Flutter Entertainment plc (FLUT) Earnings Call Transcript & Summary

All right. Thanks, everyone, for joining us this morning. I'm Jed Kelly, Senior Analyst at Oppenheimer. Happy to have Peter and Rob from Flutter to talk about recent developments in the company, what's going on into footfall, exciting time as always. So thank you, Peter, and thank you, Rob, for joining us.

And Jed, let me see. Thank you for having us. .

All right. Okay.

So we'll just dive right into it. So you reported results last week, and we saw accelerated engagement, especially around the World Cup. But the big news is the incremental promotional investments, impacting EBITDA by about $270 million you're making into FanDuel. So can we kind of dive into that decision and sort of the strategic rationale behind it?

Of course, I mean, look, we've been talking to a lot of people about this, Jed. And it's a very -- it's been a very straightforward decision for us to make. And let me give you the background to it. And the first thing I'd say is that the sportsbook improvement plan we put into place in FanDuel has been working very well. So when I think about the recent performance of the business, on a number of dimensions, I think we've been very pleased to see the progress that we're making. So whether it's the introduction of the loyalty program, which is improving average player days, whether it's actually us providing better engagement and entertainment for our customers. I think that's certainly been the case. Look, as someone who spent a lot of time in New York, you'll have some sympathy for those customers who are betting on the matches, when they were on their long losing Street, we had a bit of fun with that. We're refunding customers their money. We started the Soccer World Cup. We did that big promo around goals to be scored, particularly for the American team, but also around the group stage of the tournament, knowing that, that would give customers the winning feeling and get them excited as we're going into the tournament. So I think all those have -- from a loyalty perspective, we have great traction with the Bet Protect+ product, which then would the injury issue. And I think we've had really good traction of landing the excitement that FanDuel brings to our customers. And when I see that from a -- when I look at what's been happening from a customer perspective, if I take the NBA finals, we saw 26% more actives on a gain this year compared to last year, 40% more handled. I mean, of course, it was terrific. If you had a chance to be in New York and feel the excitement to the Citadel have that huge victory. But with that great quality content, we saw really good traction and engagement from customers. Now it wasn't necessarily the most profitable thing from our perspective, but it meant that customers have full wallets going to the Soccer World Cup. We saw 2.3 million customers engaged with us through the World Cup. 1/3 of those were customers who had reactivated. So there are lapsed customers in the football season last year. People who had got a little bit disappointed with the very high margins, the poor quality content we saw. And so we're sitting here right now and we're carrying a much bigger business from a customer perspective than we normally would do into the second half of the year. We're seeing good momentum, as I say, the loyalty programs working will be fully rolled out for the football season. Bet Protect, I think, is really resonating with customers who had a great incidence of it the other night where it paid out. And so for us, the question was, how do we make sure that we extend our leadership position in OSB, right? And so from my perspective, I want to make sure that when we exit 2026, we have a bigger business with a better trajectory for the future from a market share perspective. And so that's what we're focused on. And the way to think about this is it's an investment in growing ARPU, right? We've done a lot to build our AMS platform over the years, but this is about growing ARPU, share of wallet and also driving up the sort of expenditure in the category. Rob, I don't know there's anything else you want to add.

Yes. I think Peter just touched on the main point. This is about focusing on the longer-term U.S. opportunity, which we still think is very substantial for us, and that's a lot more important maximizing short-term EBITDA, and that's why we're willing to make this investment. I think as we think about this into 2027, we need to trade through the NFL in Q3 and Q4 and see what kind of momentum that we've got exiting the year. I also think it's sensible to assume that we continue investing into 2027, the short- to medium-term thing. I don't think we'll be doing this in perpetuity and there's lot to leave us that we can pull in time are very confident about our longer-term margin trajectory, but certainly, we would foresee continuing this in the short to medium term, particularly given the levels of success that we're having early on in this investment program.

Got it. And just as a follow-up to that, I think when we think about FanDuel marketing here in the United States, you've done a very good job promoting the product, promoting the same game parlay. Do you start to market more of the loyalty program to try to reengage those customers and drive awareness? Or do you think this is something that customers will find organically as they start to reengage with the platform into football?

I think -- look, our brand is a really important part of the whole sort of feature set and value proposition for customers, right? So I think it's important that we talk about our product features, whether that's the parlays or indeed loyalty or indeed Bet Protect. But I also think it needs -- when people a financial brand advertise and what those commercials, they're going to be proud that that's the sportsbook that they're carrying, right? And so I think you'll see us try and use the FanDuel brand more as part of the value proposition that we have for customers as well. And we spend a lot of money. We're on air a lot. We engage a lot of consumers, and I think it's important that the FanDuel brand stands for that part of that sort of value proposition that we deliver to customers as well.

Got it. And I want to keep this more strategy, but I do have to ask the one question we did get post the call was squaring the guidance. Obviously, we got the 3Q investment, then a pretty big 4Q step up. So can you just help us how we should square that ramp into the fourth quarter?

Yes, sure. So I mean, if you look at the 4Q year-on-year, it steps up by about $200 million in terms of EBITDA. And the $100 million of that is just from sports results. As you know, we forecast to expected margin and actually last year in Q4, when you look at it holistically, we actually had some adverse sports results. About another $19 million is sort of the Missouri investment that we had last year. So we launched in Missouri in Q4 last year, and we definitely landed from an investment perspective there. You then move into Q4 this year, we'll have the benefit from market making. We've got some cost improvements going for reserves. So actually a $200 million swing feels very achievable from our perspective. And particularly, if you take it off the back of some of the momentum that we've got at the moment. And if you add to that, how we're thinking about production markets, as we've talked about, we think there's going to be some synergistic benefit for us on a nationwide marketing basis when we look at predicts aligned with our core sportsbook products. Some of the later than planned product rollout and predict will mean that some of the spend that we initially plan shifts out to the right on products, but we just need to see where our product is as we exit the year before we take any decisions on that investment into '27.

And I was looking at the NFL Christmas schedule, the NBA Christmas schedule just came out that seems to be just given all the sports content that went on with some of the injuries last year. It seems like we could have a better time. If we have just a, let's call it, stable content slate, that should add a couple of points to the growth, correct, as we think about 4Q?

Decent content is always welcome from our perspective. We typically get very good engagement around that as we've seen with the World Cup recently where we smashed through all of our targets because the content was so good. We recently had a about whole game, which is a few weeks before the start the season demand on that is anything to go by, and we're quite encouraged by what we're seeing ahead of the knee fleas.

Got it. And then the other key topic you said the U.S. online sports betting market is growing about 5%, iGaming is growing faster. So can you just discuss some of the dynamics, what's going on there?

Yes. I mean it's -- look, there's a lot of data and a lot of noise on the market, Jed. I really we could find some consolidated view of because that will give us the best real read on revenue, and that's what we have in a lot of other markets in which you operate. But let's just think about what we've seen over the last few quarters. We know that there were some market-wide slowdowns in Q4 last year, right? The NFL content wasn't as compelling. We saw these very high win rates. Ultimately, people are there for fun and entertainment, and it stopped being that. I think we saw some market implications. Obviously, our performance was not great in that situation. And I think we made the situation a bit worse, and that's why we lost a little bit of share in Q4. But coming into this year, if you look at it on a GGR basis, the growth rates for the first 4, 5 months were pretty close to double digits, right? Now when you include the June data, there's a lot of swing in sports results in -- it's more like 5%. And so when we were trying to plan for the second half, we've taken that conservative view or the 5% in -- for H2. But when we see compelling content, we think about the very strong growth we saw with the NBA finals. We think about the performance we've seen in the Soccer World Cup. We've had some record weeks in MLB. Rob has talked about the fan game from NFL. What I'm be tended to say the overs on that at the moment, probably. But look, we want to be conservative with our guide. We'll see what happens. And look, I think if we can get some great NFL content, and we can keep our customers engaged with some of the exciting plans and propositions we have for them. We'll see what it can look like. The important thing is that our focus is on growing the ARPU now. That's the big thing for us. We want to capture that extra wallet share from the customers. We've got a real reason for customers to keep that in with angel now because our loyalty program, which we're deploying to all of our customers will mean that there's a real incentive to give that expect to FanDuel, which is going to be very different to what we saw last year.

Got it. And then just -- and just obviously, the potential follow-up is, and maybe for the people who aren't in the weeds on the industry like I am or some of the other investors is prediction, market cannibalization because you do talk to some investors and they go, I just look at the headline volumes and they think they're taking share, but there seems to be a lot more going on underneath the hood.

I think we need to distinguish between what is happening in those states where there's regulated OSB. And the states where there isn't. Clearly, in the states where there isn't prediction markets have a free rather than right. It is no competitor to them other than the illegal bookies, I think in the regulated market, regulated OSB markets, we're seeing very limited cannibalization. We've got lots of different ways of triangulating it. We know our competitors are doing the same thing, and they're coming to the same conclusions. All the data we look at, in the regulated states, we're seeing very limited cannibalization. And it makes sense, right? And it makes sense because the sports offering on a regulated OSB is better than you can find on the breadth of market. It's better in terms of the breadth of markets but also we offer generosity, right? We spent our beginning of the call talking about the big leaning we're going to have around generosity in the second half, the collection markets are not offering their customers and it's very difficult for them to deliver that because of the nature, the variety of different market makers operate on their platform.

Got it. And you just talked about ARPU and concentrating on ARPU. So when we start to look at net win margins, is it more about net win dollars per customer versus net win margins, is that sort of the way we should start to think about it?

Not really. I mean this is something that we've obviously got to experience that internationally and around the world, we don't. We've got international markets, which are way out front of the U.S. in terms of structural margins at the moment. We think there's a lot of headroom for the U.S. to go in and see. We've got markets that are operating at higher promo percentage as a result than the U.S. And not all of the structural margin gains that you see drop through to the net revenue line, they can get reinvested. I think the key is that we see growth over time in that structural margin. And we think that there's a long runway of growth in the U.S. from the 8.7% that we've got. And for us, the key figure that we talked about at our Investor Day back in 2024 was the net revenue margin of 12%. We talked about the 16% -- 4% generously at the time. we're already at 16% structural margin in Q4 last year. So we feel that there's definitely more runway on that. If you think about the U.S. in terms of where it is in terms of parlay penetration compared to our markets, it's still got we think levels to go is more that we're doing around product innovation. And actually, we do think that -- the generosity number will come down in the medium to long term, as I talked about earlier, and we've got initiatives like model-driven generosity that we've deployed in our Australian market that's worked very hard for us. So we look at both ultimately, and we're looking at a number of KPI metrics across the board. But when I think it comes to wind margins, net with margin is what we're quite focused on from a percentage perspective.

Got it. And then -- so you haven't seen where that net win margin creeps up over 10%. Over the last 12 months, you might see a handle decline. Is that more sort of back last December, last January, we just hold got really high customer -- it was just pretty volatile for the sportsbook customers, and that's where we saw some of the churn?

I think there are two factors of compounded right? I mean -- first of all, if people are not having winning experiences, it becomes less exciting. There are those ones that get away, right? When you put your flag parlay, you just get let down on one of the legs and you're telling your friends about how you nearly made it. That's fine. But you do occasionally need to have some of these things that -- you do need to have some winning experiences. And in that very significant period of high margin, the content wasn't particularly compelling for a lot of people were betting on and people are having those winning experiences. And I think we can create opportunities to help engineer those experiences for customers. I talked about some of the stuff we did going into the Soccer World Cup, where we did our goals promo going into the group stage and knew there'd be a lot of goal scored. And look, I'm sure many people watching this call made some money off me with the goals of the U.S. team score in their opening games in the World Cup. And that's part of the fine people to have. And so I think there's activation and sort of customer focus that we have to have that the team, I think, have got a better grip on now.

Got it. And you bring up an interesting point on the World Cup. If you sort of look at the U.S. World Cup hold rates versus ex U.S. World Cup hold rates, it seems like you did much better outside the U.S. So is there just a typical way given the complexity of our sports markets, the way the U.S. better is engaging with your product versus people outside the U.S.?

Well, I think -- there shouldn't really be a big difference. But the in soccer, one of the things that American consumers like to bet on is the 120-minute market, right? So this is taking the game to the end at regular time plus extra time. And typically, in the European markets, people are only betting to the outcome of the game at full time. And so there is a difference. If you think about all those gains that went to see extra time to bookies will always be hoping for a draw. It's the outcome that often delivers the best result for us because then you have needed team winning, that's I think one of the structural things you see, particularly around the way that we've created soccer markets in the U.S. I think, more generally, though, when I think about U.S. sports, you couldn't really design across the sort of NBA and NFL and MLB. You couldn't design better codes for wagering of. If you think about the nature of the player narratives, the fact that you even introduced brakes in the game, which -- yes, I think some people call them commercial breaks there are great opportunities for customers to get their bets on for what the thing is going to happen in the next quarter or the next phase of play. I mean it was pretty remarkable. Last -- in the last football season, we had more handle on gifts that we did on the Patriots when they went through to the Super Bowl. So look, playaraties are absolutely crucial. We also know -- look, we spend a lot of time talking and focusing on parlays. We've done the analysis. We know that the more customers engage in our Parley product, the more legs they take, the higher frequency, which they take their products, the more likely they are to stay with us. I said retention rates improve. Whilst margins are do often increase retention rates also improve. And so -- I think that the U.S. market is going to -- without player narratives, that interest in parleys, I think we will end up with very good structural gross win margins in America. Notwithstanding some of the differences that we might see on soccer because of the way we structured the $120 million market.

Got it. Got it. All right. We'll focus now on prediction markets. Can you just give us an update on your strategy versus consumer-facing versus market making? It seems like it's a pretty smart strategy given leveraging your best-in-class trading. So I would love to hear more about that.

Yes. So we're actually targeting both as we've spoken about. So in our collection market, products FanDuel predicts, customer acquisition is clearly our priority there. That's where we see the real long-term benefit for the business when you think about the prediction market ecosystem. And as we've said this year, the product rollout that we've had has been slightly slower than we would have liked. And we've had some challenges along the way. But I think moving our sports and double tea product to crypto is going to ensure that we're far better positioned on that front moving forward by the end of the year. I think our product proposition is going to be a lot more competitive, and we've already recently seen quite a significant increase in our volumes. From a market-making perspective, we're really excited about that as an extra product line, first, if you like. The progress to date has been very quick and profitable. And we think this is where the majority of the economics will sit within the production market ecosystem when you look forward. And we're focused on taking as big a share of that as we possibly can. I think the advantage that we've got coming back to it is actually looking at these complex parlays with the correlated outcomes, we've demonstrated our expertise and the we've got pricing advantage on the core sports book, and that carries over here. And that gives us confidence that we can take that meaningful share. And we're scaling that business really rapidly. I think the other thing we saw a few weeks ago, we speaking to some of our investors about the CFTC have guided recently that they're not going to allow the core market making on one platform. So I think given where we sit overall at the moment, we see that as advantageous to us. We need to see how that plays through. But that's certainly an interesting development in the last few weeks.

And one thing with marketing, right? Because I assume if you're using your back-end infrastructure on RFQs for third-party platforms, you're actually improving that experience for the retail users. So -- how do you sort of think about balancing the market making, which is highly profitable versus sort of cannibalizing the opportunity in some of those unregulated markets?

Well, Jed, I think you have to -- we have to look at this. And look, the primary area that prediction markets gaining the traction is in these states, which are unregulated. And so this is a great way for us to leverage, as Rob said, the pricing capability that we've built over the years into these new incremental -- into this new incremental curtain opportunity. We already see plenty of people trying to scrape our prices and support their market-making activity. And we've got some plans for how we may deal with that. So...

Wisdom of the Flutter -- wisdom of the Flutter engine...

Yes, we'll see. So look, I'd rather directly monetize it. And I think that we can make very good returns on that. I think we've got the balance sheet to cope with some big volumes on it. And I think we've -- I think we have one of the best market-making capabilities, particularly in combos. And we'll look to try and make a lot of money out of it.

And is any of the strategy sort of you kind of look at the states, I mean, I think what the states are almost like 30 and 4 against prediction markets. I don't -- I mean we all assume this is going to the Supreme Court. But at some -- and then you see the other day on Friday, right, the CFTC says we don't want you using American odds. Can you just discuss some of like the changes in the regulatory landscape as it kind of shifted your view on how do you want to approach the market?

I think it's -- look, it's fair to say that the market is evolving quickly. And so trying to take is a very sort of long-term assessment is really right? And you talked about the ruling of our American odds, Rob mentioned this issue around market making people's own platforms. I think ultimately, this gets resolved by the Supreme Court. And I'm sure there's a market on when that will actually happen. And we can have a look at what people think is most likely. I've always stated that I think whatever happens, the incomes are either good or great for us. Yes. I think what we would like to see is clarity. And I think whatever happens, I think we're very well positioned. There's two things we're focused on, and this is all -- this is why it's all sort of incremental for us. One is acquiring those customers in those state in advance of sports betting regulating in the market. That's something that we were very focused on. And the second thing is making money using market peaking. And we talked about the $50 million for this year and very confident in the team's ability to do that. They do a brilliant job and I'm excited to see how big a share we can take in that part of the profit pool.

Got it. Is there a share you're targeting?

Large. Larger...