Flutter Entertainment plc (FLUT) Earnings Call Transcript & Summary

Good morning, and welcome, everyone, to the Flutter Entertainment Q1 Investor Update Call hosted by CEO, Peter Jackson; and CFO, Jonathan Hill. [Operator Instructions] For now, I'll hand you over to Peter. Peter, please go ahead.

Thank you, Matt. Good morning, everyone, and thank you for joining our Q1 trading update call. With me this morning is Jonathan Hill, our CFO. Hopefully, you'll have had a chance to review our statement at this point. So I'll just touch on a few key performance points. The group had a positive first quarter of 2022 with revenue growth of 6%, driven by AMPs, which are up 15%, or 10% if you account for Tombola on a pro forma basis. In the U.S., we delivered a record quarter with revenue of $574 million, up 45% year-on-year despite some significant customer-friendly results in February and during March Madness, which cost us around $130 million in revenue. We acquired over 1.3 million customers in the quarter, which represents over 70% of our entire acquisition during 2021 alone, and the strength of the customer economics we're seeing continues to give us conviction of our path to 2023 profitability. For example, our cumulative CPA remains around the $290 mark we previously shared with you, and average paybacks also remained very strong within the 12- to 18-month window. Our group ex U.S. business had some challenging comps, meaning that year-on-year revenue declined 3%. However, when you remove the volatility that can occur in shorter time periods due to regulatory changes or sports results, the GBP 1.1 billion in revenue that the ex U.S. business delivered in Q1 represents a 3-year CAGR of 11%, demonstrating the scale and diversification of our business. In U.K. and Ireland online, we grew average monthly players by 15% with a revenue decline of 20%. On an underlying pro forma basis, revenues were down 19%, adjusting to the expected impact of safer gambling initiatives, sports results and Oddschecker. This is in line with the market, reflecting normalization of engagement from the COVID-related peak in Q1 last year as well as a less condensed sports calendar. We hope to see some clarity on the outlook for the U.K. regulatory change later this month and feel confident that we are very well placed ahead of that review, given our scale and the work we've been doing to improve the recreational and sustainable nature of our business. In Australia, we delivered a very strong quarter with revenue up 8% and AMPs increasing 10% to 915,000. We've been really pleased with how well that business has been retaining its enlarged customer base from the second half of last year when we saw migration of retail punters during the strict COVID lockdowns. We stepped up investments in generosity in Q1 ahead of the AFL and NRL season start, and will continue to focus on customer retention in the coming months. In international, as expected, revenue declined given the guided headwinds, which impacted the quarter. Excluding these impacts, revenue would have been up 6%, demonstrating good growth in our key focus markets against elevated period of engagement during the prior year. We hope to complete our acquisition of Sisal in Q3 and look forward to the increased diversification and larger footprint in the key regulated market it will bring to the group. As we look to the remainder of 2022, growth on our group ex U.S. business will be weighted more towards H2 when you factor in the Q2 comps we face. We're also excited about the ballot initiative in California. I'm sure you don't need me to tell you the GDP is bigger than the U.K. And with that, we'll be happy to take any questions. [Operator Instructions] Matt, over to you.

[Operator Instructions] And the first question is coming from Michael Mitchell.

Two, if I could. Firstly, just to go back to competitive dynamics in the U.S., if I could. And I think a lot of people will find that the cadence of U.S. losses reported by one of your peers overnight through the quarter, both in terms of the losses in Jan-Feb, but then also the moderation in March, quite interesting. I just wonder, could you comment in terms of what you're seeing in the U.S. market today and how customer acquisition and customer economics fare post the Super Bowl? That's the question number one. And then secondly, if you could help us a little bit just with your U.K. online bridge. Obviously, down 26% pro forma for Tombola. I think you mentioned underlying growth more like 19%. I'd be interested in any color you could provide in terms of how you're assessing the underlying performance of that division and how you think it compares to the broader market?

Thanks, Michael. Jonathan will pick up the U.K. point in a moment. With regards to the U.S., look I'm not going to comment on what our competitors posted overnight. But what I would say is we're very pleased with what we're seeing in America at the moment. We have -- I think we've got sort of 2 market dynamics we're seeing in the U.S. at the moment, with what's going on in New York and then what we're seeing happening across the rest of the U.S. If I talk about the rest of the U.S., first, we are continuing to push hard on driving some customer acquisitions. And we're very, very pleased with the acquisition costs that we're seeing and the lifetime value dynamics that we're also seeing. It's giving us real conviction, and we're leaning in very heavily to acquire as much business as we can. There have been some state launches that we had anticipated would have happened by now but they've slipped back a bit, but we're continuing to push really hard around acquisition. Other people seem to be stepping back because I think they're finding the dynamics a bit difficult, but we are seeing continued big opportunities and are really leaning very hard into it. Interesting, if you look at it on a sort of post Super Bowl basis, we believe that the marketing intensity we're seeing and the generosity levels have stepped back more significantly this year than we've seen them in previous years amongst our competitors. I don't know whether that's because people are trying to sort of prepare themselves on their own path to profitability. We have not stepped back to the same degree as our competitors have because we have very, very good capped LTV dynamics, and we're leaning in as hard as you can to take advantage of that at the moment. I think the other piece that I'd reference is New York. And clearly, in that market, with the level of taxation, we're seeing a sort of more graduated version of that with competitors pulling back their levels of generosity in the market. And to some extent, we've done something similar. The one thing I'd highlight in New York is that we have seen a much faster penetration of our DFS space in that state than we've seen in any other state. And basically, that's given us an even bigger acquisition cost advantage than we've seen anywhere else. And we think that's going to set us up very well in that state, if there are no subsequent tax changes. And clearly, people are going to have to learn in that state to live with much lower levels of generosity throughout operators to have any chance of making any sort of contribution.

Michael, just on your second question, obviously, we had in the release, U.K. and Ireland 20% on a pro forma basis, including Tombola, in both periods were down 26%. You then adjust for the safer gaming year-on-year up GBP 30 million, sports results of about GBP 16 million and then take our Oddschecker for GBP 7 million gets you to underlying on a pro forma basis, minus 19%. Within that, we've got 2 impacts we can see very clearly. One is the average player days and the second is the sort of spend per customer, either staking or gaming spend per customer. We see a sort of continuation of the trends we saw in Q4. Obviously, we're against some very tough comps a year ago in terms of both APDs and spend per customer. But we would, at this point, see ourselves trending more in line with our pre-COVID sort of level of activity, both in terms of APDs and spend. So we see sort of a more normalized level of activity coming through. And we think what we've seen is probably reflective more broadly as the sort of aggregate of what's been announced by our competitors in the recent Q1 statements. So very much APD and spend driven, consistent with pre-COVID times.

And the next question is coming from Ed Young.

Two questions. First of all, I hope you can just give a bit more color on California. You mentioned it there. How do you assess the prospects? Should they -- seems just to be validated, but the prospects rather than competing ballots in terms of getting the right one through, as you would see it? And then the second just on international growth. You mentioned this prior year [ year's ] growth, but actually still up decently actually quarter-on-quarter. Can you perhaps help split out some of the geographic mix? Understand what's just been driven by Brazil, Canada, India, et cetera. Can you give us an idea of how big they are now within the divisions, so we can think about what kind of growth we're seeing there to offset some of the slower declining products like poker?

Yes. Ed, look, we're very excited about the Californian situation. Clearly getting to this stage was not straightforward, and we're very, very happy to be on the ballot. We've got a best-in-class campaign team. We've had significant levels of funding. And I'd flag that ours is the only ballot of very hundreds of millions of dollars in tax revenue targeted at mental health and homelessness solutions, which are real critical imperatives in the state. It's not impossible that our ballot could be passed and, for example, the tribal retail-only sports betting issue could also be passed. So they're not mutually exclusive. We're doing everything we can to ensure that ours will be successful. If the referendum is successful and California adheres to our sort of the expected sort of time table, we'd anticipate that the state would launch in time for the 2023 NFL season.

Ed, in terms of your question on international, if I look at the sort of the growth markets, so our key sort of focused growth markets, we've got some really strong double-digit contributions from Canada, Georgia, Armenia, Italy, Brazil. One of our other key growth markets is Italy, but obviously, we've got the Sisal deal coming through and while that didn't exhibit growth in the quarter, that's obviously, for recognizable reasons, given the changes in the marketing legislation over the last year. So those kind of -- those sort of 6 markets would make up just under 1/2 of the sort of revenue of the international division, and most of those are growing strongly or the Italian one where we've got the Sisal deal upcoming. So we feel pretty good about the spread there in terms of what's coming through. Obviously, we get to the point through this year when we start to lap the comps and we get -- are feeling very good in terms of Germany and Netherlands will come out in H2. And we're certainly hopeful that what we'll see is the international growth translating into positive growth and on sort of quarter-on-quarter equivalent basis as we get through the year in international, and I think the guys are doing a great job there of growing in these key focus markets.

The next question is coming from [ Clark Langdon ].

I wanted to follow up maybe really quickly on Ed's point. To your -- the point about these ballots [ and tribes, ] that's not necessarily being mutually exclusive. How might that actually work if both did pass? Would it impact your ability to sort of launch in an optimal or maybe sort of most competitive capacity? And then second question I have is on customer economics and products. your payback period improved to 12 to 18 months in the U.S. And I wondered if you could help us understand what's driving that maybe with regard to player engagement as a component. Are you seeing any changes or maybe evolution of usage or debt mix between things like single games, [indiscernible] and in-game?

I suspect it's very early wherever you are. So it's almost let's get even. But in terms of the ballot initiatives in California, it's quite hard to be too hypothetical about it. Ours is obviously an online-focused initiative. There's a tribe one, which is focused around retail. So you could see how that both of those could be passed. Clearly, we need to just see what happens in the next steps, hope that goes through legislation. But we're very excited about the opportunity in California. In terms of what we're seeing around those sort of customer economics, and we've shared with you where the CPAs are and where we're seeing our sort of payback, but what is it that's driving that? I think, first and foremost, it's because of the quality of our product. And if we look at the feedback we get from our customers, if you look at the sort of levels that we reach from a download perspective, we know that we are ranked as one of the best products by people like Eilers & Krejcik, and that's really, really important to make sure that the product meets our customer needs. But more than that, we get the benefits of a lot of our own proprietary risk and trading capability and tech. And so things like this, the Same Game Parlay product means that we're able to better monetize our revenues than our competitors, and that makes a big difference in terms of the lifetime values that we see. And compounding that benefit is the fact that we see very high levels of retention. And it's really hard to look at the year-on-year sort of revenue profiles of customers because COVID adds a lot of noise. If we look at other markets like Sportsbet or Sky Bet, really, I anticipate that as the years go by, the cohorts of customers we've acquired would increase in value. And we don't see any reason why that wouldn't be the case in the U.S. as well. And that's because of the great products and the retention that we get from customers using our products. And look, we're seeing that in -- you can look at the weekly data in New York, and you see that customers may have taken advantage of free money from some of our competitors that they've now migrated to the best product, which is FanDuel.

The next one is coming from James Rowland Clark.

I just wanted to first ask on Australia, where you're seeing really good momentum in staking so far this year. And you also point out the structural improvement to the win margin there. Could you just talk a little bit about the drivers of that win margin improvement? And also, should we be penciling in potentially sort of 11 -- or north of 11% into our models? And then secondly, on Australia, again, can you just help us a little bit with marketing trends year-to-date and how that compares to the market in general?

James, in terms of win margins, I mean, what we're seeing is we thought that the sort of the multis mix was probably going to continue to sort of slow at a certain point, but we aren't seeing that. We're seeing a continued trend in terms of the growth in multis and actually, we've had a really successful start to NRL, AFL season. And we continue to see the penetration improving there. So that's one of the things that really drives -- it pulls staking back a little bit, but it drives up the margin. And we -- over the last couple of years, we've delivered a sort of net rev margin of 11 -- just around 11%. We'll see where we end up this year depending on the competitive dynamics. Particularly, we all know that the spring carnival is the big time, which can drive some margin movements depending on the aggression in terms of generosity, et cetera. So look, we'll see where we get to the -- at the end of the year. We've obviously got, in the next 2 quarters, some really tough comps coming in Oz, because we've got the sports results in Q2 in the prior year were very positive. And then in Q3, we had 60% of the population in all locked down. So we had a very positive sort of activity level in Q3 last year from those lockdowns. So while we're really pleased with the performance of Oz in Q1, it does have a couple of tougher quarters coming in terms of the comparatives, but we think we're well set for the year at this point.

Yes. James, in terms of your question around the marketing trends and stuff. I think it's -- there's a lot of -- there's been a lot of benefits that the sports background has had in the market. We know that we carry very high sort of top-of-funnel awareness amongst customers and noncustomers. And I think that's been a very important component in the strength of that business, targeting the recreational customer base. And so getting the mix right between above the line, generosity offers, the strength of the brand, highlighting the continued depth of product innovation. So things like the Bet With Mates product, which we've got out there, the continued involvement we've had at the multi-products, which we should provide as something that was launched years ago and we're still iterating and benefiting from it. So I think there's lots of very positive things that the team are executing on really well in that market.

The next question is coming from David Brohan.

Just one question for me. Just in terms of the Netherlands, could you provide an update on your licensing efforts there and what the kind of current thinking is around timing?

David, look, we are obviously in the process of going through our license application and we expect probably to come through slightly later than anticipated back end of this year, so early 2023.

[Operator Instructions] And the next one is coming from Richard Stuber.

Just 2 quick for me, please. First of all, could you give any color on how DFS performed in the U.S. in the first quarter, particularly in New York given the launch of that market and whether it's cannibalizing online sports betting? And secondly, could you just tell us why Sisal slipped in the quarter? It looks like it was Q2 guidance before; now it's Q3 and how sort of confident are you it will be closed in Q3?

Yes. In terms of sort of the DFS performance, there has been some cannibalization. We have seen, for example, in New York the fastest level of penetration we've seen in any state of the DFS space, which inevitably has some impact on the performance of that business. COVID had also had quite a material impact on DFS as well. Because if you picked players for your lineup and then their [ air food ] COVID, which happened a lot and at quite sort of late [indiscernible], that also impacted people's sort of lineup. So -- but I think the important thing for us is the very strong performance that we've seen across our sports business. And DFS is clearly giving us a very material advantage around our customer acquisition costs in the states. With regards to your second question around Sisal, it's always very difficult trying to sort of put a pin on the precise point when the antitrust authorities are going to approve a transaction. Particularly, business in Italy, where we were not entirely sure whether the European or Italian authorities would [ came ] to jurisdictions for the approval. So we hope that the transaction will be approved in early Q3, which is obviously not far from Q2. So the extent to which those things sort of move around a few weeks and switch it between quarters.

Next question is coming from Kiranjot Grewal.

Just 2 questions for me. Firstly, just following up on the Italian acquisition. Are you able to comment on the recent developments and the timing regulation at all? And what you think could be coming in the upcoming reform? The second question is more around win rates in the U.S. Are you expecting an improvement through the year as the states mature and the further growth in the mix of Parlay product are in play?

I'm going to take the second first. Obviously, look we -- we obviously had some pretty negative results in Q1 and actually, when you -- we had about 175 bps of negative results, and we have some pretty punter-friendly results coming through in MBA. We had some big Same Game Parlays, which clicked that actually we gave a bit of money to a lot of punters and some of those clicks. So in a way, that was a good thing. We certainly are seeing the penetration rates continue to be really strong in terms of the Parlay product. Particularly MBA has been really strong. And we'll see how that develops through the year. I mean what we've seen in other markets is positive development over time in terms of the Parlay product and the U.S. punters seems to really love it. So we'll see where we go. We're not promising anything at this point. But we feel that we're continuing to make good improvements in the product, in our pricing and now actually, we've priced all of our college basketball for the first time in-house 100% this time. So again, the pricing accuracy and retaining all of that margin in-house is another thing that just helps us. So we'll continue to take more and more of our pricing in-house. And hopefully, we'll see those -- that product mix improve over time.

I mean the other thing that's also, of course, important to think about from a margin perspective, and people sometimes forget about this is the impact of the Super Bowl and the very considerable volumes we have with the way in which we use that as a customer acquisition platform does impact the sort of perceived margin in February and so distorts market shares. But we all get that.

Yes. I mean as an example, we're obviously at 28% of GGR in New York in Feb, and 51% in March, and you'll have seen Arizona maybe overnight with a low GGR share at, I think, around 6%. But again, after February share, and we're very comfortable with that given the offer we have in the market. And you'll see that's a historic trend that we've had for the last couple of years of Q1 being marginally pulled backwards from that share of offer we've put out around Super Bowl.

And with respect to the -- any potential changes in the Italian regulatory position. I mean clearly, there's always a lot of sort of conjecture around how things could evolve and tax changes and things and we're staying very close to that. But there's nothing that we are aware of that's concrete at this stage.

The next question is from Simon Davies.

Two from me, please. Firstly, can you say anything about the impact of your introduction of deposit limits among 25s? Has that been in line with your expectations more or less? And secondly, can you just talk a bit about customer churn in the U.S.? Any evidence of a pickup in churn rates, given some of the promotional activity going on there?

Look, the -- I think if I take the under 25 deposits limit, I mean, I think you've got to remember that the number of under 25s we have in our base is quite small. So any impact is going to be pretty immaterial for the U.K. as a whole. And so, look, whilst we've done the right thing and it is having an impact amongst that group of customers, it's immaterial for our U.K. numbers, albeit, I think it is still a very important measure that we're in.

I mean it's one of the least impactful in terms of the SG year-on-year impact of the ones that we've met.

With regards to sort customer churn, I think I alluded to this earlier when I was talking about the year-on-year growth in revenues that we see from cohorts in the states. We're seeing very, very good levels of retention. In fact, I think it's one of the things that's really helping to contribute to the very strong lifetime values that we're seeing from customers, that we're seeing really good engagement and repeat engagement with our customers. And so I think whilst there are quite high levels of churn in the market as people avail themselves of some of these sort of free offers, amongst our customer base, we're seeing people on our platform users, they sometimes, I think, taking advantage of other people's free money. And that's -- the reason for that is it's the strength and quality of our products.

And do you have any data on the average number of accounts customers are having in the U.S.?

I don't have anything to hand I'm afraid. Sorry about that.

I mean one of the -- Yes. I mean, obviously, when you look at the early adopters who are taking up these offers and if you -- back to the point on New York, clearly, people are taking advantage of the several offers they can get their hands on, and there have been some very generous ones as evidenced overnight by some of the cost to some of the players. And basically, we are all buying the right to get the consumer to try our product and then the consumer is going to, when the market settles down, determine which product they really like and who gives them a suitable level of generosity and that's what we're seeing playing out. And I think the early adopters may end up with more of the products because they want to avail themselves of these great offers while they're available, but we'll see how that transpires as the market moves into the fast followers and then, at some point, into recreational.

Ultimately, though, the stats we've shared with you in the past in terms of the impact of income in year 2 compared with year 1 appear to be sort of being maintained, although it's quite hard to get a pure read on that because of some of the COVID impacts. Well look, thank you very much, everybody. I think there's no further questions. I appreciate your time this morning and particularly those of you who got up very early in the States. Thank you very much indeed.

Thanks, all.

Thank you so much, [ dealers ]. Thank you, everyone. That marks the end of our conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.