Flutter Entertainment plc (FLUT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Flutter Entertainment Third Quarter Update Call hosted by CEO, Peter Jackson; and CFO, Jonathan Hill. [Operator Instructions] Thank you. I will now hand you over to Peter. Please go ahead.

Thank you, Ben. Good morning, everyone, and thank you for joining our Q3 trading update call. With me this morning is Jonathan Hill, our CFO. Hopefully, you've had a chance to review our statement this morning. So I'll just touch on some key points. The group delivered a strong third quarter with pro forma revenue and player growth of 11%, driven by continued strong momentum in the U.S. and our consolidate and invest international markets. In the U.S., we delivered another record quarter with revenue of $700 million, up 82% year-on-year. We had an excellent start to the NFL season with sportsbook revenue up 150% and customer returns remain compelling, with a payback period predicted to be less than 18 months for those customers acquired in September. We continue to innovate our market-leading products with Same Game Parlay Live launched in September, and we're now averaging over 1 million customers each NFL Sunday. This strong performance continues to underpin our confidence in delivering a full year EBITDA profit in the U.S. in 2023. In our overall group ex-U.S. business, we continue to expand our recreational player base with AMP growth of 6%. Pro forma revenue declined 6%, reflecting anticipated challenging COVID comps we faced in Australia and the concluding stages of the European Football Championship in July 2021. By ex-U.S. division, in the U.K. and Ireland, online player volumes were in line year-on-year on a pro forma basis, while revenue was 4% lower. If we exclude the closing stages of the European Football Championship last year, sports revenue was flat year-on-year despite the fixture cancellations and a slower start to the football season given the mid-summer start. And we eagerly await the kick off of the World Cup later this month. It's a great opportunity to acquire recreational sports bettors and retain them through the subsequent domestic season. Our gaming business continues to perform well, growing 5% in the quarter, driven by player growth of 9%. In Australia, player volumes of 1.1 million were 1% ahead of the prior year. Revenue was 21% lower, primarily driven by challenging COVID comps, when 60% of the population were locked down during Q3 2021. We also saw significant weather-related disruption to racing which led to cancellations as well as poorer quality race meeting due to the extreme conditions and the smaller field sizes. Despite this, however, we've been pleased with the underlying momentum into Q4, with player volumes at the Melbourne Cup last week and across the entire spring carnival period growing versus the prior period. In international, we completed acquisition of Sisal in August. Sisal has continued the strong momentum as shown across the first half with revenue 19% higher on a pro forma basis in the quarter. The record SuperEnalotto, which is currently at EUR 300 million, is helping to drive online customer acquisition with a record 550,000 online players in Italy in September. Our consolidate and invest markets now account for 78% of the division's revenue and grew 15% in the quarter, providing the division with strong momentum into 2023. As we look to the remainder of 2022, we are increasing our revenue guidance in the U.S. by $100 million at the midpoint, reflecting the fantastic performance seen across Q3. The additional revenue will help fund the launch in Maryland later this year, a state we originally expected to launch in 2023. This means U.S. EBITDA losses are in line with previous guidance in local currency but slightly higher in sterling due to movement in the exchange rate. Group ex-U.S. EBITDA guidance is expected to remain within the previously guided range of interims despite some fixture cancellations in Q3 and a continuing weaker retail outlook in Ireland. This guidance reflects current consumer trends we are yet to see any discernible sign of a slowdown in spend. Before I finish, there are a couple of additional topics I just wanted to touch on. Firstly, although the results are not yet in, the polling indicates that California is very unlikely to pass our initiative to legalize a competitive online sports betting market on this occasion. As we think about the U.S. market longer term, we find it hard to see a scenario where sports math state like California won't have access to what will be legally available in so many other U.S. states. Secondly, we're delighted with last week's ruling in our arbitration with FOX. With FanDuel valued at $20 billion in December 2020, it clearly vindicates the patience we've shown on this matter. Should FOX wish to go through the onerous licensing process for the 16 online states in which FanDuel is live, an exercise option, it will cost them $4.1 billion as we sit here today. Clearly, this buying is reflective of FanDuel's #1 market position, and we are really excited about our Capital Markets Day in New York next week, where Amy and the team will share the drivers of our success and just why is it so hard to replicate. And with that, we'll be happy to take any questions. As usual, I will kindly ask you to limit yourself to 2 questions each to start with. And then if we have time, we'll be happy to take any follow-ups. Ben, back over to you.

[Operator Instructions] And with that, we will proceed to our first question today coming from Michael Mitchell from Davy.

Two on the U.S., if I could. I'll start with customer economics. The statement refers to improving customer retention rates. And I think your opening message was something similar, Peter. I presume that means that we're looking at a situation where customer lifetime values have been higher than anticipated. And if so, I wonder could you also update us on the other part of the equation, namely CPAs and whether the ratio between the 2 actually improved in the period. So customer economics, question number one. And question number two, in terms of your Q3 U.S. margin, obviously, up in excess of 200 basis points. Feels like there were some sports results benefit there, but clearly also an improvement in your expected margin. So I guess, could you just talk about that improvement in the expected margin and the extent to which we should be thinking about expected margins being in that range, maybe kind of 8% going forward, given what you're seeing in terms of penetration of higher-margin products?

Michael, I'll take the first question. Jonathan will pick up on the margin point. So look, your point about the sort of customer economics, and we've talked regularly about the sort of acquisition costs, the lifetime value dynamic that we see and wanting to keep ourselves in that 12 to 18-month payback period. We are continuing to see very strong levels of retention amongst our customers. When we look at the benefits we're seeing in the higher lifetime values, some of that is driven by improvements to retention rate. Some of it's driven by higher levels of cross-sell into gaming where relevant. And of course, there's also the sort of frequency margins, another point that Jonathan will come to. When we look at our CPAs, we remain very disciplined in our approach and focus to marketing. And look, this is something we'll definitely be talking a lot about at the Capital Markets Day next week. I think you'll have Amy and Mike and other members of the team. And I think we do a great job in acquiring very large volumes of customers and disciplined approach that we have. That's what helps keep the CPAs under control. And as we get closer to exiting 2022, it's obviously very important we build up our large customer base to give us this confidence around getting into profitability next year, and that isn't indeed the case.

I'll just add one point to that. And as we think about Q4 and what we're seeing in terms of customer economics and then I'm sure we'll touch on it later, U.S. guidance, but we see the opportunity to continue to invest aggressively in existing states, to build the business as we go into 2023, to give us even greater confidence around that EBITDA positive result that we're aiming for in 2023. So in terms of the sportsbook and the margin, Michael, I'd make a couple of points. Obviously, as we said in the release, up in terms of online sportsbook by 150%, you saw stake is up 83%, and that's primarily very similar to the sort of growth in AMPs that we had in the online sportsbook. So a really, really strong result there in terms of underlying AMP growth. The vast majority of the improvement year-on-year is actually structural margin improvements because we actually had positive sports results both this year and last year. They're slightly higher this year than last year, but then we've given a little bit more back-end generosity than we did last year as well. So those 2 things are relatively -- sort of relatively knock each other out. So primarily, this is about underlying expected margin growth from the growth in parlays and the bet mix.

Our second question comes from Clark Lampen from BTIG.

Jonathan, maybe I can follow up on that sort of latter point you were making. And I guess with easy and competitive dynamics, I'm curious if that might enable you as you move forward with new launches to be a little bit more efficient with upfront spending, if it is you and maybe your next closest competitor that are most, I guess, aggressive in new launch spending? Does it perhaps, I guess, enable you guys to capture the same level of customers with lower spending overall? Or do you expect that, that situation might be fluid in any way? And the second question I have is on profit guidance. You talked about an expectation for profitability next year. Is that consistent versus prior periods where that excludes costs from new launches? Or is that now maybe a pro forma number given the bettor visibility that we have around Maryland, Massachusetts and Ohio?

I'm going to deal with the second of your points first, Clark. It includes -- we've always been consistent about how we've talked about this. It includes state launches and any cost of any state launches. It is EBITDA after share-based payments. So it's a proper EBITDA measurement of profitability of the entirety of the P&L. So hopefully, that's really clear. And that's the same definition and the same way, I think, we have explained it. And it is for the full year financial results for the 12-month period as opposed to a month, quarter or a third Thursday in November. So just to be clear, it is for the full year period. In terms of your first question, I think we've said in the release today, 12 to 18 months in terms of paybacks. That gives us a really high level of confidence as we invest and Peter talked about that to start with. I think that dynamic of that CAC-to-LTV ratio, we've -- I think we've always been slightly more efficient than other players in the market. And we can verify that given we own a very small player in the market and the difficulties of being subscale in this market. So we've got another comparator there. We feel that we are able to lean in and aggressively invest at great paybacks and we'll continue to do so. Peter, anything you want to add?

Yes. I mean, look, I mean, I think it's important that we continue to push hard and acquire as many customers as we can in using the disciplines that we've brought to the market. So if you look at Q3, 40% of all customers we acquired in the period were in pre-2021 to date. And I think it shows that there's good growth in the existing states. But of course, we also really focus hard on state launches because of the opportunity that we have with the pent-up demand with the strength of our brand and the product customers want to get a hands on. So we've got different playbooks we're deploying in different places we're live in the U.S. And I think the team will talk a lot more about it next week.

The following question comes from Ed Young from MS.

Mine are both on the U.S. as well, if that's okay. First of all, there are elements relating to a potential IPO that is still under the arbitrator decision, I think, you said early next year. Can you just clarify exactly what your position is around those issues and exactly what you think the arbitrator is going to be deciding on? And then the second is the broader relationship with FOX. The judgment says that you, in fact, invested disproportionate resources beyond any measure of commercial reasonableness when it comes to the investment into FOX Bet. So I guess could you cut it from its current level to reduce the losses? I think you said it was 20% losses in H1? And then more broadly, with the FOX relationship, other negotiations still ongoing? Or should we think of the arbitrator decision and then the August '23 deadline for TSG U.S. as a real milestone? Is there really anything active going on in discussions between you at the moment?

Let me pick up on those. Ed, look, I mean, I think the important point to make as we think about the verdict is I think there's a -- we're very pleased. I mean, it vindicates our patience. And I think it's great that the arbitrator has come down where she has in terms of the valuation. Look, we have obviously talked about an IPO. I mean, it's very difficult to see IPOs in the current market context. I think we tried to clarify over the last couple of days that at no point have FOX been able to block any potential FanDuel IPO. We have asked the arbitrator to help clarify the extent to which FOX will be able to participate in an IPO we want to proceed and we will get the -- we'll hear from her early next year. Jonathan, do you want to talk about sort of FOX Bet? I mean I think the -- before we talk about sort of the impairment losses what I would say is, look, we've always strived to be good partners. We're committed to making FOX Bet successful, and we've tried as hard as we can, and that's why we're putting a lot of resources in it. And there are some questions from FOX as to whether we'd really catch our side of the bargain and it's great to hear that we have been good partners and done a lot more than we should have done to try and make that business success.

And I think the other point to carry on from that is under the existing TSG U.S. agreements with FOX, we have commitments under those agreements to -- with FOX around committed spends into the FOX network. We'll continue, obviously, to honor those in their entirety as we go forward. And as you say, we'll see what happens post -- as we get to August next year, but we will honor all the commitments that sits in our commercial agreements going forwards and continue to work with FOX over as we go into 2023.

Just the only thing you didn't touch on there, if it's possible is, are there -- do you continue to talk? Or is this really kind of going through external decisions to delineate the future relationship or is there a potential you could come to some agreement that would be outside those pipelines? Just any sort of color you're able to give on that will be useful.

Ed, there's always the potential to reach an agreement. And if one is possible, and it is for the benefit of our shareholders, then, clearly, we'll consider it. And we'll see where we get to over the next period with the forthcoming narrow arbitration hearing.

Our next question comes from Joe Stauff from Susquehanna.

I wanted to ask just about -- you had some comments about -- Jonathan, I think you made in particular about just the hold rates in the U.S. on the sports side. You had about 8.5% or you had an 8.5% hold in the third quarter. I'm wondering in terms of like how much of that is a structural improvement in that overall hold rate given, again, what you said product mix and so forth as we think about whether it be last year or going forward? Just wondering what you can share with us there.

I'm sorry to say this, Joe, but I'm going to leave that question hanging until next week because the guys are going to be talking about that in a detailed session as part of the Capital Markets Day next year. I would point out that within that 8.5%, there was a significant quantity of positive sports results for us. So that isn't necessarily the underlying hold rate because there's a lot of good sports results within that but I'm going to have to plead the fifth on this one and leave it until next week until the guys talk about it.

Okay. Yes. Understood. And maybe just a follow-up on the FOX relationship now. Just to clarify, if they were to unwind or exercise the option that they have, wouldn't they be required to repay Flutter at least half of the expenses that you have, at least lifetime have spent to build it up at this point?

You're referring, Joe, to the FOX Bet relationship?

Correct.

Look, I think the point is if there's a -- if there were to be a sort of overall settlement, then that will be a different commercial construct degree between the parties. And I can't foresee what the specific terms of that would be, nor would I speculate on that. So I don't think we're going to get hypothetical on this one.

The following question comes from Kiranjot Grewal from Bank of America.

Thanks for clarifying the point on EBITDA in the U.S. with the new state launches. If we could just build that up. Could you confirm which state you're expecting to launch next year within that guide? Then secondly, can we touch on the international segment. Even on a pro forma basis, the segment is doing very well. What's behind the positive performance? And can we assume that Poker underperformance has now flat lined? And then the last question is more on macro. Are there any regions that you've seen a step change in performance?

Do you want me to take the first one?

Yes, you can.

Yes. I mean we do have some expectation because we've got some pretty good visibility on the early states next year of I think it's Ohio and Massachusetts. So we would expect them to go in Q1. We had expected, obviously, Maryland to go in Q1 next year, and it's come forward. It's very difficult for us to sort of speculate on what comes in the remainder of the year. Obviously, we don't expect California within that, which would have been a massive and material investment, which is why we have that very high level of confidence over being able to deliver a positive EBITDA number next year.

With regards to the -- your question around international, look, we shared the [ regions and archetypes ] in terms of how we're thinking about the business. And as I just mentioned in my opening remarks, we're seeing good growth in our sort of invest and consolidate markets, which is a huge proportion of our revenues now in international, particularly pleased of how Sisal is performing, Junglee is also continuing to perform. So look, I think the business is in a good place. And I think the changes in investments we've made are working well for us.

I mean from my perspective, the fact that the consolidate and invest markets now make up 78% of the International division's revenue, it's fantastic. As Peter said, the Sisal performance is incredibly good. India is great. Within these numbers, clearly, we still have the headwinds, this pro forma growth. So it has the headwinds of Netherlands and Russia in there. So at certain point, we do lap those. So we're -- and as we said, that 78% in consolidate and invest is up by 15% on Q3 last year. So there's a lot of really good positives in there. And I think the guys in the international team have done a fabulous job in reshaping this business and getting real clarity on the strategy, direction and the areas where we're going to put our shoulder behind the wheel to grow it.

And Kiranjot, you sneaked in a third question in terms of the macro impact. Look, as I mentioned in the release, we're not seeing any discernible impact at the moment. I mean I think in the U.K., you see what happens with the changes around energy bills and stuff. But we should remember, our customers are very recreational-focused. Typically, people spend at least GBP 10 a week and we think they get great value from that entertainment. And so we'll see what happens. But we're confident that the business is well placed and we're not seeing any disenable impact at the moment.

Our next question comes from Jordan Bender from JMP Securities.

In the U.S., I believe your DFS business saw some cannibalization as sports betting states launched. Now that we haven't seen a state launch in about 6 months or so, can you talk about what you're seeing from the DFS business and maybe we've seen that trend reverse? And then second, for U.S. AMPs last year's third quarter included an unfavorable calendar comparison with the MBA going into July, which we didn't get this year. So AMPs might look lower. Can you give us maybe September or even October AMP growth, just to give us a sense of maybe your true user growth during the quarter?

Thanks, Jordan. In terms of your question, we -- you're absolutely right. We have seen cannibalization and kind of what we expected. We've been really pleased with the performance in both DFS and TVG being roughly flat year-on-year in revenue terms. And I think you work that out kind of from the numbers. So while there is downward pressure on those revenue streams, I think the guys have performed really well in those businesses in the quarter.

I mean I think the impact where we're seeing the cannibalization is actually in the AMPs numbers, some of the sort of more recreational types of customers and those products are switching to sports betting where they can. But obviously, as Jonathan just said, the revenues remain robust year-on-year. Look, in terms of the timing of the prior year period, it's -- and the switch around with the NBA from July, I mean it just slightly complicated the picture. But I think in general, we're very pleased with how the business performed. I'm not sure it will be fair to give obviously AMP numbers.

I mean I think the most important thing is that our staking was up 82%, and that's roughly in line with our AMP growth in online sports betting. So we're seeing it supported. But the revenue growth is driven by AMPs growth and that's the most important thing to us, but we're building a big and recreational business in the U.S.

The following question comes from David Brohan.

Just 2 questions for me. Firstly, on Tunisia, you've announced it's a solid, won the contract there just around the end of Q3. Could you give any comment on the scale of the opportunity there? It seems like a pretty attractive deal for you guys. And then just on Australia, could you just touch on the competitive backdrop in Australia as you exited Q3 and into the spring carnival period?

Sure. I'll maybe take that Australia questions, David. I mean, certainly, as you'll be well aware, we've had a material new entrant come into the market in [indiscernible] with some very, very aggressive offers. We've seen Tabcorp step up their -- the quality of their product with their new app. We've seen others being aggressive as well, but still we being. And while we've seen a great aggression from others, we're -- we feel as if we've performed well through the start of spring carnival. Peter referenced it in his opening statement on carnival day itself we -- on the Melbourne Cup Day itself, we saw AMPs up 6%. So we're very -- we really think that the team of [ land peers ] are aggressively competing with other players in the market. And I think they've done a really good job so far in the spring carnival.

David, thank you for asking the question about Tunisia because it's great to be able to talk about this. I mean it's a nice win for the team in Sisal. We'll be -- for those of you not familiar, the 12 million people in Tunisia will be live next year. We're able to offer sports betting, the lottery and some gaming, so instant wins and virtual scratch cards. We have a monopoly in the market and there are no marketing restrictions. So we're very excited about it. We're not providing details on the economics, but it will take a bit of time for the market to ramp up.

Up next is Joseph McNamara from Citi.

I'll take my one at a time, if that's okay. Firstly, do you believe you're taking share in U.S. iGaming? Any particular state to call out, I guess, New Jersey, Michigan and Pennsylvania? And then if so, what's working well there and how you're kind of getting traction?

Yes. Look, I mean I think what is important to look at is we obviously have a couple of brands operating when you think about our business in the U.S. I mean I think FanDuel has performed very well. We might have lost a tiny fraction of share just because of the lightness of the sporting calendar and the focus that our business has around sports cross-sell. But I think the team has done a nice job. We started down the path of making some of the improvements we want to make around gaming, and we'll talk to you more about that next week at the CMD. I think that's a big thing. The guys have got a section to talk you through iGaming, where we are, what we're seeing in terms of positive signs, and hopefully, you'll get some more comfort from the team next week.

Excellent. Okay. Very clear. And then secondly, could I ask about your Irish retail estate, please? Clearly, revenue continues to trail pretty significantly below 2019 levels. I'd be keen to hear your strategy here midterm. And then, I guess, how should we think about the kind of 250 shops you have in the country over the next couple of years?

Yes, Joseph, look, we -- it's worth remembering that retail in Ireland is only really sports focused. We don't have the same benefit of the gaming support that we see in the shops in the U.K. And so we are seeing a relatively weaker performance in Ireland. And in fact, we haven't yet returned to the pre-COVID levels. I think a lot of that is driven down to sort of changes in working patterns and frankly where people are actually living in Ireland at the moment. So look, we don't anticipate those things reverting back to where they were significantly in terms of working patterns, as I say. It is going to continue to put pressure on revenues in our estate in Ireland.

I think we've got a well invested and well positioned estate. We'll continue to monitor our estate as you'd expect with any retail business, but we'll also continue to monitor how the peers are getting on in this more challenging footfall market.

The following question comes from Simon Davies from Deutsche Bank.

Two from me, please. First, can you update us on trading at Tombola? How has that performed during the half? What kind of growth rates are you seeing there? And secondly, I was hoping, Jonathan, if you could give us some color around your new COO role. Is that going to be focused on driving synergies across the group? And any color you can give us in terms of what you might be looking for there?

Yes. Simon, look, for those of you who are fans of I'm a Celebrity, you'll have seen some of our advertising for Tombola. Look, it's -- we're very pleased with how the business has performed since we took it over. I mean we actually launched and ran the Britain's biggest ever bingo game, which we're really pleased with the results of last week. I think we had 175,000 current customers on -- playing that game. So the business is performing well. There's good growth in revenue and the sort of AMP level which I think I do look at this as the Tombola business and the customer base is a sort of canary in the coal mine versus to whether there are any challenges from a macro perspective in the U.K., and we're seeing no evidence of that at the moment.

And we've got a bit of international exposure as well with Tombola in Italy and in Spain and the Italian business is performing really well as well. So that's a positive. In terms of my new role, I think you're exactly right. The thing is that we have a very clear business model, which is driven around making sure that the divisions have the ability to drive profitability and have control over the levers in their business model. We are pretty effective today trying to get the benefits of our scale by having the sharing of knowledge across the group between teams that work on the same areas at a customer office or promotional spend or these type of things. There are other areas where we can drive greater benefits and we focus on those in terms of procurement and in terms of some of the sort of areas where we can do risk and trading ones, distribution of pricing ones, et cetera. So I think there's just the ability to -- Peter has asked me to concept this up -- the COO function, which will be bringing some of the existing functions, but really making sure that we're not missing opportunities and making sure we've got these things moving at the sort of pace that we need. There's also other opportunities around the future of the -- where we build out some of our capabilities. So I think there's a lot to look at, but we need to do that within the context of making sure the successful business model that we've got in place today, we don't disrupt that by creating something that holds the teams back from being able to deliver.

Our next question comes from Richard Stuber from Numis.

3 for me, please. The first, on the U.K. I think you said that pro forma revenue is down 4%. But if you sort of adjust [ 4 and 5 weeks ] of U.S. and everything, it's probably going to be sort of near or flat. There aren't many sort of RG measures now in place. So do you see sort of flattish revenue in the U.K. going forward into next year? Is that sort of a reasonable assumption? And whilst on the U.K., just lots of rumors about the U.K. Gambling Act. I know we haven't had a single question on it yet. Presumably you're a lot closer to what's going on. Have you got any indication whether it will happen this side of Christmas? And do you think it's sort of slightly changed since the draft was put on, on Number 10 desk last summer?

Richard, look, I mean, I think in terms of your question around the U.K. revenues I think flattish, I think, is probably a good place to start. Obviously, we need to see what happens with it on print paper. I can't comment on timing because I've tried to comment on it for about 2 years now and keep getting it wrong. So I don't think anything I can say will have any credibility. But look, I think it will -- I suspect it will end up coming out after Christmas because there wasn't much time between now and Christmas. And whether the newer ministers want to put their mark or not, we'll see when the paper comes out. I think in the meantime, we've got a very recreational base. And we're very -- I think that is important to remember. We're positioned on both relative and absolute basis very well with that and the changes that we've made to the business over the years.

And can I ask a second question just on balance sheet? Just assuming FOX don't exercise their option in the near term, can I just ask how you're thinking about your balance sheet and your current deleveraging profile?

Yes, sure. I mean, I think the great news as we look into 2023 is with the expectation of the U.S. being EBITDA positive, I think, the cash flows from the business will be fundamentally changed from the investments that we've made over the last couple of years. Our ability, therefore, to deleverage is clearly materially enhanced. And as you'll be aware from the disclosure today in terms of the interest costs, assuming the weighted average cost of debt on today's debt level, there are clearly marginal cost of debt within that debt stack that we would be very keen to reduce. So as we get our positive cash flows in through Q4 and into next year, clearly, we'll be focusing on, a, getting the leverage down and, b, caking out the most expensive of those pieces of debt that we can within the confines of our financing arrangements and agreements.

Thank you, Richard. Look, thank you very much, everybody, for your questions this morning. It's a busy time for us as to whether the arbitration news in FOX, the results today. And of course, we've got a Capital Markets Day next week in New York. So I hope to see many of you there. It'll be a great opportunity for you to hear from Amy and the team about the fantastic business we have in America with FanDuel, which is continuing to win and lead the market. So thank you.

Thank you for joining everyone today. That concludes your conference. You may now disconnect. Please enjoy the rest of your day. Goodbye.