Analysis: Flutter not yet taking off

Flutter, the artist formerly known as Paddy Power Betfair, kicked off the UK reporting season on Wednesday with a set of results that was as encouraging as it was concerning and confusing. Group revenue growth was strong, driven by the US and Australia, while online looked weak but with green shoots both literally and figuratively.

The growth story is built around its four pillars the firm once more laid out to investors and analysts: to maximise profitable growth in its core markets; to grow Betfair in the rest of the world; to attain podium positions in additional regulated markets and to pursue the US opportunity rigorously. Of these four you could say it was a mixed bag in the first half, with the second quarter providing a couple of steps forward and a couple of steps back in terms of progress.

Online is increasingly hard to unpick with so many moving parts, but overall the picture was one of a business limping rather than running into a brave new future with revenues up 8% in H1 and just 1% excluding the impact of Adjarabet. Sports revenues were flat although Q2 looked an improvement up 5% against tough comparatives and 22% prior to the World Cup period and this was clearly helped by a 1.5% improvement in margin with Flutter finally joining the RAB party. Gaming performed better, although growth slowed in Q2 and stripping out Adjarabet was just 3% ahead.

The UK remains the problem market, with revenues just 1.5% ahead in H1 and Betfair in particular continuing to suffer from the loss of high-value accounts as Flutter rightly continues to up its responsible gambling game. But in the green corner there are positive signs with Paddy Power showing actives growth of 16% in Q2 prior to the World Cup on the back of 22% actives growth in Q1. And it appears it outperformed William Hill in the period. The question is to what extent this actives growth can compensate for the drop in ARPU caused by new responsible gambling measures? And when and if the UK can return to a good level of growth.

Catch-up or overtake?

What Flutter can benefit from in the short-term is some catch-up growth and Paddy Power appears to be dragging itself back to life and winning a bunch of new fans like a band back on the road after its last album flopped and finding people still like the old hits. The Huddersfield shirt stunt was right out of the old playbook and the Rhodri Giggs loyalty campaign combined with a real resurgence in promotional intensity and continued improvements to an app that has slipped well below the top tier has seen good growth in actives, if not quite yet revenues.

And that’s no huge surprise as Flutter faces a number of headwinds in the UK, with the storm by no means over. And this is true in some other markets it is targeting for growth. Italy’s advertising ban will be tough for it to navigate with no land-based presence, and the potential for a similar ban in Spain as well as a very tough looking environment in Sweden. There is also a hardening regulatory stance in Denmark, rising taxes in Italy and Romania, market closures, high tax costs in newer regulated markets such as Portugal, the Czech Republic and Poland and payment blocking in Norway to name just a few.

International sounds great in theory but where are these markets Betfair is going to suddenly make large revenue gains in? There are a number of markets that have potential such as Germany, Japan, Canada, Brazil or even China but all come with a varying level of regulatory risk, while regulated markets are alarmingly hard to find bottom-line enhancing growth in at the present time. Certainly turning back on a number of smaller markets with decent localisation and payments could be enough for a boost but to really move the needle you sense it needs to look bigger and that picture is still very fuzzy for the whole industry. The bigger opportunities it seems remain in Australia and the US.

The new world

The firm’s Australian business has long been a shining star and even as market conditions toughen it continues to provide some light in the dark. Australian revenues were up 16% in H1, although EBITDA took a 3% hit thanks to a 67% rise in cost of sales due to the introduction of Point of Consumption taxes in most Australian states. There are further headwinds in Australia too with advertising, sign-up offers and deposit limits all facing further regulatory scrutiny. But it was interesting to hear Flutter talk of some let-up in marketing intensity by the competition and a potential fall in costs there, with the market behaving more rationally than some European ones in response to a shift in conditions.

The most headline grabbing aspect of Flutter’s results, however, and presumably the main reason for its share price rise, was the performance of its US division which has been hitting it out of the park in H1. The trouble is there is no real way of knowing what comes next. Flutter’s success to-date has been through having a near perfect combination of factors in its favour. Its partner is the large sportsbook just over the bridge from New York City, it has pre-existing experience of operating in New Jersey with proven onboarding, wallet and customer service, it has acquisition and retention marketing expertise and the ability to cross-sell in both directions from its online casino.

But that’s far from all. It also has strong in-house consumer facing product and trading through Paddy Power with a market-leading range of markets and aggressive pricing and a huge acquisition funnel from FanDuel’s DFS database and it has the FanDuel brand. In short it’s playing with cheat codes on. The extent to which it’s able to repeat the trick in other markets remains to be seen, but it clearly retains many of those advantages in other markets. But how long most of those remain significant advantages is harder to define, with some fierce looking competition set to come online that should in theory rival or exceed its abilities in marketing, trading and product.

The competition is coming

TSG’s Fox Bet, GVC’s PlayMGM and William Hill are all in theory launching new bespoke US platforms for the new NFL season and will be throwing money at marketing and promotions once September begins. And alongside these we have the looming shape of bet365 in the distance ready to show its hand in the US, while we shouldn’t forget that DraftKings is unlikely to stand still when faced with the challenge of both FanDuel and the long list of new market entrants. Penn National and theScore are also working on betting products on varying timelines while PointsBet has managed to secure a near-5% market share in New Jersey. This is sure to be a market that is fiercely competitive and one where FanDuel’s market share looks exceptionally hard to defend or repeat in future States.

Analysts certainly seem keen on the US business. Goodbody said: “We are big fans of the group’s US exposure, and the performance during H1 provides significant encouragement.” Davy noted Flutter’s strong position in the attractive US market and drew attention to the group’s view that the US can rival the current online division for profitability over time. But the ‘when’ part of that is a huge question. The US is still a handful of relatively small markets, and the key states are yet to come online. An early lead only holds so much value, and while DFS can remain a cheap and stable source of revenues, you wonder how long that will remain a major competitive edge as players become more exposed to sports betting generally.

With just one state in operation, Flutter’s sports betting revenues are already closing in on DFS revenues. So will the business be as committed to the back-breaking marketing spend in future to support a far lower-margin business model? The balance between the two will be a crucial factor in maintaining growth in the US market as market conditions begin to change and on this, and many other factors, Flutter needs to work hard to defend its current edge and that means continuing to push to be market-leading in trading, product and marketing. Things move fast in the world of online gambling and Flutter does not need to look far back into its history to learn how standing still can soon see you overtaken.