Analysis: Betfair prepares for expensive future
UK's PoC tax means pressure remains on operator to find diverse revenue growth, and fast
On the back of substantial H1 profit growth, Betfair is broadening its horizons with an expensive US venture and an exchange launch in Italy. But while it appears more focussed than ever on sustainable growth, the UK’s imminent point of consumption (PoC) tax is just one of the many serious challenges on its horizon.
The operator reported a 6% decline in overall H1 revenues this morning and yet there was no hint doom and gloom from CEO Breon Corcoran as profits soared by 56% to £32.5m thanks in no small part to some serious cost cutting. The firm reported its leaner structure accounted for an £18m reduction in operating costs in H1.
Corcoran’s strategy, chiefly to exit unregulated markets such as Greece and Germany and focus on growing its business in what he calls “sustainable” jurisdictions is also showing positive signs. After a full-year pre-tax loss of £49, profits for 2014 are expected to be between £82-87m in 2014 with regulated territories including the UK, Ireland, the US and Denmark accounting for 77% of group revenues, compared to 67% in Q4 2012.
And after launching in New Jersey last month with its own-branded casino site, an exchange product in Italy is next on the agenda in a geographic expansion drive. Plenty of positive news, then, for the company’s shareholders who were no doubt delighted to see H1 dividends increase by 50% to 6p per share today.
Yet the focus on the UK and Ireland means the UK government’s proposed 15% PoC tax looks set to be extremely damaging for Betfair and Corcoran estimated it would have cost £17m had it been in place for the H1 period. This means there is even greater pressure on Italy, the US and its fledgling sportsbook product to perform well.
New horizons
Corcoran said he was happy with the initial data he had seen from BetfairCasino.com in New Jersey and claimed the company’s digital marketing expertise would allow it to compete in the state.
Cynics would argue that while New Jersey is the best US opportunity yet in terms of gaming, its material impact for Betfair will be minimal in the short to medium term given that competition includes massive local brands Caesars and Borgata.
Indeed, other egaming CEOs have predicted the market will be a “bloodbath” and both Betfair’s staying power and willingness to invest will certainly be tested.
Leveraging its TVG horse racing businesses will be vital, while revenues from its 4NJbets.com wagering site will also help stabilise Betfair US, which contributed a handy underlying H1 EBITDA of £5.2m to the group.
Meanwhile, in Italy the launch of Betfair’s exchange site, expected to go live next spring, remains up in the air as the country’s regulator completes its rigorous testing process.
The product is largely unproved in the country but previous estimations have suggested Italy’s exchange market could be half that of the UK and so, along with its fixed-odds sites, its impact on Betfair’s bottom line could be significant.
“I see potentially a lot of upside from Italy,” says Panmure Gordon analyst Karl Burns. “The ring-fenced dot.it liquidity will of course impact the size of the potential but if Betfair can replicate its success in the UK of cross-selling from betting product to another it should be a success.”
Prudency and product
Closer to home, preparation to offset PoC hit has also seen an internal cost-cutting drive reap rewards. Operating costs in the first half of the year were down £18m which the operator said would allow it to invest in product and marketing to drive revenue growth.
Add all these factors together and it’s clear to see why many analysts are backing Betfair to meet or exceed full-year 2014 EBITDA forecasts of around £87m.
But there are surely too many unpredictable variables for the pragmatist Corcoran’s liking. And while Italy and the US are healthy future growth areas, Betfair’s core betting exchange business must not be neglected.
Revenues from the product fell 7% from £132.1m to £122.5m compared to the first half of last year and it faces increased competition “ albeit unproven “ following the launch of Ladbrokes’ betting exchange product.
Burns suggests Betfair has finally turned a corner with its core product and that unique features, such as the ability to cash out on multiple bets, will key customer acquisition tools in an increasingly competitive market.
Furthermore, the 32% of new UK and Ireland exchange customers joining via the sportsbook are far more likely than exchange punters to be cross-sold into the lucrative gaming and casino products, he says. This needs to be a key area of focus with a stark performance from its egaming product in H1, where revenues fell by 25% mainly due to a 48% decline in unregulated jurisdictions.
“I think this could be the start of something special for Betfair,” says Burns. “I think they are finally realising the exchange is really powerful and can be used to differentiate from the likes of William Hill and Paddy Power.”
Fast forward to December 2014 and Betfair is likely to be an even leaner and more focussed operator with established businesses on both sides of the Atlantic. Corcoran must hope both perform well enough to combat the hit on profits the PoC tax will bring.
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