Analysis: Bet365 and the tale of two giants
Bet365's latest results should send a shiver down the spine of rivals as its growth story seems to have no end in sight
While Amaya’s proposed $4.9bn acquisition of Rational Group made all the headlines this month, it was arguably the tale of another low-key private operator that should have caused the biggest shockwaves in the sector. Bet365 quietly released its annual results and the story it told will cause a few nightmares in boardrooms around the egaming world.
The results gave a brief insight into a business that was more profitable than the aforementioned poker giant by around 25%. An 81% rise in operating profits to £320m for the 12 months ending March 2014 saw the Stoke-based firm outpace its rivals by some distance. Its revenue from gambling for the period was £1.28bn, up 38% on the previous year, with mobile revenue growth of 103% helping drive growth in its core sports betting business.
It’s hard to compare bet365 like for like with its major competitors due to differing reporting years and accounting measures, but it’s quite easy to paint a picture. For the year ended December 2013 Paddy Power reported £86m in operating profits from its online division, William Hill Online £147.8m and for the year ending April 2014 Betfair reported £61.6m. That makes bet365 larger than all three of those industry heavyweights combined.
This is not to do down any of these businesses, which have performed fantastically well in the period, but merely to highlight just how impressive bet365’s figures are. William Hill in its entirety “ including its 2,342 betting shops “ posted a £335m operating profit for the year, only slightly ahead of bet365’s online-only operations. If bet365 were valued at the same multiple attached to Amaya’s acquisition of PokerStars it would be worth £3.6bn ($6.2bn) some way in excess of the $4.9bn attached to the Rational Group buyout.
After some expensive launches during 2013, not least in Australia, the surge in profits is way ahead of the top line revenue growth as bet365 returned to a more comfortable margin compared to the 14.6% it recorded last year. Revenue growth of 38%, with active sports users up 39% in the period and amounts wagered up 36%, shows very healthy underlying growth if not quite at the same rate as profitability. The 25% margin hints at the difficulties even a proven, efficient business such as bet365 had breaking into new markets during the previous year.
The growth in profitability also came despite significant investment in the period with staff numbers rising by 12% in the period to 2,686 and a number of new technology launches including cash out, 10,000 new live streaming events, a new in-play platform and a number of mobile launches from its gaming division. Gaming grew by a relatively modest 17% for the year, driven by strong growth in casino and an impressive 8% rise in bingo revenues.
But bet365 remains a sports betting business first and foremost, and this culture runs throughout the business. Gaming is run practically as a separate business unit headed up by the highly regarded Gil Rotem with all technology outsourced to various third parties with Playtech the premium partner, and the main business focus is on maintaining its position as a market leader in sportsbook in any territory it enters.
Unlike last year’s results, which referenced Spain, Denmark, Australia, Germany and Greece, there were no references to its international expansion plans aside from an oblique reference to “several” regulated markets. But make no mistake bet365 is very much a global operator with as much as 75% of its revenues estimated to come from outside the UK.
There are few territories or regions where bet365 doesn’t have some form of operation, either through strong affiliate links or its trademark TV advertising. It dominates the sports betting market in Spain, is second only to William Hill in the UK and is one of the few European firms with a significant business in Asia. It’s also strong in Eastern Europe and Scandinavia and is exploring a number of new regulating markets around the world.
Bet365 is ruthless in its efficiency in this regard with a well-established model of low margin trading and in-play focused operations allied to a big marketing spend and strong affiliate partnerships. It’s a tough competitor in any market and more importantly it’s a very hard one to replicate, not least because of bet365 owning its own sportsbook technology.
The firm is arguably the most well insulated from the cold winds of the PoC tax that are due to start blowing in the winter, given it is already paying 15% gross profits tax on the vast majority of its revenue. Its thriving gaming division is likely to take a profitability hit, but the potential benefits of not paying 15% GPT on foreign revenues would easily compensate for this.
What this could mean for rival operators in the UK is facing up against a rival who is already operating at lower margins and has even more money to spend in a marketing war. If it’s not a terrifying prospect then it should be. And while it has no interest in the US market, it’s active in every important regulated region (or is soon to be) and has reached a scale where it can afford to spend big in several territories at once to gain market share.
As a private operator with just four shareholders, it can afford to ignore some of the pressure of the public markets. It gave away more in charity donations in 2013 than its owners took in dividends, and it has proven time and again they are prepared to reinvest to grow the business. There are no signs of it slowing down, and whoever you speak to at the organisation there is a quiet determination to continue growing and building a business that is still only 14 years old.
In this tale of two giants, Amaya and bet365, there are two very different stories emerging. PokerStars and Full Tilt’s move into casino and sports betting have investors in online rivals worried and the industry watching with baited breath. Back in Stoke the story is more subtle and one that is harder to define in a soundbite so is perhaps more easily missed.
But while bet365 may not be the company everyone is talking about right now, it’s the one company nobody can afford to ignore.