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Executives

Norbert Teufelberger - Chief Executive Officer

Martin Weigold - Chief Financial Officer

Analysts

Bwin.Party Digital Entertainment Plc (OTCPK:PYGMF) Q2 2013 Earnings Call August 30, 2013 9:30 AM ET

Operator

Welcome to the Bwin.Party U.S. investor conference call. My name is Sarah, and I will be your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. (Operator Instructions).

I will now hand the conference over to Norbert Teufelberger to begin. Thank you.

Norbert Teufelberger

Good afternoon, and welcome to Bwin.Party's results conference call for the half year to June 30, 2013. This is Norbert Teufelberger. I am the CEO. With me is, Martin Weigold, Chief Financial Officer. I am going to give a brief overview of our results. Martin will then take you through the numbers in more detail and I will then cover our development plans before opening the call to questions.

As we have highlighted on previous calls, 2013 was going to be a major year of transition for us that would produce a number of challenges. We expected nothing less as we set about optimizing the shape and size of our business. These are fundamental changes that are designed to deliver greater value from less volume, reclaim the crown we lost during our Merger integration and ultimately return Bwin.Party to growth.

Operationally, we have increased our focus on regulated and to be regulated markets, began the transformation of our technology operation through the universal adoption of the Agile methodology and started to revitalize our product suite with delivery of the first of a series of innovative new products. The financial consequence of reshaping our business together with the impact of the dotcom migration at the end of last year is evident in our revenue numbers.

We are focused on doing less but doing it better reducing our cost base significantly embracing the Agile method of working that has contributed to the success of many of the major e-commerce companies. Agile will enable us to increase our productivity significantly over the next 12 months. We aim to double the number of software releases made today by reducing downtime. This greater output will increase the pace at which we can develop new products and features and enhance the overall customer experience. But the move to Agile will also help us to deliver better product quality and platform stability, all important drivers for our long-term success.

Key strategic developments in the first half included operationalizing our launch into New Jersey and since the half-year we have submitted all the relevant documentation to the regulators and started to install the online gaming service in the Borgata Casino in Atlantic City. We are on track to meet the expected launch date in the final week of November.

A shift in our marketing strategy was also rolled out in the first half as a shift from acute brand awareness to direct consumer engagement through securing several online betting and gaming peers with leading football clubs in key regulated markets in Europe. We are now at the top of the Manchester United in the UK, Real Madrid in Spain, Bayern Munich in Germany, Olympique de Marseille in France, Anderlecht in Belgium and Juventus in Italy. These are six of the biggest and best known clubs in Europe throughout the world. Our relationships with MotoGP and European basketball has also been expanded.

Martin will now take you through the numbers and I will then go into more detail about our plans.

Martin Weigold

Thanks, Norbert. Total first half revenues fell by 16% to €342.5 million, largely reflecting our shift from volume to value with an increased focus on nationally regulated and to be regulated markets, as well as the migration losses that reduced crossover volumes upon bringing the Bwin and PartyGaming platforms together at the end of last year. By the end of the first half, we had stopped spending on player acquisition marketing in 18 countries. This action brought about €31.9 million reduction in marketing spend versus the same period last year, as well as lower transaction fees on third-party content costs.

It also meant that we were able to continue further with generating synergies for our shareholders through streamlining the sporting infrastructure in the form of event and outsource services. The introduction of a 5% turnover tax on sports betting in Germany and the string of the license in Belgium increased our gaming taxes which together with a drop in revenue meant that clean EBITDA declined by 34% to €60.7 million.

Operating cash flow from continuing operations before merger-related expenses, retroactive taxes and associated charges dropped to €25.6 million, primarily due to the introduction of the German turnover tax, the settlement of an outstanding legal claim brought by the state of Kentucky for €11.5 million and a reduction in current liabilities reflecting our focus on those customers that generate most value for us.

Net cash, including the amounts held by processes and that's current liabilities at the end of the period stood at €75.1 million compared with €96.7 million at the beginning of this year. More than €20 million was returned to shareholders in dividends and share buybacks in the first half.

You would have seen that we have changed the way in which we allocate certain costs and resources between the verticals. This has no effect on total clean EBITDA only the split by vertical. The new basis better reflects the way that the business is now managed following implementation of our management blueprint, it also better reflects the impact of crossover between verticals. Under the new basis, a high proportion of cost are attributed directly to each segments and the remaining central cost are now allocated pro rata to gross profit instead of net revenue. This is particularly important following introduction of the turnover tax.

It has net been possible to re-create the basis of the prior year because the management structure did not exist at that time. So there are no comparable figures for 2012 but we have included the figures calculated on the old basis for those products for those tiers.

I will now move on to cover up the performance for each product verticals starting with sports betting. The total amounts wagered fell by 34% to €1.4 billion, mainly reflecting the imposition of the 5% turnover tax in Germany, that made the short for that product became unviable thereby reducing the volume of sports betting significantly. The impact was that the overall amounts wagered in Germany, which is our largest market, fell by 53% to €369 million.

The absence of a major international football championship, together with our shift from volume to value that meant that business volumes were impacted by a marked reduction in acquisition marketing as well as restrictions on the new player registrations in several dotcom markets were one of the major factors in the period. The drop in business volumes was offset by a two percentage point increase in the gross win margin to 9.2%. It was primarily due to a structural shift in Germany where we saw a marked increase in wagering on higher odds singles and combination bets as well as the withholding of 5% of winnings on bets placed by German customers, in lieu of the tax due. Our shift from volume to value also contributed to an increase in player yields as well reduced the number of casual players that were attracted by the Euro 2012 Championship.

I will now turn to casino and games. Total revenue fell by 21% to €112.2 million in the period due to several factors, being the shift from volume to value, a reduction in cross-sell activity from bwin.com following the migration in December 2012, a continued decline in the cross-sell from poker, the removal of slots in Spain and ISP blocking in Belgium remained in place until the May 20. Overall, the amount wagered declined by 15% to €3.58 billion and the number of active player days declined by 27% to €3.8 million.

Moving on to poker. The downward trend in poker continued during first half reflecting the decline in the Italian and French poker markets, migration losses, as well as the shift from volume to value. This included the termination of a number of affiliate guilds as well as the lower level of marketing spend ahead of the imminent launch of our new poker product. With significant reductions in player signups and activity levels, total poker revenue fell by 35% to €63.9 million

While confident that the new poker product will mark a turning point for our poker business, the drop in revenue during the first half is unlikely to be made up during the second half. A turnaround in poker performance is likely to take a while to bleed through as players spend time exploring the new features and get to know the new layout. We will provide an update on the performance at the time of our Q3 KPI and interim management statement later this year.

Finally Bingo. Total revenue fell by 14% to €27.6 million due to two main factors. The UK was impacted by the weakening of Sterling versus Euro as well as aggressive competitive activity. In Italy, we have seen similar aggressive promotions by new entrants in a declining market, impacted no doubt, by cannibalization from the newly introduce casino slots according to data provided by the regulator and the market declined but some 27% in the first quarter and we believe there was a similar year-over-year decline during the second quarter. While the new regulated French market is performing reasonably well, given the macroeconomic backdrop, it remains relatively slow as a proportion of the whole.

I will conclude with a few words on current trading and outlook. In the eight-week period ended August 25, 2013 average net daily revenue was down 8% versus the second quarter of 2013 and down by 21% versus the same period in 2012. This marks a really tough July that was down 29% year-over-year reflecting absence of the Euro Championship, the introduction of a 5% turnover tax in Germany and the shift from volume to value. In August, despite the impact ISP blocking in Greece that represented 4% of net revenue in the first half, we have started to see an improvement in the trend while overall average net daily revenue at August 25 is still down €015 year-over-year, August revenue to-date represents a 19% uplift versus July with all product verticals showing month-on-month growth in net average daily revenue.

Whilst encouraged by this recent trend, the prospects for our new poker product and the possible opening of the U.S. market, these are unlikely to mitigate the softer than expected first half result, so we now expect full year revenues to be between 14% and 17% lower than 2012 with clean EBITDA margins likely to be two percentage points lower than last year. While the transition year has proved to be tougher than we first thought, we continue to generate net cash and as we look into next year on the back of a suite of new products, the 2014 World Cup and the benefit of further targeted cost savings, we remain confident about our prospects.

In line with our progressive dividend policy and reflecting our confidence about the group's prospects, we have declared an interim dividend of €0.018 per share representing a 5% increase over 2012. We have also today committed to a further share buyback of up to €10 million of shares over the next 12 months. The timing and amount of any purchases will of course always be subject to market conditions and the overall cash requirements of the business.

I will now hand back to Norbert.

Norbert Teufelberger

Thanks, Martin. As I said at the outset, we did what we need to do to address the issues we face and return the business to growth in 2014. We are focused on four key areas, being one, increase our productivity through faster, better and more efficient software development, two, operating with a new leaner, better and fast organizational structure following a number of senior management changes particularly in IT and poker, three, transform our customer offer with several new products and finally, promote them effectively through new marketing approach.

The casino initiatives is also being ready to launch on day one in New Jersey, faster, better and more efficient technology centered to our ambitions. 85% of our players are now on single technology platform and we aim to complete the migration of the remaining players in France and Italy over the next six to nine months. The exact timing will be, in part, driven about the speed of our transformation to Agile as well as progress in other market opening such as New Jersey and Netherlands.

Changing our working practices to Agile is key. We are reducing the complexity of release cycles, improving time-to-market and the quality of our software releases. We believe that the doubling of the number of software releases a year from now will sharpen our competitive edge. The Phase 1 launch of our new PartyPoker product next month will provide a taste of what you can expect to see from us over the coming months.

Rather than try and explain over the phone how the new product is different, I think you will just have to wait and see for yourself. The feedback we have had from our extensive beta test has been usually positive and whilst we had hope to have it launched in time for the result, it was more important that we got it right rather than rushed it up before it was ready.

All of our efforts have been focused on making the new product relevant and disruptive, so that it will not only challenge but will change current perceptions of both our brand and also of online poker generally. We are going to put the fun back into poker.

This is only the beginning as we will add a string of new features over the coming months and our product innovations are not just about poker. Innovations to our other three product verticals are also on the agenda for the rest of 2013 as too we are improving our mobile offer. In social gaming, we have launched a series of product this year and in the next six months you will see us continue to optimize and market these products in key markets as well as launch additional products to drive customer values, volumes and revenue.

Following the rebranding and launch of Kalixa, our in-house payments business in April 2013, it has continued to make solid progress. Kalixa Accept, which allows merchants to accept payments, is being used by Mastercard to drive their Repower programme that launched in Poland with three other countries to follow later this year. Kalixa Pay, which is our own eWallet with an integrated contactless pre-paid card, launched a secure digital card and mobile application in the UK and the service was also launched in Austria with other countries to follow in the second half.

To summarize, before I hand back to the operator for questions, 2013 represents a transition year for our business. Whilst we have developed many storms since the merger, we remain committed to our strategy, one that will ensure we can capitalize on all of the efforts over the past year as we execute a clear plan to return the business to growth. Our focus is on delivering sustainable revenue growth on regulated and to be regulated markets to increase productivity from our technology, new product innovations and through leveraging our strong international brands using a fresh marketing approach. Our increased focus has also allowed us to strengthen our cost base significantly but without compromising the significant opportunities we are determined to capture in New Jersey and from growing revenues from new business streams.

Thanks for listening. We will now open the call to your questions. So I am handing over to the operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We currently have no questions. (Operator Instructions). We have no questions coming through at this point. So I will turn the call back to your host for any concluding comments. Thank you.

Norbert Teufelberger

Thank you very much for listening in, and we will come back to you with an update in a few months. If you have any further questions, please contact Peter. He will be available at any time. Thank you very much and bye.

Operator

Ladies and gentlemen, thanks for attending today's conference.

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