US investment hits Paddy Power Betfair earnings in 2018

6 March 2019

Paddy Power Betfair has seen its 2018 revenue grow as a result of the acquisition of FanDuel and an improved performance by the Paddy Power brand in the UK market, though the US investment has also hit full-year profits.

Paddy Power Betfair, which has announced plans to change the name of the business to Flutter Entertainment, reported a 7% year-on-year increase in group revenue to £1.9bn (€2.2bn/$2.5bn)

This was driven by a 6% increase in sports revenue to £1.5bn, despite the vertical being hit by unfavourable sporting results over the year. Gaming revenue, meanwhile, grew 11% to £399m.

"I'm really pleased with the way that the Group performed in 2018 in what was a challenging year for the sector with regulatory and tax changes,” Paddy Power Betfair chief executive Peter Jackson said. “Our collection of challenger brands are well positioned in their local markets.

“Paddy Power has regained its mojo, taking share following product improvements and some of our ‘classic’ marketing. Betfair, our unique combination of product that appeals to customers around the world, will be improved by our ongoing investments in languages and localisation,” he continued. “In Australia recent tax changes favour the largest operators and we are determined to maintain our leadership position amongst the online bookies, using Sportsbet's leading customer proposition and generosity to continue to take market share.”

The online division saw revenue grow 5% to £948m, thanks in part to an improved performance from the Paddy Power brand. For all markets excluding Italy, where the brand was withdrawn in Q4 2017, revenue was up 11%. This, the operator said, was due to a significant turnaround for the brand, with an improved customer offering and improved marketing execution helping Paddy Power grow revenue in the UK market.

Over the year Paddy Power Betfair improved the speed of the Paddy Power app, and rolled out the Same Game Multis feature, which successfully increased uptake in accumulator bets. Promotional products such as Beat the Drop and the Power Up price boost feature also aided growth during the year.

Sports revenue was up 3% year-on-year to £678m, with a 6% increase in sportsbook revenue offset by a 2% decline in the contribution from B2B and the Betfair exchange. Total stakes for the year amounted to £5.5bn, down 3% from the prior year.

The exchange struggled over the year, with Q1 revenue hit by weather-related racing fixture cancellations, resulting in a 7% decline. From Q2 to Q4, revenue was then flat, though the operator insisted the product would remain a core part of the business.

“While this trend reflects the products maturity, the exchange remains a key differentiated product for Betfair and, when combined with our sportsbook, offers customers an unparalleled sports-betting experience,” Paddy Power Betfair said. “The combined Betfair proposition positions us well in the UK and is a key differentiator when targeting international markets.”

Gaming, meanwhile, saw revenue grow 13% to £270m, driven by the strong performance of Paddy Power, and a three percentage point increase in cross-sell rates. Growth was aided by the launch of new gaming apps, improvements to the gaming product within the operator’s betting apps, which performed particularly well on the Betfair apps.

While not included in the 2018 results, Adjarabet, the Georgian operator acquired by Paddy Power Betfair in February this year, saw revenue for the year grow 37% in local currency to £64m.

In Australia, where Paddy Power Betfair operates the Sportsbet brand, revenue for 2018 was flat at £403m, despite staking growing 23% to £4.3bn. This, the operator said, was due to unfavourable sporting results, and a significant investment in generous promotional offers.

This saw early-payout promotions rolled out, extensive money-back offers for racing and targeted customer bonuses, as well as Powerplay odds boosts. These promotions were designed to enhance customer value by increasing player activity, in a bid to increase market share, with Paddy Power Betfair noting it was encouraged by the initial returns.

The US division, which was expanded through the merger of Betfair US and daily fantasy sports giant FanDuel on July 10, saw revenue grow 75% on a reported basis to £191m. On a proforma basis, incorporating FanDuel’s performance into the full-year periods for 2018 and 2017, revenue was up 18% to £236m.

The roll-out of legal sports betting in New Jersey and West Virginia contributed £11m to revenue. New Jersey performed particularly well, establishing a 35% share of the online betting market.

The TVG-branded horse racing product increased its market share over the course of the year, boosted by growth in active customers. This was driven by the launch of a new app with embedded streaming and money-back promotions.

Fantasy sports was boosted by the addition of new game formats and retention promotions, both to drive additional growth among core players, and expand the recreational player base.

“The opening of the US online sports betting market has the potential to be the most significant development to occur within the sector since the advent of online betting,” Jackson said. “Rather than announcing our plans, we have moved quickly to give ourselves the best chance to win in that market. We are confident that FanDuel's nationally recognised sports brand, 8 million customers, our group betting expertise, and our market access partnerships position us very well.

“Our success to date supports this view, with FanDuel achieving a 35% online market share in New Jersey in its first 5 months of operation, and Meadowlands becoming a marquee venue for sports betting.”

The operator’s retail division, comprising 362 UK shops and 264 outlets in Ireland, saw revenue decline 1% to £331m, with a 1% increase in UK revenue offset by a 4% local currency decline across the Irish Sea.

This decline was due to weaker customer staking, with amounts wagered down 3% to £1.8bn, largely as a result of a decline in racing, driven by weather-related event cancellations in the first half of the year. This was offset in part by growth from self-service betting terminals (SSBTs) and football staking, though retail sports revenue ultimately declined 3% to £222m.

Retail gaming revenue was up 3% to £110m, though Paddy Power Betfair said it was unconcerned by the introduction of the new £2 stake limit for B2 gaming machines in England, Scotland and Wales from April this year. This, it said, would not have an impact on its sports-led retail strategy, with the company now looking to take advantage of rival operators’ shop closures to grow its position in the channel.

Cost of sales for the year amounted to £470m, up 16% year-on-year, though revenue growth ensured a 6% increase in gross profit to £1.4bn. Operating costs for the year increased 10% to £953m, largely as a result of a significant hike in US costs, which rose 99% year-on-year to £161m, as a result of sales and marketing, and product and technology costs more than doubling, while operational expenses for the division were up 74%.

This resulted in underlying earnings before interest, tax, depreciation and amortisation falling 5% to £451m. Once depreciation and amortisation of £90m (up 11%) were removed, Paddy Power Betfair’s 2018 operating profit fell to £360m, down 8% from 2017.

Once financial expenses and £53m in taxes were stripped out, the operator made a net profit of £304m for the year, down 10%.

Looking ahead to 2019, Paddy Power Betfair said that the new financial year had started in-line with expectations. It described the acquisition of Adjarabet was further evidence of its drive to delivery against its regulated market strategy, and said it believed the growth opportunities outweighed the regulatory challenges that may come during the year.