ESPN goes all-in with Penn

Say hello to ESPN Bet, FanDuel’s ton up, LNW-SciPlay deal, earnings in brief includes Full House, Endeavor, Genius +More

Earnings+More

Aug 09, 2023

Good morning. On today’s agenda:

Penn does $1.5bn deal with ESPN, drops Barstool.
Flutter says FanDuel produced $100m of adj. EBITDA in Q2.
Light & Wonder completes buyout of SciPlay stub.
Earnings in brief from (deep breath) Full House, Endeavor, Genius Sports
… and Century Casino, DoubleDown, Playtika.

Television man made me what I am.

Penn switches channels

Penn has switched sports-betting horses, teaming up with ESPN and dropping Barstool.

That ain't working, that's the way you do it: Penn Entertainment will pay $1.5bn in cash payments for the exclusive right to the ESPN Bet trademark for an initial 10-year term with an option for a further 10 years. ESPN will also be granted $500m of warrants to buy 31.8m Penn shares. A further 6.4m of bonus warrants would be available if market share targets are hit.

The OSB offering will be launched sometime in the fall, rebranding Penn’s existing Barstool Sportsbook operation.
At the same time, Penn has sold 100% of Barstool Sportsbook back to Dave Portnoy, thus ending one of the more controversial partnerships from the OSB era.
In exchange, Portnoy has signed a non-compete alongside other restrictive covenants and has agreed to give Penn 50% of the proceeds from any subsequent Barstool sale.

Hooking up: ESPN-owner Disney has been rumored to be seeking a deep partnership with a sportsbook for some time and reportedly late last year got close to agreeing a significant partnership with DraftKings.

Instead it has gone the route of a full branding exercise, which will see Penn benefit from “exclusive promotional services across ESPN platforms, including programming, content and access to ESPN talent”.

Penn estimates that, long-term, ESPN Bet will provide $500m-$1bn of annualized adj. EBITDA to its interactive arm.
At the same time it will relaunch its iCasino with a separate Hollywood-branded app.
Penn CEO Jan Snowden said the deal was “transformative”, while Jimmy Pitaro, chair of ESPN, said that after many meetings it was “clear” Penn was the “right long-term strategic partner to build ESPN Bet”.

A supposedly fun thing that I’ll never do again: Certainly, despite the noise created by Dave Portnoy, the Barstool Sportsbook failed to set the market alight. After the latest furore around the sacking of Barstool personality Ben Mintz, Portnoy hinted he might leave the business altogether.

Meanwhile, Barstool Sportsbook struggled to achieve anything but a low single-digit market share in all of the markets it entered.
It also failed to secure a license in New York.
Snowden said the Barstool team had helped Penn to “rapidly scale” across 16 jurisdictions and introduced the Barstool audience to its retail and digital products.
The initial 36% of Barstool cost $163m in Jan20, with Penn stumping up $388m for the remainder in February this year.
Whose idea was this? Wells Fargo said owning a viral-driven media platform “was nearly impossible for a publicly traded, licensed gaming company such as Penn, so we are not shocked at a parting of the ways.”
Deutsche Bank summed it up: “The Barstool partnership wasn’t working, the risks were too significant and Penn was at a crossroads.”

Number to play with: Jefferies noted that including the $551m for Barstool, the $2bn paid for theScore and the $2bn in cash and shares for the ESPN deal, Penn has now outlaid $4.5bn of digital investment.

Don’t bring me more questions: The team at JMP put it baldly: will this media tie-up work when others have signally failed, including Barstool. Noting that Sky Bet in the UK “only saw success when it stopped depending on Sky for customers”, the team suggested Penn has its work cut out as the competition isn't standing still.

“Recent share gains within the industry have been product driven, and we believe Penn will need to prove to investors its product is on par with industry leaders to hit its targets,” the team added.
DB said Penn had opted “essentially double down with a new strategy” and, as the team at Truist noted, the deal is “not cheap”.

📺 Penn’s after-hours share price bump

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FanDuel hits a ton

FanDuel achieves $100m of profit in H1 as Flutter beats forecasts elsewhere.

Driving the news: The official stamp of inflection point for the US OSB and iCasino sector has been marked by sports-betting market leader FanDuel, which achieved adj. EBITDA of $100m. The US division as a whole notched up adj. EBITDA of $63m taking into account Fox Bet and PokerStars US losses.

Revenue for the US division rose 63% in dollar terms to £1.78bn
Flutter said FanDuel was the “clear market leader” with 47% market share in OSB and 23% share of US iCasino.
Notably, this is down 300bps from the time of its Q1 trading update in May.
Flutter is forecasting full-year US net revenues of $4.5bn-$4.9bn for 2023 and adj. EBITDA of $120m-$240m.
Group H1 revenues came in up 42% at £4.8bn with adj. EBITDA at £765m, a 76% increase. It expects ex-US full-year adj. EBITDA of £1.44bn-£1.6bn.
The company noted it was working towards the completion of its US dual listing by Q423 or early Q1 next year.

👀 Buy the rumor, sell the fact – Flutter down 5% in early trading

Zooming out: CEO Peter Jackson said it was important to see the context of the US business and that the business was “bigger than anticipated” just a few years previously. “I’m focused on the trajectory into next year,” he said. “There is a very material shift in earnings, and that will compound next year.”

“We’ve proved the model works,” he added.
“We’re continuing to see good returns across the board,” he said, adding the lifetime values had proved to be better than forecast.
Catch us if you can: “We have a bigger warchest” with the marketing and product, Jackson said. “We’re a fast-moving target.”
“Rest assured, we’re investing very heavily in our market-leading position.”

Noisy neighbors: Asked about the ESPN deal overnight with Penn, he said “we always anticipate a highly competitive environment”. “There are a few people who say they intend to make something of a splash” this NFL season, he said.

“We do the deal we want to do and leave others to do deals we don’t want to do,” he added.

Flesh on the bones: Flutter said it estimates that pre-2022 states could increase at a CAGR of 15-20% between 2022 and 2025. At the same time, it estimates the CAGR from 2022-23 state launches is 60-70%.

Should these levels of growth be hit, it expects costs as a percentage of revenue to fall.
It noted that cost of sales at 50% was currently within the 2030 target of 47.5-52.5%.
Sales and marketing at 27%, however, is still more than double the target of ~12.5%.
Other operating costs at 10% are also double the 2030 target of 20%.

The template: The company noted that the Ohio launch in Jan23 cost it ~$120m after adjusting for positive sports results. But the company does “not expect to incur significant losses” in H2. The company estimates that states worth 4-5% of the US population will open in 2024/25.

“The Ohio template is a good framework for considering the financial profile of these states in the period post launch,” the statement added.

Tacking: The statement noted the performance of its UK & Ireland division in the face of regulatory headwinds, with revenue up 13% to £1.24bn and adj. EBITDA up 24% to £396m. It said sports revenue growth of 11% was driven by an expanding recreational player base. UK & Ireland retail was up 11%.

International revenue was up 85% to £1.17bn helped by the addition of Sisal in Italy and which represents 47% of segment revenues.
Australian revenues were down 1% in Australian dollar terms to £601m, while adj. EBITDA dropped by 27% to £158m. The drop was largely down to increased points of consumption taxes and higher marketing spend.
Jackson said Sportsbet in Australia was a “real Covid winner”, adding that he hoped the company would return to growth next year.

Light & Wonder’s big play

An agreement has been reached on the 17% of SciPlay it didn’t already own.

Friends reunited: “We’re excited to bring SciPlay back into the house, in totality,” said L&W CEO Matt Wilson on the call with analysts after the company announced the $485m acquisition of SciPlay’s remaining shares.

“Bringing them back into the family gives us ultimate flexibility of how we deploy capital. It’s the last big milestone for us in terms of streamlining the platform: now it’s about executing.”

SciPlay was spun out of L&W/Scientific Games in 2019, but by 2021 there was already talk of a recoupling.
The deal is expected to close in Q4.
SciPlay achieved record Q2 revenue of $190m, a 19% increase YoY.

Triple threat: More broadly, revenue was up 20% to $731m with double-digit growth across all three business lines, powered by gaming machine sales in North America and Australia, which rose 41%. Table revenue turned green, rising 34% YoY, while gaming adj. EBITDA was $233m, up 30% YoY.

Online gaming enjoyed a 32% YoY revenue boost.
Wilson said the business is on track to launch live casino in Michigan during the second half of 2023, pending regulatory approval.

L&W debuted on the Australian stock exchange in May and is committed to investing more in operations down under. The listing gives access to a deep, liquid pool of institutional investors with strong gaming ties that are unable to invest offshore.

The land of plenty: “It’s gone beyond our wildest expectations,” said Wilson.
“Three months in, we are well ahead of expectations. We’re in Sydney next week in front of investors talking about the story. We’re firing on all cylinders.”

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Earnings in brief

Full House: The Temporary by American Place in Waukegan, Illinois has completed its first full quarter of operations, notching up $20m of revenue and $4.1m of adj. EBITDA and helping to boost group revenues by 34% to $59.4m. Continued work on the Chamonix in Colorado meant adj. EBITDA was down 13% to $10.5m.

CEO Dan Lee said it was a “complicated quarter”. He noted the steakhouse for the Temporary – “basically a diner” – was “disappointingly late” but would open in September, as would the sportsbook.
He noted that the building work on the permanent casino in Waukegan had been delayed by a lawsuit against the city from the Potawatomi tribe.
“We thought this soup was pretty much gone, and they appealed something… and so that puts it back into flux a little bit,” he added.
On financing the project he noted the “horrible” state of the bond market at present and dangled the prospect of doing a REIT deal to get the cash.
“Delays aren't all bad because it does make the financing easier,” he added.

Endeavor: The sports data and technology segment saw revenue rise 116% to $131m YoY, driven by the inclusion of OpenBet and growth at IMG Arena. The segment’s adj. EBITDA was $13.7m, down 11.7%. The segment was affected by certain costs at IMG Arena incurred in advance of the sales cycle.

CEO Ari Emanuel said OpenBet was boosted by the launch of its deal with OPAP.
It was a “significant development” that demonstrates OpenBet’s focus on pursuing “durable growth within the sport-betting ecosystem”.
On IMG Arena, CFO Jason Lublin noted new data costs “continue to create temporary pressure on segment margins”.

DoubleDown Interactive: Revenue came in 7% down at $75m, reflecting the further normalization of player activities following the lifting of Covid-related restrictions and more normalized consumer entertainment-focused behavior in 2023 compared to the prior year. Adj. EBITDA was up 10% to $27.6m.

Playtika: Revenue was down 2.5% YoY to $642m as the company said it was “adapting to the changing mobile gaming environment”. This week the company completed the Governor of Poker acquisition for €81m.

Century Casinos: Analysts at Macquarie said that similar to others in the land-based sector, Q2 was not kind after adj. EBITDA fell 2% to $29m on revenues up 23% to $137m boosted by the Nugget Co. acquisition. Current trading has also been bolstered by the closing of the Rocky Gap deal.

Genius Sports: Results were dominated by the renewals to its contracts with Football Data Co and the NFL as Q2 revenues rose 22% to $87m and group adj. EBITDA increased 87% to $16m.

CFO Nick Taylor explained under new terms with the NFL the 2m warrants originally intended for 2027 and 2028 had been replaced with predetermined cash payments.
CEO Mark Locke said both deals gave the group “stronger visibility” over its cost base. Genius raised FY23 guidance by $10m to $410m and adj. EBITDA by $3m to $52m.

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Newslines

BetMGM has signed a market access agreement for Kentucky with Revolutionary Racing. The agreement also allows for a retail sportsbook to be built at Sandy’s Racing & Gaming, a gaming and entertainment facility in Ashland.

Meanwhile, MGM Resorts, BetMGM and the Borgata Atlantic City have collaborated to introduce Evolution’s dual-play roulette, allowing players at a physical table in the casino and online players to participate in the same game.

Bragg Gaming has signed an agreement to provide a number of its games to PokerStars.

DAZN has acquired broadcast rights to stream the Saudi Pro League to UK viewers, effective with the kick-off of the upcoming season on August 14.

Affiliate Catena Media has initiated a €3.8m-€4.2m cost savings program following the sale of its UK and Australian brands to Moneta. This will be in addition to the €2.8m it will save as a direct result of the sale.

Calendar

Aug 9: Inspired Entertainment, Sportradar, Penn Entertainment, Everi
Aug 10: Entain, Acroud, Bragg Gaming
Aug 14: Playmaker
Aug 15: 888
Aug 17: Rank, Raketech, Gambling.com, Super Group

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