Flutter Entertainment plc (FLUT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Flutter Entertainment Q3 Results Call, hosted by Peter Jackson, CEO; and Jonathan Hill, CFO. [Operator Instructions] But for now, I will hand over to Peter Jackson. Please go ahead.

Thank you. Good morning, everyone, and thank you all for joining us this morning. With me today is Jonathan Hill, our CFO. I'm sure you've all had a chance to read the Q3 trading update that we released this morning. And therefore, I won't go through it in detail here. I'll just highlight a few key points. Our business is continuing to perform very well. Our revenue growth in the third quarter accelerated from the 22% we reported in H1 to 30% in Q3. This strong performance has been across both sports and gaming, with sports up 33% and gaming up 26%. This acceleration has been driven by excellent customer engagement across all key regions. Globally, we grew daily [ actives ] actives by 41% year-on-year in quarter 3. That reflects both strong customer acquisition and good ongoing engagement from our global customer base. While customer growth has been strong across all of our divisions, the U.S. has really stood out, with new customer acquisition exceeding our internal expectations. In the U.K. and Ireland, both of our recreational brands are winning market share, and it's great to see both Paddy Power and Sky Bet driving each other on. In addition, Betfair continues to prove its appeal. As was clearly demonstrated in recent weeks, where nearly GBP 600 million was matched on the next U.S. President market on the exchange. We believe this makes it the single biggest betting market ever on the exchange. More broadly, we've estimated that our U.K. and Irish brands engage with approximately 50% of all consumers who had a best online at the start of the new football season, or for American listeners, the new soccer season. In Australia, we grew our revenues by 76%, whilst also completing the migration of BetEasy customers across the Sportsbet. That migration went very well and customers accounting for 90% of BetEasy's revenues in the preceding 12 months have already engaged with Sportsbet post the switch. We're also continuing to acquire new customers as a result of the ongoing migration from retail to online in that market. In PokerStars, the normalization of the revenue trends that we detailed at our interim results have broadly continued. Poker net revenue trends have returned to pre COVID run rates, but this has been more than offset by strong casino growth. We have substantially increased our level of investments in the international business through targeted generosity and higher marketing investments and the early signs are promising. Approximately 1/3 of the customers acquired during Q2 continued on our platforms. This marks just the first step in our longer-term strategy to invest more in both our products and brand. And finally, in the U.S., we're building scale faster than we expected. Focusing on a few highlights. We had more than 1.8 million customers active with us in the quarter. We acquired over 450,000 new customers, a number that exceeded our internal forecast in both new and existing states, and we grew total net revenue by 82%, and we now estimate that our U.S. gross gaming revenue will be over $1.1 billion in 2020, making us the first online operator to break the $1 billion mark for annual gross revenue. We are continuing to see very attractive customer economics across both new and existing states and have, therefore, decided to continue to invest accordingly. Our revised U.S. guidance simply reflects the higher-than-expected number of new players that we have acquired. Player paybacks remain very attractive. You'll have also seen that we secured long-term partnerships with Turner Sports and Entercom. These deals give us long-term access to important sports book integrations across their platforms. And we also recently signed a multiyear marketing deal with NBC. We've expanded our U.S. footprint with successful launches in Illinois and Tennessee, and Michigan and Virginia coming soon. This will bring our total addressable market for online sports betting to almost 1/4 of the U.S. population. And we finished the quarter with a 46% share of the online sportsbook market and a 29% share of the combined online sports and gaming market. In conclusion, you've seen that we've raised our guidance for group ex U.S. this year by 5% at the midpoint despite further COVID-related retail closures and the early impact of new German gaming regulation. As we look ahead into 2021, we have quantified the expected financial impact of new German regulation, which we expect will cost the group GBP 50 million in contribution on an annualized basis. This should be taken into account along with the guidance we provided [indiscernible] in arriving at forecasts for next year. Jonathan and I will now be happy to take your questions. In the interest of giving everyone an opportunity to ask theirs, can I request that you limit yourselves to 2 questions each in the first instance. And if we have time at the end, we can then come back to follow-ups. And with that, I'll hand the call back to Carolyn to manage the Q&A session.

[Operator Instructions] First question comes from the line of James Rowland Clark.

So yes, I've got 2 questions, please, one on PokerStars and one on Australia. Just on PokerStars. You mentioned there how you flagged seeing about 1/3 of the customers that you sort of acquired or reactivated in Q2, continuing on your casino and poker in Q3. But you've seen a 10% decline in poker in the third quarter. And the data we've seen shows about double-digit growth on poker platforms, so globally. So just wondered if you could discuss why that's declined by 10%? Does that relate to accelerating the RG and AML measures that you flagged at the interims? So that's the first question on PokerStars. And then on Australia, you've obviously had a blow out quarter there with Victoria being locked down. But now that Victoria lockdown is lifting, what are the recent trends you're seeing there? And how does that make you feel about the run rate for the fourth quarter heading into 2021? Do you think you can deliver growth year-on-year next year for Australia?

Okay. Thank you, James. Look, in terms of the position around PokerStars, I think one of the things you have to remember in quarter 3, and this is true for poker generally, is that the events that drive quite a lot of activity around poker are driven by global competitions, which different operators get behind. And the world series of poker, which was obviously quite an important driver of volumes in the third quarter occurred with a different timing to last year. And that's not something which we run. So one of our competitors has that, which has an impact on our performance relative to other players. I think it is also the case that a lot of the customers that came to us in Q2 that we reactivated, as you said, were not habitual poker players. And the fact that they came back to the platform when they're in lockdown, I think, is evidence of that. So we've been -- we wouldn't have expected them to stay playing poker, but we're very pleased that we've kept them engaged in our casino platform. And as you said, we kept 1/3 of those customers there. So I think we are pleased with the way that the poker business is performing. As we said before, we need to make investments in poker to support -- the longer-term high performance of the international business. So that's around product, it's around marketing, tech. We have made some early changes to the levels of generosity we put into that business, which I think is something which is important to do, to give back to customers.

I'd just add too [indiscernible] just building on Peter's point there. I mean, actually, the GGR trend is slightly better than the NGR given the uplifted promo spend in that Q3 as we work with the players to give a bit more back and keep them engaged in the platform. I think the second thing is exactly the point you made, some of the RG AML points coming in, in Q3. And we obviously have some -- we get annualization of some of those market switch offs as you go through time and switch markets off. There's a little bit of that in there. But actually, the underlying trends, we're quite pleased with and we're sort of testing and learning as we up this level of promo spend to see how we can do that as effectively as possible.

And then look, in terms of Sportsbet, clearly, we've come into a very important time of year, which is the Spring Racing Carnival. And I think we've been very pleased with the performance of the business through that festival. We've recently had the Melbourne Cup, which we're delighted with the way that the, a, the resilience of the platform, but also how the business performed. Clearly, they have had a [ low fly ] lockdown in Victoria during Q3, which would have impacted the business. I think more broadly, we have seen a large number of retail customers come over to our online business during the course of the year. And we hope that we'll be able to retain many of those customers because of the benefits of the sort of improved generosity and frankly, it's a better product that they get with us compared with the retail environment. Certainly, they get much better value from us. So look, we are pleased with the way the business has performed, pleased with the indications we're seeing coming into quarter 4. And obviously, we'll then go into next year with a much bigger base than we would have originally anticipated. And our job is to keep as many of those customers, who've migrated over to us from retail, as we can.

And hopefully, things like the racing streaming will also help us as we go into next year, and the team are really focused on that retail cohort and how we keep that -- a bit of that share of wallet as we go into 2021.

The next question comes from the line of Ed Young.

My first question is on the U.S. Obviously, as you said, a very strong result there. I wonder if you could give -- I know you've given the FOX Super 6, but I wondered if you could a bit more color about FOX's performance within that. More broadly, what you found, as you've had a bit more chance to get into that business and sort of take it over, operationally. So your, sort of, wider strategic thoughts around where FOX sits within the broader FanDuel group, if that's okay. That's my first question.

Do you have a follow-up question, Ed?

I'll say that depending on what [indiscernible]

Clearly, we're very pleased with how the business is performing in America. I mean, you'd imagine that within -- you see the market share figures that we're taking. It is interesting for us to as a contrast the benefits that we have with the scale, brand, customer franchise, and frankly, it's a platform advantages with FanDuel in comparison with FOX Bet. And I think it does make us realize how important a number of those advantages that the FanDuel brand has, and particularly around the ability to acquire customers at sensible acquisition costs. I think -- and I think it is a good reminder of why -- we should continue to push hard and take advantage of the opportunities that we have. And that's what we're continuing to do with the FanDuel brand. I think for the FOX Bet business, the most important thing we can do is to build up that national franchise of Super 6 customers, and that's what we're doing, and we were very pleased with the figures that we've acquired onto the platform. And actually, when some of the [ actual ] data, you can see how popular the Super 6 products has been amongst sort of engaged sports fans in the U.S. So look, we're really pleased with how that's going, the -- the levels of integration and stuff that we have with, right across the FOX platform, it's fantastic. So actually, we acquired a lot of customers off the back of some smart integrations the team did with FOX News off the back of some of the U.S. presidential debates. So I think we're really working hard with all the different FOX property to make sure we can take advantage of different integration efforts. And I think ultimately, that's what will be important in terms of driving that business forward is acquiring that national Super 6 franchise, and we're pleased with the way in which we've been able to do that.

And I'll leave my follow-up on it. That's a really useful answer. I guess, the other thing you mentioned, a long while ago now is, and perhaps a need to clean up the ownership structure of FanDuel group, which is quite complicated. Is that something that's still ongoing, in front of mind? Or have you changed your mind about that?

It's an important point. I mean, the arrangements we have in place are quite complex, as we've previously disclosed. There's the push and pull agreements to increase our stake in FanDuel to sort of 77% in 2021, in the middle of next year, and then to around sort of 95% in '23. The structure of those arrangements meant that we did not require shareholder approval at the time of the original deal. And in since then, of course, the level of complexity has risen further because we had Boyd's investments, and then we put in place the cyclical arrangements with FOX at the time of the Stars merger. And of course, the prospects of the U.S. business are far more highly valued today than when we did the original deal. So there is a lot of complexity around it. I don't think we feel any immediate short-term pressures to address it. But I think we also have to recognize that in the majority of cases where businesses have these complex arrangements we often find that they find an alternative route to resolving them. We don't feel any pressure to necessarily undertake that part ourselves.

Look, I think, Ed, if there was something that worked for our partners in FanDuel and for our shareholders then we'd look at it, but we're not going to be pressurized into doing something in the short term.

Our next question comes from the line of Monique Pollard.

A couple of questions from me, if I can. The first was just whether you could talk a bit to -- particularly the PokerStars brand, if you've seen any further reactivation to some of those customers that you'd acquired in 2Q at the start of this new U.K. lockdown from November, in particular, strong performance [indiscernible] performance? And then the second thing was just around the U.S., as you've mentioned, really strong position that you're achieving there, particularly the market share in Sportsbook. Just wondered if you could touch a little bit on the gaming market share, and it's still very good, but sort of what you're focusing on there to drive further market share gains?

Okay. Thanks, Monique. So look, it's obviously -- it's very early days in terms of this new sort of lockdown Part 2 in the U.K., but we have seen lockdowns occur in a number of different markets across Europe over recent weeks. And I think it's fair to say that the lockdown is probably not as strict as they have been previously. That said, we have seen some increase in sort of activation on the platform when we look at it on a soft of -- in comparison with year-on-year also, last month. So there has definitely been a sort of -- a step up, but nothing like we saw in the quarter 2. In terms of -- in terms of the gaming side, actually, we've seen a slight reduction in market share, but what we've actually done by putting in the account wallet, which we've now got in, obviously, across all of the states. That gave us a slight short-term reduction in the number of games available. And actually, we're just working very hard to get that availability again back up, improve the offering to make sure that we can drive market share up, as we go forward. So we're very comfortable with our position at the minute. I'm really pleased with having got the entirety of the business across [ CR ] and account wallet at this stage.

Our next question comes from the line of David Brohan.

And just 2 questions from me. Firstly, on Germany, and you've obviously given the kind of guidance around the impact of new measures. Just to what extent is kind of mitigation built into that? And then just the second question around TVG and price strong growth in your data customer numbers, obviously, some of that is kind of retail online shift. What else -- is there any other factors that's kind of driving that very strong growth?

David, let me pick up the TVG points, and then Jonathan will talk about Germany. Look, we're very pleased with the way that TVG performed. Clearly, TVG is an online operator, and we're always very strongly placed. And whilst there have been a number of ongoing restrictions in the U.S., our horseracing has continued. And that has allowed the business to thrive off the back of the sort of retail to online migrations that had to happen for these -- for people to be able to sort of carry on engaging with the sport. Again, we hope that we're able to retain a lot of that business in the future. As people realize the benefits to get from sort of the enhanced generosity, the sort of money back specials, the type of things that you would recognize as our brands that we've taken to America.

And in terms of Germany, yes, I mean, this is the net effect across primarily PokerStars, but a bit on Betfair. And the point is it is quite uncertain at this point because we obviously have the EUR 1 slot restrictions coming in from the middle of December. So we put in place what our estimated -- our best estimate of the net effect is overall on 2021 annualized at this stage, and we'll see how it pans out when we past the -- where we can pass that 15th of December point. Obviously, quite a few of the restrictions, as you know, will have -- have come in already, but that's obviously a big movement itself just from that one change.

Next question comes from the line of Michael Mitchell.

Two, if I could, both on the U.S. and I guess the context here, obviously, a strong quarter from a customer acquisition perspective and a share gain perspective. Could you just talk a little bit about kind of the real product plays in the customer decision in the U.S. at the present time? Or is it more about kind of brand and generosity on the acquisition front? That's question number one. And then question number two, just around your kind of net revenue margins in the U.S. in the quarter, clearly down driven by what you call strategic investments. Could you just talk a little bit about what that tells us about the kind of competitive route you've taken there and what that likely looks like going forward?

Yes. Thanks, Michael. Look, your -- to some extent, no, I think you're leading with what you think the answer is with your question around the role of products, it is really important. You can have the best brand and the best marketing. But if you haven't got the product to back it up, then customers will quickly switch away from you. And that's something that we've definitely experienced over the years with the Paddy Power business with SkyBet and with Sportsbet. We know that when we have the best product, to some extent, the adds almost drive themselves, and you get into a bit of a virtuous circle. When we launched in America, we had our access to our global risk and trading capability. And of course, that is, to some extent, what product is in America. And I think that, that's always given us a head start. We are the home of Same Game Parlay, which I think is a product which not many other people have access to in the states, and I think customers are really enjoying that. And of course, the introduction of our new accounts and wallet. And over the back end of this year, early next year, the rollout of our own sort of sport betting platform in America will sort of leapfrog our product on -- ahead of where we stand today. So I think we believe we have product leadership in America, and then we're going to -- we're investing hard to make sure that we maintain it.

And actually, there was a review done by [ Iris Cricheck ] of the products across the U.S. and FanDuel ranked #1, which we're really, really pleased with, but we're not going to rest on our laurels there. There's improvements we need to continue to make in that, and we'll make every effort to do so.