Five questions from Paddy Power Betfair's H1 results

Paddy Power Betfair this morning reported a 20% year-on-year rise in H1 online revenues and a 34% increase in EBITDA, with strong growth from both sports and gaming.

However, despite the impressive half-year numbers, important questions still remain over the future trajectory of one of the industry’s biggest power players.

1. Will the synergies being realised drive more M&A?

Perhaps the most impressive aspect of the results was the apparent synergies being driven throughout the business. “The focus in the first half of the financial year has been on integrating the legacy businesses efficiently while minimising disruption to the Group’s trading momentum,” the firm said in a statement.

And it’s hard to say it has not delivered on this with £65m in expected synergies – 60% were headcount – now expected compared to an initial forecast of £50m and strong revenue growth. According to CEO Breon Corcoran the “restructuring is largely complete” and the business is now operationally streamlined with more shared resources and central services.

But what should worry its competitors is PPB is now taking the best parts of each business in marketing and technology to make both brands more efficient and effective. Paddy Power’s pricing models are being used by Betfair’s sportsbook, data analytics and player modelling is being shared, Cayetano games are offered on the Betfair casino sites, while the exchange is being used by both books for pricing, hedging and cash out functionality.

The rise and fall of bwin.party has led to considerable talk of the difficulties of integration in this sector, but PPB is already proving this “truth” to be false. And it could lead to an increased pace of further M&A in the sector over the next 12 months.

2. Is marketing cost inflation a sign of things to come?

The firm reported a 32% rise in online marketing costs which it put down to “continued asset inflation” along with the expected increase in marketing spend over the Euro 2016 tournament. This is a new message from the UK-facing brands, which have previously insisted marketing costs were remaining relatively stable.

It’s not a surprising claim. What we’re seeing in the UK is an increasingly competitive environment with a number of firms spending aggressively to gain market share. Ladbrokes posted a 76.7% rise in digital marketing costs in H1, and the likes of Betway, Unibet, 888 and smaller players such as LeoVegas and Betsafe are all spending heavily to try and establish themselves in Europe’s largest market.

But it does raise a question: is PPB driving its own cost inflation to an extent? The firm stresses scale as a differentiator not least in its ability to use its “firepower” to acquire key assets such as TV packages and sponsorship deals including a partnership with FC Barcelona.

It is now the second largest advertising partner on Sky TV after Unilever, according to Corcoran, who added they were the “go-to guys” for multi-year deals for media assets. But he adds its unit cost is lower than its competitors due to more sharing between the brands and its scale. This should be a concern for any operator looking at mass market advertising in any regulated European market right now.

3. Can it handle the technology leap better than Hills?

While the firm has made some huge strides in terms of driving efficiencies and synergies, the real end-game is a single technology platform across both brands. Corcoran laid out the plan for the business with Paddy Power moving towards the modular predominately in-house platform currently used by Betfair.

The advantages of this are obvious and substantial, but will not come without some considerable internal effort and you only need to glance at bwin.party, Ladbrokes or William Hill to see how difficult major in-house technology projects have been in this sector in the past. But Corcoran seems to suggest they expect this work to be done on a short time scale.

“This work is started and it will never be fully done, but this will allow us flexibility when we get there in the next 12 months or so to accelerate customer facing improvements on a number of channels,” Corcoran told analysts. The sheer size of the business with its huge IT staff base should make this an achievable goal, but its one where there are a huge number of potential roadblocks.

Progress on the move to a single platform will be watched closely by analysts and its competitors, but if PPB can pull this one off in 12 months or less then it will have achieved more than bwin.party managed in its five years of existence.

4. Can it make the dual brand strategy work?

Many questions were raised about how the two brands would work following the merger announcement, and there was substantial clarity on this in the results today. The clear differentiation between a value offering and an entertainment offering was confirmed, with Betfair said to be largely “functional and rational” and Paddy Power more “emotional” in its branding approach.

“Betfair will primarily target customers whose motivations to bet are money-centric with a brand approach that emphasises a strong value proposition on both the exchange and sportsbook. Paddy Power will target customers whose primary motivations are social interaction and entertainment,” the firm said.

We’re already seeing the results of this with the new high-budget Betfair campaign, with TV ads looking like something that could have come from Nike or Adidas. Paddy Power is remaining solidly in its edgy, fun-driven advertising. Corcoran said this value versus entertainment positioning would be how it views things for the next few years to come and would allow it to capture the vast majority of the market between them.

“By re-sharpening the focus of both brands we take ownership of both segments of the market,” Corcoran said. And this should be a worry to its competitors in the market.

5. What about international?

The dual brand strategy will not be applied to markets outside the UK with most not at the scale needed to sustain investment in both brands. Paddy Power already exists in Italy, but otherwise it will be the Betfair brand driving forward international growth with Corcoran saying the presence of the word “bet” in the brand had an additional benefit.

And it will be international growth where PPB can truly make the next leap forward and fully take on bet365 as the leading firm in the industry. At the moment it’s not there, as Corcoran admits: “While the Italian business is small we’re happy with the progress we’re making there and in Spain,” he said. And he added there were a number of small markets they were looking at for growth.

How quickly and effectively it can take on bet365 in Italy, Spain, Denmark and other key territories is the biggest question about its future growth plans. It also needs to sustain its dominance in Australia while keeping an eye on any future markets such as The Netherlands and Sweden as they open up fully as regulated markets.

PPB is the leading player in the UK, and looks set to only extend that lead in the next couple of years, but it is internationally where it now needs to begin to flex its muscles.