H1 results: A tale of two futures for Flutter and Entain

It’s a long time since we had a grand vision in online gambling. We probably need to go back to the old Amaya days where we were told gamblers could become multi-vertical consumers of anything digital. These days, investor calls are a dry ritual of CEOs talking about bolt-on acquisitions, organic growth in regulated markets and zzzzz…wake up! Entain are bringing the fun back into online gambling with a whacking great chart showing this paltry $40bn online gambling market could become a $162bn hyper global meganet of interactivetainment riches. You just need to close your eyes and believe. The vision Entain is presenting for the future of both its company and broadly the online gambling sector itself is actually very compelling. It’s looking beyond online gambling as a purely transactional platform and reimaging it as one that facilities a variety of gaming and gambling entertainment options. Chief among these expansion areas is esports, but it’s also looking at social casino (remember this?) and more casual gaming. Alongside this, Entain is looking to expand into new territories including Africa, Latam and the remainder of Europe it’s not conquered yet both through organic and M&A-driven growth. The esports and “interactive entertainment” aspect, however, will get the most attention, even though it’s the smallest contributor to the overall online gambling market growth. Growth here is predominately through players betting on their own performance, either in tournaments or head-to-head games one assume, in a manner similar to poker’s monetisation model. Entain will sit in the middle providing a platform, content and other ways of building and sustaining a community of players. Again, all very analogous to poker. The strategy is fascinating and one that absolutely everyone involved in gambling regulation should pay very close attention to. The concept of placing gambling platforms at the centre of gaming and sports and esports entertainment is one where the industry will lead and regulators will belatedly follow. DraftKings is looking to do similar things in the US market with more of a sports focus, but others will undoubtedly follow, while Betway has also been quietly plugging away at the esports angle for some time now. These are huge shifts in product, positioning and platform that people need to get their heads around now as once they start to happen, they will happen quickly. The final piece of the puzzle is, of course, the US and this is one area where Entain is increasingly confident about its position. Gone are the days of Kenny Alexander dryly promising 15% market share with his words seeming to never quite belie a deep underlying conviction, and the brands struggling to make any impression at all on the market at large. But that was then, and with a year of platform development, staffing up key roles and a renewed marketing budget war chest, BetMGM has been burning up the US market in the present tense. This is now and they are now spoken of in close to equal weighting with DraftKings and FandDuel as leading US brands.

But what about Flutter?

Flutter’s future story is at once both very similar and starkly different. The US remains the big greenfield opportunity and the business is running towards it like Theresa May faced with a field of wheat, but organic growth opportunities are much more prosaic and a matter of getting the basics right. It’s not as sexy, and feels palpably dull in comparison, but is inarguably where the focus needs to be for the next 12 months. There remains a lot of unlocked value in the UK business, not least through Paddy Power and Betfair, a lot of market share to protect for Sky Bet and PokerStars, and a big global sports and casino opportunity for PokerStars. The key to executing on all of these will be platform integrations, management, marketing and trading teams working in sync and to a coherent cross-brand strategy in various international markets, as well as continued investment in all of these areas. A large amount of work has been put into getting the building blocks for all of this in place across the past year and change, and Flutter will now need to start putting its foot on the accelerator pedal in some key areas. It really does need to start showing the benefits of its substantial structural and scale advantages both at home and abroad. Big things need to happen in 2022. Marginal outperformance of the wider market is not really a blindingly successful future. It is, however, what is happening in the first half of 2021, and Flutter can be fairly pleased with how things are going so far amid what remains a pretty intense integration of a number of brands, platforms and regulatory overhauls. The UK and Ireland business, which is Sky Betting & Gaming, Paddy Power and UK&I Betfair, saw revenue grow 30% year-on-year (YoY) to £1.1bn and EBITDA rise 43% YoY to £359m. As with all firms in this period, the comparative periods contain the peak of the first lockdown with sports shutdowns galore so any conclusions drawn here should be treated with a large pinch of salt. But gaming growing 17% against much more robust comparatives is impressive, and Flutter continues to gain ground here in an area of historic weakness for Paddy Power. What’s interesting to note is costs rose less aggressively, even with a “normalised” marketing spend and it’s probable the business can feel some of the marginal benefits from an increased player base through the rest of the year. Flutter is increasingly focused on average monthly players as a core metric, not least to assuage accusations it is taking ever more money from its UK player base at a time where affordability is the watchword, and 3.3 million players in the first half speaks to a business at some scale. On a very crude basis, it implies around £55 per player per month in spend, which feels a very sustainable level heading into what could be a period of substantial change in the UK gambling market.

Poker in the back

Over in the International division, things look less bright. Revenue was down 11% YoY to £680m and EBITDA down 52% to £197m with Flutter citing tough comparatives, with many of its core markets under strict lockdowns in the period, but it also seeing the impact of the rapid decline in interest in poker once sports kicked back into gear. Poker revenue was down 34%, while casino was up 5%. The casino growth is fairly muted and is also impacted by more rigorous due diligence checks in line with the UK business, the regulatory issues in Germany and additional shifts to a more regulated market focus. But the powerhouse of PokerStars Casino seemingly running out of steam should be a small concern. Sports betting revenue was much more buoyant, however, and is beginning to be meaningful in that division and there is a lot of headroom for growth. It is certainly an area to watch. For Entain, online growth was near identical at 29% YoY to £1.6bn, with sports revenue up 52% and gaming revenue up 11%. EBITDA rose 35% to £496m. Germany weighed more heavily here than on Flutter and outside of that market, online NGR was up 38% with growth of 31% in the UK, 76% in Italy and 153% in Brazil, alongside strong growth in a number of other markets. Sports growth was clearly the major factor here, with gaming growth slower, although the firm did report 14% gaming growth in the UK and 45% gaming growth in Italy. Entain, with its retail crossover, felt a larger lockdown benefit from much of its competition and it will be interesting to watch how it manages the transition back to new normal in its core European markets while also coping with the same regulatory pressures as the rest of the market. It does retain headroom for growth in many of its brands, which have underperformed historically, but at some point you sense it could run out of juice to squeeze. And this is truly the bigger challenge facing everyone right now. Looking away from the shiny esports future and the big bold primary colours of the US opportunity, the opportunity for the rest of the egaming world remains complex, challenging but substantial. Entain has pegged its growth opportunity, in terms of its total accessible market, as nearly $6bn just in regulated Europe alone by 2025, with an additional $8bn coming from Latam and Africa, although it should be noted this is across both online and retail. For Entain, this means expanding into new markets such as the Baltics, Eastern Europe and other underweight parts of Europe as much as it means seeing progressive growth in online due to shifting consumer habits.

What about the consumer?

But how much consumer behavioural shifts will continue to drive low double-digit growth is a much more nuanced and difficult question to answer. The acceleration in online gambling growth we have seen during the pandemic is already beginning to slow and the regulatory grip on the sector has only just begun to tighten. There are also economies with soaring levels of debt that may and probably will look to gambling as a source of easy additional tax revenue in the near term. Germany is the most obvious example of when these pressures can combine to turn a growth marketing into a negative. And while operators and the market generally are adjusting to some of the more onerous regulated market conditions and managing to make environments as hostile to EBITDA as Portugal, Poland and even France work, it’s not the egaming market of old and it takes serious discipline, marketing and cost control and adaptive strategies to make it work. Some of the advantages of scale even start to fizzle out in the face of markets with niche product, platform and marketing requirements. Entain needing to develop a new platform and payment system for Africa is just one example of this. What this may well mean is the acceleration of another pre-pandemic trend where each regulated market is dominated by local brands, or those with an existing presence, and tier-one operators are mostly forced to buy their way in. Flutter has described this as acquiring “local heroes” in the past, and both they and Entain have a good track record of doing just this as well as a solid history of expensive organic launch failures, too. They’ve learned lessons well from both sides of the fence, and with a dealmaker at the head of Flutter and some very grand ambitions at Entain we should expect to see more acquisitions over the next couple of years. Growth in online gambling is no easier to find now than it was before the pandemic, but it’s a lot easier if you break out the chequebook. And with the regulatory outlook beginning to cloud over and some of the lockdown momentum tailwinds beginning to drop away, there is no better time to begin to think even bigger.