Five things we learned from Ladbrokes Coral’s 2016 results

Growth story continuing

What was most encouraging from today’s results was the positive momentum carried into 2017 when comparatives are far more robust. Digital net revenue was 20% ahead of last year, with sportsbook revenue 34% ahead and gaming net revenue 8% ahead (gaming net revenue 12% ahead in the sportsbook led brands).

A freak set of results in Italy (with margin down 14% in its retail estate) and slight decline in UK retail means group revenue was only 2% ahead, but broadly it seems the operator is continuing where it left off in 2017. And this is absolutely vital with the likes of Sky Betting & Gaming, 888, Paddy Power Betfair and a recovering William Hill all providing huge competition in both its UK and Italian markets.

Ladbrokes Coral CEO Jim Mullen is keenly aware of this and said the merger was only the start of the journey. “We are focussed on building on the leading multi-channel experience developed by both brands, utilising a rigorous approach to data driven marketing and ensuring that our product delivers a leading customer experience. We will look to leverage our existing experience in international markets to drive further growth and use our significantly increased scale in technology to develop new products and deploy across the enlarged group,” he said.

What is most interesting about this is not what is similar to its rivals – in terms of using its scale to expand internationally and invest in data-driven CRM and product – but what is different. Ladbrokes Coral appears to have carved out its own niche as a multi-channel operator and it’s a potentially compelling story for investors. The question is, of course, is it the right story for future growth?

Sportsbook surging…

Sportsbook revenues grew 51% Y/Y in what was the stand-out vertical for the operator. With Coral stakes up 34% and Ladbrokes stakes up 20%, it’s a business that has benefitted from improved margins and increased operational efficiency and the £310m of revenue was a comfortable £40m ahead of its old rival William Hill.

The operator pointed to its retail estate and the multi-channel offering, with players recruited into its mobile apps in-store, as a key differentiator with Coral Connect customers responsible for over 50% of Coral sportsbook revenue. And the impending roll-out of a similar model in Ladbrokes through its Grid card points to a major growth opportunity in 2017.

But longer-term there are reasons to be slightly concerned over growth trends in the sportsbook business. The retail estate will not have an infinite supply of new customers and at some point those wells will begin to run a little dry, not least if shop closures are forced on them by the Triennial Review. And there was also a concerning note about product development in the sportsbook vertical.

“Merger integration and technological harmonisation have meant that we have not advanced our products in some core sportsbook markets at the pace we would have liked. Therefore, we will be making sportsbook product development a major feature of our plans going forward,” Ladbrokes Coral said in its results. And with product features and functionality vital in the current market this needs to be addressed quickly.

Gaming growth slowing

While sportsbook powered on in 2016, the growth in gaming was less dramatic, up 21% year-on-year to £356.2m. The more complex nature of Ladbrokes Coral’s gaming business makes it harder to discern if the Gala business acted as a drag on the sportsbook brand’s gaming growth – but a 9% growth in staking in Gala Bingo suggests it was to some extent.

Gaming growth in the first two months of the year, however, was perhaps more of a concern with a reported 8% rise (albeit 12% in the sportsbook brands). With cross-sell now working well and more in-house content from Coral’s games studio helping margins, any growth below the wider market should be seen as a failure in 2017 and Q1 will be an interest test of the strength of Ladbrokes Coral’s gaming business.

Unlike the sportsbook vertical it can be viewed more as a business at scale and maturity on the Gala Bingo side, while both Ladbrokes and Coral have already seen considerable uplift in preceding years as Playtech brought their expertise into the business. As such, there feels like less low hanging fruit to grab. And with the new bonus tax likely to impact the bingo business and huge competitive pressures in the casino market generally, Ladbrokes Coral will face a tough task to maintain its momentum here.

Reliance on retail

Retail is a huge part of the Ladbrokes Coral digital growth story, and it has led the way in the UK in terms of what a multi-channel offering can mean. Coral Connect has been a major contributor to digital growth and sets out a path not just for the whole group in how to potentially build a sustainable retail business that works with and for the benefit of digital. And it’s taking these lessons into Europe too.

“Our experience has demonstrated that multi-channel customers are worth significantly more than a single channel customer, are cheaper to acquire and demonstrate greater brand loyalty.  The extension of a single wallet facility to the Grid card will bring the offer in-line with the existing Coral Connect offering, while the Ladbrokes bet tracking app will be rolled out to the Coral estate,” Ladbrokes Coral said.

Retail’s transformation into a real multi-channel offering continues at pace with the addition of SSBTs and continued cross-sell into mobile. But revenue was down 1% Y/Y in the first two months of 2017 and over the counter (OTC) revenue was down 6%. This is perhaps only to be expected as the firm looks to turn its retail estate into its main acquisition source for digital, but with an EBITDA from retail more than double that in digital it must be wary of robbing Peter to pay Paul here.

The biggest question hanging over Ladbrokes Coral and its huge retail estate is what happens next in the Triennial Review. A big hit on FOBTs would be tough to mitigate in the short-term, even if it has laid the groundwork for shifting some of those players onto the digital platforms. While the impending horse racing levy will offer no respite to the OTC business.

What comes next?

While there is still plenty of market share in both sportsbook and particularly gaming to aim for in the UK, the firm also has it sights set further afield for future growth too. “A key focus for the business going forward will be to diversify further into more international markets. We are prepared to take full advantage of relevant expansion opportunities as they arise while avoiding expensive forays into unproven markets or models,” Ladbrokes Coral said.

In other words, Ladbrokes Coral either doesn’t know or isn’t telling. It suggests the firm won’t be rushing into any Eastern European markets and it’s possible it may sit out the Netherlands launch as that appears to fit both the unproven and expensive adjectives quite neatly. Denmark is an obvious move, considering Ladbrokes prior strength in the region, as would a bigger push into the wider Nordic market. Spain also seems to offer plenty of headroom for growth and its Italian business has some key competitive advantages.

But perhaps the most important aspect of what Ladbrokes Coral does next is not attempting to do too much. They are a huge threat to any operator in the UK and this year should see them consolidate that position and fend off the many rival firms snapping at their heels. The work at home is still only half done.