Ladbrokes keeps a lid on rising expectations

Ladbrokes’ interim management statement made interesting reading on Thursday. For a firm which over the past few years has contributed chapters to the book of excuses, you’d have forgiven it for making hay of results which finally reflect a firm on the up.

Yes, the operator’s H2 results showed signs of promise, but this week’s Q1 release underscored those green shoots and then some with impressive growth across the board, including a healthy rise in net revenues despite suffering a loss-making Cheltenham Festival.

The turnaround in fortunes comes almost exactly 12 months after Jim Mullen (pictured) replaced the much maligned Richard Glynn as CEO. And Mullen, who at the time was something of a surprise appointment, has in a year gone from fighting fires to keeping expectations in check.

Compare and contrast

Take the operator’s IMS as a case in point. On an absolute comparative basis, Ladbrokes’ Q1 net revenues, excluding Australia, were up 57% year-on-year with sportsbook net revenues up 122%. That’s some going, particularly against the backdrop of a profit warning from old rival William Hill.

Yet Ladbrokes, or Mullen in his wisdom, decided to strip out HVC losses incurred during Q1 2015, meaning the operator’s headline revenue growth was a more modest 37%. And instead of sportsbook margin rising from 4% to 7.9%, it used a higher comparative point of 6.3%.

Of course you can argue Ladbrokes did the right thing by subtracting the high roller hit but it’s not unheard of for operators to ensure comparatives reflect as positively as possible, particularly when trying to gain the confidence of the City.

And it would appear Mullen would rather be a CEO that under promises and over delivers. A mantra he rolled-out in the early weeks of succeeding Glynn was that he wouldn’t “promise jam tomorrow”, and that was never more apparent than last week.

Regression to mean

While the Scot pointed to signs that his Plan A, which he unveiled last June, was starting to bear fruit, he was also quick to highlight the favourable run of sporting results enjoyed by the industry in Q1, particularly domestic football, which he said was unlikely to last much longer.

“This is the third quarter of a 10-quarter strategy so there’s still bit to go,” Mullen told EGR. “We are seeing our recreational scale growing and our products coming through but I want people to know that when results go against us, which they will, it will have an impact, but I’m encouraged by our underlying numbers.

“I’m not concerned [results will turn against us],” he adds. “The probability theory means they will. Our margins have been good and the reason I didn’t labour on those is because our underlying numbers have been excellent.

“At some point – it may be England winning the Euros or some bad football weekends which we haven’t really seen yet – results will deteriorate and when they do I can say to people ‘I told you to expect that’.”

Group stage blues

Mullen also played down the opportunities presented by the expanded Euro 2016 tournament this summer. While many would expect bookies to be licking their lips at the prospect of extra games, Mullen says the likelihood is that Ladbrokes will lose money in the early stages due to a gulf in class between teams.

That doesn’t mean Mullen will have Ladbrokes shying away from the tournament. He says the bookmaker will compete for custom early doors, even if it means taking a hit during the group stages. “I think we will have to invest some margin and take some losses at the beginning and hopefully by running a balanced book we will see that money come back at the later stages,” he explains.

It all adds up to a very cautious approach and outlook from within. While investors and analysts have witnessed many false dawns before, this week’s numbers appear to show the sun finally shining on the Magic Sign. There are even some suggestions the firm should renege on its proposed merger with Coral.

That all said, while on the surface Mullen maintains a poker face, reading between the lines Ladbrokes appears to be cranking up the pressure on the already under pressure William Hill.

Turning the screw

Last month Hills issued a profit warning, pointing to a poor Cheltenham, European football results and a significant increase in customers electing to self-exclude, which it said across the year would wipe ?25m off its profits – although this figure has been called into question by analysts.

At the time Paddy Power Betfair said it was surprised by Hills’ admission, and Mullen also downplayed the impact of self-excluding customers, telling EGR – perhaps with an air of satisfaction – the financial effect had been blended into its full-year projections and were broadly in line with what they had been expecting, giving a sense of full control.

Furthermore, although not naming Hills specifically, Mullen called into question the trading strategies of rival firms at Cheltenham, saying some had “abandoned bookmaking principles” with overly generous pricing and offers.

Hills said Cheltenham contributed to a poor first quarter (with a 1.9pp reduction in margin) while Ladbrokes, albeit from a smaller base, was still able to post strong revenue and margin growth. “Cheltenham proved to be the worst in living memory which took some of the shine off the period,” Mullen says, in deep contrast to Hills’ profit warning.

Although Mullen may not say it publically, with or without the merger with Coral, we may be seeing the beginning of a renewal of an old rivalry, something which seemed an unlikely prospect just 12 months ago.