Five things we learned from Paddy Power Betfair’s Q3 trading update

Paddy Power Betfair this morning unveiled another mixed trading update with Q3 online revenues declining 3%.

Below is five things we learned from the update and subsequent analyst call.

• The platform work is nearly complete

The project to create a single group platform is nearing completion after a long year, according to Breon Corcoran. New Paddy Power desktop and mobile front-ends are currently being tested with a small number of customers.

“We anticipate that all Paddy Power customers will be migrated to the integrated platform by early 2018,” the firm noted. “Completion of the integration will both improve efficiency and facilitate enhancement of our customer proposition.”

Corcoran said the migration would be done on a phase basis to “reduce risk”.

Analyst Simon French from Cenkos Securities noted: “With the integration of the Paddy Power and Betfair technology platforms nearly complete, 2018 should see more new product delivery across both brands with the potential to reinvigorate top-line growth.”

The project has been a significant drag on the firm’s technology teams, and hindered new product development during 2017 so much so that Corcoran said earlier this year: “If we’d known how difficult this was going to be, we’d have put it off even longer”.

• The exchange didn’t fare as poorly as it appears but competition might be increasing

The headline figures show Q3 exchange revenue dropping 5% year-on-year, but Corcoran stressed the figure was expected due to the impact of the Euros and some “exceptional VIP activity from a certain cohort of customers”.

The outgoing CEO said investors should compare exchange revenues with Q3 2015, which would have resulted in 2% annual growth, which he said was more in line with their expectations for this business.

However Corcoran was also asked by analysts about increasing competition in the exchange space, specifically a Racing Post article on Matchbook, which quoted the operator saying it would increase its marketing spend by 300% in 2018.

He played down the competition, noting: “We’ve got a couple [of exchange rivals] in the UK that we watch with respect.

“They have different strengths and weaknesses but they’re not arguably pure play exchanges in that some of them do proprietary trading and trade against their customers. Nonetheless we respectfully watch what they do in terms of product and marketing but we’ve done that for some years.

• Draft is still immaterial

PPB’s US-facing DFS operation Draft incurred start-up losses in the quarter of £8m and is expected to account for a FY EBITDA loss of £15m. CFO Alex Gersh also refused to give revenue figures, saying they were immaterial.

However Corcoran did say he was pleased with the firm’s progress, having grown form 10 staff at the time of the acquisition to around 30 now.

He added: “The NFL product is much improved this season and we are learning about cross-sell with basketball. The marketing is working in places, with refinement needed in some other places. Overall we’d give it a solid tick. It’s still a very small business but we’re happy with the progress so far.”

• Corcoran is bearish on US sports betting

One benefit of the Draft acquisition was the chance to build a database for sports customers ahead of the potential legalisation of sports betting in the US. And that plan looked to have been given a boost by the Supreme Court potentially overturning the federal ban on the activity.

However, Corcoran said PPB was “probably less bullish on sports betting than most people we speak to or whose analysis we read”.

“There’s an awful long way to go from where we are today to a framework for sports betting that is acceptable for offshore operators.

“It relies on many things including the repeal of the law, the acceptance of that by states, then some kind of online resolution. The way Draft is going, we can acquire customers that we couldn’t through the horseracing business, but we still think sports betting is a long way away.”

CFO Alex Gersh did add that PPB had enough strength on the balance sheet (approx. £125m cash on hand) to invest heavily should the market open up.

• No end in sight for gaming woes

The problem vertical for PPB was flat again in Q3, and the firm suggested there was no impending uptick, guiding for revenues to flatline at around £60m for the next few quarters.

Gersh admitted the firm still had issues with UI, mobile, player management, branded content and no new content on PP.

He said a direct gaming brand was still being discussed “quite a lot” but there was “no news yet”.

He added: “It’s obviously not satisfactory. As we marshal the capabilities we have with the single customer platform, we can refresh Paddy Power gaming, and the expectation is we’ll fix it but it’s not short-term and I really don’t know when we will return to growth.”