Flutter Entertainment plc (FLUT) Earnings Call Transcript & Summary

Good morning, and welcome to the Flutter Entertainment Q1 results update. Peter Jackson, CEO, will host the call and is joined by CFO, Jonathan Hill. My name is Cathy, and I'm your event manager today. [Operator Instructions] This call is being recorded. But now I will hand over to Peter. Please go ahead, sir.

Good morning, everyone, and thank you all for joining us this morning. With me today is Jonathan, our CFO. I'm sure you all had a chance to read the Q1 trading update that we released this morning. I won't go through it in detail here, but I would just like to highlight a few key points. Firstly, it's easy to figure out just how much has changed at Flutter since our Q1 report a year ago. This time last year, we were yet to complete our combination with the Stars Group, and were in the midst of assessing what lockdown and the cancellation of global sport would mean for our business. Thankfully, 1 year on, the diversification benefits our merger delivered are evident in the numbers we're reporting this morning. Our business is continuing to perform very well, with total revenue growth in Q1 of 33%, and online growth of 42%. This has been driven by 36% growth in average monthly players or AMPs, with strong growth in our recreational customer base across all 4 divisions. In the U.K. and Ireland, we've continued to win share as more and more customers have migrated from retail to online. What's been particularly encouraging is how SBG and Paddy Power Betfair, both performing well with revenue growth of 35% and 36%, respectively, in Q1. We estimate that Flutter brands accounted for 56% of all Cheltenham customers this year with Paddy Power, the #1 downloaded app during the week. It really was an Irish festival this year. In Australia, we grew our revenues by 59% and our AMPs by 43%. We've been watching trends in this market closely as it emerges from COVID disruption. And I'm pleased to say that so far, customer numbers have remained at elevated levels. That said, while the economy has opened up in Australia, things are not fully back to normal just yet, so we'll continue to watch this closely. In international, we are continuing to evolve our customer proposition by increasing our levels of investments in generosity, and we're seeing some early signs of progress. Overall, revenues increased 17% in the first 2 months of the year before we started to lap the challenging COVID comps. International, in particular, faces more challenging comps throughout Q2, with additional headwinds of German turnover tax, which we believe will come into effect on the 1st of July. As a reminder, we think that change will cost the group approximately GBP 20 million in EBITDA in the second half alone. In the U.S., we maintained our #1 position with a record quarter for revenue, AMPs and customer acquisition. We generated revenue of almost $400 million, up 135% year-on-year in the first quarter alone, with 1.6 million average monthly players. We are pleased to launch in Michigan and Virginia during the quarter. Our performance in existing states remains very encouraging, with staking growth of 93% in Q1 and stable market share. ESG and safer gambling initiatives remain a key priority for the group across our markets, with new measures introduced, including our Gamban partnership in the U.S. and development of the planned Affordability Triple-Step in the U.K. And we're continuing to focus on new ways to ensure that our business is built on sustainable foundations. We announced in March that we're giving consideration to a potential listing in the U.S. of a small part of FanDuel Group. While we continue to examine options for this exciting business, no decision has been made at this point, and you'll appreciate that we are unable to take detailed questions on this at this time or provide forward guidance. Of course, should we decide to proceed with the transaction, were there the rationale in details in full at that point. You also have seen our announcement on the 7th of April with respect to an arbitration process between Flutter and Fox Corporation with respect to an option to acquire an 18.6% stake in FanDuel. That arbitration process is now underway, with the appointment of an arbitrator almost finalized. Given that this is now the subject of a legal arbitration, we won't be commenting further. Our position on the matter remains unchanged. As we think about the rest of the year, we are conscious of the fact that parts of our business will now face deeper comparators as we lap the benefits of stay-at-home restrictions in many parts of the world. However, with a normalized sporting calendar in place and good plan momentum across our business, we look forward to the remainder of the year and beyond with confidence. With that, Jonathan and I will be happy to take any questions you may have. [Operator Instructions] With that, I'll hand the call back to Cathy to manage the Q&A session.

[Operator Instructions] The first question comes from Ed Young of MS.

The first one was on Australia. And I thought the comments there were interesting about Australia and essentially being a bit of a lead indicator.

We've lost you, Ed.

We have now got Gavin Kelleher.

I think we'll have to come back to Ed.

Yes. we'll come back to Ed in a moment.

On the U.S., obviously, huge customer acquisition in the quarter. I know this isn't -- you don't give EBITDA updates. Can you give any sort of indication on where your CPAs are tracking? Are they ahead, above or in line with expectations in Q1? That's my first question. And then my second question is on the area of responsible gambling. You're doing an awful lot of mass. You mentioned the triple-step introduction of affordability in the U.K. Can you just give us a bit more insight on when that will be introduced and how extensive that introduction will be this year? And as well as that, I believe you're trialing some staging limits in Sky Bet in the U.K. When that happens? And any sort of learnings to date if there have been trials?

Thanks, Gavin. Look, I think you're definitely stretching the 2 questions with different parts there, but I'm happy to take those. So look, in the U.S., you're right, there was a huge customer acquisition in Q1. And a lot of that was focused around the tremendous success we saw in the Super Bowl. But yes, we're also very pleased with the acquisition that we've seen in the new states that we've entered, Michigan, Virginia. We were able to take advantage of the fact that in Illinois remote sign up was available for a period of time. So we pushed really hard. We're continuing to be very pleased with the way we've been able to sort of cross-sell into our DFS base. And then we continue to believe that we have some industry-leading acquisition costs in the states. The one thing I'd add just in looking at where we are in the states, particularly in these new sites is that because our -- some of our acquisition costs comes through in promotional mechanics, particularly around our very successful Super Bowl 55-1 offer, what you find is a suppression of GGR in those new states during that open period. So actually, when you look at those 2 new states, you should take a good look at handle rather than solely looking at GGR because you've got a GGR suppression in those very early months, particularly around these -- either the Super Bowl offer or the Spread the Love Campaign, which we also do, which is a sort of viral way of driving olds up and giving value to customers.

Yes. And look, in terms of the work that we're doing from a safety gambling perspective, look, this is a very important area of focus for us right across the organization. I remember on the call we did last time, we had a number of questions around what we're doing in the states. And so we wanted to sort of showcase some of that in today's statement. Here in the U.K., we are continuing to rate for the top, as we said in the past, the triple-step approach to affordability is part of that clearly. And for those of you who aren't familiar with it, it's the third part of the triple-step, which is effectively some of the suspending backstops, which we've been introducing relatively recently into the -- into our brands in the U.K. We're pleased with the impact that that's had and then the engagement it is driving us with customers, and so we'll continue to do more of that and it provides us with good data and insights that we can use in our business to help sort of improve flare protections and indeed share that data with the government as part of the reviews that they're doing into the Gambling Act. And it's actually that decision to pursue the data and insights and share them with the government that's led us to undertake some of the staking limit trials with Sky Bet. We thought it was a good thing to get some data and insights out of it. So we're filing it, and we will share that data with the government as appropriate.

The next question comes from Kiran Grewal.

Just 2 questions from me. You've offered some really interesting insights to the FanDuel Group losses last year, which amount to about GBP 110 million. It looks like FOX Bet is running at a disproportionately high cost. Could you perhaps offer more color on when you believe the FanDuel Group could turn cash breakeven or positive? And what is it about FOX Bet that's explaining these disproportionate losses? Are you cross-selling behind your customers into FOX Bet yet?

Yes. I mean, on your -- first, thanks for this questions here. The answer to the first question is not very precise. The answer is, it depends. And it really is driven by the pace of state opening. And obviously, we laid out in the prelims, the contribution from those '18 and '19 cohorts that have come through and the positive contribution, but obviously, what happens is every time we open a new state, clearly, we make a loss as we invest in building the customer base. So it's very difficult to say exactly how that legislative process is going to work across the U.S. and therefore, part of those loss-making state openings will impact the P&L. So -- and the cash flow. So it's a really tricky question and one that I think you probably have to take a view on the state openings. And particularly, as you get the bigger states, those tend to have a bigger in-year divot, particularly when the states open in the August-September timeline and time for NFL, when obviously we spend all of the market money. We make all of the promotional generosity to drive customers into the franchise. And then obviously, they return minimal or even negative net revenues during the financial year. So it's a very tricky question to ask, but I think the thing I take most comfort in is the data that we shared with you at the prelims around that, got really positive contribution that we're driving from those older cohorts in New Jersey. And as we build up those older cohort to the profitable customers, it will just be that balance in each year between the existing cohorts of existing customers and the balance, the proportion of those relative to how much we're driving new customer base into the business.

Yes. I mean -- and I think just anything here in Jonathan's answer there helps provide some of the explanations to what we're seeing in terms of the disparity between the performance between FanDuel and FOX Bet. The way I think about the FanDuel business is we're creating a tremendous of embedded value with the large numbers of customers that we're putting into the business. The dynamics of the customer acquisitions, the LTVs are very, very positive, and we're really pleased with it. And of course, we get really good -- we increasingly get better and better operating leverage as we push more volume through the business. If I contrast that with FOX Bet, which is struggling, the product is not as good as FanDuel. Unfortunately, we have -- we're starting to use the legacy Stars Group sports betting platform, which is not as good as the capabilities that the FanDuel have. And so customer acquisitions are lower, particularly on the sports side, and we don't get the same benefit of that sort of operating leverage. And so with this -- with the fixed costs associated with the business, losses are higher, and it gives us some interesting visibility of what it's like for our other smaller competitors facing us down in the states? It's hard.

Yes. And the final point I'd add is we obviously have TVG and DFS within FanDuel, and they are very good positive contribution businesses and obviously covering a lot of fixed overheads, which you have in these businesses. So a range of factors.

[Operator Instructions] The next question comes from Michael Mitchell of Davy.

Two, if I could. First of all, international. You referenced being pleased with acquisition and retention metrics in the division. I wonder could you provide a bit more color in terms of what you're seeing in response to some of your more recent promotional and brand initiatives? And then secondly, in the U.S., just interested in your comments around the expansion of the expected margin. Again, I wonder, could you shed more light on that and your thoughts in terms of whether FanDuel could structurally be a more profitable business than some of the other operators in the market?

Michael. Look, from a sort of international perspective, we have been pleased with the way in which we've been able to grow the casino business. We talked to you about wanting to invest behind that. And we recently launched a new campaign, and we're pleased with the way that, that's getting traction for us and we think continued growth in the casino business. I think we're also pleased with the way the poker business is performing. But it's hard to disaggregate what's happening on an underlying basis with the sort of continued lockdowns that we face across the -- particularly some of the European markets, which are so important for that business. Look, we think that the investments we made in generosity, investments we're making in just beginning to start to improve the product are all important steps to take in that business. And Jonathan, if you could add anything?

And I think some of the actual mechanics we're using, so if I just talk about a couple of those, we obviously get the rate back challenge in terms of poker, and we can measure the ROI on those very clearly and the returns to the player and higher that effects, how much they engage with the platform. So very measurable in terms of how we invest. Obviously, we've got a bit of money that we're putting into -- also into overlay in terms of tournaments. And again, we can measure that quite precisely in terms of returns. On the casino side, if it's 7 days of rewards, which is a really popular initiative in casino, which is driving activity and really driving customer engagement, then obviously, we've had the $1 million rate that we've really been pushing in casino. We -- it's pretty new. We've run another race at the end of March. And again, we're seeing really good engagement with that product. And then obviously, some of the brand initiatives we've done, the Neymar, the Epic Downtime, which is landing very well in terms of the casino product. And then obviously, the Neymar campaign, which is helping drive saliency of the brand and consideration of the brand. So a lot of positive stuff in there, a lot of very good measurable stuff as well.

I mean we hit an all-time high number in terms of the number of games or hands per player in March in the casino, which was great validation for all the work that the team are doing. So in terms of the U.S., look, we are pleased with where we've seen the margins trend to. I think we've rather -- given -- we talked a little bit about the benefits we're getting from Same Game Parlay, which is obviously quite a proprietary piece of technology that we have in-house, and therefore, we get all the benefits of. And even while some of our competitors are beginning to try and copy that product, they're using third parties, which means they don't get the same margin uplift. And I think it's a good example of where having ownership of our own technology stack and ownership of sort of risk and trading gives us real benefits in the business. And I think that when you compare the sort of expected performance of our business in the future compared to a lot of other competitors who are more reliant on third parties, we ought to get some structural benefit as a consequence of the product mix in place after the Same Game Parlay as well as the fact that we sort of own risk and trading. But clearly, we're not taking an underlying different approach to the sort of head-to-head overruns in the market. We're keeping them where we set them to start with pretty tight in order to make sure that this is a pretty competitive market in the U.S. when it comes to overruns.

The next question comes from Simon Davies of Deutsche Bank.

Three from me, please. First, can you give a rough indication of what percentage of your international revenues now come from unregulated markets? And are there any plans to exit any more markets over the coming 12 months? And secondly, just on Canada. What are your expectations in terms of the opening up of the Canadian market? And how well positioned do you think FanDuel will be for that?

What I can tell you is, overall, our revenues -- the split of overall group revenues from -- if you went back to H1 '19, would have been 83% regulated. I think we're now at somewhere around or just above 90%. And that comes from a mixture of factors, Simon. It comes from markets which have moved from unregulated to regulated, and it comes from markets where we've chosen not to continue to operate. I would just make sure we all think about the fact that there's 3 types of markets, in our view, there's regulated, there is unregulated, untaxed, and then there is black, which is illegal markets. We do not operate in the third of those. There are markets in the second category where we're very comfortable operating. So we don't immediately see that going to 0, but we'll continue to -- your question about do we see turning any more markets off over the next 12 months? It's a very dynamic situation in terms of regulation across the world and the geographies that we operate in, and we will continue to analyze and make sure we understand exactly what's going on across the markets in which we operate and make decisions on a flexible and real-time basis.

Yes. I mean, look, Simon, that 90% is going to grow in time. And you'll be aware that after the transaction with the Stars Group, we did a very detailed assessment of that business, and there's quite a lot of business which we chose to switch off because it didn't meet with our what I would just describe as more progressive risk appetite. In terms of Canada, look, we're excited to see what happens in that market. Interestingly, the PokerStars brand has been advertised in Canada for more than 20 years. So it's an incredibly well-known brand in that market. And of course, FanDuel will get some bleed across as well because of the interest in the U.S. sports in that market as well. So look, we think we've got some very good brands to target to that market. And hopefully, we'll be able to achieve a podium position, if not a gold metal.

And the next question comes from Ed Young, MS.

Can you hear me now?

We can, yes.

Perfect. So my first question was on Australia being a lead indicator for how markets might perform as lockdowns ramp down elsewhere in the world. So I just wonder if there are any sort of KPIs you could share about sort of retail type customers you've acquired during the period in retention? Or any other kind of indicators that would help really across -- obviously, we can see on a headline basis, the revenue numbers still remain very strong? And the second one is, I mean, I'm not sure which bit you'd like to answer. Maybe it's a straight no, which is fine. But on the U.S. side, I mean, obviously, FOX is a partner, but I would say some of the process you mentioned, arbitration is also a bit adversarial. I just wondered, could you just sort of help us understand if there is any risk that U.S. operations could be distracted by what is going on? Or are you sort of comfortable that they're all run sort of separately enough to avoid that risk going forward?

Look, Ed, on Australia, you're right. I think it is a really good lead indicator for us in the rest of the world because a lot of the lockdown restrictions have been lifted a little bit. There are still occasional snap lockdowns in the market. I think we're really pleased with the way that the business has retained a lot of the retail customers that we acquired last year. I think -- we think that we have retained most of the customers. When we look at the betting patterns and behaviors of some of those cohorts we acquired last year, they look very familiar to us as the type of retail funds. And we seem to have kept them in the business, and we think the quality of the products and the generosity we're giving them is what's helping us there. And so look, we're very pleased. You can see the AMPs data that we shared in Q1 to half of that 43%, I think it just shows how well the business is performing in Australia. Jonathan, anything that you want to...

Yes. I mean the only thing I'd say is we're -- Australia is not back to the historic normal. So -- and it's pretty early days since they've come out of sort of full locked down in all territories. So I would -- we'll continue to monitor this really closely because I don't think we've seen the full sort of extrapolation of -- we're certainly not back to normal. And until we get back to normal, we won't really see the patterns. But hopefully, a proportion of that wallet share from those who have migrated from retail to online, they'll keep with us, and we'll keep a share of that spend.

And look, your question about the U.S. FOX are a very important partner for us in the market. We do have those 2 businesses in the U.S., the FanDuel business and then FOX Bet. And of course, we know FOX have the rights to come in and acquire half of FOX Bet. We've done an awful lot to support the FOX Bet business. When I look at the step-up in the quality of the team and management we have are supporting that business, the focus that we're putting on it from a tech perspective, lockdowns has been tremendous in terms of chairing regular meetings to help boost and improve the performance of the Super 6 products. And you've seen where that business has got to. So we do think that they are important partners. I mean, they're particularly focused, obviously, on growing the FOX Bet business. And when we look at the amount of media spend that FanDuel has with FOX, it is small, but there clearly could be opportunities for us to improve that in the future, yes. We are going to this sort of arbitration. I mean, one of the benefits ordinarily of arbitration is you can do it confidentially. So it hasn't been our intention to discuss it. I think it's pretty regular thing that occurs in the U.S. markets. And we understand that these mechanisms sometimes have to be used. So we remain supportive of what we're doing with FOX Bet. But obviously, really delighted with the way that FanDuel is performing. And you've seen the disclosures in the release this morning of the 2 businesses that we effectively own in the U.S.

And just 2 points to that. One is, we'd obviously -- Peter has referenced the sports product in FOX Bet from the earlier question is quite challenged. And it's obviously dependent on swapping out the sports betting product for international. So this is sort of dependency, and we're getting on to that. But that, as you'll be aware, takes time. I think the second point to make is just while FOX is a very important partner of ours, it's not a huge component of the marketing spend of FanDuel and actually FanDuel is being pretty successful even before pre merger and when FOX became a partner of the group. So while we're highly, highly supportive of the FOX Bet business and FOX's partners, FanDuel is overly reliant on that as the channel to market.

[Operator Instructions]

Have we got any more questions coming through? Should we take those?

We do have another question. It comes from the line of James Rowland Clark of Barclays.

Just a couple of quick questions on the U.K. and Ireland. You talked in the release about the strength you saw in January, February before the COVID comps, but also in March as well. Just thinking about the trends you've seen since the partial reopening of pubs, restaurants and betting shops. It looks like online gambling deposits dipped initially quite a bit because everyone went to the pub or restaurants and has reverted back to the level seen before that. Is that something you would agree with? And then secondly, you answered that question about Australia's activity kind of trending down recently, but not to pre-COVID levels quite yet. Do you think Australia is a genuine lead indicator for the U.K. and Europe, and if not a perfect, then why not?

So look, James, I think you could have be -- particularly -- it's not easy in Q1, and it's going to get even harder as we go into sort of Q2 and Q3 to try and to draw comparisons of what we're seeing in the market in comparison to last year. I mean what we've actually started doing in the businesses, we've been looking at how we've been performing in terms of a 2-year basis because there's so much disruption happened in March. So look, we are very pleased with the way that the business in the U.K. has performed in Q1. We shared with you some of the stats that we saw from Cheltenham. And actually, if we look at things like the Grand National, the amounts that we state and compare that with 2019, we believe that the market was sort of -- was well ahead. So look, I'm pleased with the way that the business is performing. I think there is undoubtedly going to be some impact as a result of consumers being able to get answers out and that will have a knock-on impact on the business. But we think we've got some very resilient brands with Paddy Power, Sky Bet and Betfair, of course, the PokerStars brand, which focuses on casino as well in the U.K. And I think whilst we might see -- we might expect to see a reduction in the number of sort of interactions with the customer on a sort of -- on a weekly or monthly basis, it could be that people will just slightly moderate their behavior. We don't expect people to stop sort of transacting with us altogether. I think when we look at what's going on in Australia, it isn't entirely back to normal there. Attendance is -- the AFL and NRL have been down significantly year-on-year, is that because people now starting to get in public transport because people would be rather seeing friends who haven't seen all year, I don't know. So I think the Australia is definitely that -- is definitely a leading indicator for us, but trying to apply too much -- really get into the U.K. is tough. The U.K. market is different. And I think we're going to see how the economy performs, this Brexit impacts. They're going to directly have a big impact on the economy. And we don't even yet know how lockdown is going to open up, are people are going to able to travel for holiday, there's a lot of stuff to work through.

Yes. I mean I would probably summarize Peter's final comment as while we're happy and pleased with where we've got to both the end of Q1 and more recently, there is a lot of uncertainty out there and why we're not being overly pessimistic about it. I think we just recognize there are a lot of moving parts and over the next 3 quarters.

Look, I think we'll draw to a conclusion there. So Cathy, thank you very much. Thank you, everyone, for joining and listening this morning, and we hope that at some point we'll be able to do some of these things in person soon. Take care.