Flutter Entertainment plc (FLUT) Earnings Call Transcript & Summary

Good morning and welcome to the Flutter Q4 Trading Update hosted by CEO, Peter Jackson; and CFO, Paul Edgecliffe-Johnson. Please note, this conference is being recorded. [Operator Instructions] I will now hand over to your host, Peter Jackson, to begin today's conference.

Thank you, Jess. Good morning, everyone, and thank you for joining our Q4 trading update call. With me this morning is Paul Edgecliffe-Johnson, our CFO. Hopefully, you've had a chance to review our trading statement this morning. As we move towards our U.S. listing, we will, of course, be starting these calls with standard disclaimers. Whilst we're not U.S. listed just yet, we do have a couple of upfront comments to make today. Ahead of our expected U.S. listing on the New York Stock Exchange on the 29th of January, we are still in an open application process with the SEC. This precludes us from being able to directly reference EBITDA either in the statement or on the call today. Today's release is a brief trading update under IFRS. Our full year 2023 results will be reported on the 26th of March under U.S. GAAP and in U.S. dollars. We will also provide 2024 guidance at this time. A reconciliation of our historic results between IFRS and U.S. GAAP will be made available before our full year results to help you understand the basis of our reporting going forward. Now moving on to Q4. We were very pleased with the underlying performance in the group as the Flutter strategy delivered strong AMP growth of 12% and revenue growth of 15%. In the U.S., FanDuel retained its clear #1 sportsbook position with a 43% GGR share and a 51% NGR share. FanDuel Casino continued to go from strength to strength as we delivered on the strategy to improve our gaming proposition. It took share in Q4, accounting for 26% of the market. The underlying momentum in the U.S. business remains very strong. AMPs were up 33% with sportsbook staking up 53%, and iGaming up 49%. Revenue growth of 26% reflected a well-publicized impact for very customer-friendly sports results, amounting to $343 million largely on NFL gains in November compared to the bookmaker-friendly results in Q4 2022. The nature of our business means that there are periods where the outcomes swing in our customers' favor as we saw in the U.S. in November. This can cause variability when looking at shorter time periods. Though reassuringly, if we look across all of 2023, our actual margin was just 50 basis points for our expectations. And in 2022, it was 10 basis points ahead. Taking into account the impact of sports results, we anticipate the U.S. revenue will be $225 million or GBP 147 million, lower than previous guidance, and that this guidance will drop through to adjusted EBITDA at approximately 35%. Outside of the U.S., Q4 trading was in line with our expectations, leading to an anticipated full year performance in line with the guidance provided at Q3. This ex U.S. performance was driven by very strong momentum in the UK&I, supported by recent product enhancements as well as international growth driven by a good performance in our Consolidate and Invest markets. We completed our acquisition of MaxBet at the start of January, adding another local hero to the Flutter portfolio. Overall, we look forward to 2024 and the strong momentum we are taking to the start of the year gives us confidence in our outlook for the year ahead. We are very excited to add our U.S. listing on the 29th, subject to SEC clearance. The additional listing will enable us to access deeper capital markets as well as making Flutter more accessible to U.S. investors and marks a new chapter in the history of the Flutter Group. With that, I'll turn it over to Jess for Q&A. This is a brief trading update and, therefore, we only have 30 minutes for questions on the trading update itself. We're unlikely to get to everyone as a result, and the IR team will be on hand to help with any follow-ups.

[Operator Instructions] The first question comes from the line of Ed Young from Morgan Stanley.

Two questions on the U.S., please. The first one is your expected margins were up 200 basis points quarter-on-quarter to 13.5%. Could you talk through the drivers of that change? It's well above your 12% 2025 gross win margin target. Should we think about that kind of 13.5% level being achievable in Q1 or in 2024 generally? And if not, why not? And then the second question is, your 35% drop-through you referenced is quite a low number, the whole related revenue shortfall. Can you just sort of remind us and talk through what kind of flexibility you have in the business around investments? What kind of mitigations you made in response to November results? So if there's anything you've done in any way to impact the revenue or profit potential of the U.S. business heading into 2024?

Thanks, Ed. And yes, look, we were very pleased with the results overall and really pleased to see the expected margin up by the 220 basis points. And we've been growing over the years our expected margin and that's -- the capabilities that we have in risk and trading, the very strong market share that we have in the parlay product, which we know we're the most famous for and that does have a higher margin for us. Q4 and Q1 are the biggest sports quarters, as you know, and they're biggest in the sports that we are biggest in, so they are our best quarters from a margin perspective. It won't be a performance that we can replicate every quarter, certainly not at the moment. And we'll have to see what happens in the first quarter. We can't talk about 2024 right now, as Peter referenced. We're very pleased with that. And it doesn't mean that over time, we can't get there. We talked at the Capital Markets Day as to what our margin targets were, and we are beyond that now. And certainly, we will continue to push. But as I say, very pleased with that 13.5%. In terms of the drop-through that we always had a few levers to pull, and we can think about how much we want to invest back into the business. Customers did very well in November, as Peter referenced. And that's sort of an element of generosity. So they have money in their pockets. Perhaps had we not seen that, might we spend a little bit more perhaps. We always have to take a view on that, as you would expect. But really pleased with the results overall.

I mean, I think, the other point around investment we're making in the business is making sure that we have the right size of infrastructure for the business that we're going to become. You can see the level of growth we are exhibiting in the States. We don't see that slowing down anytime soon. And we think it's important to continue to invest in the infrastructure that supports the scale business that we are and indeed are becoming.

Your next question comes from the line of Clark Lampen from BTIG.

I've got 2 on the U.S. also. Peter, I guess, as we think about sort of fairly strong underlying exit rate of growth for the U.S. business in 2023 and if we were to juxtapose that, I guess, against the sort of medium-term U.S. outlook that you guys have provided previously, I'm curious whether it's fair for us to conclude that the underlying performance in the back half of the year has been stronger than you were expecting or are there headwinds to growth that you might sort of remind us of here. And then, Paul, second question, sort of as we think about that same sort of reference point with the medium-term U.S. outlook, could you remind us what's baked in, I guess, at least directionally for the major KPIs like gross win margin, market share and the promo rates?

Clark, I have to say it's always admirable when you get up in the middle of the night to join these calls, so thank you. Look, I think we -- obviously, we're very pleased with the performance that we saw in Q4. It's worth remembering that our business from a sport's perspective has a degree of seasonality. Q4 and Q1 are always going to be the busiest periods for us. Actually, even within Q4 that, that period where there's a strong push at the beginning of the football season to make sure we sort of reactivate and reengage customers. I think from my perspective, what I look at is the level of AMPs engagement that we had through the back end of the year, 4 million customers on the platform. Also seeing very strong momentum in casino as well as we execute on our strategy to move ahead of the pack from a product perspective and hope to see further gains in that area as well. So I think the business is trading well. Q4 was a good reminder for us that margins can be very -- sports results can be very positive and negative. And it was also a quarter where there's lots of competitive intensity as well. But I think we showed the strength of our brand, our products and the customer engagement that we had to finish the year very well and all as well ahead for the future.

Look, in terms of the future, Clark, and the framework that we've set out before and how the numbers translate through, it is all translating through very much in line with the framework. We're not talking about the 2024 guidance today, that will come in March. So we'll put out our full year numbers in full on 26th. And we are restricted, as Peter said, as to what we can say today. But we're very confident in the framework, we're seeing really good exit momentum, and we're very confident in the business.

Your next question comes from the line of Paul Ruddy from Davy.

Just 2 quick ones. Firstly is just on the November win margin. Do you get any sense that there's kind of any inherent higher level of volatility in the win margin owing to the fact that you have a structurally higher margin, i.e. kind of more parlay or lottery-type products? Or was November just that kind of a one-off-type event? And the second one then just really quickly is just on casino share looks particularly strong. And is that boosted in Q4 by your cross-sell from sports being given it's the strongest quarter from a sports perspective? Or is it more to do with project enhancements? Any kind of color around that would be helpful.

Why don't I talk to you on the casino piece, and Paul can come back to you on sort of the volatility around the November margins. Look, I think if you look at the gains we've captured here, clearly, a lot of points of share growth year-on-year. We believe a lot of that has actually come from the customers who are solus gaming customers rather than cross-sell. We've always been very strong in the cross-sell sphere because that's obviously where the sports business has given us a leg up. But then product enhancements that we've made, the changes we've made to the product, the branding, the positioning, the daily free-to-play mechanics, the titles we have available on the platform contributed really enhancing the quality of the product for those solus iGaming customers and that's where we've seen the growth come through. And I think we've been taking share from some of the pure-play effectively casino businesses in that area.

Look, in terms of the win margin and the variability that we could see there, the way I look at it is that we are taking a very high market share of the product that our customers like most and where the biggest growth is and where actually the highest margin is for us, and so that's incredibly good news for us. It does mean that when you see some unusual results, that will have an unusual outcome for us. But across the year, taking significant market share is going to be very valuable for us. And if you look at the biggest game for us at the end of November with Cowboys and the Seahawks, there were some unusual outcomes there. But that was great for customers who bets on that and really drives their interest and so all goes very well for the future.

Your next question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group.

Curious on Brazil, what the strategy is going forward there with new legislation. Is it [ govt ] established brands like Betfair where you already have a toehold? Or is it the local hero strategy that you've done in many other markets? And then secondly, just want to say on the iGaming, a lot of momentum there. And I think it's often an underappreciated business for how strong and impressive results you have relative to just how good you are in sports. But any additional product innovation in the pipeline or pockets of targeted iCasino first players that you think you can drive further share gains there?

Ryan, let me very briefly just deal with those two. I mean I think from a Brazilian perspective, we've been very pleased with the performance of the Betfair and PokerStars brands in the local market. And look, it's been some time coming, but we hope at some point, the regulation will be signed in Brazil. If you look at our approach to markets around the world, we have always been focused on organic growth and that's something we've been doing in Brazil. But we've also used M&A as well as a means of cementing positions on the podium and trying to achieve that gold medal position. So I think you shouldn't be surprised if we continue to push from an organic basis and also contemplate where there are other ways of increasing our scale in the market. And from an iGaming perspective, look, we're following the strategy that we laid out at the Capital Markets Day. We said in the first year, there were things that were broken and we're going to fix. We said in the second year, we get to product parity. And then the third year, we get ahead of the market. We're in the third year. We're going to get ahead of the market. And I'm not going to tell our competitors what we're about to launch, I'm afraid.

The next question comes from the line of Daniel Politzer from Wells Fargo.

First one, quickly, what were you baking in, I guess, originally as you gave your guidance a few months ago in terms of the improvement in structural hold sports outcomes and promotions? And you just say that because I believe that in the third quarter, your structural hold was up 80 basis points year-over-year, so this is a big acceleration. And then your promos came down, I think, a little bit. So I'm just trying to bridge what were those expectations a few months ago versus where you came in this morning.

Was there any follow-up, Daniel? Is that the only question you got? Sorry.

Yes. And then in terms of just the follow-up, I mean, maybe you can talk a little bit said about the promotional environment over the course of the quarter. Obviously, ESPN came to this market and then maybe your expectations for 2024 with BetMGM viewing in 2024 as a reinvestment year. And that's it for me.

Thanks, Daniel. So look, the expected GGR that we saw was stronger than we had anticipated and we're really pleased with that. But as we've talked about before on the call, seeing the very high parlay penetration coming through is very encouraging. And what's also really encouraging is the promotional environment and we did spend a little more than we spent last year across the course of the year, but this wasn't a step up in the fourth quarter. And this is our plan because we see that we can acquire very attractive customers. As you know, we have great data on our customer cohort and the returns we make from them. So continuing to invest into that allows us to continue to grow the business. If you look at how we're growing the AMP, how we're growing the margin, it's all stepping in the right direction sequentially. So no meaningful increase in promotional spend and a little ahead on the GGR percentage versus our expectations, but nothing massive.

The only just -- the only thing I just -- to make sure we could come back on all of your questions, Daniel, is the question around what we had in our guidance at the Q3. Clearly, you can see the strength that we're seeing in our gross win expected margin. And you can see that the gap of the $343 million and how that compares with the $225 million, you can see that the variance is largely higher in the expected margins.

Your next question comes from the line of David Brohan from Goodbody.