Analysis: Is Amaya's poker business in decline?

Why Amaya Gaming needs to lead PokerStars and Full Tilt into new markets in order to overcome a 13% YoY decline in Q2 poker revenues

At first glance, the Q2 trading update issued by Amaya Gaming last week was a hugely positive one. The firm said PokerStars and Full Tilt were on track to generate revenues of up to CA$326m and adjusted EBITDA of up to $146m for the three month period, with its recently launched casino vertical accounting for 12% or $39m of the total. But while Amaya said its core poker business posted year-on-year growth on a constant currency basis in Q2, dig a little deeper and the numbers appear to suggest the growth story may depend on the definition of “core”.

Following Amaya’s trading update, Eilers Research issued a report stating it believed total poker revenues had fallen 13% year-on-year from US$258m in Q2 2014 to $226m in Q2 2015, and follows a 9% YoY decline in the vertical in the first quarter. Eilers said it believes there are “a number of factors at work”, including: reduction in player purchasing power due to FX movement and weak macro-economic conditions in a number of key markets. More importantly though, it believes these headwinds won’t subside in the near-term, meaning consensus estimates, which calls for online poker revenue growth over the next two to three years, “are not realistic”.

Buck the trend

The challenge facing PokerStars and Full Tilt is huge. The global decline in online poker play has hit most operators’ bottom line hard, and while PokerStars and Full Tilt have the scale and financial clout to fight the sector’s failing health, they are not immune to secular trends. They are faced with generating growth where others have struggled simply to arrest decline. It also faces the increasing tax pressures of the dot.country markets and the brutal hit to bottom line they bring with them as the model continues to expand across Europe. Amaya has already moved to trim costs since the takeover, with major changes to its affiliate programme the highest profile move so far.

But cost cutting can only get you so far, as Kim Lund, consultant at Infinite Edge Gaming says. “I have every reason to believe that PokerStars’ profitability per deposited dollar in the dot.com space is best in class. The reason profits are dropping is because they suffer from the same basic churn issues everyone else has to cope with and have run out of grey market growth to counter it. To grow they need more markets to turn at least grey, or solve the problem of re-establishing a profitable relationship with churned players. This is what Full Tilt is now up to [with the recently announced changes to its ring game lobby, rewards program and rake structure].”

PokerStars has been bullish about its quest to double the global poker market over the next five years. To do this it needs to expand beyond its current brand reach and Stars has recently signed a number of high-profile sportsmen – including flamboyant soccer stars Ronaldo and Neymar Jr – as ambassadors as it looks to boost brand equity. “I think they made a very bold, and expensive, move with Neymar Jr and Ronaldo, but the key is how they will activate them and leverage these assets to make them an acquisition tool,” says Alex Dreyfus, founder of the GlobalPokerIndex. “I’m very confident in Amaya’s ability to bring some strong initiatives to promote poker to a wider reach in the next 18 months, but we can’t always expect an old lady, which has a near monopoly in its vertical, to bring the most innovative and disruptive approach,” he adds.

Plugging the gap

The key to unlocking this growth will be through growing in markets such as the Far East, Brazil, Russia and India as they gradually begin to open up to regulation. Back in March PokerStars announced a series of promotional initiatives in China and Japan while they have been on a charm offensive in California in a bid to drive legislation across the line there. But Lund cautions that the rate of legislative progress may not be fast enough for the firm’s lofty growth ambitions. “I think there is a short-term risk that Amaya reaches for growth that simply isn’t going to materialize instead of cost-cutting their way into better profitability until the regulatory landscape is hit by the seismic shifts required to truly open up new markets,” he says.

There is no reason to panic, however. While last week’s trading update suggests a less than stellar Q2 for Amaya, management has maintained its full-year guidance, which calls for revenues of CA$1.5bn and adjusted EBITDA of $625m. Eilers says that implies poker revenues of $1.3bn for FY2015, meaning Amaya will have to generate revenues of $692m from the vertical in the second half of the year, a 16% increase on its performance in H1. And while Eilers believes it is “certainly possible”, the current health of the global poker market will make it “difficult to achieve”.

PokerStars and Full Tilt total revenues relatively remained flat in the second quarter, down just 2% from US$262m to $257m. And with online casino growing at a triple digit percentage rate, and sportsbook still in beta, it could be argued Amaya’s long-term prospects are not reliant on any significant turnaround in the poker market. But with the move into new verticals comes a new challenge.

“Short-term – better margins per deposited dollar. Long-term – the loss of PokerStars’ immensely strong brand position as THE online poker site,” says Lund. “And negative experiences in an online casino will naturally spill over into other product verticals. By giving their players a taste for a product segment that they are not market leaders in, they may turn poker specific gambling spend that they have a lock on into casino deposits that may end up somewhere else.”