Five unanswered questions from Paddy Power Betfair’s FY17 results

Paddy Power Betfair (PPB) yesterday reported its first set of results with Perter Jackson at the helm, with a mixed bag of numbers causing the firm’s share price to dip almost 5%.

The results and the subsequent analyst calls arguably threw up more questions than answers, starting with…

Are Paddy Power’s issues fixable?

The dominant message from Wednesday results was that Paddy Power has lost market share (sportsbook up 3% YoY, gaming down 8%), and returning it to form is the priority. The turnaround appears to be relatively straightforward, with PP the main casualty of the platform migration due to a lack of product upgrades and less retention and marketing spend as a result.

With an improved product, and increased share of voice, PP has the brand cache to start recapturing its share of recreational punters.

Is there a solution for gaming troubles?

Gaming continues to flatline, with revenues down 2% for the year, with the latest update now marking nine straight quarters where gaming has declined or stagnated.

The firm noted the underperformance has been both on cross-sell revenues from sports and on revenue from direct gaming customers, where the two sports-led brands “remain underpenetrated”.

While Breon Corcoran has previously spoken about launching a gaming-only brand, new CEO Peter Jackson refused to provide an update on that, saying only: “Its early [in his tenure]”,  when asked about it.

Instead the firm promised less drastic measures including “additional investment to address gaps versus competitors including improving in-app customer journeys and our promotional capabilities”. In short it’s the same kind of thing that PPB has been promising for the past year, which has yet to make any impact.

Where is the international expansion happening?

PPB said part of the extra £20m it spent on marketing this year would go toward international expansion, namely for the Betfair brand.

It noted: “Betfair serves customers in a large number of international markets”, predominantly due to the exchange’s unique proposition, but it remains sub-scale in most geographies outside of the UK and Ireland.

CFO Alex Gersh said the firm had identified a lot of high margin international markets where PPB could get “good bang for its buck”, but declined to specify where exactly these markets were prompting some confusion among onlookers.

https://twitter.com/gamblinglamb/status/971337093556383744

Jackson also ruled out expansion to some of the greyer markets, leaving Germany, the Nordics, Italy and Spain as some of the key options for investment. These markets of course come with their own issues, with the first two facing uncertain regulatory futures and the latter two not necessarily “high margin” markets. The US of course is the real blue ocean opportunity, with PPB well positioned by virtue of its existing businesses, including an online casino and horseracing exchange in New Jersey and a nationwide ADW racing business.

Goodbody noted the firm had significant optionality in the US, adding: “PPB has strong local expertise in payments and digital marketing and has good relationships with regulators.”

Does this put a dampener on future mergers in the industry?

PPB blamed the technology migration following the merger for much of the downturn in Paddy Power’s numbers, pledged major investment in the brand and product going forward.

However, as Berenberg analyst Roberta Ciaccia noted: “Experience from previous deals (mainly the bwin merger with partygaming) suggests that it will take time for the company to improve its metrics significantly.”

The company’s stock is also down more 20% from the heights of £1,000 soon after the merger, suggesting the deal hasn’t quite delivered as expected, which could be said for other major deal, including the Ladbrokes/Coral tie up.

As industry analyst Alun Bowden noted in December: “If the industry has been taught one lesson the hard way it is this: mergers are never as compelling in practice as they are on paper.

It’s a lesson PPB may have learnt itself when it comes to any further M&A, after being narrowly beaten out for the William Hill Australia business.

Perter Jackson said the firm had “remained disciplined” with its bid, and would employ that same discipline on any other options. Berenberg downplayed the likelihood of any major deals, explaining: “We do not see many potential targets that would fit PPB’s requirements and think returns to shareholders are more likely.”

How’s the exchange doing?

As covered extensively on EGR, the exchange sector is hotting up like never before, with Smarkets, Betdaq and Matchbook all spending big, and undercutting Betfair on price. However, the firm refused to acknowledge any serious impact from this competition, even when asked directly about Matchbook and Betdaq.

On exchange competition: "The market is definitely getting a lot noisier, but whether its actually getting more competitive…?"

— EGR Global (@EGRIntel) March 7, 2018

That stance is perhaps informed by 3% growth in the exchange in Q4, although Gersh noted exchange revenues were inherently lumpy on a quarterly basis. That said, both Betdaq and Matchbook have reported massive uptick in liquidity following their recent offers, so the Q1 exchange figures will make interesting reading.