Paddy Power Betfair's (PDYPF) Management on Q3 2017 Results - Earnings Call Transcript

Paddy Power Betfair PLC (OTCPK:PDYPF) Q3 2017 Earnings Conference Call November 1, 2017 4:30 AM ET

Executive

Alexander Gersh - CFO

Analyst

Ed Young - Morgan Stanley

Richard Stuber - Numis Securities

Gavin Kelleher - Goodbody

Joe Thomas - HSBC

Simon French - Cenkos

David Jennings - Davy

[Call Starts Abruptly]

Unidentified Corporate Participant

Good morning and Thank you for joining the Paddy Power Betfair Q3 Call. With me this morning is Alex Gersh, our CFO. At this stage I guess you have had chance to read the Q3 trading update. So I’ll briefly cover a number of highlights and the move on to questions.

Overall this was an encouraging quarter for the group, including another standout performance from Sportsbet in Australia, which delivered revenue growth of 29%. EBITDA increased by 7% despite marketing investment in Draft, our US startup and a strong contribution from Euro 2016 to the comparative period last year which particularly impacted growth in our Online division.

For the full year, we now expect to underlining EBITDA to between 450 million and 465 million sterling. A key for this year is the integration of our technology platforms which we are undertaking to improve the efficiency and to increase the pace of new product releases. This project is nearing completion.

We’re moving now to the migration phase, which will see all Paddy Power customers migrate to the Betfair, a new version of the Betfair platform. The new Paddy Power front end are currently in beta testing with a small number of customers. The full migration will be done on a faint basis to minimize risk, and we now expect this to be completed early in the New Year.

As you would have also seen in our announcement, we’ll handover the leadership of the group to Peter Jackson in the New Year, although that outlines the (inaudible) August, I believe we’ve built a business that has structured advantages to enable it to enjoy sustainable profitable growth, and I look forward to turning the business on from the sidelines of the shareholder.

In the mean team, let me assure you that the management team remains committed to competing hard and delivering on our key strategic objectives.

And with that Alex and I are happy to take the questions.

Question-and-Answer Session

Operator

[Operator Instructions] So we have it from [Powell Grant] from Credit Suisse.

Unidentified Analyst

Just a quick question on obviously the (inaudible) that hasn’t started yet, but is there anything from the Board or from the current management team with regards to the expected use of the cash on the balance sheet at the moment?

Unidentified Corporate Participant

No change as we decide at the end of January, (inaudible) are working on transition and we’ll expect to increase the pace of that over the coming months, but no change on capital structure.

Unidentified Analyst

Okay. And then just quickly, in the last quarter, how is the final (inaudible) that we’re seeing recovery and exchange or online, how is that sort of going so far.

Unidentified Corporate Participant

Let me break them in to two parts, with given guidance for the full year, which obviously hasn’t obliged guidance for the fourth quarter, that’s the best sharper side as we tighten the range that we can give, acknowledging that we’re in a certain way through that final quarter. Of course there’s still a fair amount of sports to go, and the Breeders Cup, the Melbourne Cup and there’s enormous amount of soccer between now and the end of the year. And we remain sensitive to sporting results and currency moves.

With the exchange, the exchange we called out last year that there were some exceptional, some very large - there were some post Euro 2016 impact on our particular customer cohort, and I think we referenced that at that time. If we look at the two year change on the exchange, it’s much closer to the normal growth rate we assume and we weren’t particularly surprised by the results in the quarter. We think these changes are performing fine.

Unidentified Analyst

And then just finally on Australia, any update on the potential point in consumption cycle on a national scale?

Unidentified Corporate Participant

There’s some this morning and I may be wrong, as to say, I read it on the phone on the way, but the Labor Party in Tasmania who are currently not the party at power in Tasmania there, they’re opposition, but expected to win an election that will be held no later than May of next year. And they have announced an intense (inaudible) 15% point of consumption tax. So when the team from the sports represented here, whatever it is, six or eight weeks ago, they talked about how it was probably 50-50 whether it went state or federal. I think we think there’s much more probability to go state now, and we will see that happen over the next 12 to 18 months we think.

Operator

The next one now is from Ed Young, Morgan Stanley.

Ed Young

I’ve got two questions if that is the case. First of all, could you just give us a little bit of a color on gaming, you did really mention in the statement. If you could just give either sort of color on any of the moving parts and that which obviously remained fairly flat quarter-on-quarter and year-on-year. Sort of further goals on what you announced previously in terms of investigation in to the potential benefits to Brand there.

And then second of all, if you could just give a bit of a color on Draft. I can barely listen to the sports broadcast without hearing at the – when I listen to if I can see the marking spend that’s coming through. But I guess I’d be interested to see the encouraging start of the Draft and progress. How do you think about, is that in terms of brand awareness or engagement or active slope or revenue growth. How do you see the business at this stage that it’s now?

Unidentified Corporate Participant

I’ll start with gaming, I think we experience, last time we did the results that we – our expectation and effectively what’s been happening for the last five quarters, plus or minus obviously, big tournaments is about 60 million a quarter of unlined revenue. I said my expectations would be, we continue to do about 60 million a quarter. We did at 60 million, I would expect to think can happen next quarter.

We still have issues with our customer facing products and UI and mobile, they are fixable, we are working on them. Player management automation which we can fix and we are fixing, branded content, debt gaps which we are looking at. Technical and digital marketing capabilities, which we think we have and direct gaming brand which we are still looking and seeing what we are going to do with that. We discuss it quite often and quite a lot and there is no news to tell you. \

So the summary is, we don’t expect any change, it’s obviously still not satisfactory. We expect that 60 million a quarter. But as we’re marshalling the capabilities that we have and of course with the single customer platform as well, a refreshment particularly Paddy Power gaming. As we are doing all those things the expectation is hopefully we will fix it. But as we said over and over it is not a short term fix and I really don’t know at what point we will return to growth.

Alexander Gersh

And on Draft I met the guy, sort of spent some time with the guys last week. We are happy to have it gone, however it is financially immature in the context that we look. And so when we did deal back in May with 10 people it’s now low 30s. The products have matured impressively, even last night on Twitter they announced they just launched a new type of product versus Fantasy.

Football products, the NFL products are much improved over the summer and the season starts as well, the basketball starts at I think two or three weeks ago. So we are learning now about cross-sale. That’s critically important given the number of basketball games relative to the number of football games.

The marketing is working well in places and has further – we have further work to do to refine in places. So I think we give it a solid kick, but it’s still a very, very small business, but we are happy with the progress so far.

Operator

And the next one is from Alistair Ross from Investec.

Alistair Ross

Just a couple from me, just in terms of Draft, just a quick one in terms of revenue. Can you actually give us the figure in terms of revenue given the amount of losses, and can you give us the revenue figure?

Unidentified Corporate Participant

It’s very, very small. It’s immaterial, and I don’t want to give it because I’m going to have to give it every quarter and it’s immaterial. We will start giving it when its material.

Alistair Ross

And then secondly, can you just confirm whether the majority of Mayweather/ McGregor fight was introduced online?

Unidentified Corporate Participant

The majority of it was in Australia.

Alistair Ross

In Australia?

Unidentified Corporate Participant

Believe it or not.

Alistair Ross

And then in Australia are you seeing any margin compression, EBITDA margin compression.

Unidentified Corporate Participant

I think what we’ve seen in Australia is the continuing investment in the products that we have been investing which we’ve highlighted in the first half of the year, right, and that does effect the margin. But it obviously has tremendous benefits in terms of customer acquisition and in terms of revenue growth.

In the first half of the year we said we spent 30 million on some of those types of promotions which have impacted the margins. Most of that was spend in Australia. In the third quarter, of this year we see the same profile, and we spent about [15 million] in the third quarter and most of that also in Australia.

Alistair Ross

And then lastly, just in terms of the repeal of AFSPA, how bullish are you guys about the repeal of AFSPA in the US, and what sort of action are you taking (inaudible) US. Are you just waiting, keeping it part of (inaudible) etcetera.

Unidentified Corporate Participant

So I think we are waiting and watching. You would have seen what happened to Pennsylvania during the week, and that’s good news for us on the TVG business where the part of the stake and which we can say that (inaudible) wagering has improved and that’s also good news for the Fantasy business and the online can see that is something that we are looking at.

With respect to sports betting in particular, I think we are probably less bullish than most people we speak with or just the commentary we read, and we think there is an awful long way to go from where we are today to legalize framework for sports betting that’s accessible to offshore operators. You have believed many, many things including a repeal of the law and then a broad acceptance by states and then some kind of online thing as well.

So the draft business is showing we can acquire customers that we wouldn’t have acquired through the horse racing business. But we still think sports betting as we know it in Europe is a long, long way.

Alexander Gersh

But I think one of the – and this is a point on the balance sheet. One of the reasons why it’s important to have the kind of balance sheet that we have is that if we are wrong and if the ability to get in to that market presents itself, our opportunity to invest is quite substantial. It’s probably more substantial than a lot of our competitors. And I think that’s one of the key plus points that we have to keep in mind as we’re thinking about the balance sheet.

Operator

And the next one is from Patrick Coffey, Barclays.

Patrick Coffey

A few questions from me (inaudible), could you quantify the impacts on revenues media got from the AFL Grand final falling in to Q3 best as Q4 last year within the Australian division? Second question over runs on certain key sports products of Betfair being reduced over the last six months or so. Can you give us a sense of how that is resonating with punters in the UK, and have you seen a continuation or perhaps an acceleration of the Q3 online European wagering in to Q4? And then final question on DCMS, were you disappointed that they didn’t announce the cut at the maximum state there?

Unidentified Corporate Participant

The first question that the final was, it was only a couple of percent.

Patrick Coffey

Only EBITDA for the group or for that division?

Unidentified Corporate Participant

On the revenue and the Sports Bet revenue, yes, of course.

Alexander Gersh

I am not going to be drawn on that fair pricing, I mean the Q3 update. We’re happy with lots of parts of the business, we’ve obviously given guidance for the full year, we don’t give guidance for next. But within the guidance for the full year is based on what we see up until we get it published the numbers. On the triennial, well our views in the public domain we have thought long term certainty and clarity and yesterday doesn’t deliver that, but hopefully we will get there at the next stage which is less than 12 weeks away.

Operator

And the next comes from Richard Stuber from Numis Securities.

Richard Stuber

Just a couple of questions, one is on machine gaming, so you included about $0.08 this quarter. Could you say is that all going be for B3 content and can you just confirm what your split between B2 and B3 is taking or revenues are. And the second question, it might just be – so there are a lot of small numbers, but you’re closed in on regulating both [retail] and online, and you got 10% this quarter. Are there any sorts of countries or any sort of color you want to add to that?

Unidentified Corporate Participant

You know pretty much really the terms of mix shift on the machines not being called out. I’ve known international, again some (inaudible) are trading fast and they are growing fast and that obviously – but we don’t dwell in to the details because it has to be left out of the portfolio in part because we just don’t know what will regulator not regulate when and so again nothing to highlight there, nothing in particular exceptions going on.

Operator

Next one is from Gavin Kelleher, Goodbody.

Gavin Kelleher

Just on the net revenue margins in Online in Europe and you noticed the sporting results year-on-year were less favorable compared to last year, and so the investments in margins as well. Can you still – is it a sense how much the quantity of miles in terms of year-on-year shift on the margin side for results?

Unidentified Corporate Participant

I think what we’ve said was that the margin of 6.6% on the quarter I think was without expectations and that pretty much and probably 1% of that, one point of that from sporting results.

Gavin Kelleher

I know you guys don’t like to forecast on a quarterly basis, but 6.6% be broadly line or you expect Q4, Q4 being a bit seasonally higher in the sporting calendar mix.

Unidentified Corporate Participant

Gavin, we give the guidance and we put in to that all we know about momentum and seasonality from (inaudible) so we think that should satisfy – we hope that satisfies most of your questions, so nothing really to ask.

Operator

And next from Joe Thomas, HSBC.

Joe Thomas

Just a couple of questions please, just on Australia the strong performance there, did you think that there was 16 million invested in Australia? And can you perhaps run through why the investment put in that business doesn’t appear to affecting the win margin there. I mean presumably there should be there right in terms of (inaudible) results. Any color would be quite useful. And then allied to that, can you perhaps give sort of sense of where we should be expecting this customer investment to go in future periods, be that Australia, Europe or wherever else.

And beyond that could I just ask about the European online staging. What do you think is the sustainable rate of online staging correct, I suppose I’m really asking what the markets’ growing at and how you’re growing versus the wide market.

And then finally, a couple of things on exchange business, you haven’t given the cost and currency growth in this trading segment. Could you just provide us with that? And then secondly I noted the news offered in the rating process of about one of your exchange competitors. Looking to make some big some big marketing investments next year, how are you seeing that shaping up, is it a cause of concern or is it something that you can do away with?

Unidentified Corporate Participant

I think there were four questions there, cunningly switched in. I’m going to let Alex take the first one which is Australia. In the (inaudible) exchange competition, we’ve got a couple in the UK that we watch with respect and they have different strengths and weaknesses and they’re not arguably pure play exchanges and that some of them are due for (inaudible) trading and trade against customer flow and so on.

But we’re not nonetheless we kind of respectfully watch what they do in terms of products and marketing [goods]. There’s no change that (inaudible) for so many years. The currency on the exchange, I don’t know that we’re going to – and I ask Paul Rushton he may turn to achievement like (inaudible) tend to break it out.

Stacking in Europe, as you know we don’t give guidance, we don’t give even market growth guidance. It’s pretty hard to know with all the moving parts at the moment, we’re just getting guidance for the full year. So I can’t help you with that. And Alex the question on --.

Alexander Gersh

Well first of all I didn’t say 60 million was an investment in Australia. I said 60 million was a group investment with majority of its investment in Australia. And yes in terms of the sporting results, we are better in Australia and the mix was, the reason for it was the mix of mobile and some of the multiple bets as well. So it is true that it was a better sporting result in Australia.

Unidentified Corporate Participant

Alex do you think, 1, 6 or 6, 0 was with the --.

Alexander Gersh

No I said 1.6. So its 30 million for the first six months and basically it’s going to be at 60 million for the third quarter and then I would expect it to be the same for the fourth quarter. As such 16 most of it is in Australia and not all of it in Australia. The investment is broadly in Australia and in the Betfair’s sports book, right. So that’s one step which is gone, but of it is on Australia.

Unidentified Corporate Participant

And does that broaden asset any point to being --.

Alexander Gersh

It depends on what kind of promotions and what kind of products we’d start to run. We can’t forecast that.

Operator

[Operator Instructions] The next one is from Simon French from Cenkos.

Simon French

Just going back to the online performance in the third quarter where you headlined down 3%. If you look at the split in there in terms of gaming being flat, were the gaming performance hindered or helped by the unregulated markets performance? And I’ll get to that another way, is sports being driven by regulated or unregulated market demand?

Unidentified Corporate Participant

There has been really no change in gaming performance, if you examine that. Our regulated market has to be much bigger and so they contribute a lot more. Both on sports and gaming there haven’t been any change in terms of the mix or anything else to really know here.

Simon French

I think someone may have asked this earlier, but I’m not sure you answered it. In terms of the constant currency for online and retail in the first quarter, it’s not split out in the appendix, can you just give those revenue growth numbers please in constant currency.

Unidentified Corporate Participant

They are immaterial and the reason why we didn’t put out is because the impact was very, very small. To be fair, we can ask Paul to do something, but it maybe literally immaterial.

Operator

(Inaudible) JP Morgan.

Unidentified Analyst

The two question to you, the first one is, I was wondering if you could comment on the direction of marketing costs in Q3, for in H1 they were flat but up 10% adjusted for the euro spend last year and is this still (inaudible) or is this mostly due to Draft and is the underlying trend still flat outside of those two things.

Unidentified Corporate Participant

I mean obviously is clearly a part of it. There will be more of Draft going towards the end of the year. There will be some increase, and as I’ve always said there would be an increase in marketing cost, I just don’t think there will be exponential unless there are new markets, but there will certainly be some increases as far as we can see in Q4 as well in addition to Draft.

Unidentified Analyst

I think you were saying that this could increase if we find something very, very new, very exciting. So is that the case?

Unidentified Corporate Participant

I think we’re very excited to have the single customer platform launch and support will probably necessitate some increase in marketing.

Unidentified Analyst

And my second question was on the triennial review timing. I think you mentioned that that could get more clarity in 12 weeks. If my understanding is, all the parties have 12 weeks to submit any new information is it not a bit optimistic to expect that these (inaudible) digest all that inflow overnight and to have more clarity for you on the 24 of January. They are not going to start --.

Alexander Gersh

I think that’s probably fair I mean, you’ll understand I am a guest in this country and I may not understand all of the process. I think you’re absolutely right though. I am optimistic. I have in the past been optimistic and in this case I am too optimistic for that clarity in 12 weeks. You’re right, it could well be the strips, I think we all appreciate this could drift well in to – well this can drift in the New Year.

Operator

And last one at the moment from David Jennings from Davy.

David Jennings

Just one question from me, just wondering if you could give us an update on how the group is performing initially and how that market is developing, and your expectations for the business under a single brand.

Unidentified Corporate Participant

David, I know you’ve had a long term interest in the Italian business. I think that that’s just fine, migration from the Patty brand to the Betfair brand is well underway. I think we’re probably materially there in terms of revenue if not in customer numbers. I haven’t looked at it in a couple of weeks.

It is something to regulatory approval and the final step as to whether, because its licensed on a brand basis, the final step is to when do we switch off a brand or how we switch off a brand is yet to be determined this ongoing conversation with the regulator.

In terms of financials, I am happy enough, I’d like them to be bigger obviously. But I am enough with topline growth and where in positive territory financially, which is very welcome for both brands.

David Jennings

Just a follow-up, do you think that you get the business to where you wanted it to be organically or do you (inaudible) and that much to get to the scale if you want to.

Unidentified Corporate Participant

I think David that 67 days after CEO withdrew and I find it very hard, but I’m not share Italian inorganic is going to happen in that time. So we’ve said in the past, acquisition can either de-risk or accelerate international. I think a whole bunch of people would like to scale up in Italy, where most of that (inaudible). But that doesn’t mean, just wanting to do it doesn’t mean that it can be done. So we can continue to grow, and I think the team there are competing well, I think they can continue to grow it. But obviously it struggles to be material on a group level and with the current structure.

[Call Ends Abruptly]