Red Tiger impact fails to halt NetEnt revenue decline in Q3
NetEnt has reported a marginal decline in revenue for the third quarter of the year, after favourable exchange rates and the acquisition of Red Tiger Gaming partially offset struggles in the Norwegian, Swedish and UK markets.
Revenue for the three months to 30 September 2019 amounted to SEK437.4m (£35.3m/€40.8m/$45.4m), down 1.3% year-on-year, with the bulk coming from royalties from games launched via clients.
This accounted for SEK424.1m of the total, down 2.7% from the prior year, with setup fees increasing 3.1% to SEK13.4m, while a further SEK6.0m came from other sources.
This included SEK30.0m from Red Tiger, covering the month of September. Without Red Tiger's contribution, revenue would have been down 7.9% year-on-year.
Mobile games accounted for 65.3 percent of total game win — operator revenue from NetEnt games, form which royalties are calculated — in the period, an increase from 61% in 2018. Slot games generated 91 percent of game win, while table games accounted for 9 percent.
The United Kingdom was responsible for 12% of revenue when Red Tiger was excluded, while Sweden made up 9%. Other Nordic countries were responsible for 16% of game win, with 50% came from the rest of Europe and 13% from the rest of the world.
Red Tiger's game win was more focused on the United Kingdom, which contributed 34%. Sweden contributed just 4% while other Nordics brought in 7%. The rest of Europe was responsible for 29% of game win and the rest of the world 26%.
NetEnt group chief executive Therese Hillman said that poor performances in Sweden, Norway and the UK were major reasons for the lower revenue.
“The primary reason for the lower revenues was attributed to continued weak developments in the Swedish market,” Hillman said. “Sweden accounted for 7 percent of the decrease, but Norway and UK also had a negative impact on revenues.”
The company had previously pointed to difficulty in Sweden and other Nordic countries as reasons for financial declines in the first quarter and first half of 2019.
However, Hillman added that the company did see more positive signs from US markets.
“On the positive side, it’s worth highlighting the US, with continued strong growth in New Jersey and a great start in Pennsylvania during the quarter,” she added. “Revenues from these two US states could continue to grow for many years to come to potentially account for a greater share of our total revenues in the future.”
Locally regulated markets contributed 47% of NetEnt game win when Red Tiger was excluded and 42% of Red Tiger game win.
The group released eight slot games during the quarter, of which Butterfly Staxx 2 was the most successful.
Overall operating expenses for the group reached SEK331.4m, 19.5% above Q3 2018's figure. The company paid SEK120.4m in personnel expenses, up 3.3% year-on-year while depreciation and amortisation came to SEK84.3m, a 51.9% increase. Other operating expenses totalled SEK126.7m, a 20.4% rise from 2018.
NetEnt’s operating profit sharply declined from the prior year, down 34.9% to SEK112m.
In addition, finance related costs rose to SEK27.5m, leaving profit before tax to SEK84.5m, less than half of what the company reported in Q3 2018.
The supplier's net profit after tax for the period amounted to SEK76.1m, down 51% from 2018.
However, the company’s overall income figure was significantly boosted by favourable currency exchange rates. Whereas in Q3 2018, NetEnt lost SEK8.1m to exchange rate differences when dealing with foreign operators, in 2019, the company gained SEK46m.
NetEnt also broke down further details of its acquisition of Red Tiger. The SEK2.56bn deal saw NetEnt take on SEK1.11bn in assets, including SEK444m in customer relationships, SEK399.1m in trademarks, a SEK244.4m game portfolio and SEK112.5m in cash and bank, valuing the company’s goodwill at SEK1.44bn.
“The gaming industry is undergoing a period of consolidation in which NetEnt intends to participate to secure long-term growth and profitability,” Hillman said. “The acquisition of Red Tiger is strategically important, resulting in a stronger market position and economies of scale for the combined companies. The two businesses complement one another well both in terms of geography and product offering, and the customer feedback from both companies’ customers has been very positive so far.”
Hillman said the acquisition could provide SEK150m worth of synergies annually from 2021, and that the companies have already built a new version of NetEnt’s Piggy Riches game featuring Red Tiger’s daily jackpot feature, to be released in January 2020.
Hillman said that going forward, a major priority will be the company's live casino offering.
“Within live casino, we continue to pursue our plan to make improvements to the product and organization,” Hillman said. “We rolled out an upgraded user interface for a better player experience as well as products such as Perfect Blackjack and Network Branded Casino to our customer network.”