Bwin.Party Digital Entertainment's CEO Discusses Q1 2013 Key Performance Indicators and Interim Management Statement (Transcript)

May.21.13 | About: Bwin.Party Digital (PYGMF)

Bwin.Party Digital Entertainment Plc (OTCPK:PYGMF) Q1 2013 Key Performance Indicators and Interim Management Statement Call May 21, 2013 4:30 AM ET

Executives

Norbert Teufelberger – CEO

Martin Weigold – CFO

Analysts

Gavein Kelleher – Goodbody

Simon Davies – Canaccord Genuity

James Hollins – Investec Bank

Nick Batram – KBC Peel Hunt

Operator

Good morning, ladies and gentlemen, and welcome to Bwin.Party Digital Entertainment Plc., Q1 KPIs call. My name is Lynn, and I will be your coordinator for today’s conference. For the duration of this call, you will be on listen-only. However, at the end of the presentation you will have the opportunity to ask questions.

(Operator Instructions)

I will now hand over to Norbert Teufelberger to begin today’s conference. Thank you.

Norbert Teufelberger

Good morning, and welcome to Bwin.Party Key Performance Indicators and Interim Management Statement for the First Quarter of 2013. My name is Norbert Teufelberger, I am CEO. And with me is, Martin Weigold, our Chief Financial Officer.

Since announcing our 2012 full-year results two months ago, we have continued to execute our revised approach with a significant reduction in acquisition marketing spend in select dotcom countries, the initiation of the a cost cutting program across the entire organization, and the development of a corresponding plan to increase our focus on regulated and to-be regulated markets.

Several factors impacted our year-on-year growth of overall revenue performance including the introduction of turnover based gaming taxes in Germany, and the corresponding change to our offer, the closure of Spanish slots and ISP blocking in Belgium. However, it was our shift from volume-to-value, together with a lower than expected casino and poker performance following the integration of our dotcom database that were the main reasons behind the 17% decline in revenue versus the same period in 2012.

The headline revenue number reflects deliberate actions on our part to rebase the business, operate with a lower cost base and form the foundation for future sustainable growth. Increasing our focus on regulated markets will also mean that we will reduce our exposure to regulatory shocks that have had such an impact on our business over the past few years, as we optimize the shape and size of our business across and with our focus European footprint, reducing our marketing spend significantly.

Instead of acquiring new customers in more than 30 markets, we will focus now around on 10. This will enable us to sharply reduce our cost base and the complexity of our operation. The introduction of more agile development processes that are focused on cutting the time to market and increasing the quality of product will expedite our transition from integration to innovation in 2013.

We still have some homework to do to get us there. We need to complete our technology integration. We also need to improve our operational performance.

At the full-year results, I talked about fixing broken windows such as the lower than expected play activity in poker and casino, following the dotcom migration last December. We’re addressing these one by one, but they take more time than initially expected. We are also expanding our mobile footprint, improving the customer churn and revitalizing our entire product suite.

In summary, we do need do less, but do it better. Our approach has always been to own and control our technology rather than rely on third-parties. The fragmented nature of regulated markets means that this is even more important to operate this need to able to plug and play different productions, deal with different regulatory requirements, and of course offer products via mobile, wap, and social channels and do so in all core markets.

Turning our vision into reality has been a huge effort, but the journey never ends. We are ready to start rolling out our product improvements that were delayed by the development of our integrated single platform.

So our priorities for the rest of 2013 are clear; progress our technology integration and change the way we are developing our products by focusing on high-quality and cutting the time it takes to bring our products to markets, innovate our core gaming products, further develop our footprint in regulated markets and reenter Belgium via our partnership with Partouche, operationalize our US entry with our partners in New Jersey and possibly other states, expand and improve our mobile offer, improve operational performance as we focus on doing less but doing it better, and generate EUR70 million of annualized cost savings that we have already identified and are on track to deliver this year.

That all sounds like a lot, and we are aware that this is an ambitious program. But by focusing on fewer markets and changing the way we function and operate, we remain confident that we’d be able to deliver on each of those action points.

On our last call, we guided the market that we expect the revenues will be slightly decline this year by up to 10% versus 2012, and despite the first quarter revenue performance we’ve been comfortable with our guidance. We also said that we’re optimizing the shape and size of our business. We expect it to see a significant reduction in costs, translating it into a 100 basis point increase in clean EBITDA margin in 2013. Again, based on our progress to-date, we remain comfortable with our guidance.

As we head into the seasonally quiet summer period, we are unlikely to see any meaningful impact on our top line before our quarter three and quarter four, but with all of the changes we are making and the full-year’s benefit of cost savings to come in 2014 and 2015, we remain confident about the outlook for our Group.

Finally, before opening this call for your questions, the picture for Germany has not really changed. It is still unclear, but what seems certain is that Germany will remain a talking point for awhile yet, during which time we will remain focused on executing our plan as I have described.

Thanks for listening. We will now open this call for your questions.

Question-and-Answer Session

Operator

Thank you, ladies and gentlemen (Operator Instructions) And our first question comes from the line of Gavein Kelleher of Goodbody. Please go ahead sir.

Gavein Kelleher – Goodbody

Hi good morning. Just in terms of the 10 markets where you’re concentrating acquisition spend. Is there any of those which would be considered – are they all clean from a regulatory perspective, or is there any there that could be closed or removed in the near-term? And as well, in terms of the additional cost savings in ‘14 and ‘15, can you give any sort of idea of how much additional cost savings there will be?

Norbert Teufelberger

I’m taking the first one. Well, the ones we are focusing on are all regulated or to-be regulated. So obviously most of them are already regulated, but once we will be focusing on, for example, Netherlands which is not regulated yet, but it’s to be regulated then the rules and regulations actually will come up for consultation I believe next week. But all the other markets are regulated ones and then the other one which is maybe still to certain extent unclear is Germany, sports betting which is part of that footprint we are focusing on. Sorry, I’ll close the [ph] machine.

So that’s the other part. And Germany in itself, obviously on the sports betting side is not crystal clear yet, but we call it to-be regulated market, but all the others are clearly nationally regulated.

Gavein Kelleher – Goodbody

Okay.

Martin Weigold

In respect to your question about where do we think we’ll be in 2014 and 2015. Our (inaudible) before in terms of clean EBITDA margins, which is that we expect them to rise further. We’ve had a 100 basis points in 2013. And in 2014 and 2015, we expect them to get into the 23% to 25% range, and that is still our guidance.

Gavein Kelleher – Goodbody

Okay. Thanks very much guys.

Norbert Teufelberger

Thank you.

Operator

Our next question comes from the line of Simon Davies with Canaccord. Please go ahead.

Simon Davies – Canaccord Genuity

Good morning, guys, few from me. Especially, can you give us a feel for where the EUR70 million of cost savings are coming out, are either split between marketing spend and other areas?

Martin Weigold

Sure. I mean the savings are actually coming pretty much across the thought you can some mechanistic reductions. What I mean by that reductions in areas such as transaction fees, chargebacks, fee of payments which will automatically just drop back based on the lot of the volume of revenue. And then you can see further reductions coming in the form of customer acquisition, and retention spend in some of those markets, overhead and third-party content. Third-party content is also actually another one that should drop automatically except where we’ve got some minimum guarantees in place.

In terms of roughly how much is coming from each area. I would say it’s about 40/60, in terms of 40% from admin costs – 40% to 45% from admin costs and the balance from distribution expenses.

Simon Davies – Canaccord Genuity

Secondly, can you give us a feel for the gross window margin run rate into Q2, and a feel for how much of that uplift you saw in Q1 is from the run of results and how much from the shift in mix and the impact of the turnover tax in Germany?

Martin Weigold

Yes, so the margin in Q1 on sports was 9.8%. As we ran into Q2 in the current trading period, it actually dropped back to 8.2%. So I mean, you can do the math, although in current trading on sports, we’re sharing a 20% drop in respect of bet amount, we’re actually only 3% down. So most of that was margin, where in particular, had we been hit – April wasn’t great. We had a lot of the favorites winning, and particularly, for us of course Germany is a big market and pretty much been winning everything. So that was one of the factors behind that.

Simon Davies – Canaccord Genuity

Great. And last from me, just on poker. Obviously we’re assuming that the re-launches still due for – assuming, one of it seems in June. Can you just talk about the marketing strategy we’re in a launch and how quickly you think we should expect to see revenues response to that product re-launch?

Norbert Teufelberger

We are preparing the marketing strategies right now. Obviously we will launch a first version. It’s completely new product across all channels. And we are planning for the marketing initiatives to kick-in in the beginning of fall when the season really comes back, all the plans are well – they are well prepared right now, and they will go not – we are not going to go across all regions, but we’re going to pick a few markets, we’re going to start with our initiatives.

So we don’t want to disclose it in which markets we will be, but it will obviously in one of the new regulated and to-be regulated core markets.

Simon Davies – Canaccord Genuity

Great, thank you.

Norbert Teufelberger

Thank you.

Operator

Thank you. Our next question comes from the line of James Hollins with Investec. Please go ahead.

James Hollins – Investec Bank

Yes. Thanks for questions. It’s on the US. I mean I’d just say, I think those are three. The first one New Jersey, can you just remind us what sort of prices [ph] from now – I mean you’ve hopefully given a date of November 2013 as the likely start date. The stock prices going (inaudible) before that. The second one was assuming it is November ‘13, would you be ready to start immediately both B2B and B2C in that territory? Third one is actually on Nevada. You talked about sort of undergoing a process there. Can you just remind me, is that you are going for a gaming services provider license or what you mean by that? And actually there is four. The fourth one is, are you sort of running quite hard and getting close to other license fees in the US? Thanks very much.

Norbert Teufelberger

I didn’t get the last point of the last question, but I’m starting with New Jersey. Obviously, New Jersey, it’s a two-fold process right now. On the one hand we are operationalizing our approach in New Jersey and we are gearing up to do that. We have just recently three days ago received the rules and regs on how our software needs to behave, how the KBSC [ph] process has to be, what the blacklist and those things, so it needs a much more detailed description than Nevada. Nevada had a 24-page document. Now New Jersey came out with a 70-page document. We only got that 2.5 weeks ago.

So we are currently reviewing it. But for the time being, we don’t see any showstoppers for us to be ready both for B2C and B2B launches for our partners. So that’s the operational part.

On the timing, we have not been told yet what the timeline is exactly on when to launch a complete application through the New Jersey regulator, but again we are preparing that as we speak, and we can use a lot of work we have already done for Nevada in order to fulfill that requirement. So we are very confident that we will be able to launch on day one in New Jersey. The time of which is also not exact yet, but we all believe that it’s going to be mid-November at that point of time.

What was – the other question, what we are doing in Nevada is, we are filing for a preliminary finding of suitability. We have decided for our customers that we won’t be in that market at day one, exactly also for the – Nevada is not a huge market in terms of size. It is potentially than if once we have launched in New Jersey, we will then look into Nevada, for sure.

James Hollins – Investec Bank

So that difference to the gaming services provider license is just…

Norbert Teufelberger

It’s quite a preliminary finding of suitability. It’s not yet the license. It basically – it behaves the same checks, but when we are [ph] getting serious into launch, then you apply for a license where you basically upgrade that, but all the work which has been done on us and individuals and the company will obviously we used by the regulator and the investigators.

James Hollins – Investec Bank

Okay, sure. Just to clarify my final question was, are you sort of close on working hard on getting other licensees or you’re pretty comfortable with the one that you’ve signed up already in the US?

Martin Weigold

Are you meaning – just to make sure we understand your question. Are you talking about just generally in the States that we’re talking about other B2B partners or you’re talking about effectively in other states that are looking to regulate – getting partners like United Auburn in California?

James Hollins – Investec Bank

The former.

Norbert Teufelberger

Okay.

James Hollins – Investec Bank

And then in existing like B2B?

Norbert Teufelberger

Not necessarily, I mean we had pursued a little bit of different approach. Many years ago, we have started to try to prepare ourselves for any eventual outcome, be it a federal regulation or a state by state regulation. We have now one partner actually – we have two partners in our joint venture which is MGM which holds 25% of the JV. 65% by us, 25% by MGM, and 10% to Boyd Gaming in this space, where Boyd Gaming has a license.

In space where Boyd Gaming or MGM do not have a license, we need obviously another license holder to get access to that market. For example, in California we have entered into a deal with United Auburn tribe, the Thunder Valley Casino outside of Sacramento, they own this JV 10%, 25% MGM and 65% us. And then maybe other states where we will use the 10% which are currently reserved for, Boyd, in the states where they have a license, so additional licensing partners or access partners to the market.

So for example, Pennsylvania where neither MGM nor Boyd is licensed, we will mostly soon have a deal with one of the license holders to have access to Pennsylvania once it regulates its market. We are not necessarily looking for additional B2B partners in the space, whereas we can, so we are not blocked to do so, but it’s all going to be a question of bandwidth.

James Hollins – Investec Bank

That example of Pennsylvania was perfect. That was great. Thanks very much.

Operator

Our next question comes from the line of Nick Batram with Peel Hunt. Please go ahead.

Nick Batram – KBC Peel Hunt

Good morning, guys, just a couple of questions. Just to put some meat on the bones, in terms of the migration issues, and whether the severity of the downturn is taking you by surprise and also what are you doing about it? And then secondly, it’s sort of broader question, I mean as you admit your plans are quite ambitious and you’re fighting a number of fights [ph] in a number of areas. In terms of the guidance that you’ve given for this year, is that a conservative guidance, or is that really where you think you should be in which case clearly there is an awful lot of potential to go wrong in the meantime. So I just want to get some feel for where that level of guidance is?

Norbert Teufelberger

I am starting with the migration topic. In a migration, historically in the industry and for us as companies I think is always a risk, especially on the poker side, when you migrate from one poker system to the other poker system because players are quite used to what they have before. So that is something which to certain extent we expected. Now technologically, the migration worked extraordinarily well. It was a huge migration, we migrated 13 million customers over. So all the customers arrived on the new platform, but what we usually have is that certain players just don’t like what they find in the new systems, and that would have gone either way if we had moved from the old dongle [ph] system which we then had to Party system vice-versa.

What happened though is that certain usability issues in certain areas were a bit worse than we expected it initially, that’s on the poker side. And in addition, obviously the hitting trend in poker right now which is in the existing market in Europe not a good one. So it’s not only us suffering from it, but it’s all the other suffering, even PokerStars showed some impact now in certain markets.

So that’s partly trend, partly migration, partly things which are new that at some point we have to address and we will do. And at the same time, we were not able to yet give our customers a new product experience, so we at the same time developed a new poker system in order to address the more recreational market which we are now due to launch very soon here.

So that’s the poker side. On the casino side, there are elements which is working well, but there are other (inaudible) for example like mini games which were embedded on the sports book client, on the bid inside which we have changed. Now actually – initially user had told us that users will like what we had done, but we saw a drop in revenues there.

Now we are adjusting those gains as we speak and it just takes a bit longer than we initially thought, that’s one. And the second thing where we are behind – we are behind the competition is on the mobile side. We just are not yet in a position in all the markets we are operating in to give our customers a mobile experience they deserve today.

So those are the areas we are focusing on right now, so they are partly migration cost, but also they are caused by just us changing our entire product suite and being a bit late to do so.

Martin Weigold

In terms of the question on guidance, you are right, in terms of obviously there are a number of many moving parts here. Is that guidance cautious? How did – I guess is what you’re referring or is it where we think we’re going to be. It’s the latter. Why do we think we can get there? I think in sports if you – as I’ve always said, we had very poor April. We do expect the margins to come back later in the year, as you know once you get towards the end of the season you do tend to get more predictable results and the margins can tend to drop.

We should see further margin improvement from the registration restrictions that we’re putting on in certain dotcom markets and on further limits on particular customers. We’ll obviously see them to pick up going into the second half. And obviously the year-on-year comps at the moment in sports look difficult, because of course in Q1 2012, we didn’t have the turnover tax, but as we progressively go into the year, those comps are not looking too difficult.

Norbert Teufelberger

And let’s not forget Belgium.

Martin Weigold

Yes, that’s a third point and of course, the ISP blocking that we had in Belgium, which now – of course, which we’re switching back on through the new deal that we have with Partouche.

In poker, as you know last year Q3 was very weak which makes again the comps that much easier, last year in Q3 just to remind you of course as part of the – sorry, the plan to improve the ecology and the reduce the drain. We made some changes which – so some of the top VIPs leaved system generating a lot of rate that actually taking our net deposits.

We’ve got the launch of the new product coming in June. Just to remind you that’s the first really complete new product that we’ve launched since 2009 because of the product team being tied up on integration matters. And we of course are aiming to get back some of that lost poker cross-sell. We lost over EUR30,000 a day. We got back, we reckoned around the quarter, about so far we want to get the rest of that, and we’ve got a relief coming in June which should hopefully do that.

Also just to note, on poker we had some higher bonus costs in Q2 following the migration as the legacy Party loyalty programs had to be played through. So we’re looking essentially to stabilize poker, return to that sequential growth.

In respect to casino, we would expect to benefit from the poker re-launch. Obviously the impact from cross-sell, and also see a return of a whole to more normalized levels in our current trading, that drop that you can see there in terms of revenue of 9%, if you look to the bet amount, it was actually 2% down and the margin have dropped from 3.8% to 3.5% but as we know, you do get statistical variation in margin, we would look to get to return back to normalized levels, and also again recapture some of that lost cross-sell in casino again just over EUR30,000 a day. We’ve only got back so far 10% or 15% of that.

And then of course in bingo, we did have the – we should expect seasonal pickup in the second half. We have had current trading impacted by FX at the moment with sterling weakening versus the euro. and because of the phasing of the marketing campaigns, we’ve had unusually high bonus costs in this period which we would expect to come down in the second half.

So again in summary, we are not – the forecast we’ve given in our guidance for the market is not padded, but we think it’s a realistic of where we will land given all the moving parts.

Nick Batram – KBC Peel Hunt

That’s great. Thanks very much.

Operator

Thank you. We currently have no questions coming through. (Operator Instructions) And we have another question from Gavein Kelleher of Goodbody. Please go ahead.

Gavein Kelleher – Goodbody

Yes, just one more question. In terms of mobile, can you give a percentage of Group revenue in Q1 that came from mobile, please?

Martin Weigold

Sure, if you would just bear with me one moment.

Norbert Teufelberger

It’s a bit hard to compare us to the UK operators who predominantly have most of their revenue coming from one or two markets as you spread – still very thinly in terms of our – in our geographic footprint I think. What was the revenue, Martin?

Martin Weigold

It’s 15.5, so we are looking at – it’s about 8% of Group revenue coming from mobile in Q1.

Gavein Kelleher – Goodbody

Thanks very much.

Martin Weigold

Okay.

Operator

Thank you. We currently have no questions coming through. I will hand back to your host to conclude today’s conference. Thank you.

Norbert Teufelberger

If there are not any more questions, I thank you for your interest. And I am sure we will catch up with you on one on ones soon and we will be back I think mid-August with our half year call. Thanks a lot.

Martin Weigold

Thank you.

Operator

Thank you for joining today’s conference. Ladies and gentlemen, you may now replace your handsets.

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