Five things we learned from Paddy Power Betfair’s FY16 results

Paddy Power Betfair (PPB) this morning reported a 14% jump in online revenues, and a 27% jump in EBITDA, but the tone of CEO Breon Corcoran on the subsequent investor call was more cautious than expected.

Corcoran admitted to some underlying issues in the gaming vertical that needed addressing, while asking for patience on the Paddy Power sportsbook while it is migrated onto the group’s new platform over the course of 2017.

That said, there were also plenty of bright points from the figures, so here are five key takeaways from PPB’s 2016 results

• The Betfair sportsbook is the biggest beneficiary of the merger

The merged firm created a single trading centre, with Paddy Power proprietary pricing and risk management tools at the core. This means the Betfair sportsbook has been moving off third-party pricing feeds, with 85% of its bets now being covered by Paddys’ models. Within the next few months, all markets will operate on the integrated platform.

According to PPB, the change had two major customer-facing benefits. Firstly it has enabled a broader range of markets to be offered with, outside of football and racing, a 70% increase in the number of in-play betting events now available.

Secondly it has “significantly improved” the accuracy and responsiveness of pricing, allowing the firm to pursue it “brand pricing strategy” of tight margins for Betfair sportsbook customers and a greater focus on entertainment at Paddys.

• Paddy Power sportsbook upgrades will be put on hold

While the Betfair sportsbook has reaped the benefits of the merger, the Paddy Power sportsbook could suffer as the focus this year will be on migrating the legacy Paddy Power brand over to the combined platform.

While this happens, new product releases on the Paddy Power brand will be “relatively limited,” which is a major change of direction for a firm that is known for sportsbook innovations like Kicker and One Touch betting.

According to PPB: “We expect to complete the integration of our European online platforms by the end of 2017. Until then, new product releases on the Paddy Power brand will be relatively limited, but on completion customers will see immediate benefits. These include access to an improved cash out product, a new proprietary desktop, greater promotional flexibility and certain product features that are currently only available to Betfair customers”.

This pause in product releases may well play into the hands of innovative competitors such as bet365.

• The new platform will be able to host ‘three or four brands’ and M&A isn’t off the table

Corcoran said the new platform could support three to four brands once the Paddy Power migration is completed in Q4 2017.

He suggested the Australian brand Sportsbet, which saw stakes increase 25% to £2.9bn last year, could also be brought onto the platform, helping to cut costs on things like payment processing and KYC, which currently have to be done separately in each market.

More brands could be added to the platform through acquisitions, with Corcoran saying: “In terms of M&A, the business is back to a steady state and if things come up we will look at them.

“We are a balanced portfolio with international diversification with a great platform to generate growth – that doesn’t require M&A but if the right thing came at the right price we would look at them.”

• Gaming needed more attention in 2016

Although Online gaming revenue increased 14% to £245m (cc +12%) in 2016, the firm reported a slowdown in Q4 and an “underwhelming” start to 2017.

The firm said the downturn was attributable to lower direct gaming activations on the Paddy Power brand, a reduction in Betfair sports customers cross-sold to gaming and reduced year-on-year VIP activity across both brands.

In response, the firm increased TV advertising from mid-December, but Corcoran admitted that other “operational levers” would need to be used to kickstart the vertical.

“We aren’t satisfied with gaming,” he said. “We should have put more focus into it last year. We’ve started that but it isn’t fixed yet,” the exec said, although he refused to specify what would be done to turn it around.

• Marketing spend could be at capacity

CFO Alex Gersh said the firm spent £300m on marketing last year, adding it was “difficult to visualise how or where we could spend more in the UK”. However he said the budget could go up if any new markets were entered.

The firm also lauded the benefits of combining its digital marketing knowledge, saying: “The pooling of analytics data has improved our econometric modelling, giving us greater insight into the effectiveness of marketing activity and leading to improved optimisation of spend.

“For example, we can better test the effectiveness of different approaches to promotions on a particular event and up weight activity that is driving the most effective returns. Co-ordinated bidding for assets, such as keywords on paid search, is also improving the efficiency of our marketing spend.”