Playtech Limited (OTC:PYTCF) Q4 2016 Earnings Conference Call February 25, 2017 4:00 AM ET
Alan Jackson – Chairman
Andrew Smith – Chief Financial Officer
Ron Hoffman – Chief Executive Officer, Financials Division
Mor Weizer – Group Chief Executive Officer
Gavin Kelleher – Goodbody Stockbrokers
Tal Grant – UBS Investment Bank
Ed Young – Morgan Stanley
Richard Stuber – Numis Securities
Simon Davies – Canaccord Genuity
Good morning ladies and gentlemen and welcome to Playtech's Full Year Results for 2016. I'm delighted to report that Playtech has successfully executed its strategy in 2016.
The gaming division once again developed very strong growth for the full year with significant new licensees and important renewals securing future growth. In line with the Group's stated strategy, 2016 saw Playtech delivered complementary M&A to further enhance its omni-channel offering and extend its competitive advantage.
The acquisitions of BGT, Quickspin and ECM will augment organic growth in the gaming division in 2017. Whilst the acquisition of CFH was a landmark transaction for the financials division. The financials division has reported an encouraging performance, with the business now positioned for growth.
The management changes in 2017 are Andy joining as CFO and Ron moving to full time CEO of the Financial Division. And this provides greater depth of management resource and focus. And I'm delighted therefore to welcome Andy to the Board and very pleased to have Ron to represent the financials division.
The strength of Playtech's balance sheet and substantial cash generation has enabled the Company to return €296 million to the shareholders during the year. Including a special dividend of €150 million announced at the time of the half-year results. And a €50 million share back program before the year end.
In accordance with Playtech's progressive dividend policy, which we adopted at the half year the total ordinary dividend for the year has increased 15%. Given the progress Playtech has made in 2016 and the growth it has already secured both organic and through M&A we remain confident of a strong performance in 2017 and beyond.
Just before I hand over to Andy, you'll notice they're all copying me with glasses. Obviously the figures are quite spectacular so they now need glasses to read them. So Andy, over to you sir.
Thanks very much, Alan. Thank you and good morning everyone. By the way, this isn't on the script. But just as an aside I've spent the last half an hour with everyone telling me I'm an aggressive presenter. So I'm going to try and have to relax a little bit.
When I started as CFO six weeks ago I set myself two targets for today. The first was to present well as my first presentation as CFO. And the second was to lose weight given I'm getting married in a month and because I'm on camera today. I couldn't bear to be a total failure so I hope you like my presentation.
2016 saw very strong reported growth in revenue and adjusted EBITDA. On a reported basis it is noticeable that adjusted EBITDA grew well in excess of revenues, leading to significant margin expansion. And this is something which I'll look at in greater detail in a few slides' time.
Significant exchange rate movements especially the weakening of sterling impacted all P&L line items in the year. Specifically looking at adjusted net profit, the weakening of sterling versus the euro in 2016 impacted the reporting of cash balances held in sterling. This had a material consequential impact on adjusted net profit with 2016 seeing an exchange rate loss of €44.7 million versus a €10.6 million Euro gain in 2015. A delta of €55.3 million.
It is worth noting that the GBP75 million from the Ladbrokes merger is not included in adjusted net profit. As this has been stripped out to reflect the underlying performance in the business.
Looking at the 2016 results on a constant currency basis, it is clear to see the impact of exchange rate movements on the presented line items. With revenue and adjusted EBITDA growth increasing by 8 percentage points and 12 percentage points respectively, versus the non-currency adjusted numbers.
The impact is even more noticeable when looking at adjusted net profit, which moves from being flat year on year to growing 42% at constant currency. When stripping out acquisitions and at constant currency which is arguably the most pure measure of organic growth, revenue, adjusted EBITDA and adjusted net profit grew well into double digit at 13%, 28% and 48% respectively.
Looking now at the gaming verticals. As discussed at the interim results in August, going forwards we are going to remove the land-based vertical to reflect the true omni-channel nature of our offering. Accordingly, we will be presenting the split by vertical in both the old and new format today. And we'll present only the new format from the 2017 interims going forwards.
Looking at the right-hand column, the revenues from land-based have been allocated as follows. Videobets casino, retail sports which is mainly revenues from BGT to sports. Retail [indiscernible] revenues generated by ECM to bingo and IGS and the sale of machines into other. And the service in poker lines remain unchanged.
Turning now to the line items. I'll look at the performance of each vertical using the new presentation. So look at the middle columns. Casino continues to go from strength to strength. Up 22% on a constant currency basis. This strong growth was driven by a mixture of existing and new business, including growth from the UK, and with a particularly strong performance from both Live and in Asia where we have added new customers as well as improved our commercial service.
Services grew 4% on a constant currency basis with increased white label revenues in 2016. Offset by the continued transition to .com to regulated revenue streams. Leading to regulated revenues up 8% in services and unregulated revenues down 7%. Excluding white label revenues, services revenues were down 6% in the year.
It's also further worth noting that services is very much an enabler to allow Playtech to generate casino revenues. And so revenues from services cannot simply be looked at in isolation.
Sport grew 82% at constant currency due mainly to the inclusion of revenues from BGT. Excluding BGT, sports grew 2% at constant currency with a good contribution from Ladbrokes and Caliente, which was offset by the previously discussed loss of three Mobenga contracts with UK licensees who are implementing their own content.
We see sport as a significant growth engine for the business which Mor will talk about in greater detail later.
Bingo revenues grew 10% at constant currency, which included revenues from ECM. Excluding acquisitions, bingo saw a 1% decline at constant currency primarily due to increased bonusing from operators.
However, bingo was a key acquisition channel for casino with bingo side games being included in the casino line. And therefore, as with services, bingo revenue should not simply be looked at in isolation.
The online poker market remains challenging with revenues down 17% at constant currency. And finally, for this slide, the other line increased by 62%. Mainly due to casual games revenues which enjoyed a significant uplift in the second half of the year following the launch of the Narcos branded game.
Group adjusted EBITDA margin improved from 40% to 43% or 44% on a constant currency basis. With a material improvement to the gaming division margin due to the optimization of costs as well as improved commercial terms in Asia, which increased revenues with no material additional cost.
Excluding the Sun Bingo, the white label margin in 2016 was positive.
As I spoke to many of you recently, going forwards we would expect Group margin to be a less relevant KPI for the Group given the different margin profiles of the different parts in the business. Obviously, we'll look to increase the margin in each part of the business. But the Group margin will be impacted by the mix effect.
This mix effect is expected to lower 2017 Group margin to around the level of the Group margin in 2015. With a higher percentage contribution from lower margin parts of the business, including white label – specially on the four year contribution from the Sun Bingo, the financials division and from casual.
Playtech has always been focused on cash innovation. And it is key to us that even if the Group margin fluctuates due to the mix of revenues, operating cash continues its upwards trajectory.
Looking now at costs. The table analyses costs including acquisitions which contributed €82 million of additional costs during the year. Even taking into account these additional costs from acquisitions, it is clear that there has only been a small increase in costs compared to a significant increase in revenues.
If stripping out acquisitions – which better reflects the cost control within the business – operating costs increased by 2% at constant currency.
Employee related costs, excluding acquisitions, were almost flat year on year due to a cost reduction plan that was executed towards the end of the first half of 2016. Which resulted in a decrease of about 500 employees, with no impact on the ability to generate growth in the business.
The eagle eyed amongst you may have spotted that the 2015 mix of costs has moved slightly, although there is no change to the totals. The reason for the change is that we have reallocated €29 million of costs to better reflect the classification of these. With the majority moving from revenue driven cost to marketing costs. A detailed breakdown can be found in today's RNS.
Finally, the jump in revenue-driven costs is largely related to the Sun Bingo contract.
Turning now to below the line items. As mentioned earlier, adjusted net profit was significantly impacted by foreign exchange movements with a €55 million swing from 2015. Also mentioned earlier, the GBP75 million from Ladbrokes is not included in adjusted net profit as this has been stripped out to better reflect the underlying performance of the business.
However, adjusted net profit does include €12 million of impairments with €5 million of this from PokerStrategy. This €12 million was however offset by €12 million of dividends from Ladbrokes and Plus and a further $7.4 million of dividends is due from Plus500 in March 2017.
Growth in adjusted EPS is slightly lower than growth in adjusted net profit due to the full year impact of the increased number of shares from the equity placing in June 2015. Partially offset by the €50 million buyback completed at the end of last year.
As discussed when we announced the acquisition of BGT, although there's no underlying change – change to the underlying D&A charge, depreciation increased in 2016 due to the higher CapEx requirements of BGT. The adjusted D&A charge in 2017 is expected to be around €55 million.
Looking now at cash flows. Net cash from operations was up 22% to €251 million. Operating cash conversion improved from 80% to 94% from adjusted EBITDA. The improved cash conversion in H2 was due to the reversing of the timing of cash collection which artificially lowered conversion at the half year.
There's been no changes to payment terms with customers and no changes to the way we recognize revenues in our accounts.
As a consequence of improved cash collection, day sales outstanding have fallen to 37 days as at the year end. From 43 days at the end of 2015 and 53 days at end of June 2016.
The strength and sustainability of our operating cash flows has enabled an increased ordinary dividend of 15%, in line with Playtech's new progressive dividend policy which was adopted at the half year.
Playtech has a strong balance sheet with significant fire power to execute its strategy. When adjusted for jackpots, security deposits and client equity, Playtech had €392 million of gross cash at the yearend compared to €751 million a year ago. And I will look at the bridge between these numbers on the next slide.
Contingent and deferred consideration liability increased to €209 million mainly due to the earnout on the Quickspin, BGT and CFH acquisitions. It is worth remembering however that future contingent consideration payments would expect to be covered by operating cash flows.
In addition to the €392 million gross cash, Playtech had €230 million of available for sale investments. Around the same as a year ago. With the additional €40 million of shares received following the completion merger between Ladbrokes and Coral being offset by share price fluctuations and the weakening of sterling.
Finally, for me, I thought it would be helpful to bridge the adjusted gross cash in the year.
So we started the – with growth cash net of client funds, progressive jackpots and security deposits – of €751 million. Finishing the year with €392 million on the same basis.
There were significant returns to shareholders during the year with €150 million special dividend, the €50 million buyback and €96 million of ordinary dividends paid.
We spent a further €217 million on M&A which is €240 million, the number that you'll recognize – net of €23 million of acquired cash. We spent €87 million in total on PP and intangibles, including capitalized development costs, with exchange rates having a €45 million impact on cash balances.
Finally, it's also incredibly pleasing to see that the very largest blue bar represents our net operating cash, which remains arguably Playtech's biggest strength. And with that I'll hand over to Ron.
Good morning everyone and thank you Andy. And let me take this opportunity to wish you the best of luck in what I can assure you is a challenging role. I have every confidence that you will be a major success.
I am delighted to be here to present my first set of results as the full-time CEO of the financial division. As we will outline in the following slides, the repositioning of the business ahead of the regulatory headwinds in the industry will strengthen our position compared to our peers.
As represented at the H1 interims and the 2015 full year results, there has been continuous development in the regulatory landscape across different jurisdictions in the industry.
Starting from tighter onboarding controls being imposed on brokers, greater restrictions on marketing and promotions. Enhanced AML requirements, closure of jurisdictions such as Belgium. And effectively closure of the French market through implementing a ban on marketing.
This is all in addition to recently introduced leverage limitations and banning of all bonusing schemes.
Whilst we welcome these changes – and they present a great opportunity for us – the performance for the full year of 2016 compared to that of 2015 reflects the impact of these regulatory changes. We see this as a complete rebase in the performance of the business and believe the financial division has made tremendous progress across all areas. Reflecting a significant growth opportunity for the wider Playtech Group and its shareholders, with a strong and positive outlook.
During the H1 2016 interim presentation, following the difficult first half of 2016, we announced that we are now confident in our business model and abilities. And well positioned for sustainable growth going forward. Well, the performance for H2 2016 has already proven that it is indeed the case.
We see significant improvements in the second half of the year across all key metrics. Despite the low volatility during that period other than the US election in November. The business has managed to grow its top line with revenues up 4% together with a significant improvement in EBITDA performance – up by 51% compared to H1 2016.
The improvement in EBITDA has also enjoyed the positive impact from the reduction in headcount made during the second half. And for more effective and focused marketing initiatives on the back of continued improvement in our unique media buying technology.
The second half has also enjoyed the first month of consolidating CFH into our accounts. With a contribution of €1.8 million to our revenue line item, which I will go into more detail later on in the presentation.
Looking now at the encouraging KPIs of markets activity. As can be seen from the slide, we see an increase in the direct B2C business as well an increase in our B2B segment.
On the direct activity of markets.com, we note a healthy 7% growth in number of active customers. This is despite a slowdown in new customers onboarded in H1, which naturally negatively impacts the active customers in H2.
This shows an improvement in churn, an increasingly attractiveness of the platform, which is a result of continued development of the platform and further features offered such as live Traders Trends, more relevant notification and communications to the customers on the back of their own trading history and beyond.
The improvement in the performance of markets.com is even more visible in the number of first time depositors, which increased by almost 60% compared to H1 2016. And it is even more impressive given this is on the back of the more difficult regulatory environment with stricter onboarding procedures.
This reflects a significant growth trajectory which will be translated to an increasing number of active customers going forward. And eventually an increase in revenues and EBITDA. Driven by efficient marketing initiatives through our unique media buying technology and automated funnels.
Whilst the B2C business continues to present improvements and further develops, we continue to focus and grow our B2B business. Resulting in healthy growth rates in both active customers of 12% as well as growth in FDs of 24% compared to H1 2016.
We expect the B2B business to further contribute to growth in 2017 and beyond. And we believe it will accelerate with the addition of CFH as part of the overall offering of the financial division. And with that, let's now discuss the CFH acquisition.
CFH is a B2B technology and liquidity provider which is considered to be one of the top interbank STP venues in the world. Providing retail brokers with multi asset prime – of prime access to tier 1 liquidity sources. And complementary risk management and liquidity control tools. All done through its proprietary best in class ClearVision technology.
In the slide presented I have tried to illustrate in a very simplified way where CFH is positioned in the value chain. And in essence, its core business model.
Let's take an example. Let's assume a retail customer is looking to open a position with its local broker. That broker as a customer of CFH will effectively ask ClearVision what is the best price and execution that can be offered for that position?
ClearVision, given it is connected to a significant liquidity pool, from a list of tier 1 banks, prime brokers and liquidity providers will check instantaneously within it's available liquidity pool to look for the best price and execution that it can offer for that position.
ClearVision will optimize and split the execution between the liquidity providers, so its customers will effectively enjoy the most competitive flow available. ClearVision will take into account real time exposures with the banks, marginal thresholds, size of position, price and more all in real time for over 110 instruments, simultaneously with all of its banks for approximately three to five yards a day in volume. Yard being the financial term for 1 billion.
At the point of execution of a position, CFH then STPs the trade, straight through the relevant liquidity provider, therefore not taking any market risk.
This is in essence the core offering of CFH, all happening in milliseconds, driven by its best-in-class technology. One of the things which got us excited about this acquisition, was the fact that CFH centralizes big trading data, data which can be analyzed and learned from in terms of market trends, segmentation, methodologies of trending and will enable us to tailor our existing products to better service our customers and their needs.
In addition to that, CFH customers can enjoy risk management and liquidity control tools offered through ClearVision in order to effectively manage their own risk and exposures.
CFH generates revenues primarily through commissions charged as a percentage of trading volume processed through its platform, either its clearing fees or technology services. It currently has over 400 customers in more than 80 countries of which over 250 are active monthly, which service thousands of retail customers worldwide and is considered one of the largest and most reputable providers for technology and clearing in the industry.
CFH is uniquely positioned in the market with $1.5 billion in direct interbank credit lines with tier 1 bank's liquidity providers and prime brokers including Barclays, Goldman Sachs, UBS, Jefferies and more.
We see significant opportunities following the acquisition, including enabling CFH customers to enjoy a deeper pool of liquidity and expansion in the variety of instruments they can trade on, which will cater for higher volumes, revenues and profits. In addition, we see significant cross-selling opportunities to offer our unique trading platform, CRM and back office system, to a selective range of customers, which will feed the relevant profile, increasing our market reach and cater for further stickiness with our customers.
The acquisition completed on November 30, 2016 and accordingly we have enjoyed one month of performance as part of our consolidated accounts, contributing €1.8 million in revenues for 2016 and has continued in line with expectation for the beginning of 2017 with a healthy pipeline of further customers to be onboarded.
As you may already know, there have been further regulatory developments from both CySEC and the FCA, following the Q&A paper issued by ESMA in October last year. To be clear, we absolutely welcome these regulatory developments, and we believe they present significant opportunities for us going forward.
The separate regulator has introduced new guidelines which include two main changes. First, CySEC defined the maximum default leverage that can be offered to new retail customers at a level of 1 to 50. This leverage restriction is implemented at the onboarding stage of the customer.
The second change is the introduction of a ban on bonusing schemes that are designed to incentivize retail customers to trade. These significant changes reflect the change of atmosphere and the regulatory framework under which the industry operates. While we do acknowledge there is uncertainty on how these changes will affect the market in the short term, we do believe they will have a positive impact to our business in the medium to long term.
When addressing the point on limitation of leverage, there are a few factors that should be taken into account. First, this is a default limit, rather than an absolute one. Customers will have the ability to self-define their own limits and can chose dependent on their appropriateness score, which includes experience, education and financial profile.
Secondly, and more importantly, fundamentally, we believe that the customer lifetime value will remain the same as the underlying trading economics remain the same. While it may be the case that such leverage limitation may have an impact on volumes in the short term, this will effectively prolong the lifetime of the customers, which is a positive effect. This may eventually result in them trading more, depositing more and therefore potentially increasing the COV over the medium term.
The industry today is highly fragmented, where the market share is split across many different brokers in this space. A significant portion of those market participants is very much dependent on using aggressive bonusing schemes to attract customers, with that being their main marketing methodologies and in some cases, their only marketing methodology.
The elimination of bonus schemes altogether will cater for a more consolidated competitive environment and presents an opportunity for the appropriate and compliant brokers to grab more of the market share.
We see similar circumstances in Japan, whereby new regulations and restrictions were introduced in August 2011 and despite the significant leverage restrictions, which even go beyond what has been presenting through CySEC and the FCA consultation paper, the market evolved to become bigger in size and the competitive landscape has changed with less brokers in the market, but significantly bigger and more profitable.
While markets.com has previously offered bonuses, this was never used as a significant route to marketing the business, but rather to align to industry practices and not to be in a competitive disadvantage.
Marketing methodology of our B2C business is focused on the uniqueness of our trading offering, the specific features and value that customers get by trading with markets and the fact that our platform is uniquely tailored and customized for the retail customers with the vision that markets.com is the home for traders. This is where they get their marketing information, this is where they get their insight, this is where they get connected to the markets and this is where they trade.
Traders can enjoy a variety of advanced tools and get a better understanding of what's trending now, giving them greater visibility on real time market movements. Through our markets.com, traders' trends, we enable our customers to get real-time insight into the markets book for our long tail of instruments. Through our events and trade offering, traders get connected to relevant macroeconomic events, their consensus and how these events in the past impacted certain instruments based on the historical information.
Our approach is for customers to get more when trading with markets.com, where content has to be both relevant, up to speed and provide depth and value, centralizing news and relevant notification and information for the benefit of our traders in a way that will cater for the platform to become their real home for trading and access to the market. This means more engagement, greater stickiness with the customer base as a whole and eventually caters for an increasing trading activities and growth in the business.
We look at 2017 and beyond with confidence and excitement. We are well positioned in the market for the new regulatory environment recently introduced, both in terms of our compliance status and competitive edge. 2016 was a year of transition for us, where we have made tremendous progress all across the business, establishing the true foundations for growth, whether from the compliance perspective or from a technology and product angle.
The acquisition of CFH marks a significant step for the financial division in terms of its B2B strategy and growth opportunities going forward, together with opening the door to further complementary M&A transactions. We see a real potential in this business for both Playtech and its shareholders and I've made this my career focus to deliver this vision and value to shareholders, which I would not have done if I didn't see the great potential and opportunity in doing so.
With that, I'll hand over to Mor for the operational and strategic review.
Good morning everyone. Thank you, Ron, and again, good morning everyone. I would like to take this opportunity to publicly thank Ron for being a fantastic CFO over the past four years. I would also like to thank Ron on a personal note for being a fantastic and close friend for the last 12 years. We have worked closely together through all his roles at Playtech and Ron has been instrumental to the success of the Company. I look forward to continuing to work with him and there is no better CEO for the financial division.
I'm also delighted to welcome Andy to his first results presentation. I look forward to presenting many more financial results with you as we continue to deliver the strategy for the Company.
I'm delighted to stand here today and tell you that we have done exactly what we said we would do. 2016 has seen Playtech deliver a strong financial performance with growth in revenue and profit and improved cash flows.
Operationally, we have seen new licenses, new content and features for customers, and important long-term renewals continuing to lock in future growth. We have executed our M&A strategy to deliver the acquisition of complementary, technology and content.
The additions of BGT and ECM to the Playtech platform have augmented and extended our omni-channel offering and Quickspin adds premium content to our already industry leading offering.
Whilst the acquisition of Eyecon post the period end, further strengthened Playtech's position in the important bingo vertical and gains us the most significant access to customers and networks than we have ever had before.
At Playtech, we never lose sight of our focus on shareholder returns and in addition to the €150 million special dividend and €50 million buyback, we have moved this year to a progressive dividend policy to provide shareholders with increased consistency of dividend payments. Due to the strength of our balance sheet and cash generation, we have been able to return this capital to shareholders with no impact whatsoever on our M&A capability.
I'm delighted to say that the gaming division had another strong year, achieving 21% reported revenue growth at constant currency. As Andy outlined earlier, this was driven by our flagship casino offering and a strong performance in H2 from sports following the contribution of BGT. We will discuss BGT and the new OPAP deal in more detail later.
Importantly, regulating gaming revenues continue to increase in 2016 with gaming regulated revenues increasing despite the strong growth in Asia. In 2017, we expect to see regulated revenues continue to increase as we see the full year benefit of Sun Bingo and BGT as well as organic growth of existing and new customers in regulated markets and the contribution made by our structured agreements partners, all operating in regulated markets.
Mobile continues to be a key driver of increased player activity across all verticals. As you will see from this slide, mobile penetration increased to 33% of all software revenues, an increase of 45% on the same period in 2015.
The significant mobile penetration in casino is being driven by increased mobile usage across the globe with significant growth in Asia and increased penetration in the UK where mobile accounted for 54% of UK software revenues in 2016.
Unsurprisingly, given the maturity of the UK gaming market and the quality of its mobile networks, there still exists a material difference between the UK and the rest of the world, which still only generates approximately 15% of revenues for mobile and therefore we expect the positive trend and transition to mobile to continue and mobile to become an even bigger part of our business.
Given our unique position in the gaming industry, Playtech is able to identify new trends in player's behaviors, that lead to higher lifetime values, resulting in incremental revenues from these new players. The slight decline in mobile sports is due to the previously mentioned loss of three Mobenga contracts.
Playtech has had a strong 2016 from an operational perspective, achieving one of our key strategic objectives of locking in future growth for the business. The strength of Playtech's offering and commitment to its licenses is clearly evidenced by the length of our relationships with our customers.
Many important agreements were renewed in 2016 and the beginning of 2017 with nine out of our top 10 licenses now on long-term contracts. This includes Paddy Power, BetFair, William Hill, Rank and BetFred.
I'm delighted to be able to report that the BetFred agreement was one of the first contracts I put together at Playtech more than 10 years ago, and I feel proud we extended again a fantastic relationship that we expect will only improve. This demonstrates our strength, the strength of our relationships and the competitive benefits of our offering.
This year saw the launch of many important customers, including PokerStars, Sun Bingo, MaxBet and Wintoday with further significant new licenses signed in 2016, still to launch. In total, 10 new licenses launched in the year with a number of relationships already secured and further go lives expected in 2017.
It is my belief that the strength of our offering is reflected in the quality of our customers and as our offering continues to grow, so does our pipeline of new customers.
We have just had Valentine's Day in the UK. I'm sure many people will have been saying size doesn't matter. At Playtech, size does matter. For us, it is about the scale and quality of our licenses and the licenses we can partner with.
We support some of the most lucrative brands in the regulated markets, the largest and best and we have empirical data proving that the customers we partner with are best positioned to become the most relevant and fastest growing in their markets.
As many of you will have seen at ICE earlier this month, it is Playtech's innovative industry leading offering that allows us to deliver long-term agreements with our licensees. Looking at just a few of these in more detail.
Playtech remains focused on its live casino offering as we have seen strong growth in demand across all licensees and we expect to see this to grow in 2017. This year, we have delivered two new studios in Latvia and Romania due to the high levels of demand from our customers.
Our new studio in Riga is the world's largest live casino studio and offers state-of-the-art augmented reality graphics to deliver an enhanced player experience and better branding and marketing for customers.
Post period end in February 2017, Playtech Live launched its new flagship live casino VIP offering, Grand Royale, with bespoke hand engineered live offering for our clients. This allows operators to provide a more engaging, rich and rewarding VIP experience in live casino.
Through Playtech BGT Sports, we are able to further modernize the sports retail experience for players. We are now able to offer fully anonymous cash out functions via SSBTs, allowing players to place a bit via one SSBT and return to another shopping terminal in order to cash in the bet.
Throughout 2016 we launched over 55 new games in the year, including the exciting edge of the gut suite, the end result of extensive analysis that dramatically increased the chances of success and we expect to continue this program with a new series of games expected to launch in 2017 and beyond.
Also, announced at ICE earlier this month was the new Warner Bros. agreement on behalf of DC Entertainment. Due to its scale and size, Playtech can offer exclusive content such as DC Entertainment franchise to its customers.
We also launched the industry first omni-channel slot game, Tiki Paradise, that rewards customers with unique enhanced experiences, features and bonuses through the use of omni-channel play and available only to those. I'm happy to say that Tiki Paradise was launched across all channels and devices with Coral in all 1,800 shops and is extremely successful.
Last, Playtech has built a revolutionary new games platform that will change the way slot games are built, tested, certified, delivered and distributed. This revolutionary platform is a game changer, using a modeling approach instead of a coding approach. The result is faster development and more cost-effective casino content delivery than ever before. This unified approach to rapid online and omni-channel game deployment enables operators seeking differentiation and customization to integrate bespoke games in record time and importantly, under budget.
We will now move to look in more detail at the new OPAP agreement announced earlier this month, with Playtech BGT Sports. This is the first significant contract signed only few months following the acquisition of BGT and it is a landmark agreement both in terms of quality and quantity and a true testament of the quality of BGT and the true potential of our newly established Playtech BGT Sports division. This is only the tip of the iceberg.
OPAP is the leading Greek betting and lottery operator and the transformational agreement is for the provision of SSBT software and services and the introduction of an over-the-counter sports betting solution. The agreement means PBS will provide software and services for a combination of full sized SSBTs as well as the recently launched compact SSBTs to approximately 5,000 OPAP shops.
Importantly, the initial rollout of machines in 2017 will be followed by the rollout of an OTC, over-the-counter, solution in 2018, a first for Playtech.
Playtech will provide the fully managed service to OPAP including trading, and over 25,000 in-play markets. There are multiple opportunities to further develop our relationship with OPAP as it looks to enhance its digital retail offering and we believe the new agreement will mark the start of a long and successful relationship.
We have been extremely pleased with Group's M&A activity in 2016, having spent €240 million on acquisitions. After the period end, we spent a further €29 million on Eyecon. The focus has been on acquiring technology and content to further complement our industry leading offering.
The acquisitions of BGT and ECM have formed the foundation for the next stage of our omni-channel offering, whilst at the same time allowing us to enhance our sports and bingo distribution networks.
Gaming is experiencing the same convergence of retail and ecommerce as all other industries. A lot of operators have been preoccupied in the last few years with a shift to digital of retail channels, concentrating on extending retail to online and mobile. In reality, retail and online form part of one experience and one journey for customers.
With the acquisitions of BGT and ECM, Playtech is uniquely positioned to provide the only real omni-channel solution. As Ron discussed earlier, CFH has been a landmark acquisition for the financials division, significantly enhancing our B2B offering in the financial trading space.
At the end of January 2017, we announced the acquisition of Eyecon, especially supplier of online gaming slots and bingo slots. Founded in Brisbane, Australia, in 1997, Eyecon is especially software supplier with a particular focus on bingo audiences with an established games portfolio of over 70 games including industry leading soft gaming slot, Fluffy Favorites.
The acquisition not only adds premium content, but also increases the distribution of Playtech's bingo network. Eyecon has developed its own remote gaming server, RGS, which enables it to distribute its content direct to operators and via distributors such as the entire 888 bingo network, including 888 own bingo brand, which we haven't had any direct relationship with before.
So far, Playtech bingo network has only integrated a select few games. We now have the intention to offer the entire portfolio of Eyecon games across the network for the benefit of our licenses, which will enjoy not only a larger number of games, but an improved product. In line with our acquisition strategy, Eyecon's revenues are predominantly sourced in the UK and therefore almost all fully regulated.
Our casino offering is at times mistakenly regarded as casino games offered on operator sites under the casino tab. The Playtech casino platform is a lot more. Integrated with the Playtech IMS, the Playtech casino platform provides online casino operators with the most advanced and sophisticated feature rich solution. As a fully integrated omni-channel offering becomes an industry necessity and the standard in regulated markets, our flagship casino offering will continue to benefit.
Given the positive regulatory changes and our proven track record in Mexico, Spain and elsewhere, we believe that the services division will see growth in the coming years and will play a key role in the future success of our Company. The scalable nature of our services offerings means that Playtech is the partner of choice for operators, operating and entering newly regulated markets.
Bingo continues to be a key customer acquisition channel with the acquisitions of ECM and Eyecon, continue to strengthen our bingo offering. The acquisition of ECM earlier in the year also forms the foundation for Playtech's omni-channel offering in bingo, allowing us to build on the success of bingo as a casino acquisition channel.
Late in 2016, we successfully completed the migration of the Sun Bingo to the Playtech platform. Whilst the technical migration was very successful, the insufficient data provided during the migration meant it required additional analysis to ensure we identify the VIP customers and this is something we are working on.
The Sun Bingo brand remains amongst the best and strongest brands in the industry and continues to attract high levels of new players than ever before.
Poker will remain a low margin vertical and accordingly operators in most cases focus on cross-selling players into casino instead, which is a higher margin vertical and we do not expect to see much change to this vertical.
In 2017, growth in the other line item is expected to be driven by casual gaming, with a strong performance from the recently launched Narcos game. We believe that our approach to sports is unique in the industry. Playtech is focusing on delivering an omni-channel sports solution, allowing licensees to offer a seamless customer journey through online and in-store integration and creating an ecosystem of loyal customers, which is the end goal.
Accordingly, following the acquisition of BGT in June – in July 2016, in November, we launched the new Playtech BGT sports division. The new division brings together Playtech's sports companies with more than 600 employees. Playtech BGT Sports will provide a bricks-to-clicks fully integrated sports betting technology solution, with Dr. Armin Sagader appointed as CEO of the new division. We believe that PBS will continue to revolutionize retail and online businesses alike.
Unlike certain companies which have a product that is coming to the end of their technology and offering lifecycles and are focused on one or two key core markets, PBS offers a flexible solution that can be deployed in various regulated markets using the most sophisticated and advanced technology and features and represents a significant growth opportunity.
Turning to the last slide. Since the start of the year, the gaming division has seen strong growth both on an organic basis and when factoring in M&A.
In the financials division, markets.com continues to see encouraging KPIs despite the lower market volatility with volumes in CFH in line with our expectations. Playtech continues to focus on M&A to augment organic growth and our M&A pipeline remains healthy with active ongoing discussions. Given the progress we have made in 2016, delivering on our strategic objectives, we remain confident of a strong performance in 2017 and beyond.
So, that ends our formal presentation for the morning and we will now be pleased to take your questions. As always, as we are being broadcast this morning, could I please ask that you wait for one of the microphones that we have here? Thank you very much.
Q - Gavin Kelleher
Morning, Gavin Kelleher from Goodbody. Just a few from me, please. Just on live gaming, obviously, a big investment done in there with a new studio in Riga. Could you just give us some thoughts on how the growth will come through there? Is it organic growth from existing licensees or should we see new licensees coming on stream this year?
How should we think about Sun Bingo this year building, given it's kind of disappointing to date? And that's it at the moment.
[Audio Dip] within Playtech, because we truly believe that the future lies with live casino. And actually, I don't see why people should basically transact and use graphical engines when they can basically use a solution that brings you one step closer to reality and the ability to have fantastic streaming on mobile devices as well as over the web and the ability to communicate in real time, with a live dealer experiencing, which is a fantastic experience for their customers.
In terms of the growth, as expected on the back of the advanced technology and the improved streaming, we see very significant increase and growth in live casino, which I strongly believe will continue in the coming years, not just in 2017, and will be driven by existing customers that understand the value and look for further growth and will be willing – and we already have this commitment from various customers of Playtech – to increase the level of marketing, pushing the product within the offering and to do a lot of marketing around that.
On top of that, as you can imagine following the fact that it's not a coincidence that we opened the world's largest live studio in Riga. It was in preparation of the fact that we intend to grow the number of licensees. And I believe that already in 2017, definitely in the coming years, you will see a lot of new customers for Playtech in the live casino vertical. We already have active discussions, in some cases, we actually secured certain agreements that we believe will be very significant for us and for the operators. So, short answer, very bright future. A lot of organic growth together with a lot of new licensees.
As for Sun Bingo, I think that we need to put it into perspective. We wanted to be very, very transparent with you guys and with the market and not try and deflect or avoid the point. What happened is that the transition or the migration was very successful. In tact, all the data was moved from the former supplier.
However, the data that was provided was insufficient and if I may say, it was to some extent even poor. I'm not coming at them, this is the nature of such businesses, versus their capabilities and the quality of our products. What it means in reality is that the migration phase, that we always expected to take some time, because this is the nature of migrations, will take a little bit longer.
But just to put it into context, as I had these discussions with The Sun management, and they basically were ones reminding me that actually we are only six months into a five-year contract and as they said, it's an initial five years' contract. I think that given the fact that we just renewed our – nine out of our top 10 customers, with BetFred extending after 12 years, actually, we started with them in 2005. I think that it's quite to safe to say that we see a long-term future together with the Sun.
We are investing our hearts and efforts into that. Yes, it will take a little bit longer, but six months, within five years, initial five years' relationship, I think that Playtech cannot be in a position not to turn it into a huge success, as we have done elsewhere in Spain, Italy, twice in the UK, Mexico, Romania as we speak and expect to do that going forward.
And again, just to put it into perspective, I do want to make to emphasize the fact, I don't want people translating that into a very big loss. It's a transition period. It takes a little bit longer, let's put it into perspective. At the end of the day, yes, 2017 will be a transition year for Sun Bingo, but 2018 and actually second half of this year and 2018 I believe that this will turn into one of the fastest growing bingo operators in the country.
You hinted of M&A opportunities, what could they be? There are not names, what kind of – what sort of businesses and scale?
As we are highly focused right now on the B2B aspect of the business, we see many technological, many companies which are coming with sort of technology solutions, which are complementary to what we have today. So, I will say, generally B2B nature and from the technology angle. I can't go more into detail because it's a small industry at the end of the day, but we do evaluate a few of those at the moment.
Hi, Tal Grant here from UBS. Three questions. First of all, just to follow-up to Gavin's just now. You said Ron that the future for B2C, CFD trading is very strong, very good. Obviously the listed CFD brokers imply that the opportunity is about half as good as it was. So, is there anything kind of stopping you from taking advantage of that price decline, maybe not in the listed space, but I'm sure it's the same in the private space as well. Why wouldn't you buy a B2C player there?
Secondly, just wondering if we can get an update on the Philippines, obviously a very big part of your revenues from there and a bit of fluidity in the regulatory situations. So, just wondering what's the latest there.
And finally, just quickly on the growth. If we strip out the price increases in Asia, could you give us an idea of what the growth would have been? Thanks.
Okay, so, with respect to the B2C opportunity, obviously given the new regulations, it will basically – we believe it would have the same effect as we saw in Japan, meaning the market will consolidate and the market share will be split differently. This will potentially open up certain M&A opportunities. We're not against it to be honest.
With that being said, I don't think that the right strategy for us generally from a strategic perspective is just to start consolidating B2C business and then just buying more B2C businesses.
It really depends on the opportunity, it depends on the market where they target, where we want to make sure that we don't basically cannibalize what we do on our own B2C business and it depends on the revenue synergy that can be achieved through such acquisitions.
So, it really depends on the opportunity as a whole. We're not against as I said, but I think right now our focus is mainly on certain B2B M&A transactions which are definitely – which we see that definitely complementary to what we offer today.
Yes, on the Philippines, everyone here knows that I like to talk, and the reality is it's a little bit longer answer, but I will provide it because it's a very important – I will give the full answer because I think it's an important element of our business to give everyone the comfort. There were a lot of headlines, obviously, some of those were poorly translated in this part of the world.
In essence what happened since the new President was elected, two things happened and I will divide it between the domestic market, which we have almost nothing to do with, albeit we do work with one of the bingo operators in the country and we have regulated income streams coming from domestic activities in the Philippines but its marginal. A lot of the headlines about online gamings, those are bingo halls and other formats of gaming domestically in the Philippines are called e-cafes, internet cafes, e-bingo halls, e-bingo and therefore translated into online gaming. And the terminology used is online gaming.
A lot of the headlines that were quoted in this part of the world had everything to do with domestic activity and nothing to do with online gaming or the type of operation that we have in that part of the world.
In domestic activity, there were two software providers, one of the licensors there held by [indiscernible] was simply not renewed and it obviously created a lot of headlines. It doesn't mean that a lot changed there.
Yes, they did impose certain constraints on certain businesses to ensure that certain e-cafes, internet cafes, bingo halls will not be too close to churches and schools. But the number or the level of activity and the number of shops in the domestic Philippine market remain broadly the same. There was a little bit decline, some moved the shops, some closed their shops, but in essence, we haven't seen any real change there.
The other part is obviously the framework that so far was operated under a private company or a concession provided to a private company called FCLRC, that still has a license and is part of a concession for 25 years to provide licenses for certain operators that operate from the Philippines and into other foreign countries.
Since the President was elected, PAGCOR, which is the regulating body of the domestic activity, issued its own licenses to do the same, meaning providing 35 licenses for certain operators that would like to operate from the Philippines into other foreign markets.
Actually, all of our customers obtained such a license. Actually, the license is called POGO, it's a PAGCOR off-shore remote gaming license, an operator's license, under which people have service providers. Playtech obtained for its own activities and its own service centers, service provider licenses and all of our customers secured one of the 35 or the available licenses below those.
So, I just came back from Asia. Nothing to do with this presentation. I simply – I spent many, many weeks every year in that part of the world, because it is moving and probably you saw that certain formats were regulated, certain poker variations were regulated recently in China and the license was provided to a company that operates in our space, that is listed on the Hong Kong Stock Exchange. So obviously we monitor all the developments closely.
I came back from Asia, I had a lot of conversations with a lot of our customers and potential customers and I must say that I believe that it is sustainable.
I don't believe that there is much change. And to be very open, I actually see very good and positive progress, given the fact that the official formal regulating body, PAGCOR, that reports directly to the President's office, issued such certified licenses and endorsed online gaming. And this is why I believe that it is sustainable, our customers remain in the Philippines, albeit they only operate from there.
The target countries are outside, nothing prevents them from moving elsewhere. Some of them actually have operations outside of the Philippines, but it is, I think, everyone's interest to make sure that it will remain intact, will grow, generate taxes and fees for PAGCOR and others in the Philippines to ensure that everyone is happy.
Okay, on the increased growth from an increased royalty rate, I'm not going to give you the exact number, Tal, as you've probably guessed I wouldn't. What I would say is that it was on top of actual underlying growth, so it was sort of a little boost on top but it wasn't a huge amount. And just to give you some comfort on that, obviously if you look at current trading in Q1, that obviously stripped out the royalty rates increases from the start of last year and that is still a double-digit number.
So just quickly, they were put in on January 1?
Hi, Ed Young from Morgan Stanley. First of all, just congratulations to Andy and Ron.
And to you as well.
Thank you. First question is on the margin, you said there was to be less focus on the margin going forward because of the change in Group mix. Also it becomes slightly less relevant and you've got other measures in addition to that, so I understand that.
Obviously you've given some indication for what that might mean next year, but can you give me a bit of a feel, or give us a bit of a feel for what that might mean going forward in terms of the mix to the business? Or to put it a slightly different way, Ron, where do you see a sustainable margin in the financials business going to? Or what sort of contribution margin do you see from growing revenues, given you see the growth opportunities there?
Shall I go first, then Ron can talk specifically about the financials division. It's a very difficult question to answer actually, Ed, to be honest, because it's going to depend on a variety of factors. Specifically if you look at the – we'll call it the non-core gaming. When I say core gaming I'm talking about the software margin that will always go up because of the scale and because we have a technology model.
However, as we talked about in terms of the mix effect, things like growth in white-label, which is an inherently lower margin business because of the way that you report revenues under IFRS. You generate more of an operating margin on that and then other parts of the business, such as casual as well.
That's why I want people to focus very much on the cash generated, because that's specifically the focus for the white-label operations. So, as I say, it could vary this year, but around the 40% level, which is what it was in 2015 and feels about right.
As to financials margin, Ron?
Yes, as to financials margin, I would say again it depends on the balance between the variety of elements within the business. On the B2C side of the business, I think we can expect that margin to remain at the level of 25% to 30%. And in terms of the B2B opportunity, which obviously comes with a higher margin, I would say somewhere along the lines of the 40%.
CFH we'll want pretty much on the same basis and there are obviously certain revenue synergies in terms of cross-selling opportunities and liquidity pools which can actually even go beyond that. So it really depends on the balance of how things evolve.
Just to try and give you a bit of comfort as well, Ed, one thing that we've been looking at and I will continue to look at, is to what extent I can strip out and actually give you the pure underlying margins, give you comfort that the technology model is working, which of course it is. However, it's quite difficult because then you're effectively inventing a brand-new category and you keep on stripping more and more out. So I think we just need to give you overall comfort, but it's something I'll continue to look at.
Great, thank you. I've got two more, if that's possible. The second question is on services and again, I appreciate the context you gave around that, not seeing it in isolation. But it went from 8% constant currency growth in H1 to flat in H2, it looked like. Can you give us just an idea of what the moving parts were there and how we might see that going forward as well?
Yes, sure. The two big moving parts are the shift from unregulated to regulated markets and we'll see services revenue growth accelerate as more markets regulate and as we do more services in those areas. As you know, we also put the majority of white-label revenues into services.
Once again, that may be something that over time we strip out to actually give a pure services number, but at this moment in time they're done. So it is moving, in terms of – if you give me one second, I'll just have a think about what we expect for – I'll come back to you later and I'll tell you roughly what we're expecting to grow in 2017.
Sure, thank you and one final question more, if it's okay. Would you be able to talk a little bit more about the opportunity with the OPAP contract then? You talked about obviously this is initial this year, then you've got the OTC opportunities next year. Could you give us an idea of what's new about the OTC relationship in 2018 and where you could see that potentially growing?
Yes, I will say obviously I can't refer to it more than what I already presented, meaning the SSBTs, the focus on SSBTs in OTC, albeit this is the start of, I believe, a very successful and a very important relationship for Playtech, we have been circling around OPAP for many, many years now.
And finally, through the acquisition of BGT and the quality of the products, we managed to establish ourselves as a true partner of OPAP in, I believe still today, the most important element of the business, which is retail. They acknowledge the fact and realize that if they digitize their retail environment, they will take it forward to the next level.
As you know, the CEO has a lot of experience, comes with extensive experience in this area. I dealt with him, with Damian, when he was still in Gala Coral. One of the – actually the architects of the relationships we have with Gala Coral, which proved to be one of the most successful relationships we have in the country and the best example for a true omnichannel solution and that was obviously then followed by Ladbrokes, his experience in Ladbrokes. It's been extensive, he fully understands the value.
The importance is that actually we put the foundation, we put the infrastructure, not only to digitize the entire retail environment, which is almost unheard of and will be done almost the first time, including if you factor in the UK, because most still have their own very old legacy systems for over the counter. And the ability to digitize over the counter and to integrate as part of a fully integrated solution that is integrated to the SSBTs and then integrated to the online solution, I think, is the future.
They will be one of the first, if not the first to do that and I think that it will prove to be very, very successful for them. Nobody really deployed a digital over the counter solution that is definitely not one that was integrated with the SSBTs. You look at the over the counter and SSBTs growth in the UK, I think that it's a good example. You see first that SSBTs grow faster than any other part of the business.
If you digitize the over the counter activities, I think that we will see further growth and I think that by the way, in the next 18 months a lot of the UK bookmakers will follow OPAP and do the same. Which is quite interesting, because Damian came from the UK market and then everyone follows him and will do the same in the UK, which is the right thing to do.
And just to come back to you on that point that I was just checking one small thing, I think in 2017, as we said, it's going to be a transition – a period of transition year for the core services. I would expect the overall services revenues to be around flattish. There won't be much growth this year, which will be a decline in the core services due to the transition, offset by the increase in white-label.
From 2018 onwards, depending on the pace of markets regulated, I would expect both parts of the business to grow. But we'll look at that nearer the time.
Hi, Richard Stuber from Numis, a few questions please. The first one regarding the renewals with William Hill, Paddy Power Betfair, could you just elaborate a bit more in terms of is the scope still the same with those, the length of the renewal and also the commercial terms? Have they changed since the previous one?
The second question is any update again in terms of your views on the Ladbrokes and Plus stake?
And finally, it may be in the numbers, but could you just split out what proportion live casino is now of casino? Thanks.
Let me take that one first. We don't give that exact number, because it's commercially sensitive. We don't split it out, but it tends to be around between 10% and 20% of casino revenues.
Yes, in terms of the terms and the renewal process, I'm very, very happy to say, delighted, that it was renewed on broadly the same terms. I will say that we even improved the position of the operators and Playtech by extending the contract to new areas of the business, so the contracts are even more comprehensive to include other parts of the business on the same terms.
The reason I refer to the term broadly the same terms, is that in the case of Ladbrokes, Gala Coral, or now Ladbrokes Coral and Paddy Power Betfair, we had two sets of agreements in place and we had to basically come up with one set of agreements. As I indicated before, we let them choose either one of those.
In some cases there was a small twist, but it was broadly the same as before, taking into consideration that they chose one set of agreements. And we worked on that to obviously include both groups. So I would say obviously a very promising opportunity for us, not least because it's the same terms on a more comprehensive basis.
In terms of Ladbrokes and Plus, I think that people do need to distinguish between the available for sale investments that we have into Ladbrokes and Plus. I remind everyone that Plus, we basically have Plus from the time we were bidding for the company. And at this point in time, it's something that we monitor on a continuous basis, and at this point in time, we don't see any reason why to do that. Nothing prevents us, by the way, from obviously realizing the gains, or selling the assets, if and when an opportunity will present itself.
As for Ladbrokes, just to completely answer, Ladbrokes, I remind everyone, has more of a strategic element to it. This is following the combination of Ladbrokes and Gala Coral becoming Ladbrokes Coral. This is the largest UK customer that we have today. They have omnichannel with us, they have SSBTs and the FOBTs. They have a full solution, the most comprehensive solution in the online and mobile space.
And accordingly, and I remind everyone that we had a services agreement that was amended, in fact you could argue it was terminated in order to allow them more flexibility to realize the synergies between the two companies. When you factor all of that in, the fact that it's the most comprehensive relationship that we have within the UK, the growth prospects for this business alongside other customers of Playtech in the UK, and the fact that we have this services agreement, it's set – actually we had the plan in place to ensure they meet the targets.
We wanted to align ourselves strategically with Ladbrokes and if you think about it, it was done roughly around the time that they were negotiating for the merger and started having conversations with us about the services agreements. Again, it's an available for sale, it's recorded as such and we do monitor it.
If an opportunity will present itself, we have a fantastic relationship with them, but at the same time it aligns the interests and going forward, if an opportunity would present itself, we will not hesitate and use the cash and use the available for sale assets in order to – if we will think that there is more value to be created, we will do that.
James, you've got a question.
Morning, just a couple of questions please. Just coming back to this BGT machine rollout, perhaps you could give us an idea of the scope of the rollout and the timing of it through 2017 and 2018, the locations. You've talked briefly about the UK, but what about other markets? Just try and scope that out a bit.
And secondly, just in terms of the financials division, ultimately Ron, are you trying to pursue the sort of game plan that we saw in gaming, where it ends up being a B2B business rather than B2C?
Yes, so on BGT I will say that at this point in time the plan is still being agreed with OPAP. I will say, however, that they identified a partner there, or the machine manufacturer, they basically – we all agreed and started preparing for the deployment that will start in April. Or it may be delayed slightly, but it will still be in the first half of this year. We will start the deployment and we will take it from there.
We're talking about thousands of machines, we're talking about 5000 OPAP shops, we indicated before. You look at the experience elsewhere, you look at the evidence elsewhere, you see that usually you have between four to five – at least four to five SSBTs in a shop, sometimes by far more than that. So you can obviously imagine that it's a very big opportunity.
Again, we start small, however, we will start the deployment already in the first half of the year and we have an agreed phased deployment plan together with OPAP. I think that it's too early to say that, it's for them to update the markets about that, but obviously, it's a very promising opportunity.
It will build up over time. We're talking about a very long-term relationship that we expect to have with OPAP. We are not here for the short term or the next dollar, we are here to make a real difference to their business, so both companies will benefit from that. On top of that …
Sorry, can I just add on the financials?
On the financials for that, this has minimal impact in 2017 and it's far more of a 2018 and then into 2019 event.
In terms of other markets, I will say that we will deploy more machines in Spain. We believe that we will deploy more machines in the UK and we believe – and we know that we will, actually we know that and we expect to deliver more machines in other markets like Mexico, like Colombia and various other markets.
There are a lot, actually now we are in the process of prioritizing, because we can't take as much and we want to do it properly. Rather it's not just the quality and the number of machines.
Yes, on the financial question, the answer is we see an opportunity on both obviously. The reality is we've entered into the vertical through the B2C element and given the regulatory changes, we see that as an opportunity to grow that part of the business quite significantly. With that being said, we did identify some sort of following the entrance into the vertical, that there is a very big opportunity to become almost to mimic the success that Playtech had on the gaming side, to do that as well on the financial side. Because there are a lot of B2B opportunities out there.
We do have a unique offering, both now on the liquidity and clearing parts and on CRM back office and the front-end trading platforms. So we do identify that there is a very big opportunity on the B2B side, which we believe can create significant value.
So we do see growth potential in both sides of the business, but there is a very big one on B2B which was recently identified through the acquisition of CFH and we are looking to pursue that.
Probably got time for one more question.
Morning, Simon Davies from Canaccord, three from me please. Firstly, obviously big step up in the level of bolt-on M&A activity in 2016. What should we think of going forward as a normal year for bolt-on M&A in terms of value spent?
Secondly, can you give us a feel for total R&D spend across OpEx and CapEx in 2016? And where do you use that trending over the next few years?
And finally, obviously there's a lot of investor focus around the triennial review in terms of UK slots. What, if any, do you think the impact could be on Playtech?
Yes, so in terms of M&A, I think that people should not lose sight of the importance of these bolt-on acquisitions, the number of bolt-on acquisitions we did in 2016, in the beginning of 2017. Strengthening up our position, both from a technical or from a technology point of view, as well as content.
And I think that given the cash generation, given this strong position, the position or the strong balance sheet that we have, and the fact that we already many times stated that M&A is an integral and inherent part of our strategy, they should expect us to continue with the theme and continue buying bolt-on – or to do bolt-on acquisitions that will allow us to either further strengthen our position in existing verticals like Quickspin, like Eyecon. Or extend our reach into new verticals like retail, that we have done through BGT and ECM.
We are very flexible, we remain very opportunistic. Nothing basically forces us to do a bigger deal or a smaller deal. We are very much focused on the future of the industry, how we see it developing and we want to ensure – and our goal is to ensure that Playtech will be best positioned for the changes, the expected changes across different markets in the future. And as we all know, there are a lot of opportunities and a lot of markets opening up and new types of operators launching an online gaming arm.
In terms of a triennial review, obviously the exposure of Playtech to the retail activity is very, very limited. I'm not sure if we quantify that.
It's less than €10 million.
It's less than €10 million, so – and the vast majority of that is basically paid to Playtech on a fixed fee permission per week, sorry per day. So at the end of the day, the impact on Playtech, I believe, will be nonexistent. There are some arguments, or some people arguing that there may be some – there may be other effects if the stakes would be reduced to a very low level and shops will have to be closed.
I think given the SSBTs and the fact that the SSBTs can be moved to other shops and the desire of operators to overcome that by growing their business, they will do exactly that. I also believe that certain online gaming operators may increase their marketing spend in order to further establish themselves, because they will see that as an opportunity. So in fact, I think that the impact on Playtech will be almost nonexistent.
On the R&D points, we tend to spend around €90 million to €100 million each year on R&D. That's broadly split a third capitalized, two-thirds OpEx.
What I would say there's two – when you look at it going forwards, there are two things that compete on this. One that's a bit of operational leverage as we get bigger and bigger. But I think the most important point to remember is that we are a technology company and R&D extends our lead. And they're the two competing things that we need to balance.
Simon, has that covered your points?
Good. Well I think – one quick question, anymore?
Well, thank you all very much for coming along and I'm sure that Mor and Andy and Ron indeed will be around a few minutes and if you want a quick chat. Otherwise, once again, thank you very much for coming.
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