[toc]GVC’s full-year results for 2016 show that the company has successfully integrated bwin.party, which it acquired at the beginning of February last year.
What has GVC done?
- Turned around Bwin’s declining sports betting revenues in its largest market, Germany.
- Restored partypoker to a growth trajectory.
- Is on target to achieve the anticipated synergy savings of €125 million ($136 million) by the end of 2017.
More from the year-end presentation:
- The financial results are available here.
- The web presentation is here.
- The conference call can be listened to here.
One of GVC’s key strategies has been to limit the activity of bettors who have been long-term winners. It either closes their accounts or limits their bet sizes.
A cursory look at the numbers shows that the company’s €25.5 million ($27.7 million) profit in 2015 turned into a statutory pre-tax loss of €138.6 million ($151 million). But this did not detract from the upbeat tone of the results webcast.
The detailed figures showed adjusted profits — excluding the costs of the Bwin acquisition on a clean EBITDA basis — come in at €205.7 million, up a healthy 26 percent on 2015.
CEO Kenneth Alexander commented:
“The acquisition of bwin.party in February 2016 was our most ambitious transaction to date and through the hard work of our people we have once again demonstrated our ability to create significant shareholder value through selected acquisitions. Our strategy of pursuing international diversification and scale through leveraging our proprietary technology, is more appropriate today than at any time in our history. The organic growth opportunity is equally exciting and we are confident of delivering further growth in 2017.”
Key financial highlights
- Net gaming revenue up nine percent to €894.6 million ($972.6 million); up 12 percent in constant currency
- Sports wagers up four percent to just under €4.6 billion ($5 billion)
- Sports margin increased from 8.5 percent to 9.6 percent
- Adjusted profit before tax €93.8 million ($102 million), up from €46.4 million
- Cash cost of acquisition of bwin.party (net of cash acquired) was €189.4 million
- 79 million registered player accounts
GVC has fixed the sports betting ‘challenges’ left by Bwin
Helpfully, although perhaps painful for the former bwin.party management, GVC set out exactly what challenges it had inherited in the sports betting vertical when it took over.
- Poor risk management
- Low cross-sell to gaming
- Product development gaps
According to Alexander, the algorithms used by Bwin contained a number of flaws that increased the company’s risks when setting odds. This poor risk management has been fixed, and together with curtailing “low margin turnover” the Bwin margins have now increased by more than two percent.
Bwin had the opposite problem as Amaya, which is trying to cross-sell sports betting to its online poker players. Bwin needs to cross-sell online poker and casino to its sports bettors.
GVC says it have addressed the problem by adopting more efficient bonuses, improving VIP management and improving the segmentation of its customer base.
It has made the online casino more attractive to sports bettors by introducing over 650 new casino game titles. The net result has been an increase in Bwin’s net gaming revenue of 26 percent.
GVC addressed product gaps with four measures:
- Improved coupon UX (User Experience)
- Improved live streaming content
- New live navigation
- The introduction of a quick deposit option
The changes have produced record levels of sportsbook deposits with first-time depositors’ value increasing by 37 percent.
Mobile use has also increased, rising from producing 20 percent of gross gaming revenue in 2015 to 29 percent in 2016.
In sports betting, the proportion of wagers placed on mobile devices is even higher. In 2015, 34 percent of wagers were placed by mobile, a figure that increased in 2016 to 50 percent.
Sports betting turned around in Germany
During the call to investors, Alexander explained that Bwin was by far the best known sportsbetting brand in Germany, which is both the company’s largest geographical market and the largest sports betting market in the EU.
The brand is so ubiquitous that Germans see it as a national, not foreign, brand.
Over the last few years, Bwin had reduced investment in the market on regulatory concerns. This allowed its main competitor, Tipico, to take away some of its market share.
Alexander explained that it has reversed this decline, and Bwin is again growing in the German market.
German regulation is an opportunity
It could be said that GVC has a more aggressive approach to regulatory compliance than bwin.party. However, management may prefer to see its approach typified as realistic.
The German Interstate Treaty on Gambling that apparently deterred Bwin is not seen as an obstacle by GVC. Several court rulings have found that the treaty is unconstitutional and in breach of EU treaties — therefore it is unlawful and the German courts have refused to enforce it.
Recent amendments to the treaty agreed to by the 16 German federal states won’t change the treaty’s fundamental illegality, and indeed gives GVC confidence in the future of the market.
The very fact that the amendments are illegal suggests to Alexander that the treaty will be replaced in the not too distant future with one that permits sports betting, online poker and casino.
After pointing out to investors that this was about the twentieth time he addressed the issue of German regulation, Alexander said:
“I’ve never been more confident about the future of the regulatory environment in Germany. The German federal states have announced that they are evaluating the regulation of online casino and poker.”
The investor presentation noted that the EU Commission has already confirmed its opinion that the proposed amendments will not bring the treaty into compliance with the law:
“The European Commission has upheld its Detailed Opinion on the proposed changes to the State Treaty on Gambling. Amongst EU criticisms is that current amendments do not create a sustainable solution for the growing online casino market.”
He told investors that future regulation could only be a boost to Bwin’s position as the dominant player in the German market.
Australian exit confirmed, but Colombia irrelevant
One investor asked Alexander about the recent Australian legislation and whether GVC would be exiting the Australian market.
After explaining that they were monitoring progress, Alexander said that it would indeed pull out of the market if the legislation passes. Since there is virtually no chance of the legislation not proceeding, PartyPoker and SportingBet’s Australian customers will shortly have to look for a new service provider.
An unscripted note of humor followed. The same investor asked about Colombia, where in the Amaya investor call, CEO Rafi Ashkenazi, explained that new regulations meant that they would have to decide to either exit the market or apply for a license.
In a sotto voce aside to CFO Paul Miles, Alexander could just be heard asking:
“Do we have anything in Colombia?”
GVC is ready, willing and able to make more acquisitions
Having successfully digested the acquisition of bwin.party, GVC believes that it has the technological platform, management skills and financial firepower to make more acquisitions if the opportunity presents itself.
Kenny Alexander said that a huge number of proposals come across his desk. But he wasn’t looking to fill any particular gaps in the company’s structure:
“Our number one focus is organic growth, but if we see opportunities in terms of [mergers and acquisitions] than we wouldn’t be shy of exploiting that.”
He then commented that GVC is likely to be involved in some form of M&A in the next 12 months.
The US market seems to have fallen off the radar
The one geographical market which received no attention whatsoever was the US.
In the update on regulation and taxation slide, GVC mentioned Germany, Belgium, the UK, Poland, the Czech Republic and Brazil.
However, despite successful operations in New Jersey, and the possible legislation of online gambling and/or poker in US states including California, New York and Pennsylvania, there was no reference to their potential as revenue producers.
This is surprising. Bwin.party always made a big thing of the potential of the US market. However, Alexander seems to have less interest.
Brazil is a major market for GVC, and got a mention because there may be new legislation on a three-year time horizon. Yet, the US got no mention. Legislation in at least one new state is likely within a much shorter time scale.
Perhaps Alexander is just more pessimistic about the chances of new state regulated markets than some analysts.