Investors See Paddy Power Betfair Growth Potential From US Sports Betting Expansion

Paddy Power Betfair (PPB) might have reported an underwhelming set of financials for Q3, but US sports betting prospects look quite good.

Investment banks Morgan Stanley and UBS both upgraded their recommendations on PPB, specifically because of the US opportunity. Morgan Stanley wrote:

“Paddy Power Betfair's US business is seen as a key play on the attractive US opportunity, and M&A upside risk is increasing, in our view.”

UBS concurred:

“We believe [Paddy Power is] well positioned in the US with FanDuel, which combined with the market size potential means we see potential positive catalysts where we to get more comfort around the UK performance.”

The UK performance reported in the Q3 trading update was less than stellar. Retail revenue fell by 4 percent to £82 million ($106.8 million).

Group-wide, EBITDA fell 16 percent to £101 million ($131.5 million) although revenues rose 10 percent to £483 million ($629 million).

Online and US growth is strong

This performance contrasts with strong growth in the company’s online businesses:

• Online revenues up 15 percent
• Sportsbook revenues up 17 percent
• Gaming (mainly online casino) up 26 percent
• Exchange betting up 1 percent.

US revenues, which include FanDuel’s DFS business, grew by 22 percent. PPB bought FanDuel earlier this year and is using the brand to spearhead its US sports betting operations.

Growth excluding the new US sports betting market was a respectable 14 percent. US sports betting net revenue came in at $5 million for the quarter.

CEO Peter Jackson commented:

“In the US, the exciting potential of the sports betting opportunity and the strength of our strategic positioning has been evidenced by our experience to date in New Jersey. FanDuel recorded a 30 percent share of the sports betting market in September, driven by a market-leading customer proposition, our strong brand presence and the ability to cross-sell from our fantasy sports player base.”

PPB positioned for US sports betting growth

The corporate landscape in US sports betting is changing so quickly it can be tough to keep up.

PPB’s US interests in addition to FanDuel Sportsbook are:

• FanDuel DFS: 18 percent growth in Q3 across 41 states
• TVG horseracing: 7 percent growth across 33 states
• Betfair Casino and Exchange: 40 percent growth in New Jersey

Growth in DFS came from:

“New game formats, coupled with retention promotions, are driving growth with core fantasy players. In addition, we are expanding the recreational player base through a combination of increased marketing investment, use of free-to-play content, and new product initiatives, including single entry contests and a ‘Guru’ tool (which helps a user create a competitive contest lineup more quickly). “

PPB reported that the New Jersey FanDuel Sportsbook at the Meadowlands generated more than $1.5 million per day in October. That rate of revenue generation makes it “one of the biggest sports betting outlets in the world.”

The success comes partly from position. PPB estimates that around 30 percent of the wagers came from New York residents.

Despite these successes, PPB’s US strategy is firmly based on online betting:

“That said, we continue to believe that the key US market opportunity lies online. This is evident in New Jersey where, in October, our online stakes were 40 percent higher than our retail operation. Our objective for sports betting in the USA is to launch within key regulated states and quickly achieve online scale.”

Peter Jackson made a point of saying that the sports betting activity was not cannibalizing DFS revenues. This was a concern a number of analysts raised in using FanDuel as its primary US sports betting brand.

PPB is leveraging FanDuel’s brand

The one element of the strategy that only DraftKings can replicate is “leveraging fantasy sports.” This does appear to give PPB a competitive advantage.

As sports betting rolls out to more states, the brand recognition that FanDuel enjoys becomes important. It’s not enough on its own, but with excellent execution of the other elements all but guarantees a share of the market.

During an investor call, Peter Jackson confirmed that FanDuel’s experience in New Jersey showed the value of the brand:

“To date, the customer acquisition trends that we've experienced in New Jersey have confirmed to us the value of our fantasy sports player base, both in terms of players who've been active with FanDuel recently, and perhaps more encouragingly, with respect to dormant customers reengaging with the brand.”

Exchange betting also came in for praise as a key differentiator:

“The exchange remains a key differentiated product for Betfair and, when combined with our sportsbook, offers customers an unparalleled sports-betting experience.”

Start-up costs are unpredictable

Start-up costs in the US acted as a drag on earnings during Q3:

“For 2018, this investment means we expect to record an EBITDA loss of around £25 million relating to U.S. sports betting, with £4 million of this incurred in quarter 3. As you would expect, we'll not be giving guidance on expected investment levels for 2019 at this point. Relevant factors that will determine the scale of investment include how the New Jersey market evolves and the timeline of additional markets legislating, regulating, and ultimately, going live.”

All the players in this market are in the same boat. Their start-up and marketing costs in 2019 are going to depend on how many states legalize sports betting.

The post Investors See Paddy Power Betfair Growth Potential From US Sports Betting Expansion appeared first on Legal Sports Report.

Original source: https://www.legalsportsreport.com/25599/ppb-third-quarter-financials/

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