Due Diligence #3

New entrants enter the OSB fray, Kindred serial warnings, recent analyst takes +More

Earnings+More

Jan 17, 2023

Welcome to issue #3 of Due Diligence, our monthly deep dive into the sector’s shifting currents.

In this issue, we take a look at what Fanatics has said about its US market entry strategy, assess its chances of success and what its belated appearance might mean for the to-date settled status quo at the top end of the market.
We also look into what Kindred said last week when it issued a profit warning for Q4, stating that its performance didn’t meet management’s expectation.
Lastly, we have a selection of the latest analyst takes including some views on DoubleDown’s buyout of SuprNation, the company behind the Duelz.com site.

What’s that coming over the hill?

Seconds out

The US sports-betting market is set to get a whole lot more competitive this year.

Objects in the rear view mirror: The latest and perhaps the most serious challenge to the supremacy at the top end of the US sports-betting market is almost upon us. Within the next week, BetFanatics will launch operations in Maryland, first via a retail outlet at the Washington Commanders’ FedEx Field and, within weeks, online.

The launch was confirmed on social media, but the company is yet to register for an online license in Maryland.
It appears the online debut will actually be in Massachusetts after the company gained a temporary one-year license following a hearing with the Massachusetts Gaming Commission.
Fanatics also has an Ohio license but is yet to confirm a date and told the MGC it had applications pending in five more states.

A sighter: Last week’s online presentation to the MGC by Fanatics Betting & Gaming CEO Matt King gave greater insight than before into its plans to be live in the majority of online states by September 2023. Despite its admitted second-mover status, King said FBG would “play the role of innovator”.

King said he had assembled a team with a proven track record and expertise in sports betting.
They include Ari Borod, previously at FanDuel; ex-Beats by Dre CMO Jason White; CTO Ian Botts, also formerly at FanDuel; and Andy Wright, VP of trading, who was previously head of trading at Sky Bet.

I’ll follow the sun: Noting Wright’s previous experience, King said Sky Bet was “very analogous” to Fanatics. “They did in the UK what we will do in the US, which is really be a second mover in the category,” he told the commissioners.

To achieve that, King said FBG would create a “very consumer-focused proposition”.
“One of the luxuries from being a second-mover is having the benefit of hindsight,” he added.
To take advantage of the perspective gained, King said FBG was building scale from the ground up and that meant building stability into the system.
“One of the things that has been most frustrating to consumers in the first wave has been stability,” he argued.

Own it: The MGC meeting was the first confirmation of FBG’s use of a core code base bought from Amelco. CPO Scott McClintic said the company was “Fanatasizing, if you will” the course code. King noted that 70% of the business was dedicated towards product development, with a “particular focus on loyalty”.

Matt King: “At our core, we want to be the most preferred brand to all consumers. That means being the best operating team in the business. We are in this category to build real (market) share.”

Base jump: Fanatics has made much of its 94m-strong US customer database and noted that in Massachusetts it has 2m customers’ details on file. In a recent Washington Post interview, Fanatics CEO Michael Rubin said he wanted to build the “greatest cross-loyalty program in sports”.

King also noted the customer base and said it gave the company access to customer research.
“What we have learned is relatively simple,” he said. Betting and gaming consumers “want what is out there but they want it done better”.

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Team of rivals

You’ve got company: FBG isn’t alone in hoping it can break into the top tier of OSB operators. The betting public in Ohio got the first sighting of micro-betting startup betr when the market launched, while EKG pointed out in a recent report that European “sleeping giants” bet365 and Tipico were ramping up their efforts in various states.

In a recent note, analysts at Roth believed Fanatics’ branding and database “offer the potential to assert meaningful market share”. They noted, though, that it’s “difficult to assess” without knowing the quality of the offering.
Still, Roth suggested Fanatics’ entry will “reinvigorate” the marketing costs for incumbents.

Firepower: Fanatics has the cash to sustain a prolonged push. Since 2021 it has added $2.8bn in new funding with the latest raise of $700m valuing the business at $31bn. The company said at the time the new money would be used for M&A either in collectibles or gambling.

In the MGC presentation, it said it had cash on the balance sheet of $2bn and that the business as a whole generates revenue of $6bn in 2022.

Me, worry? Where might the introduction of Fanatics cause the most consternation? As one source put it, it has the money, it has hired a top-notch team and it has the tech, albeit with unknowns around previous US deployments of the Amelco codebase. “I think it is a smart mass-market play but execution will be paramount,” the source added.

As another source noted, it will have to spend an “absolute fortune”. But noting Fanatics’ war chest, there was the suggestion that some of the major players will be more worried than others.
“FanDuel and BetMGM are somewhat cocooned,” said one source.
“But I think it will be a problem for DraftKings in particular because they haven’t got the money to keep them relevant and I think it will also slow Caesars.”
By implication, the appearance of Fanatics – and to a lesser extent betr and the greater US push by bet365 – will also be causing furrowed brows at the second-tier operators, “those that don’t have the cash to stay relevant”.

Bottom line: This year will be a huge test for the status quo of the US online market as it developed post-2018. As one source put it, “so much of the success of FanDuel and DraftKings is down to having first-mover advantage”. “It should never be underestimated,” they added. “It’s absolutely massive.”

Kindred’s woes

Investors at Kindred must think Punxsutawney Phil has taken over as CEO.

It doesn’t have to be this way: Analysts at Regulus pointed out that Q4 was “meant to be a soft comparable” compared to a pandemic-affected quarter in 2021 and with the added benefit of the World Cup. But that turned out not to be the case with Kindred, which last Friday issued a further profit warning. Recall, late last year it warned around the time of its enforced Netherlands exit.

This time the company suggested the World Cup had been more of a dis-benefit, causing a shortfall of games.
In the US, meanwhile, Mattress Mack’s Astros win was the cause of a ‘one-off’ £4.4m hit to the bottom line.
It then threw in problems caused by the introduction of new responsible gambling measures in Belgium and changes to its offering in Norway as further reasons for the earnings shortfall.
On the call, CEO Henrik Tjärnström said Kindred takes the problems “very seriously”. “Actions are being taken to improve our profitability in the short and medium term,” he added.

Remedial: Tjärnström appeared sanguine over the “one-offs” of Belgium and Norway. In the first instance, he pointed to a similar downturn when previous measures were introduced in Belgium, particularly with higher-value customers. “It took a couple of quarters and then we saw Belgium growing strongly,” he claimed.

He admitted, though, that Norway was “less of a one-off” and that the changes to the offering designed to appease the regulator were “expected to continue to impact revenues until they lap the changes in Q4 this year”.

Hand me that wrench: In the US, Tjärnström appeared to suggest the company was cutting back further on its marketing despite the plan to launch on its own backend in New Jersey within weeks. He noted this would be “an important milestone”, giving the local team an “improved toolbox”.

He added this was an “important step” towards breakeven, which he insisted would occur this year after US losses “bottomed out” in 2022.
In terms of underlying EBITDA those losses totaled £15.9m in Q4, according to the profit warning, or £10.6m ex-the Mattress Mack payout.

Here comes Mr Brightside: The only upside from the call was the Netherlands, where Tjärnström said Kindred was currently third in the market with hopes of regaining the top spot this year.

Known knowns: Regulus wasn’t impressed by the excuses. “Even with these headwinds, the result is relatively lackluster,” the team noted. “While the company blames fewer major football matches for the weak performance, this was a known variable when guidance was provided.”

Regulus also questioned whether Kindred is addressing the more long-term issue of the cratering of margins in regulated markets caused by the cost of mass-market engagement and localization measures.
Notably, Tjärnström’s Belgium defense was that the company will bounce back from having regulator-imposed responsible gambling messaging.
But as Regulus pointed out, it is the nature of regulated Europe that further restrictions will be imposed and will act as a ratchet.
“A rising tide no longer rises all ships: those even partially anchored to weak market share in mature markets are likely simply to be swamped,” the team concluded.

DoubleDown’s SuprNation deal

The $35m deal for the operator behind the Duelz.com site marks a strategic shift for the social gaming operator.

Sanity check: Macquarie analysts suggested the ‘sensible’ multiple of ~1.5x sales provides a “positive readthrough” for further sector M&A after a period in which deals have been stymied by “lofty private market seller expectations”. They added that the chatter is of valuations “starting to become more reasonable”.

“We are beginning to see concrete signs that valuations have pulled back to a level conducive to M&A,” the team said.
They pointed to PlayStudios’ deal for Brainium in October where management said it “couldn’t have been done a year ago given the elevated valuations at that time”.
B Riley added that the lower valuation “might spark” B2C interest in casual gaming operators in the search for proprietary content and significant player bases.

Branching out: Sources suggested it is logical for social and casual gaming operators to look at adding real-money gaming functionality. “As iGaming (eventually) happens, the risk to the social platform is significant if they don’t have a strategy,” the source said.

“So I think DD has been particularly smart to give themselves a toolkit at a relatively low price for something that is coming down the pipe,” they added.

Analyst takes

The team at JMP suggested US online gaming is poised for a strong Q4 reporting season.
CBRE ran the rule over the runners and riders in the New York downstate casino race and tipped MGM as one of the likely winners.
Jefferies said it believes investors will continue to steer clear of the gaming sector until the threat of a downturn recedes.
Wells Fargo put the case for Macau being finally past the worst with the junking of China’s zero Covid policy.

Calendar

Jan 19: Kambi Capital Markets Day

Jan 26: Rank FY

Contact

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