Feb 23: Caesars: Digital Q1 ‘will be ugly’

Caesars Entertainment Q4, Catena Media Q4, Churchill Downs P2E acquisition, DraftKings analyst downgrade, earnings in brief, Playtech takeover news +More

Earnings+More

Feb 23, 2022

Good morning. On today’s agenda:

Caesars Entertainment says there was ‘method in the madness’ in New York
Catena Media sees the benefit from NY, however.
Churchill Downs expands HRM footprint with $2.49bn acquisition.

Right here, right now.

Caesars Entertainment Q4

Q4 revenues up 62.5% to $2.6bn; FY revenues up 167% to $9.6bn.
Q4 Adj. EBITDA ex-digital up 183% to $886m. Actual adj. EBITDA up 67% to $581m.
Digital revenues of $116m, up 214%, mix 65% sports-betting, 35% icasino
Digital adj. EBITDA loss of $305m. Loss for the year of $476m.

Vanishing point: CEO Tom Reeg kicked off by saying “nothing has changed” about Caesars’ expectations that it would cumulatively lose $1bn in establishing itself in sports betting and generate 50% EBITDA ROI at maturity except the velocity.

Having “got where we needed to be” ahead of time with 21% market share, CEO Tom Reeg said that Caesars Sportsbook traditional media spend would “disappear” from the TV screens.

Reeg: “You're going to see our commercials largely disappear from your screens. We have reached where we want to reach in terms of customer acquisition.”

Beautiful on the inside: The New York launch had been “eventful” with volumes being 2x pre-launch expectations and with Caesars achieving a market share that was also 2x larger than planned. “We were extremely pleased with how we came out of the box,” Reeg added. But he admitted the promotional spend would mean the first quarter for digital “will look ugly”.

Tom Reeg: “This current quarter is our peak EBITDA loss that you're never going to see a quarter like this again; the quarterly loss is going to be larger than it was in the fourth quarter.”

Omnichannel datapoints: Reeg said Caesars Rewards customers accounted for 28% of digital customers but ~50% of volume. Custom from digital into bricks and mortar are now worth an annual run rate of $150m.

The $3,000 question: On the New York promotional spend, Reeg noted that the average amounts deposited - and matched by a welcome bonus - was $450. “So our results in New York were not driven by a lot of $3,000 deposits… it was hundreds of thousands of smaller customers that came to our site”.

Reeg: “The reason that you go after those brand new customers as avidly (is because) the customer that you find in the first quarter post-launch is worth something in the neighborhood of 2x what you find afterward. So there is a method to the madness here in terms of the customers that you're targeting.”

There but for omicron: Caesars properties on the Las Vegas Strip would have enjoyed a record fourth quarter if it weren’t for the last couple of weeks of the quarter being “clipped” by omicron issues. This weakness continued into January and February, but Reeg said the medium-term picture was very positive. “Everyone is going to have a good 2022 and 2023 because of the return of group business,” he said.

What Reeg said:

On recent market pessimism on sports betting: “Can this be a profitable business? We've gone from kind of ever increasing bullishness to unlimited bearishness at this point.”

On the shape of the market: “We always thought market share would consolidate into a handful of players and that's all happened quicker than we thought.”

On the New York casino opportunity: “How do I answer this politely? New York is a difficult regulatory state. I think it's going to be extremely expensive to build there. I think it's going to be an extremely expensive license fee.”

On the prospects of a Las Vegas Strip asset sale: “We're excited about where we can get here. If you recall, we only paid $17bn for Caesars… We bought Caesars for less than 6x EBITDA. And the Vegas asset sale is going to bring back 15% plus of those proceeds most likely back onto our balance sheet.”

Analyst quick takes

Deutsche Bank suggested the digital losses were greater than expected and said Q1 losses would be the “largest losses of the year, by a wide margin”. The Macquarie team reiterated their bullishness on Caesars:

Macquarie: “We believe CZR remains well positioned to emerge a double-digit market share player given its brand, tech, and omnichannel strategy.”

The Truist team noted the management’s track record of squeezing more EBITDA from its acquisitions and said it gave them “confidence” in the long-term digital ROI.

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Catena Media Q4

Revenue up 20% to €31.9m, adj.EBITDA increased 4% to €12.8m.
North America revenues +97%, accounted for 51% group revenue.
Jan22 revenues up 29% (36% excluding Germany).
FY22 revenue in North America will exceed $100m.

Efficiency drive: Catena’s North America pivot is well and truly underway. The New York and Louisiana OSB launches had driven January revenues up 29% YoY and Catena expected strong growth from Ontario. The group highlighted the fact that in 2019 ~19% of Catena’s revenues came from the US, this had reached 30% in 2020 and 50% in 2021.

CEO Michael Daly on affiliate efficiency: “Online casino is more profitable (than OSB in the US), but online sports betting is still very strong, even though it is fuelled by marketing. But even if that slows down affiliates will shine as they are one of the most efficient ways to acquire customers.”

Organic focus: The US icasino opportunities were “significant”, Daly said, despite only ~13% of the US population being able to access the products currently.

Daly on US icasino: “We continue to invest in keyword positioning, content and working to be prominent among casino affiliates. We’re doing healthy business in regulated states, but only about 13% (of US population) have access to icasino and we have not even tapped those markets for all available players.”

Germany slo-mo: The ongoing travails of the industry in Germany, “the largest OSB market in Europe” until the new gambling regulations came into force in Jul21, CFO Peter Messner said, would continue for some time, but there were also signs for long-term optimism.

Messner on Germany: “There are huge opportunities in Germany, but very tough comps with 2021. The new (OSB and icasino) regulations only kicked in in Jul21 and it’s still growing at low levels of ~3% of group revenues, so there can only be upside even if the regulatory rollout has been disastrous.”

Daly added that Germany would not be like the New York launch, where the impact has been felt “from day 1”.

“It will be a slower approach, but markets like Pennsylvania started with one operator, then two and is now one of our best performing markets in the US, Germany will be the same for us we think.

Big in Japan: The group said revenue from Japan rose strongly YoY but didn’t disclose amounts. That had happened despite “volatility in search engine rankings” and the easing of Covid restrictions which had led to fewer online sessions.

Earnings in brief

Esports Entertainment: Q4 revenue was up $12.2m to $14.5m YoY, but down 11.4% QoQ and adj. EBITDA losses were $6.8m vs. -$4.3m QoQ due the group shutting down its Bethard sportsbook in the Netherlands and low margins caused by unfavorable sporting results. The group has reduced its 2022 revenue guidance from $100m to $70-$75m. Further COVID restrictions also prevented it from launching its LANDuel and Helix esports events and venues. The group said the launch of its esports betting site vie.gg in New Jersey and of its new B2B-esports focused solution OMEGA had been very well received.

Webis FY21: The UK-listed operator said Dec21 and Jan22 have been steady with handle and revenue above pre-COVID levels. Initial results at the Cal Expo were hampered by poor weather and an outbreak of equine flu, resulting in lower handle.

Churchill Downs acquisition

Peninsular Pacific Entertainment bought for $2.49bn.
Assets include properties in New York, Virginia and Iowa.
Deal part-funded by Nov21 Calder Casino land sale plus new debt

Historic expansion: The deal sees CDI expand both its live and historical racing machine footprint via the addition of the Colonial Downs Racetrack to its portfolio. Colonial Downs comes with half-a-dozen ‘Rosie’s Gaming Emporium’ sites featuring some 2,700 HRMs with more planned.

Waterloo sunset: CDI also gains the del Lago Casino in Waterloo, New York and the operational assets of the Hard Rock Sioux City, Iowa which will also see its real estate bought by an unnamed third-party.

Diary note: Churchill Downs will report its Q421 earnings tomorrow, Feb 24 with the analyst call schedule for the day after.

DraftKings analyst updates

Wells Fargo moves to a Hold and crashes target price from $41 to $19.
BoA moved its target price down from $30 to $25.

Knockdown: While the market worries about stratospheric levels of marketing hindering the chances of DraftKings being EBITDA positive by the predicted date of Q423, Wells Fargo say the “accelerating” opex spend is also a worry.

The 60% increase - mostly product and tech - will take spending in opex to $900m+, or broadly where the company said previously it would be at maturity. This was meant to coincide with revenues of over $5.4bn, not the forecast 2022 figure of $1.85-$2bn.

Make that 2025: Hence, the team suggests that it is “difficult modeling a scenario” where DraftKings achieves EBITDA profitability before 2025. Recall, the team at CBRE warned about a similar timeline in a note on Friday.

Brighter later: More promisingly, both for DraftKings and the rest of the sector, Wells Fargo noted that a compressed promo spend dynamic is emerging with higher levels of spend for a shorter period of time but with customers flooding in quicker.

Wells Fargo analysts: “Thus (we) could envision a scenario where DKNG’s 2-3 year state- level profitability path skews closer to two years.”

Heavy sits the crown: In a note suggesting it was a “tough day to be King”, Bank of America said the guidance “spooked investors”. “We expected losses to exceed consensus given the timing of new state ramps, but the magnitude was worse than expected,” the BoA team added. They were also worried about the tech spend in comparison with its peers.

BoA: “DraftKings is still building its technology platform while key competitors like FanDuel/BetMGM are able to leverage existing systems. Higher fixed costs could/should result in a later inflection to profitability and perhaps a lower margin structure than peers.

On Wagers.com: More analyst round ups on DraftKings.

Playtech takeover

Mor, Mor, Mor: In a somewhat surprising development, it emerged first in the press and subsequently confirmed by the company that CEO Mor Weizer had teamed up with ex-CEO Tom Hall to ask if they could explore the possibility of joining the bid being put together by TTB Bond. Peel Hunt said the news was “on balance” a positive, though competing bid now seem unlikely.

Peel Hunt: “The most knowledgeable participant in the bid process sees a reasonable prospect of TTB’s possible offer being accepted by shareholders.”

Newslines

Board level: The special board committee at Bally Corporation formed to examine the offer from major shareholder Standard General has appointed Macquarie as its financial adviser and Potter Anderson & Corroon LLP as its legal counsel.

Make it pay: Bally Corporation has signed with Paysafe to integrate the group’s online payment methods for its Bally Bet sportsbook in Arizona and Bally’s Casino in New Jersey. The rollout of payment methods will include Skrill, Neteller and paysafecard among others and will be expanded to more sports betting states in the coming months.

Novi surrender: Novibet has surrendered its UK gambling license, according to a message on its UK-facing website and was no longer taking UK bets as of Monday, 21 Feb. Novibet has been operational in the UK since 2014 and parent Novigroup remains registered in the Isle of Man.