergence of different industries and verticals is a very comfortable place for us. We like when it's sort of chaotic, and somebody's got to step through the chaos and figure out how to create a compelling strategy and vision. We think we're set up really well as a team to do that. We live and breathe this every day. And when I say this, it's not just gaming, it's sports, it's entertainment, it's media, it's tech. It's all of the adjacent industries that we see coming together. And we think we're set up really well, and we've got some ideas on how we can really, like I said, sort of make the moat that we've built, wider and deeper, and you should be expecting to hear more from us on that.

I'll turn the call back over to you for any closing remarks.

That's all I have. Really appreciate everybody taking the time to join us this morning, and we'll be in touch with all of you soon. Thank you.

Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.