Caesars talks digital profit

Caesars sees digital inflection in October, Fertitta takes Wynn stake, Better Collective sheds US staff, Prop. battle hurts CA sports betting +More

Earnings+More

Nov 02, 2022

Good morning. On the agenda for today:

Caesars inflects to digital profitability; cans Strip sale.
Tilman Fertitta makes a shareholding move on Wynn Resorts.
Better Collective makes ~10% of its US workforce redundant.
Experts see long-term damage to sports-betting hopes in California.
The October data from Macau shows the market is still hobbled.

All apologies.

Caesars sees digital inflection

Digital operations moved into positive EBITDA territory in October as Q3 revenues rise 6.4% YoY to $2.9bn and adj. EBITDA rises to $880m.

Win some, lose some: CEO Tom Reeg said the sports-betting and iCasino operations have a “really good shot” at profitability in 2023 after the business “inflected” to profitability in October, 12 months ahead of schedule. But he apologized to shareholders for the “self-inflicted error” of seeking the now-aborted Strip asset sale in Las Vegas.

The online business cut its losses by 77% to $38m in Q3, while revenues rose 120% to $212m. The business was helped in October by abnormally high hold (see Macquarie note below) as well as Caesars’ efforts at segmenting its audience, “shutting down certain segments with no degradation in market position”.
Reeg also noted that “some $200m” of expenses related to partnership deals with media, leagues and teams would sunset in the coming year or two.
Analysts at Deutsche Bank noted the majority of the digital improvement had come from stronger cost disciplines.
Asked about whether a spin-off of the online business was a possibility, Reeg said a “complexity would be introduced” with a separate shareholder base.

Back in boom town: Caesars enjoyed a record adj. EBITDA haul from Las Vegas in October of over $200m and Reeg suggested the strength of operations in Nevada had mitigated against the sale of a Strip asset.

“We ran into a market where the cash flow of the asset continued to increase but the ability of buyers to raise financing made it a very easy decision for us to keep,” he told the analysts.
Mea culpa: Reeg noted the uncertainty had caused an “unnecessary overhang” for the stock. “That was a self-inflicted error and that was me,” he added.
In Q3, the Las Vegas division saw revenues rise 5.9% to $1.08bn, but adj. EBITDA declined 4% to $480m. Margin was lighter due to utility costs.
Reeg said the regional business was “quite strong” although revenues were flat at $1.5bn, though adj. EBITDA rose 1% to $570m.

Free your mind: The analysts at Macquarie noted the Caesars “investment story” was now pivoting to free cash flow. Reeg said the company would be generating “something in the neighborhood” of $1bn of FCF in 2023, the vast majority of which would go to paying down debt.

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Tilman Fertitta’s Wynn move

The owner of the Golden Nugget has snapped up a 6% stake in Wynn Resorts, making him the second-largest shareholder behind Elaine Wynn.

Rocket fuel: The new ~$377m shareholding was purchased on October 19 through his Fertitta Entertainment vehicle, which also owns the NBA’s Houston Rockets and Landry’s restaurants. The Wynn share price rose 11% on the news.

🔥Wynn Resorts shares rise on Tilman Fertitta shareholding news

Accumulate to speculate? The news of the shareholding ignited speculation about Feritta’s motives. Analysts at CBRE said that though the filing “signals” a passive investment, Fertitta’s track record “suggests otherwise”.

They point to his previous buyouts of McCormick & Schmick’s and Morton’s Restaurant, both of which started with a similar SEC filing and “culminated in a full takeover”.
“Fertitta could remain passive, but that would be uncharacteristic,” CBRE added.
Still, CBRE noted the complexities in a potential buyout, notably the situation in Macau, which, they suggest, might mean any buyer would look to sell or spin out the assets.
Viable buyers would include Galaxy (which also has a stake in Wynn) and Genting, which was the surprise Macau concession applicant.

California damage

Negative ads and damaging rhetoric could have long-term impact on future sports-betting efforts.

Political casualty: The cause of sports betting in California is in danger of suffering long-term damage from the nature of the seemingly doomed campaigns for Propositions 26 and 27 in next Tuesday’s vote, according to Brendan Bussmann from B Global Advisors. Talking to the analysts at Truist, Bussmann blamed the “extremely negative tone” of the campaign ads.

Bussmann added that should both proposals be voted down, voter sentiment could take a long time to recover because of the “highly damaging rhetoric on mobile gaming's detrimental effect on consumers” by anti-prop 27 advertisements.
More widely, further iCasino regulation was also in doubt, with states not feeling the financial pressure to warrant them regulating the vertical.

Bettor Collective layoffs

Sources have confirmed reports that Better Collective is to shed ~10% of its US workforce as US expectations fall short.

Falling short: The EGR report yesterday said Better Collective was making redundancies at its business in the US and that the company is struggling to hit its medium-term target of $100m in revenues from the US.

It is thought the business has over-extended itself in terms of staffing levels and a pullback in numbers is needed to right-size the business going forward.
In Q2, the US division reported a loss of €1.8m versus a profit of €1.8m the previous year.
CEO Jesper Søgaard said at the time the company was taking a “very aggressive” approach to the US opportunity.

Time to inflect

‘Inflection point’ is emerging as the phrase of the quarter as Macquarie suggests they expect lower losses from US online in Q3.

The online operators could surprise the market with lower-than-expected losses, according to Macquarie, who pointed to the high level of hold in Q3 of 10.8% driven by football hold of 15% in September.

Macquarie calculated this could result in actual GGR being ~50% higher than normalized GGR, while actuarial NGR could be ~100% higher.
👀The team also expected DraftKings would “significantly beat Q3 consensus” on revenues and EBITDA.

Analyst takes

Downloads: The number of app downloads increased 31% YoY and 45% WoW during week 8 of the NFL, reaching 230k for the operators that control ~90% of OSB market share, according to the latest data from JMP. Season to date, FanDuel (+45% YoY), DraftKings (+66%) and Rush Street Interactive (+260%) all enjoyed above average growth compared with the overall sector.

Datalines

Macau: GGR of MOP3.9bn, or ~$488m, was down 10.7% YoY and 85% down vs. Oct19. The team at Macquarie suggested the figures “clearly show that demand remains hampered by strict travel restrictions,” despite the prospects for travel improving slightly.

But another recent outbreak that caused the temporary closure of the MGM Cotai has once again dampened expectations.

Newslines

Churchill Downs has completed the buyout of substantially all of the assets of Peninsula Pacific Entertainment for total consideration of $2.75bn, including assets and operations in Virginia, New York and Sioux City, Iowa.

Boyd Gaming has closed on its previously announced acquisition of Pala Interactive for $170m.

Tiidal Gaming’s Sportsflare has signed a licensing agreement with US daily fantasy sportsbook No House Advantage.

GeoComply has received a Tier One contractor license for its GeoComply Core and IDComply products from the Maryland State Lottery and Gaming Control Agency.