Ladbrokes, LeoVegas and growing pains

The H1 results season once again proved growth is an expensive business in the world of online gambling. LeoVegas and Ladbrokes both posted seven figure losses as they went on an acquisition spree in the period, while Unibet saw margins squeezed very thinly.

At Ladbrokes the headline growth was the main story, but a £9.6m EBIT loss for the period was in no small part down to a huge marketing investment in the period. The operator spent 35% of NGR (close to £42m) on marketing as it looked to take advantage of the Euro 2016 tournament to go on a new customer acquisition spree.

And it added it would continue to focus on “investment over short-term profitability” in its marketing for the remainder of the year. It was a similar story at LeoVegas where the launch of its sportsbook around Euro 2016 turned what was always an aggressive marketing budget spend into something even fiercer.

After spending a relatively modest 42% of NGR on marketing in Q1, LeoVegas ploughed 60% of revenue into marketing in Q2. The net result was a €2.4m loss for the period and a 147% year-on-year rise in depositing customers. The firm said bonuses were the main culprit for rising costs.

“In quarters where we have very high inflow of new customers bonus costs do come up a lot,” CEO Gustav Hagman told analysts. He added that in the UK the bonuses from sports were “a little larger” than historical casino bonus costs, which hints at how hugely competitive the market is right now.

The firm said the increase in spend was tactical and based on a major opportunity to acquire customers during the period. It’s interesting to note its spend in Q2 was 94% of its spend in H1 2015 for 90% of the same return in revenue. But neither LeoVegas nor Ladbrokes were spending for short-term gain here.

Both firms referred to the spend as “marketing investment” where they are betting on these customers returning far more in LTV spend over the next 12-24 month period. What we are seeing in the UK in particular is a rush to acquire new customers, steal market share and quickly build scale.

It’s notable that William Hill in comparison to Ladbrokes spent just 25% of NGR on marketing, and saw a 3% drop in revenue during the first six months. And although it would be wrong to suggest this was the only factor behind the revenue fall, there is no doubt the current market is no place for the timid when it comes to advertising and promotional outlay.

Numbers game

It’s a game a huge number of operators are playing, with Unibet another firm which ramped up marketing spend around Euro 2016 in order to capitalise on top line growth opportunities. An operating margin of 12% in Q2 had some Unibet investors concerned, but the firm’s CEO Henrik Tjarnstrom was clear as to the reasons behind it.

“As in previous tournament years, we invested heavily in marketing both for new customer acquisition and reactivation of existing customers. While this has a short term effect in reducing profits, we are confident that this as proven previously will drive sustained growth in gross winnings revenue and profits,” Tjärnström said.

But it’s not a game everyone can win. Betsson reported a 9% fall in Q2 sportsbook revenues with losses in the UK market after being stung by a high marketing spend around Euro 2016. “Some of these campaigns proved to be costly, too costly in fact, but this market is now one of our top three markets when it comes to new customer intake and I’m confident we will be able to extract value from these customers over their lifetime,” CEO Ulrik Bengtsson said.

With no shortage of new competitors and an increasingly promotion and bonus-driven acquisition and retention environment around sports betting many operators now face a crucial 12 months ahead. Speculating to accumulate is a well-worn strategy but can historic LTV trends stand up in a new environment? And will a new type of mobile consumer deliver the kind of results these strategies demand?

And it’s not just those firms aiming to steal market share who feel the consequences of the increase in spend. Established top-tier firms face far more pressure than ever before simply to hold on to their existing players and to scale back spend now would be a very risky strategy indeed. But what is the end game?

Few operators will be able to keep marketing above 30% of NGR in the long-term, especially with an ever rising tax burden from an increasing number of regulated markets. This intense marketing blitz is only ever short-lived, but it will be fascinating to see how long some firms attempt to sustain it for. You sense this may become a battle of who blinks first in an ever more aggressive war for new customers.