Paddy Power PLC (OTC:PDYPF) Q2 2014 Earnings Conference Call August 28, 2014 3:30 AM ET
Patrick Kennedy - CEO
Jack Massey - Director, Finance and Secretary
Cormac McCarthy - CFO
Andy McCue - Head, Retail, UK and Ireland
Peter O'Donovan - MD, Paddy Power Online
Gavin Kelleher - Goodbody Stockbrokers
David Jennings - Davy Research
Ian Hunter - Investec Bank
John Denny-Brown - BofA Merrill Lynch
Good day, ladies and gentlemen, and welcome to the Paddy Power Interim Results hosted by Patrick Kennedy. My name is Emily, and I'm your event manager. (Operator Instructions) I would like to advise the parties that this conference call is being recorded.
Now, I would like to hand the call over to Patrick. Patrick, please go ahead.
Ladies and gentlemen, good morning, and welcome to the Paddy Power 2014 interim results presentation. I am joined by, from right to left Jack Massey, our Director of Finance and Company Secretary, and Cormac McCarthy, our Chief Financial Officer; Andy McCue, Head of Retail; and Peter O'Donovan, Head of Paddy Power Online.
Let me introduce the presentation with the highlights and then pass on to Cormac. The group had a strong underlying performance in the first half with acceleration top-line momentum. Sportsbook stakes were up 17% with double-digit growth in every division. There was standout growth in online paddypower.com. Sportsbook acquired more new customers in the first six months than in all 12 months of 2013. While Sportsbet, in Australia grew its new customers and grew its profits by over 50%.
Our successful World Cup campaign showcased the strength of Paddy Power and Paddy Power’s proposition and Paddy Power was ranked the seventh highest brand globally for social mentions, and we generated almost €200 million stakes, which was 130% higher than the 2010 tournaments with almost 150,000 new online customers acquired. Revenues in the first half increased by 7% with sport results were very much favor of punter.
As a result of that swing in the sport results, operating profits decreased by 14% but we’re increasing the interim dividend by 11% reflecting the strong underlying performance and we also intend to further increase cash return to shareholders by recommencing share buybacks. The second half has started well and with favorable sports results to-date revenues in the second half have grown by 45% versus the same period last year, and for the full year overall, we expect the mid teen percentage growth in earnings per share. So I talk later about the drivers of this growth and about oppositions within each of our markets, but let me now pass over to Cormac to review the financial and operational performance of the first half.
Thanks, Patrick. Good morning everybody and thanks for joining us today. As Patrick has said, the first half of 2014 has gone well at the top line with Sportsbook stakes up 17% and gaming revenue up 23%. As it has been well trailed, the sector was significantly impacted by adverse sports results in the period with our own gross wins percentage 1% below the race, which we normally expected and which we achieved in first half of 2013.
The gross impact of this was 34 million and that’s before any customary recycling of winnings and related reduction in costs. Our successful drive in football and multiples led with our favorites pricing and accumulative bounces coincided with great results and favorites and multiples for punters in weeks 2 and weeks 12 of the year, and probably disproportionately affects us.
Our foot multiples as a percentage of total non-betting-in-running increased from 44% to 48% compared with the first half of 2013. Given the strength of racing within our business mix about 50%, we also took a significant €14 million hit in the period between the days of our May IMS when we last addressed the markets of the 30th of June driven largely by Epsom and Ascot.
Sport results will go for and against bookies and in the second half of the year so far 11 million of that impact has reversed, and this together with our experience and detailed analytic reinforces our confidence in our long-run gross wins percentage expectations of circa 10%. The weakness in the Australian dollar and sterling versus the year or during the period impacted earnings by around €6 million. Our effected tax rate of 13% is in line with last year and interim dividend of $0.50 is up 11% on 2013, reflecting as Patrick has said are confidence in our underlying performance.
Turning on Slide 6 to our divisional breakdown, you can see we have strong double-digit stakes growth in all of our divisions, but I gave you group picture of the impact of year-over-year sport results earlier things can be quite different within individual divisions depending on their mix of business. For example the Australian year-over-year picture was very good with favorable sports result in the first half of 2014 as compared with adverse sports result in first half of 2013.
While online excluding Australia and their telephone businesses have the opposite experience and their profit reductions offset the profit growth in retail and Australia. Operating cost and EBIT margin have of course been affected by these results both lowing net revenue and lowing cost growth; however, the underlying trends and costs remain as we set as before whereby we’re seeing upward pressure on OpEx as result of increased complexity from mobile, market media inflation, increased competition for new customers.
On the other hand, we’re also generating downward cost pressure through for example scaling efficiencies and our online marketing capability coupled with our distinctive brand personality. Patrick will talk about this later on with specific reference to the World Cup. Overall, if we put aside gross win percentage changes and compare paddypower.com lower EBIT margins now versus the 2012, its increased marketing and promotional costs due to TV spend and free bet costs, which has driven the change.
A well enforce point of consumption tax regime may give some opportunity for this to online in future years. I will now go through each division in turn. Firstly on Slide 8 turning to online Ex-Australia, this includes our paddypower.com and Paddy Power easily business as well as our B2B activities. Underlying growth was very strong with Sportsbook amount staked up 22%; active customers of 21% and new customers acquired over 33%. The strength with that acquisition performance manifested itself in free bet cost. Our acquisition free bets are the main components. We also switch more of value we offer our customers into free that offers enabling us to market even more compelling specials. And just to know to those of you who pay attention to these things, you will see in our statement today and appendix which increases disclosure in response to some queries we have so there's more data there for you to chew on.
Mobile continues to drive growth with almost three quarters of our customers transacting via mobile in June. We also had good gaming revenue growth of 15% driven by mobile and proprietary content. In the period, 34% of gaming revenues came from mobile devices and over a quarter of our games channel revenues were from games developed by our Bulgarian development center.
Overall paddypower.com sports with top-line performance accelerate substantially with 44% growth in new customers, 24% growth in actives and 20% growth in stakes. Pat will take you through some of the drivers of this acceleration growth later on. Our Italian business made good progress in the period. Net revenue increase by 126% or some €4.5 million with cost of sales as a percentage of net revenue falling 26% and operating cost grow slowing to 20%.
This performance has been driven by strong execution with gross in the market slower than we had expected. We now anticipate continued substantial growth in net revenue improve conversion at a gross profit level and flashes operating cost growth to drive ongoing improvements in the bottom line with the business now expected to move into profitability during 2016. Our three B2B deals continue to perform strongly and the initial six month trial for the three year deal with Nike in Slovakia has now been successfully completed.
On Slide 8, turning to Australia, our Australian business is having another standout year growing its net revenue and operating profit by 32% and 57% respectively. This has been delivered despite the increase competitive intensity we’ve seen in the market. We continue to take market share with our online stakes of 23% net revenue of 33% and active customers of 44%. Mobile growth was particularly strong with mobile stakes of 72% to almost half of online stakes in the period boosted by our in-house developed smartphone and tablet apps.
Betting-in-running is still not allowed online in Australia they grew strongly on the phone, delivering an increase in net revenue of 8% despite of fallen stakes. Cost growth in Australia of 26% in the period was less than revenue growth. We continue to invest in brand product and people to further enhance strength of the position we’ve established in Australia.
Turning to Slide 9, UK retail, UK retail operation profits increased by €1.7 million driven by about higher profits in the existing stage and new shop openings. Like for like net revenue grew 5%, machine, gaming revenue grew 15% and Sportsbook net revenue fell 5%. The underlying like-for-like stakes grew strongly, up 8%.
The growth in our like-for-like machine gaming revenue reflected the benefit from the impact of our new Eclipse terminals the optimization of our leading royalty program and the new gaming content. It’s also worth noting the performance has benefited from soft machine comparables and the period January to July last year before machine revenues return to growth in August of 2013. Increased tax and regulation at machine gaming was announced in March and as a results we’ve increased their required activity level hurdle for new shops to maintain our returns and withdrawn from some plant openings.
Nonetheless given our very healthy pipeline we still add 33 new shops in the period and expect to open up the 40 shops next year, subject of course to the purpose new planning laws not being more limiting than expected. And for these shops to generate £100,000 EBITDA as compared to a capital cost of 270,000 including the lease premium.
On Slide 10, we cover Irish Retail. Irish retail’s profits increased by 13% driven by strong stake growth tight cost control and the benefit of new shop opening. The second half of last year was a first period with both like for like stakes and revenue growth since 2007. And the positive trend continued in the period with like for like amount stake of 5% that’s our highest growth rate since 2007 and the net revenue of 2%.
Following on from the 10 new shops opened last year, we opened the record 16 new shops in the period including 14 of which we acquired. In both of our retail estates we expect continued revenue growth as we meet resilient core retail customer demand, use our leading position to enhance our offer and take further market share while also benefiting from improved economic conditions in Ireland and the United Kingdom.
Our telephone channel on Slide 11, include betting by the phone text and are exclusive PP messenger app. Such product development as the app seeing the channel takes significant share from competitors in recent years and stakes grew further 10% in the period consolidating our leading position in the combined Ireland and UK market. While this channel does face increase betting taxes later this year, we expect it to make an ongoing positive contribution to the group given for example phone registry customers then a similar amount with us online as on the telephone channel.
Cash flow has covered on Slide 12; our profits continue to convert strongly into cash, operating post tax cash flow generations exceeded after tax earnings for each of the last five years being on average of 128% of after tax profits. The first half of 2014 was no exception that over 150%, but it’s worth noting that cash conversion was boosted by the period-end date falling during the World Cup and customer balances are higher. We continue to invest heavily to further develop our strong market position. And in the period, we’ve spent €33 million on opening shops and improving expanding our products and on further enhancing our technology capability.
The bulk of our other cash generated was used to pay dividend and our dividend per share has grown by 22% compounding the last three years. At the end of the period, we had a 175 million of cash on our balance sheet excluding €69 million in customer balances. As we noted in our statements today given the strength of our balance sheet at our owning cash generation, we don’t believe that maintaining flexibility for future growth and returning additional cash to shareholders are mutually exclusive objectives.
Accordingly, it’s our current intention to recommence here buybacks. The timing and amounts of share bought back will depend on both our pipeline of development opportunities as well as prevailing equity market condition.
On Slide 13, before I hand over to Patrick just to cover tax and regulatory developments. And this environment continues to keep everyone in the industry busy and much of what’s been happening has been very well trailed. The impact of new taxes is highlighted in our statements and on the slide. I don’t propose to go through those line by line. We’re working closely with governments and regulators in all of our geographies on proposed changes affecting our business.
Our scale, our efficiency, and our focus on operating only in licensed and well regulated market leave us in a very strong position to both absorb new taxes and step up to the requirements which regulation will bring. It is critical that as new taxes and regulations are introduced, they’d be equitable and enforceable. We continue to urge with governments and regulators to implement as wide a range of enforcement mechanisms as possible.
So in summary, the first half of 2014 was another good period in the Paddy Power. The last two months have shown the sport results can go both ways. Our scale, diversity, ongoing investments and our efficacy leave us in a very healthy, financial, and operating position to capitalize of the change of the industry is currently going through.
And now, I will hand it back to Patrick.
Thanks, Cormac. And I would like to talk about the Group’s strategy and the Group’s outlook and start on Page 15 with a remainder of our long established Group strategy. I have spoken at length previously above how we’re operating in the most attractive markets globally at a large that are fast-growing; that are regulated; and where we can have edge and I have also continuously emphasized the significant levels and investments we make to develop positions in those markets which are long-term and sustainable and give strong payback, and we’re investing more substantially than ever this year.
And let me update you now on how that translated into good customer growth and good top-line momentum. Starting on Page 16 with summary of the momentum right across the Group and Group’s Sportsbook stake in the first half of 2014 up 17% versus the growth in the previous six months 13%, and drilling into the individual business line in our online business, stakes growth of 17% in the second half of the last year accelerated to 22%.
And the increase in new customer sign up the best leading indicator of future growth accelerated from 7% growth in the second half of last year to 35% growth in the first half of ’14. And despite of law of big numbers and despite our significant existing customer base, we manage to acquire almost 800,000 new online customers in six months with no increase in marketing counts per customer.
In retail, we had strong momentum both in the trading perspective and also from the development perspective. From the trading perspective, revenue growth accelerated with good increases in Sportsbook stake and machine gaming revenues. And from the development perspective, in the first half we opened a record number of new shops, 49 new shops.
Let me now summarize the momentum across each of the markets and some of the investments that we’ve made to enhance those long-term positions. And starting on Page 17 with our paddypower.com business and specifically our Sportsbook, we significantly over-index in racing. But as previously highlighted, we have been relatively underpenetrated in football and we’ve taken specifics steps to capitalize on that opportunity.
We identified that as competitors had increased media spend in advance of the point of consumption tax. Our TV Share of Voice decreased last year which was particularly was impacting on our football growth. We’ve increased our TV investments and we have ensured also that the spend emphasized our product leadership and value leadership. A key component to the value offering was our leading football accumulator bonus, whilst product developments in the first half included, Pick Your Money Back Special and Power Play Plus.
And more recently for the new football season, we’re adding new-betting-in-running pages within game statistics with commentaries and with visualization. Our value message is cutting through very well and market research shows the customers continuously rate us number one for both attractive odds and best offers.
And finally, we made sure football punters remain entertained specially supporters of anyone but Man United. We made the most David Moyes' demise. We had our grim reaper behind him at what turned to be his last match in charge. Our tribute statue to him at Anfield and our Fergie look-alike in a glass cabinet -- a break-glass cabinet outside Old Trafford, which we think we might hold on to for Louis van Gaal just in case.
The graphs on the right hand side speak for themselves. This focused investment is already paying off. We saw as you can see strong acceleration in both stakes, football stakes and foot customer acquisitions even the before the World Cup and still have a long way to go for in terms of percentage of football within our business mix compared to others. Staying at the Sportsbook looking at racing and looking at other sports on Page 18, we’ve seen continued acceleration that the additional investment in the period and product and value further enhancing the very strong position we already have in racing.
It’s not on the page but stakes in racing in the first half were up 19% and that compared to 16% growth in 2013. So further acceleration. We saw strong growth in racing in running stakes following the launch by new mobile racing and running product at the end of April, you can see a graph there and the product is a first in the markets as integrated prices with the live stream which allows punters to place a bet and without interrupting their viewing. We continue to be a leader in the value and offers we give our racing customers and money back special every day if your horse finishes second or third in some cases also fourth and has been very popular.
Moving to re-gaming, we continue to see the benefits of our early investment in mobile and we lead the markets in mobile with over a third of our gaming revenues in the half via mobile devices. And our in-house development center in Bulgaria continues to grow in importance. It’s now the largest supplier of games content after the group at over a quarter of our games revenues now coming from their content, but it’s not just quantum, it’s quality their games outperform the games of leading third-party suppliers. As an example, we developed and just introduced the new unique cash-out blackjack, which allows the customer the option to cash out as each decision points in the game of blackjack.
On the back of this investment in momentum in paddypower.com is accelerating, new customer acquisition as you can see have been growing 2% in the first half of last year grew by 37% in the first half of this year. We’ve also seen improved retention rates across the sports but that’s going to help us maximize the value of this acceleration of new customer growth. So we saw a 5% improvement in the rate of which new customers are active post one month and that’s delivering good growth in active customers as well. And the overall momentum in customers, be it a new customers and active customers overall is paying back in the top-line Sportsbook stakes and gaming revenue growth rates acceleration versus the previous six months as you can see on the right hand side, Sportsbook stakes up 20% and gaming net revenue up 12%.
The teams are no different in Australia. We continue to invest in products, marketing and value to ensure we extend our leadership of the market. Sportsbet over-indexes in the hotspots of growth in this fast growing online market as Sportsbet is the number one corporate bookmaker and corporate bookmakers are disproportionately growing ahead of parimutuels with the best fixed-odds offering and the broadest product range, the sports range and the best mobile product.
For us the key product development in the first half was in mobile and tablets with the release and Cormac mentioned of our in-house developed smartphone apps plus iPad native and tablet Web apps. And that has further strengthened our mobile offer and Sportsbet is rated the number one brand associated with mobile betting and also specifically with tablet betting in Australia and so it’s the most often used brands in mobile.
We continue to get blockbuster value offers to customers and over a third of our customers in the first half benefitted from our money back specials and we’ve got some examples up in there in the page. In marketing we are addressing a relative under penetration in the Rugby League focused states of Queensland and New South Wales and we’ve seen good increases in our brand awareness in both states and for example, strong top line growth at the state of origin rugby league series for the number of new customers which we acquired more than doubled versus last year.
And as you know, and we’ve talked about before, we developed the same distinctive brand personality for Sportsbet in as Paddy Power has on this side of the world and with customers rating Sportsbet number one and as you can see on the top right at the page, not just number one, but number one by a distance for entertaining for innovative for fun as well as the widest range of markets and best value.
Moving to 21 and looking at the payback momentum from this investment, our position of leadership in Australia is strengthening and that’s despite there is some consolidation on investment by competitors we are the clear number one corporate bookmaker and indeed looking at the percentage of customers with active accounts we’re the clear overall market leader with 36% of online betters having a Sportsbet account.
The bottom left hand side graph highlights how our brand awareness is substantially ahead of the other corporate book makers. And it’s increased significantly for us. This time last year, our brand awareness was around 49%, it’s increased to a record high of 61% as you can see here by June, it’s now almost as high as the TAB to benefit from obviously, obviously, their monopoly retail presence.
And we continue to grow faster than the markets. As you can see in the middle of the page here, our 23% stakes growth is ahead of about of all of our competitors. And we continue to dominate the markets for acquiring new customers. Our acquisition is accelerating significantly as the graph on the right hand side highlights. And in total in the first half we acquired almost double the number of new customers as William Hill did and that’s a significantly lower cost per customer.
And the business and as you can see Page 22 is generating very strong payback of this momentum. I think customers have almost doubled in the past two years and online stakes growth averaging 24% in the last two years is significantly ahead of market growth. And that’s translation of the strong profit growth and profits in the first half of 22 million accounted for almost 40% of the group profits and over double that achieved in the first half of 2012.
Turning to Italy, our team has executed very well and within two years of launch we have become the market leader, number one in the online Sportsbook market. And our e-gaming product offer is now almost fully in place. However, we are seeing slow than expected growth in the overall markets. If you look at the total gambling market in Italy, retail and online it isn’t growing in any material way because of the economic backdrop. If you dive into the online Sportsbook market which is obviously our principle target there is as you can see on the chart here on the left decent stakes growth albeit not as fast as we would like and further more as the second graph shows this growth has been driven by more activity from existing players rather than from new players.
So for example, despite the World Cup the estimated volume of market growth in new online that is the industry in June was not materially ahead of other months. If you look at this market issue in more detail and when we compared Italy to the UK, Italy had and continues to have higher mobile phone penetration but much slower ecommerce penetration at only 20% of UK level and it’s largely an infrastructure issue that broadband penetration initially is materially below all other G7 countries and its more voice rather than data usage on mobile. And this is a big focus for the government with 600 cities to be covered with fiber technology over the next two years.
And as online migration drivers accelerated, the consequence in coming years we will see significantly stronger market growth and meanwhile we are building a very good position as prepare for that. We have the leading, the number one and the fastest growing Sportsbook brand in the markets as the graph in the middle shows we had a 13% market share in the highly competitive World Cup in month of June that 13% market issue is already very close to our UK market share, but obviously we’ve been active for 14 years. And indeed when you look at the total online Sportsbook market growth by turnover, I mean look at the first half of this year and how much the first half of this year has grown as the industry compare to the first half of 2013 over 40% of that growth has been driven by Paddy Power.
And our growth has driven by strong execution in the two fastest growing segments of the market Palinsesto, the broader betting offering, and mobile. We have the lightest Palinsesto offer in the markets and we’re growing share accordingly, we estimate with almost 40% market share on the Palinsesto supplementary betting markets in the first half. And whereas our mobile almost half our first half states provide mobile devices and that was significantly 50% or 49% of significantly higher than the market average. We think our mobile market share as you can see in the page here, some of the order of 18%.
In gaming we continue to expand our product range, we launched Poker in Vegas in the first half and our offering will be completed later this year with the addition of Bingo and Virtuals. And overall, that will increase our addressable market and by some 60%. So in summary initially we expect to see further material moves to online in the country and actually it is the largest gambling market in Europe and we put in place very good foundations to benefit from that shift.
Moving to retail which the Paddy Power is a great story and where we have the same approach to invest heavily to build long term winning positions. And in both Sportsbook and retail and gaming return, Sportsbook at investment in the value we give our customers, the fit out and format of our shops, our SSBTs and our broader product offering leads us as you can see on the page here to turnover rates double that of our competitors.
In machine gaming we are pleased as Cormac said earlier with the performance of our new Eclipse terminals and our leading FOBT loyalty scheme and the new content released in the period which is translating, again as you can see on the page here, the growth rates as significantly ahead of our competitors.
And our turnover on revenue our performance internally needs the higher profitability and a virtual cycle which enables us to continue to invest and drive further the top-line of our performance. And the strength of our offer alongside our under presented position in the UK market we still only have 3% of the UK shop at space also provides a substantial strategic opportunity and indeed a attractive financial returns from the units as you can see on the right hand side there.
Heavy investment and again, we challenged for payback and I think the positions we’ve build in both our state are generating excellent payback. Our top-line momentum has acceleration both in Ireland and the UK in Ireland where at the first half we had our fastest stakes growth rates into 2007 and in the UK where in both sports and gaming the top-line is accelerating as the graph in the middle highlights.
In Ireland, our market share has now in access of 41% of the markets. In the UK our profit in the first half of €9.5 million were over double those achieved three year ago. So having talk through each of the markets I’d now like to spend a few minutes on our World Cup experience it’s a one in four year opportunity to showcase Paddy Power really is different.
So how do you acquire 150,000 new customers in the four week periods? We use customer analytics to make sure we went to market with the right offers so the right sign up and hence prices we thought we’ve been generous offering 100 to 1 on England money back on all nil matches in the group stages and headline bumper money back specials on all England matches and all of those clicked giving modest respite to the England supporter.
Our media strategy was also based on analytic and insights from previous campaigns and that allowed us to go to market with the correct media choice and timing and content for different markets and twisting different markets. For example, ensuring strong TV Share of Voice in the UK with a presence on all ITV matches but more of press focus initially the guys sprinkles a bit of mischief supported by social media to amplify our messages and to reach new audiences. And before the tournament, three stunts caught the imagination. The scientific study of our latest pundit, Professor Stephen Hawking, on what might happen at the World Cup was covered in every UK and Irish national news paper in a three-minute segment on Newsnight was the highlight of over 150 broadcast pieces on the story.
We then caused outrage on Twitter when appearing to have carved a huge message of support for England to the Amazonia Rainforest and by the time we set the record straight 36 hours later revealing it’d be hoax both Paddy Power and Save the Rainforest were trending twitter. In total, we had over 35 million impressions. The guys from Sportsbet were not to outdone they flew a 14-storey high Christ the Redeemer balloon over Melbourne, Sydney, and Adelaide and it made the TV news in all national channels in Australia.
They were some stunts in advance of the tournament. Our execution also involved reactionary activity as the tournament progressed. If FIFA hadn't banned Luis Suarez we would have got our logo on the pitch as we were striking a deal for him to wear our branded gum shield versus Columbia. The Italians put a different spin on Suarez and their justice payout on Italy following their exit in the defeat to Uruguay. They got widespread media coverage.
The exclusive signing of Paul Scholes was quite a coup, and that consistently made front and back pages in major newspapers. It got mentioned numerous several at least in England press conferences and achieved over a quarter of million views of our Paddy Power blog, which is a new record by distance. Again, we challenge for payback and the payback on Page 27 was fantastic.
On social media, Brazil 2014 turned out to the most social event in history. And our presence meant that we dominated our industry both on Facebook and Twitter. Paddy Power received three times the amount of engagements and interactions than the next six competitors combined. But looking outside our industry at all brands globally, Paddy Powers also dominated. We ranked at the seven highest brands globally for social mentions and just behind McDonald in six, but ahead of many of the official World Cup partners and sponsors including Budweiser, including Emirates, including Visa.
The ultimate measure of performance is on new customer sing up, customer stake and profitability on those metrics surpassed our targets 148,000 new customers almost 200 million of stakes which was up 130% on the amount we took in 2010 World Cup and similar growth and profitability. And overall the World Cup was a key component of what was a very successful first half of the Group with June being our highest month ever for turnover.
To conclude with current trading, the second half of the year has started well. Sportsbook stakes are up 18% online and 7% in retail on a like to for like basis with total Group revenue up 45%, showing what happens from results swing the bookmakers’ way. The Board expects mid teens percentage growth in earnings per share for the full year and despite 11 million headwinds from product fee new taxes and currency translation. And we remain confident of the Group's prospects for 2014 but also beyond due to our strong positions in the half of opted growth in the markets and our substantial target as investment behind them. There will be a small number of long-term winners in each of our markets and with our strong positions and substantial investments, we will be one of them.
Ladies and gentlemen, thank you joining us this morning and happy to open now to question. And we’ll start with whatever questions that maybe in the room and then go on to telephones.
Gavin Kelleher - Goodbody Stockbrokers
Thanks, Gavin Kelleher from Goodbody; just a few from me. On bonusing in the online division ex-Australia, it looks like it's running at in the first half 1.1% of amount staked. Do you have any guidance on what that could be in the second half, and how that may look into 2015? In terms of net revenue marketing as percentages of net revenue, can you give some guidance on that as well?
Yes, Gavin firstly on the bonusing, obviously with the level of acquisition we have in the first half of year bonusing was high and actually that was heavy in Q2. That was weighted more heavily towards the second quarter for these reasons. I mean we would expect this to be closer to 0.9 and in terms of your calculations, so it would expect to come back but obviously acquisition continues to be strong. We're happy to invest the money, given, as Patrick said and payback is strong and our retention is very good. So I think we would expect to come back a little closer to 0.9 in the long run. And on your second question on marketing, obviously the net revenue figure coming down those accentuate the percentage figure, which is closer to 26% plus if you normalize for net revenue that’s closer to 24%.
So yes and our marketing spend is open, we indicated that late last year when we were stepping up in football. And over the longer run we would expect that to come back closer to the 20% normal range that we would have obviously for the whole year given the weights in first half it will be closer to 24% but at the current we would expect that to trend, back trend back towards 20%. And the good thing from our perspective as we said is our overall group CPA is flat. So we’ve managed to spend more money on TV and acquiring media assets to build share of voice. But we've saved that in our online marketing group because of our expertise in that area. So it’s balancing the mix in the right way and we are very happy with the investments we made this year what we expected to trend back overtime.
Gavin Kelleher - Goodbody Stockbrokers
Perfect. Just two on UK retailer for me, how many shops do you expect to open in H2, in UK retail? And can you give any guidance on how much machines are performing in H2 today?
We expect to open about 20 shops in H2 in UK and our guidance for half two in terms of machine performance would be between, mid to high single-digits. So we come up against some harder comps in the second half, as we lap the Eclipse terminal roll out and also we are aware that the competition are rolling out competing terminals is not great in that terminals which they have benefit from the quarter and the second half.
David Jennings - Davy Research
Good morning, Davy Jennings from Davy. Just two questions please. Firstly on Italy and what does your new Italian guidance assume for market growth in 2015 and 216 and are you assuming in terms of your own market share in sports betting in gaming? And then second question just in relation to UK retail. And perhaps could you give us an update in terms of how you think the new regulatory regime is going to work around high staking our machines and what impact if any do you think these changes will have?
Thanks, David. Peter would you take the Italian questions and Andrew the UK retail question please.
Yes, David its Patrick here. On an overall basis the market in Italy is growing in single-digits so kind of 1% to 2%, we sort of feel if we look at Sportsbook, which is our primary market, that over the course of the next number of years growth around kind of 5% to 7% as well we would expect. And in terms of our market share and currently we’re at about 13% market share for Sportsbook, somewhere between 3% and 4% for casino and as we look at our plans increasing the Sportsbook market share is obviously key, anywhere up to 14%, 15%. But as Patrick alluded to key for at least progress is the rollout that we’ve had this year in the gaming products with poker, Vegas which is the mobile optimized casino, we feel that obviously its driving yield from our current base to driver share in e-gaming is going to be critical and we would expect over the course of next several years to kind of double our share up to about 6%.
David in relation to the space of £50 on machine, so it’s our understanding from DCMS that stake of £50 will require one of either stop interaction with the customer and or a verifiable account. And we expect the impact to be around mid single-digits, although we await the publication of the specific regulation in September from DCMS.
Ian Hunter - Investec Bank
Good morning, gentlemen. Ian Hunter from Investec, just with the -- on the online customer acquisition growth I mean it’s extremely strong in the first half of 35%. I am just wondering with that over the whole, is that really the bottle cup effect if you can just give us an idea of the impact the World Cup had on that and also the sustainable rate you see going forward both the second and half entering into 2015. You also mentioned about repeat point of success that being an attention but I am just wondering have you got a feel of the new customers you’ve got from the World Cup side of things, is that -- whether they are going to be repeat punters? Andy maybe have you an idea of whether the large numbers of customers you did retain, bought actually new punters, or switchers in from other operators of multiple users maybe saw your competition as better than those out in the market at the time.
So in terms of growth and we said there obviously we have seen about 33% first-time staker growth. Some of that is world cup as you said. First underlying growth of first-time stakers is still strong so high-teens growth if you exclude the World-Cup. In terms of customer retention and FTS, in the first half of the year we’ve seen as Cormac alluded to our CPA stay flat and we are seeing some increase in free bets being offset by reduction we have been able to impose on digital CPA. So digital CPA is down year-on-year and we are CPA growing last because of partly and CPA we’re also including the acquisition of free bets as well. So on CPA side of things, that’s broadly flat and we are seeing yield from those new customers effectively flat and encouragingly we are seeing our retention rates increase as some of the investments we put into product, into loyalty et cetera are playing out in terms of retained customers and those rates increasing. And in the balance of the half obviously the majority of the volumes of the customers are in the second quarter.
So we’d hope to see their revenue impacts play out more into H2 and into the first half of next year. And in terms of where they are coming from. It’s too early really to say. I mean there any world cup there is a lot of new entrants in to the markets. And as we know traditionally this industry is very much about shared and the customers that we are stealing from others are from the typical other providers it’s the William Hills, it's the Betfairs, it’s the Bet365 et cetera.
John Denny-Brown - BofA Merrill Lynch
Merrill Lynch just two questions if I may. One is a follow-up on Italy. I apologize I missed the comments at the end of the Italy slide. But if I look back at the May IMS, I think depending on World Cup, you're targeting a break-even by end of 2014. If I heard correctly, Italy is now a target of profitable by 2016. I wanted to make sure I caught that correctly, and if you could provide any color on that. And then the second question is on POC and market share. So share gains net of customers moving to illegal operators, in particular, now that we're a bit closer to POC, what would be a reasonable estimate of the move to illegal operators? Thank you.
Okay. There are no more questions in the room as I can see. So we now go to whatever question there may be on the line.
(Operator Instructions) Your first question comes from the John Denny-Brown. John, please go ahead.
John Denny-Brown - BofA Merrill Lynch
Good morning, it’s John Denny-Brown from Merrill Lynch. Just two questions if I may. One is a follow up on Italy. I apologize; I missed the comments at the end of the Italy slide. But if I look back at the May IMS, I think depending on World Cup, you're targeting a break-even by end of 2014. And if I heard correctly, Italy is now a target of profitable by 2016. I wanted to make sure I caught that correctly, and if you could provide any color on that. And then the second question is on POC and market share. So share gains net of customers moving to illegal operators, in particular, now that we're a bit closer to POC, what would be a reasonable estimate of the move to illegal operators? Thank you.
Yes. Just on the Italy question, as we flagged IMS the World Cup was going to be a critical period for the market of hell initially as we’ve seen in the UK and the markets in good growth market you see very good growth during the World Cup our open expectations that we would see that on Italy that didn’t transpire, turnover in the past and for example to the euros was up far less significantly there would have seen in the UK and Australia and so that would also show that the underlying growth wasn’t there. So the World Cup didn’t trigger any strong growth in Italy the manifest of that is the top-line the market isn’t growing to the extent that we require to hit our guided breakeven prior to this and as a result of that regarding that we’ll move into profitability during 2016.
In terms of point consumption in market share, we would have to wait for a POC to play out and for operator to decide it they are going to move offshore, down shore are having the legal market to play out. So we’re not guiding on any expected market gains at the moment but we did know there wasn’t competitively we’re in a very strong position. We've a great brand and great product to great marketing. And whereas we’re love position to take advantage of any share that does come into the market.
Thank you for your question. There currently are no further audio questions.
Okay. We’ll wait a moment just in case anyone raises their digital hands.
Okay. Well, in the absence of further questions I’d just like to thank you all for joining us here in the room and on the line. And if you have further questions during the day or thereafter, please do reach out and contact us. Thank you very much and good morning.
Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day.
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