bwin.party digital entertainment plc 2011 Interim results presented by Jim Ryan and Norbert Teufelberger, Co-CEOs 31 August 2011.
BWIN PARTY Results overview
Q: The interim results press release is very detailed because of the merger between bwin and PartyGaming which formed bwin.party digital entertainment in March of this year. But amid all the pro forma and the actual numbers, what are the key financials that we should focus on?
A: JR: So the results release contains statutory accounts which include the first half results for what used to be PartyGaming and it includes the bwin operations from the date of the merger, that being March 31st.
In addition to that, we’ve also included pro forma results which show the results as if the merged enterprise had always been the case, or had always been in place. From a management perspective, from a comparative perspective, the pro forma numbers are the ones to use.
When considering the pro forma numbers, we would encourage the reader to actually look at not just the data that’s reported on the financial statements, but consider some of the changes that have happened since the first half of last year. Specifically, last year was a World Cup year. That influenced the trading performance in the first half. We also shutdown our French Casino at the end of the first half last year and then we had a number of jurisdictions where we started paying gaming taxes, specifically France and Austria. So if we look at our performance on a like-for-like basis, our revenues were up 1% and our EBITDA was up 8%.
Q: Let’s assume that bwin and Partygaming had been merged since the beginning of 2010 and look at the pro forma numbers because they show growth in only one of your product verticals, namely casino. So just how are sports betting, poker and bingo performing operationally?
A: NT: Let’s start with sports and sports was down 2% but mainly driven by the fact that we had a World Cup year last year. If you strip out the World Cup, sports was actually up 4% and we are especially encouraged by the current trading trend where actually sports is up 6% quarter-over-quarter.
When you go to poker, poker still showed a decline of about 10% and especially on the dot com world. We made good progress in Italy and France where we are having market shares of 17% and 19% respectively and whilst the action of the Department of Justice brought at the beginning of April did not have an immediate impact on our poker revenues, the closure of one of the two illegal US-facing operators was definitely something where we benefited from. So in our current trading, our poker revenues are up by 5% quarter-over-quarter.
Moving into bingo, bingo was on a gross revenue basis flat year-over-year. The customer numbers are up 2%, but due to the competitive pressure and higher bonus costs in the UK especially, revenues were down by 8%. Current trading follows the normal seasonal pattern in bingo, which was expected.
Now moving into casino, which is the most successful of our verticals, our revenues were up 2%, but if you strip out the French Casino revenue, actually up by 9% and that growth was driven primarily by better margins, by improved product mix and higher jackpots.
Q: The results also show plenty of operational and regulatory activity in Europe. What’s this telling us about how bwin.party is preparing and adapting itself for the continual changes in the European online gaming landscape?
A: NT: We have been preparing for that for many, many years and we have changed our operating philosophy. We are also adapting our technology platforms continuously and we have a clear goal here; to demand a market share of at least 15% off each of our product verticals in every regulated market.
We are also encouraged by the fact that governments across Europe especially look more and more for a commercially viable structure by allowing more and more products and by being more reasonable in terms of the tax rates applied.
We are taking long-term view here. It may well be that in certain countries, certain products may not be allowed right away. It may also be that the tax initially is too high. But again, following the example of Italy which over the years have adjusted their product range and also brought the taxes down, we would expect it to happen in all other countries as well.
The merger
Q: You say that the integration of bwin and Partygaming is going according to plan, but in that case, the synergies are taking a long time to be delivered.
A: JR: In fact we’re on plan. The synergies are going to be delivered in accordance with the schedule that we’ve communicated. In fact, we anticipate we’ll have over €40m of synergies delivered in 2012 and we’ve upped our estimate for 2013 to €65m. That’s up by €10m.
Near-term projects that we’re executing on right now, we’ve completed the integration of live video streaming from the bwin platform onto Party Bets and to Gamebookers. Our completion of organisational blueprints is just about done. We’re actively working on integrating our two payments platforms at this point in time – that’s looking like a Q3 conclusion. And by the end of the year, we’ll be using what is the PartyCasino platform in the bwin environment. Quickly in 2012 you’ll see us integrate the poker platforms and ultimately, we’ll have one complete platform across all verticals. So we anticipated the synergies to be realised over the period of 2012 and 2013, and that’s what will happen.
Q: You’ve mentioned the extra €10m of annualised savings in these results. Where will those synergies come from?
A: JR: We’ve had the opportunity since the deal closed to actually review all of the synergy projects. So with the benefit of time and getting into the numbers and the projects in a little bit more in detail, we’ve actually revised our forecast right across the board, so there isn’t one specific area. This comes across from all of the expense and revenue generating opportunities that we have.
Q: bwin and PartyPoker are the main brands for your sports betting and poker verticals. Can you tell us more about your thinking for the rest of your brand portfolio?
A: NT: Well, as you said, first we clearly repositioned bwin as a sports and PartyPoker as a poker brand with very distinct and clear messaging. Furthermore, what is very important to understand is that both brands will still carry all of the products on their sites. For casino and bingo we are going for a different strategy, namely by choosing a regionally diverse and more adjusted approach and it will differ from market to market.
Q: You’ve made further moves in sports sponsorship which is something new for what was the PartyGaming side of the business. Exactly what benefits does sports sponsorship generate for the Group?
A: NT: Well we have decided to continue the successful strategy of bwin in the past by connecting the bwin brand very closely to either international sports brands or well established sports federations. And following up on that, we have now entered into three additional agreements – one of strengthening our positioning in the world of basketball by extending our deal with the world governing association of basketball, FIBA, and entering into a new relationship with Euroleague, which is the basketball organisation of the European basketball organisation.
On top of that we have also now sponsored, we are now sponsoring a new sport not known to many other than in Spain and Argentina called padel tennis. We think it has a lot of potential especially in the betting arena and what we have also done is whenever available, we have acquired very comprehensive content media rights for both sports.
New developments
Q: Tell us more about the new Mobile, Touch and Video business unit and what do you expect to gain from this investment?
A: JR: Significant opportunity with mobile right now. For years the industry has waited for the emergence of mobile gaming. We’ve got Gartner right now that is forecasting that mobile gaming will be $11.4b by 2014. Fortunately for bwin.party is that the bwin organisation had been making significant investments in this particular area.
So what do we have today that we can boast of? I think unlike any other competitor in the marketplace we have our own mobile platform. So we build our own products, it’s integrated into our back office, single wallet, single sign on, all of those wonderful things that we’ve been preaching for many years.
What’s also unique is we have a dedicated mobile team which is currently over 30 people and growing.
Where we’re investing moving forward? HTML5, our browser-based product portfolio which will cover all of our gaming verticals; leveraging our existing gaming content, taking our game studio, some of the content that we’ve already developed, taking that into the mobile world; we’ve got some native applications that we’ve been working on for some time that we’re going to finish up and something that will be new and unique to us because historically and to date, we have been acquiring all of our mobile players from our existing database; we’ll be bringing a mobile marketing element into the picture where we’ll have viral, we’ll have social marketing based opportunities with a viewpoint of bringing consumers who aren’t already customers of bwin.party into our product set.
Q: You’ve invested £15m in New Game Capital, a fund advised by two of the founders of the Cashcade bingo business you acquired a couple of years ago. What do you expect this investment to yield in the years to come?
A: NT: Well that investment is just the next logical step. We are investing in new innovative digital entertainment companies and we are doing that through a third-party vehicle at a very early stage. We have realised that innovation cannot only come from inside, which we are continuously working on, so we are making that investment to capitalise on the opportunities outside of our world so to say. And this new fund targets investment in the social media, social gaming, real-money gaming area and is led by a blue chip team; as you said, the founders of Cashcade, proven industry entrepreneurs and backed by technology venture capitalists.
Regulation and markets
Q: In Europe, Germany is your key market producing around 22% of your revenues. Are you concerned about what’s happening there with regard to proposals for regulating online gaming put forward by 15 of the 16 Lander?
A: NT: Well first, it’s true that Germany is a key market in our portfolio, but bear in mind that in Italy, France and the UK we are generating 27% of the Group’s revenue. So we are following the developments in Germany very closely. We are engaging ourselves in all kinds of political discussions, even on a grass root level, but it is very difficult to foresee what the outcome in Germany will be, especially after the European Commission has now sent a detailed opinion to the government in Germany advising them that the draft they have put forward is not in compliance with European law. So, therefore, to take any kind of prediction at this point is extraordinarily difficult to impossible. What we are doing though is we are working actively with many parties involved to find a commercially viable solution for both state operators and private operators and ultimately, we are confident that we will reach a goal which will be satisfying to all of us. And one example was Italy which started in 2006 and only five years thereafter has basically all products available at reasonable tax rates.
Q: What do you expect you’ll be able to do in Greece, which has just introduced new online gaming regulation, including a provision to claw back taxes from operators such as yourselves from the beginning of 2010?
A: JR: It’s too early to comment. The law that was passed is very broad and generic. A lot of the detailed decisions are left to the various ministries. On the tax matter, in the context of the European market, the structure seems inappropriate. The law itself has not been approved by the European Commission, so all that leads me to back my initial comment it’s too early to determine what that means for our business.
Q: Are you encouraged by some of the political momentum that appears to be building in the US for the introduction of regulation for online poker either on a federal or a state-by-state basis?
A: JR: Very much so. Much has happened over the first half. We’ve seen the US Attorney’s office indict a number of US operators in the first half. We’ve actually seen one of those operators have European licences suspended, so now they’re out of business. We’ve seen a number of bills being presented at a federal level – the Barton Bill, the Campbell Bill, Campbell and McDermott – and there is some expectation that we may see a bill coming from Senator Harry Reid after the summer recess.
At a state level, we’ve got California that has two poker bills that’s being considered. We’ve had the government itself and the President of the Senate indicate that there is a desire to pass a bill in the State of California, but that likely won’t happen until 2012.
In New Jersey we’ve just had the Lesniak Bill reintroduced to regulate online poker in the state. Florida looks like they’ll reintroduce one in 2012 and we’ve had the District of Columbia actually make online poker legal and the state of Nevada doing just the same.
I think what’s important here, and we’ve got some real meaningful political momentum and we’ve got some law enforcement with regards to those that are operating contrary to the law, there are some key drivers at work here.
And the key drivers to legislate, first and foremost, are being driven by US companies, US operators, and that’s a material change. That change was initiated last year, but now we’ve got companies that employ Americans, pay US taxes, driving for US regulation of online poker. Now why? First and foremost, the law enforcement aspect. For a number of years foreign companies have taken billions of dollars of profits out of that marketplace. Secondly, we have player protection needs. We’ve seen in the most recent circumstance a number of consumers not being able to get their funds back from one of the operators, or a couple of the operators, that closed in that market. We’ve got job creation, which is a huge driver in the current macroeconomic times and last but not least, we’ve got the ability to generate taxes. All of these factors have created a perfect storm, hopefully, for the regulation of online poker. We believe it’s not a question of if, it’s just a question of when.
Q: And further afield, do you expect countries in the Southern Hemisphere or Asia to become regulated markets?
A: NT: Ultimately, definitely yes. There is huge demand for online gaming products across the globe and governments will be looking for new forms of income to fill their empty tax coffers. It may take though a little bit longer in those regions, especially Asia and South America than we expected, so we definitely believe that any regulatory push will be driven by Europe and potentially North America in the short-term.
Current trading and outlook
Q: The dividend and your statements about current trading suggests that you’re confident about your prospects, but in addition to regulatory uncertainty, are you feeling any ill effects from the wider economic issues that are impacting major economies around the world?
A: JR: We are confident in our prospects and very pleased with how the business is currently trading. That being said, our business is not immune to some of the negative macroeconomic effects that we’ve seen specifically in the European marketplace, but our business has been resilient. If you take a look at the player acquisition numbers, we’re very pleased with how we’re performing in that regard.
Evidence that we’ve seen at a consumer level, we’ve seen deposits per consumer go down during these more difficult times and of course that has a corresponding impact on the revenues generated. But that being said, not immune but resilient is how I would characterise it.
Q: Looking ahead, how do you see the rest of the second half shaping up?
A: NT: Well with the second half already well underway and having delivered promising results so far since the end of June we are confident that we will deliver on our 2011 financial goals.
In addition to that, we very much look forward in 2011 to start monetising and leveraging our prior investments into other areas than our core areas, namely the social media, social gaming area, the payment side or the content side of our business.
