Igaming Focus: Customer-friendly results to hit operators’ Q4 margins

Thursday, November 14, 2024 8:00 AM
Photo:  Shutterstock
  • Igaming
  • Jake Pollard, CDC Gaming

Hello and welcome to this week’s Igaming Focus newsletter!

On the slate this week:

  • Customer-friendly results are set to hit operators’ Q4 margins…
  • …as Flutter results highlight the importance of product and trading to optimize hold levels.
  • Results roundup: Better Collective, Gentoo Media, Genius Sports, Light & Wonder, IGT.
  • Highs and lows: Taxes focus industry minds in Louisiana and Missouri.
  • Not just Brexit: Campaigning groups say U.K. is an outlier when it comes to gambling advertising in Europe.
  • Brazil licensing costs putting applicants off.

Source: Shutterstock

Customer-friendly results to hit operators’ Q4 margins

But importance of product and trading highlighted as FanDuel minimizes impact of customer-friendly results.    

Weak spot: Customer-friendly sports results will impact the Q4 margins of all operators in the space. DraftKings commented on the trend during its earnings call last week, with chief executive Jason Robins describing it as “the most customer-friendly stretch of NFL sport outcomes we have ever seen” and forcing the company to cut its full year 2024 EBITDA by -30% ($120m), although the Jefferies team noted that the “$175m sports margin impact (should be) partially offset by $55m of cost efficiencies.”

  • Marginal gains: FanDuel (results news below) could “potentially [be] a relative winner” as New York data indicates less margin impact so far in Q4.

Source: New York Gaming Commission and Jefferies

  • On the up: The analysts noted that while BetMGM appeared as the worst hit by weak sports margins in Q4, “its underlying trends are far more encouraging” as it “recorded its highest monthly handle since March 2022 in October (+50% year-on-year), followed by its highest ever weekly handle during the first week of November (+63% YoY).”
  • Last week Macquarie calculated NFL market hold of 2% for Week 9 (Oct 28-Nov 3) of the season, which implied overall online sports betting hold levels of 6% (non-NFL sports at 9%). This led Macquarie to revise its Q4 hold estimate to 8.5%, which would be “a slight expansion YoY given an easy hold comp.”

Flutter’s material difference 

Leading OSB group in the U.S. confident of pricing and trading abilities as sports results impact industry.  

If it wasn’t for bad luck: FanDuel parent company Flutter Entertainment’s losses dropped 56% YoY to -$114m in Q3 as the group’s chief executive Peter Jackson praised his trading teams’ “pricing accuracy” and said it was “driving the material differential that you’re seeing” when it comes to market share in the U.S. However, he also noted that punter-friendly sports results at the start of Q4 would impact the next set of results.

  • Jackson said that throughout Q3 FanDuel’s market-leading parlays, and the strong margins they generate, enabled the group to weather consumer-friendly results better than its rivals.
  • The price is right: “We’ve got by far the best product and pricing in the market and that’s what’s standing us in good stead. It’s really, really important when we’re taking these complicated parlay bets that we’re pricing as accurately as possible,” he said.
  • Chief finance officer Rob Coldrake added: “The fact that we lead the market in parlays compounds the benefit” and FanDuel will continue reinvesting in promotions to drive engagement and recycling of funds.
  • NBA gains: Flutter’s online market share in the U.S. stands at 35%, with OSB share at 41% and online casino at 25% and although it lost some OSB share to DraftKings during Q3, JMP said “early results indicate it gained share” at the start of Q4 thanks to “its superior NBA product.”
  • JMP also noted Flutter’s “impressive cost controls, leading to EBITDA beating consensus by $61m” and its Q4 U.S. guidance being “better than expected with revenue only 1% lower and EBITDA -4% for 2024, compared to DraftKings’ -5% for revenue and -32% for EBITDA, “highlighting its superior pricing and product.”
  • Global player: Flutter has also been active in non-US markets as a way to leverage its global footprint and compete for top spots in several of the world’s largest markets. It acquired NSX in Brazil to prepare for the market’s regulated launch in January and Snai in Italy for a combined $3bn during Q3.
  • In addition, during a Q3 investor day it increased its EBITDA target “to >$5bn by 2027 (vs. TTM: $2.3bn), setting the stage for an impressive growth path for a company of its size” as its “earnings power will soon approach several of the largest gaming companies such as Las Vegas Sands and MGM Resorts,” said JMP.
  • Q3 revenues were up 27% to $3.2bn while adjusted EBITDA rose 74% to $450m and U.S. adj. EBITDA hit $58m while non-US activities generated $392m of profit.

Results roundup: Better Collective, Genius Sports, Light & Wonder, IGT, Gentoo Media 

Better Collective revenues were up 8% in Q3 to €81m and EBITDA before special items rose 14% to €22m, but organic growth was down 6% due to lower U.S. activity than expected and an “accelerated slowdown” from operators in Brazil ahead of regulation. Recurring revenue was up 14% to €53m and made up 65% of group revenues.

  • Revenue share moves: In its statement, Better Collective once again emphasized its move away from CPA agreements with operators to revenue share deals, which it said had added €155m in player lifetime values to its database and will lead to more than €120m in future revenues.
  • Longer game: Better Collective has seen “increased success” working on revenue share contracts, “building sustainable long-term growth,” but also “deferring revenue and earnings.”
  • The market changes in the U.S. and Google’s site reputation abuse update in May have led Better Collective to lower revenue and EBITDA guidance for 2024 and lay off 300 staff members, or 15% of its workforce. Better Collective said it expects North America to deliver EBITDA margins of minimum 20% and upwards of 35% once rev-share deals are incorporated.
  • Brazil “within a few years has become significant” and contributed c20% of Better Collective revenues. These are based largely on revenue share deals and advertising, but with regulation upcoming, partners have opted to keep low profiles, while revenue share income “will be subject to a still unknown tax rate.” 

Beatmaker

Genius Sports had a strong Q3 as it beat forecasts and revenues came in +18% YoY at $120m and EBITDA was up 2% to $26m. Its betting tech division was up 30% and +7% vs. expectations, although its media unit missed its revenue target due to contract renegotiations.

  • The group said it had successfully renegotiated all its contracts with major customers, but also expects some downside in Q4 due to negative sport outcomes. These however should be “offset by incremental pricing from the completed negotiations,” said the JMP team.
  • Genius and Sportradar are the two leading data firms in the sector, but JMP noted that Genius “needed to prove to investors that data suppliers have the ability to find success in the U.S. To this point, it has checked nearly all the boxes, with the last major box to check around its ability to generate [free cash flow] as rights costs are now known.”

Light & Wonder reported a 15% rise in Q3 revenues to $537m and said the resolution of its IP dispute with Aristocrat over the Dragon Train slot machine would not stop it from hitting its 2025 EBITDA target of $1.4bn.

  • Having been ordered to halt all sales “or other commercialization of Dragon Train” in North America, the group said it had replaced 95% of its 2,200 installed units and that Dragon Train would have contributed less than 5% of its 2025 adj. EBITDA target.
  • Its social gaming division SciPlay was up 5% to $206m and online casino increased 6% to $74m and adj. EBITDA rose 13% to $319m.

Pure player

IGT reported its first set of results as a lottery-only company following the $6.3bn sale of its gaming and online gambling divisions to investment house Apollo in the summer as Q3 revenues were down 2% YoY to $587m and adj. EBITDA was -6% at $264m.

  • The team at Macquarie said the group carried cost cutting measures during Q3 that “resulted in a $38m restructuring charge related to a 3% reduction in the global workforce.”
  • The group expects to save $40m in annual costs by the end of 2026 and online lottery sales were up 26% thanks to solid business in Italy and improved trends in the U.S.
  • IGT secured a 10-year facilities management contract extension with the North Carolina Lottery and signed a three-year printing contract with Française des Jeux.

The affiliate group Gentoo Media (previously known as GIG Media) reported 35% YoY growth in Q3 revenues at €30.4m. The group rebranded to Gentoo following the spin-off of GIG’s platform and sportsbook during the period and said its “focus on higher-value markets” led to deposit amounts rising 36%.

  • EBITDA before special items also increased 36% to €14m and EBITDA margins were 48%. The group added that cash flow will improve post-split and going forward it will “deliver meaningful returns and create substantial value for investors.”

Source: Shutterstock

Tax lows give industry highs in LA and MO

Louisiana’s Roger Wilder has withdrawn his tax raising proposal, Missouri’s 5% gross gaming revenue tax will benefit larger operators.

Tax spices out: Louisiana Rep. Roger Wilder has withdrawn his proposal to up the sports betting tax rate in the state from 15% to 51% of operators’ gross gaming revenues following pushback from the industry. Wilder said he had “some learning to do” and that he was looking “forward to hearing the testimony from the industry, to gain a deeper insight of what the industry has with respect to their needs and their concerns.”

  • Wilder’s HB22 bill would have made Louisiana the highest taxing jurisdiction in the U.S. alongside New York, it also aimed to put a halt to operators offering promotional credits to players.
  • The proposal was part of moves by Louisiana Gov. Jeff Landry to plug an estimated $700m hole in the state budget.

Missouri electors have voted to pass online sports betting legislation and operators can expect a tax rate pegged at 10% with federal handle taxes and promotions deductible. “This allows for a very favorable margin profile for the operators of scale,” said Deutsche Bank, as the tax structure will be “similar to that of Michigan, which is currently garnering an effective tax rate of ~5% of GGR.”

  • Missouri has a population of just six million, but the larger operators will benefit from enhanced player access to their products and are expected to launch in time for the new NFL season.
  • Sorry to disappoint: The state expects to recoup c$134m in tax revenues over five years. Deutsche Bank said this “would imply GGR of c$2.7bn over the period, or c$536m per year” (c$119 per adult per annum), a healthy premium to most states not named New York or New Jersey. As such, we view the tax projections as likely to disappoint.”
  • Promotional activity will be very aggressive and will mirror Michigan where it has absorbed “c48% of GGR in promotions” over the past 12 months, added Deutsche Bank.

Endeavor okays OpenBet and IMG management buy out

Price drops massively as Endeavor continues to seek acquirer for IMG. 

Deal of the century (not): Endeavor Holdings chief executive Ari Emanuel has greenlighted and provided financing for a $450m management buy out of the group’s sports betting solution specialist OpenBet and betting data provider IMG.

  • Both firms will be acquired by OB Global Holdings, senior OpenBet executives including chief executive Jordan Levin also participated in the transaction, and the group will continue to seek a buyer for IMG.
  • Markdown: The MBO price is a 44% discount on the $800m Endeavor paid for OpenBet in 2022, which was already down on the $1.2bn it shelled out for the company in 2021.
  • The buyout will be financed through a mix of cash and debt and is part of majority shareholder Silver Lake’s plans to take the company into private ownership.

Source: Shutterstock

U.K. is an advertising outlier in Europe

Study by campaigning group says U.K. “has the most relaxed” ad regulations in Europe. 

Out and out: A new study published by the polling firm Ipsos in partnership with the University of Bristol in the U.K. and commissioned by the charity GambleAware has found that Great Britain “has the most relaxed gambling advertising restrictions in Europe” and stands as an outlier in comparison to many European markets “despite mounting evidence of harm.”

  • Going against the flow: In recent years, countries such as Spain, Italy, Belgium and the Netherlands have introduced bans and strict conditions surrounding the amounts of advertising, sponsorship or age groups operators and affiliates are able to address as part of their marketing activities.
  • GambleAware added that those countries were responding “to public health concerns about gambling harm and normalisation (of real money wagering) for young people” and that the U.K. “has the most lenient regulations” despite “having significantly more research on the negative effects of marketing practices.”
  • The charity called for reform, “including a pre-watershed ban on gambling ads and restrictions at sports events.”
  • Figures from 2017 suggest U.K. gambling operators spend around £1.5bn per annum on advertising and marketing. Research in September also showed Premier League fans were subjected to nearly 30,000 gambling messages on this season’s opening weekend – a 165% increase on the year before.

Brazil’s licensing price tag

Several applicants are balking at price of a license in South America’s largest economy.

Numbers dropping off: As Brazil gears up for its regulated igaming launch in January, hundreds of operators are said to have applied for licenses, but the final number remains uncertain as cost and the prospect of a highly competitive market is deterring many of them.

  • iGaming Business is reporting that the companies that had applied by the deadline set for this August are guaranteed to have their applications processed ahead of market launch on 1 January 2025.
  • 20/20 vision: Operators however were still allowed to apply and as of last week there were 273 applications, but at least 20 operators have now withdrawn from licensing, among them Super Group’s Betway, Arena Esportiva, AmuletoBet and Bally’s Corporation’s Vera & John brand.
  • Muito caro! The licensing fee of $5.3m is one reason for the withdrawals and the prospect of a highly competitive market dominated by major incumbents is another.
  • A number of M&A deals have already been done, but the situation could lead to more transactions as large international groups eye an opportunity to acquire market share in the largest economy in South America.