Analysis: Reasons to be cheerful for bwin.party?

The Q1 results at bwin.party made for brutal reading. The much-trumpeted shift from “volume to value”, with a focus on around 10 core territories, led to revenues falling in all four verticals and total revenues down 17% year-on-year. And there is a concern that things might get worse before they get better.

This is a period of major change at bwin.party. The move to a single platform in its dot.com business is now complete, but product development still underway and the firm’s CEO Norbert Teufelberger admitting they were a “bit late” in changing its product suite in an analyst conference call. And there is a sense the changes have been slightly more traumatic than maybe they were initially expecting.

The move to a single platform using the PartyGaming casino and poker products saw “lower than expected player activity” following the migration of around 13 million players in December. “Certain players just don’t like what they find on [any] new system and certain usability issues were worse than we expected,” Teufelberger said.

There were also some unexpected issues such as a change to the mini-games on the sports betting site that led to a fall in revenues rather than the predicted growth. The 20% drop in casino revenues is certainly an area of concern, with the impact of an ISP block in Belgium and the removal of slots in Spain adding to the general troubles of the “volume to value” switch.

Poker was once again the worst performer, with revenues falling 37% year-on-year, and Teufelberger said this was down to a number of reasons not least the sluggish performance of the overall poker market. “It was partly trends, partly migration and partly issues we knew we had to address,” he told analysts in a conference call.

With shares falling 5% in early trading, that some analysts are recommending a buy following these results is testament to the convincing growth strategy bwin.party’s executive team have put together. The shift to regulated and to-be-regulated markets, with a new streamlined product suite on a single platform will reduce costs by €70 million in 2013 and lead to an increase in EBITDA margin.

“We said that by optimising the shape and size of our business we expected to see a significant reduction in costs, translating into a 100 basis point increase in Clean EBITDA margins in 2013,” Teufelberger added. It’s always a worrying sign when a firm starts talking in basis points, but it’s a strategy that makes sense and could potentially have a big upside. It’s one that does require a bit of a leap of faith, however.

Ivor Jones at Numis was bullish in his predictions for the business. “We believe that the transformation of bwin.party is on-track and that a better business will have emerged by 2014,” he said in a note. “It will have lower costs, upgraded products and marketing focussed on expansion in regulated, growing markets.”

Nick Batram at Peel Hunt was more circumspect, keeping bwin.party at a hold for the time being. “It could be argued that bwin’s discount to its peers (c20-30%) fully reflects the challenges faced by the business, and at this level the shares are worth a gamble. The risk is that trading will get worse before it gets better and that ripping out more cost could expose structural problems with the offering,” he said in a note following the results.

Mobile and the US

Bwin.party are also behind the curve in mobile, with just 8% of its group revenue coming from mobile in Q1. Teufelberger was keen to point out that it was unfair to compare bwin.party to its predominately UK-facing competitors in the mobile space, but admitted they had some work to do. “We are not yet in a position to give our customers the mobile services they deserve today,” he said.

With mobile forming the bulk of the positive growth story at the likes of Paddy Power and William Hill in Q1 there is a real need for bwin.party to act quickly in mobile. The development of new poker, casino and bingo platforms will all have multi-platform functionality and there is little doubt this will lead to an increase in revenues once they have gone live. The first product from this suite to launch will be poker, which is slated for a go-live date of June.

The firm isn’t planning to launch a poker marketing drive before the Autumn, however, and said any poker marketing would be restricted to a select few territories. Teufelberger wouldn’t be drawn on the specific markets he had in mind, but it would not be a huge leap to assume it would include Italy, the UK and New Jersey.

Teufelberger said bwin.party is concentrating on New Jersey, and was expecting to hit the ground running both with its own brands and those from its B2B partners. “We are confident we will be able to launch on day one in New Jersey, and we think that will be in mid-November. Once we have launched in New Jersey we will look into Nevada,” he said. And a strong performance in New Jersey could have a big impact on the business.

The firm will need it, based on current trading. “On our last call we guided the market that we expected revenues will decline this year by up to 10% versus 2012 and despite the first quarter revenue performance, we remain comfortable with our guidance,” Teufelberger said. This will be based on a significant uptick in performance in H2 with revenues down 17% in the first quarter and 22% in current trading.

But there are reasons to be cheerful if you are a bwin.party investor with a large amount of products in the pipeline and the move to the new dot com platform finally complete. Once the marketing taps get turned back on and cross selling begins again in earnest it’s hard to imagine anything other than a rise in revenues. The question is just how big a rise will we see with the firm now solely competing in very competitive territories against firms with a head-start in mobile and product.

Numis’ Jones said he expected to see some “preliminary evidence of success” in the third quarter, and there were some positive noises coming from bwin.party on the second half of the year. The new poker product set to launch in June, and an increased cross-sell into casino on the back of this is expected to provide some uptick. Bingo bonus costs should drop, and a return to a more normal casino margin should also have some impact while the comparatives are likely to be good against what was a very weak Q3 for poker in 2012.

For now there are reasons for keeping the faith in the firm’s strategy. The signs are there for growth in the latter half of the year and a strong 2014. Once it has a new product suite and can begin to go on the offensive with its marketing then we should see some positive noises from bwin.party. But there is a lot of work still to do, the German market remains problematic and it needs poker to find its feet quickly. At this point there remains a feeling things may get worse before they get better.