Caesars Entertainment, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Caesars Entertainment is a gaming and hospitality company operating or managing 53 domestic properties in 18 states as of September 30, 2023, with approximately 52,500 gaming positions and 46,900 hotel rooms. It also operates retail and mobile sports betting in 30 North American jurisdictions and regulated online real-money gaming in six jurisdictions. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net revenues | $2.994 billion | $2.887 billion | $8.703 billion | $8.000 billion |
| Operating income | $724 million | $659 million | $1.936 billion | $1.251 billion |
| Net income attributable to Caesars | $74 million | $52 million | $858 million | $(751) million |
| Diluted earnings per share | $0.34 | $0.24 | $3.97 | $(3.50) |
| Adjusted EBITDA | $1.043 billion | $1.012 billion | $3.008 billion | $2.286 billion |
| Adjusted EBITDA margin | 34.8% | 35.1% | 34.6% | 28.6% |
| Net income margin | 3.1% | 1.8% | 10.2% | (9.4)% |
Q3 revenue increased 3.7% year over year, while nine-month revenue increased 8.8%. Nine-month revenue growth reflected stronger Caesars Digital gaming revenue, reduced promotional incentives, improved Las Vegas hotel occupancy and contributions from new or reopened regional facilities.
- Q3 revenue by segment: Las Vegas $1.120 billion, Regional $1.565 billion, Caesars Digital $215 million, and Managed and Branded $98 million.
- Nine-month Adjusted EBITDA was $1.527 billion in Las Vegas, $1.531 billion in Regional, $9 million in Caesars Digital, $58 million in Managed and Branded, and $(117) million in Corporate and Other.
- Caesars Digital achieved Q3 Adjusted EBITDA of $2 million versus a $(38) million loss in the prior-year quarter. Nine-month Adjusted EBITDA was $9 million versus $(661) million in 2022.
- Q3 sports betting handle was $2.320 billion, up 14.3%, with a 6.5% hold. Q3 iGaming handle was $2.472 billion, up 38.3%, with a 3.1% hold.
- Las Vegas Q3 hotel occupancy was 96.6%, compared with 93.6% in the prior-year quarter. Regional Q3 Adjusted EBITDA increased 0.9%, but its margin declined to 36.7% from 37.3%.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $1.301 billion for the nine months ended September 30, 2023, compared with $469 million in the prior-year period.
- Capital expenditures were $895 million, including $315 million for growth and renovation projects, $286 million for maintenance, $117 million for Caesars Virginia and $77 million for Caesars Digital.
- Cash, cash equivalents and restricted cash totaled $1.015 billion at September 30, 2023, including $841 million of unrestricted cash and cash equivalents. This compares with $1.303 billion at December 31, 2022.
- Long-term debt, including the current portion, had a book value of approximately $12.312 billion; long-term financing obligations were $12.725 billion. Total debt principal maturities include $4.453 billion in 2025 and $1.676 billion in 2027.
- The company reported approximately $2.1 billion of available revolving-credit capacity after letters of credit, regulatory commitments and reserves. Management stated that liquidity and operating cash flow should be sufficient for operations, capital requirements and debt service for the next twelve months.
- Interest expense was $581 million in Q3 and $1.761 billion for the nine months, compared with $569 million and $1.680 billion, respectively, in the comparable periods.
- Variable-rate borrowings totaled approximately $3.2 billion, or about 26% of consolidated long-term debt. Weighted-average rates were 8.33% on variable-rate debt and 6.47% on fixed-rate debt.
Material changes versus the prior comparable period
- Operating income increased 9.9% in Q3 and 54.8% for the nine months, while Adjusted EBITDA increased 3.1% and 31.6%, respectively.
- Nine-month net income benefited from a $904 million income-tax benefit, including a $940 million second-quarter benefit from partially reversing valuation allowances on deferred tax assets. This benefit materially affects the comparison with the 2022 loss and is not representative of recurring operating performance.
- Caesars Digital substantially reduced promotional and marketing spending. Nine-month promotional incentives declined to $184 million from $487 million in 2022, contributing to the segment’s improvement.
- In February 2023, Caesars issued a $2.5 billion Term Loan B and $2.0 billion of 7.00% senior secured notes due 2030, using proceeds to repay CRC term loans. The refinancing generated a $197 million loss on debt extinguishment.
- The company prepaid a $400 million convention-center mortgage loan in May 2023 and repaid the remaining Horseshoe Baltimore term loan in July 2023. Total nine-month debt repayments were $5.930 billion against $5.300 billion of borrowings.
- On July 10, 2023, Caesars acquired the remaining 24.2% interest in Horseshoe Baltimore for $66 million.
Guidance, outlook, commentary and risks
- Management expects remaining 2023 capital expenditures of approximately $285 million to $365 million, including $200 million to $250 million from unrestricted cash and $65 million to $85 million for Caesars Virginia.
- Caesars New Orleans is subject to a required $325 million capital investment by July 15, 2024; the current project plan is approximately $430 million, with $239 million spent through September 30, 2023.
- The permanent Caesars Virginia facility is expected to open in late 2024, with a stated development budget of $650 million. Harrah’s Columbus Nebraska’s permanent facility is expected in the first half of 2024.
- Management cited inflation, higher interest rates, labor costs, competition, construction disruptions, weather, discretionary consumer spending and variable sports-betting and iGaming hold percentages as factors that could affect results.
- A September 2023 social-engineering attack on an outsourced IT vendor resulted in unauthorized access to, among other information, the Caesars Rewards database. Thirteen class actions had been filed by October 26, 2023, and regulators had made inquiries. The company stated that potential losses could not be estimated and that the incident had not materially affected results as of the filing date.
- The company faces significant litigation, lease, debt-service and capital commitments. It also submitted COVID-19 insurance claims exceeding $2 billion; an adverse September 2023 Nevada Supreme Court ruling negatively affects claims under Nevada law.
- The Culinary Workers Union agreement covering approximately 11,000 Las Vegas employees expired September 15, 2023, and members authorized a strike. A prolonged work stoppage could materially affect operations.
- As of September 30, 2023, Caesars was in compliance with applicable debt and lease financial covenants.
Most important facts for investors to verify
- Whether the $940 million tax benefit and resulting nine-month earnings materially obscure recurring profitability and cash-tax obligations.
- The company’s ability to refinance or repay the approximately $4.453 billion of debt maturing in 2025 while funding lease payments and planned capital expenditures.
- Whether Caesars Digital can sustain positive Adjusted EBITDA without elevated promotional spending and despite volatility in betting hold rates.
- The ultimate cost, insurance recovery, litigation exposure and customer-retention impact of the cybersecurity incident.
- Progress, final cost and funding sources for Caesars Virginia, Caesars New Orleans and Harrah’s Columbus Nebraska.
- The financial impact of labor negotiations, potential strikes, wage inflation and ongoing competition in regional markets.