May 27: Weekend Edition #48

DraftKings analyst update, gaming sector analyst update, Rivalry Q1, Lottomatica Q1, sector watch - crypto +More

May 27, 2022

Where are we on the hope/despair pendulum? The gaming sector’s gyrations in the last few weeks - indeed just in this week alone - have been dizzying. As is discussed below, Las Vegas remains robust with no sign of a slowdown as yet. Yet the European online picture is less rosy - see Super Group’s somewhat enigmatic earnings statement this week. Given the febrile markets, it seems likely volatility will be with us for a while.

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DraftKings analyst update

Uneasy lies the head: The team at Jefferies came away from a meeting with senior management at DraftKings believing the bear case of needing extra cash is “not a likely outcome” and they “continue to expect a sentiment shift on the shares”.

Crunch: Jefferies note all the same that the cash position is set to deteriorate from $2.1bn as of the start of 2022 to ~$1.2bn after $890m of planned losses this year with the potential for California to eat up a further $200m-$250m.
At the trough: They suggest that at the “trough” late in 2023 DraftKings will have between $300m-$600m of cash before reaching planned breakeven in late 2023.

Jefferies: “Management reiterates its position that its capital needs are manageable such that any crisis levels and emergency capital raising would not be necessary.”

Dream on: A “topical issue” - and then some - is the prospects in California. DraftKings repeated to Jefferies their thoughts that the two proposals - a tribal retail-only question and the mobile solution pushed by DraftKings et al - can co-exist.

“Most important,” say Jefferies, is that the OSB structure is a favorable 10% tax rate with a (reclaimable via tax credits) $100m license fee.
“Our impression is that the company may spend approximately $200-$250M entering the market in the first six months, after which it would moderate considerably”.

Panning for gold: Jefferies say the acquisition of Golden Nugget remains a “critical opportunity” for DraftKings to enhance its icasino positioning. “It presents greater access to a broader demographic with higher LTVs and higher profitability,” they suggest.

Jefferies say the integration opportunities should include marketing efficiencies for the top line and GNOG’s fully-outsourced technology platform and some game content would be in-house.

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What we’re saying

This week’s Earnings+More podcast is available now via yesterday’s newsletter. You can also download it via YouTube, Spotify and Apple.

Gaming sector update

Timewarp: Having returned from a trip to Las Vegas, the Deutsche Bank team note there are no signs of slowdown as yet, even if it “might not be an if, but when situation”.

They argue that while the stock market action suggests that, as with 2007, the current era is at the top of the cycle with a “meaningful slowdown on the horizon”, the “potential indicators of a slowdown” were not yet visible.
“Conversely,” they point out, the various management teams in Las Vegas “remained very bullish,” to the extent of them being more so than of the recent positive earnings commentary.

Draft excluder: Despite the NFL predicting over 600k visitors to Las Vegas during the Draft proceedings, DB suggest the actual figure was around 300k. They noted that given the nature of the free event, they do not believe it drew in a crowd with a “high gaming-spend propensity”.

“Accordingly, we don’t believe the Draft was a meaningful needle mover for Strip operators.”

On the sidelines: The team noted that the “disconnects” between the broader macro picture of the demands of sellers on price, the team “don't get the sense that the broader M&A landscape is active”.

Datalines - Nevada Apr22

Strip revenues increased 22.8% YoY to a record $593.4m.
Statewide revenues were up 8.5% to $1.1bn, the 14th consecutive month in which Nevada has topped $1bn.

Locals were down 3.2% to $237.3m and Downtown revenues were down 12% to $67.4m.
Sports-betting revenue fell 6.87% to $25.4m; handle rose 27.4% to $583.2m.

Summer down: The team at Truist said Strip RevPAR was up +13% MoM and LV visitation levels were up 31% YoY, with its “room-rate survey showing strong but somewhat decelerating growth as we head into the summer months”, although there were signs of those revenues stabilizing, it added.

Signs pointed to continuing strength on the Strip, but Truist remained “on the lookout for any negative impact from macro/inflation headwinds”.
“While Q1 earnings commentary has indicated macro resilience, we’ve also heard concerns that sustained inflation could show an impact,” it added.

Rivalry Q1

Revenue up 149% to C$4.8m, up 122% sequentially.
EBITDA losses rose to C$6.5m from $2.3m.

Market entry: Steven Salz, CEO, noted the Q1 results don’t include any revenues from its new launches in Ontario and Australia. “In many ways (our market entry strategy) is the inverse of our peers.”

“In new markets, we start slow on spend, take in feedback, conduct user testing, iterate against it and build brand awareness in parallel.”

Money cannon: In Ontario Salz suggested the promotional environment had seen operators compete to see ”who could subsidize the customer the most”. In comparison, he suggested Rivalry was also to pace its spend.

“Our slower and more staged approach would perhaps seem misguided in a bull market (but) now looks prudent,” Salz added.

Steven Salz: “We spent C$100k in the first month; our competitors spent that in the first hour.”

Data point: Salz noted that esports-betting was worth ~90% of handle.

Tailored: Analysts at Regulus noted Rivalry has “thus far championed low consumer acquisition costs, with a tailored product to an esports audience”.

Compare/contrast: The Regulus team suggest there are comparisons to be drawn between Rivalry and Esports Entertainment which earlier this week said it was writing down the value of some of its esports assets. They note that Esports Entertainment’s Vie.gg esports-betting operations in New Jersey reported minus revenues of $23m.

Lottomatica Q1

Revenues rose fourfold to €413.6m while EBITDA likewise soared to €125.2m. Pro forma LTM EBITDA at €344.7m.

Back up and running: After the forced Covid closures of Q121, the company behind Lottomatica Scommesse and Goldbet said that against Q119 comparatives, EBITDA was ahead by over 52% while retail betting EBITDA was ahead 60% pro forma on Q119 and online betting was up a pro forma 290%.

We are no.1: The company said it is market-leading in retail betting with 35% market share, no.1 in online betting with 16.2% share and also in the lead in online gaming

Feeling the pinch: Asked on the call about any signs of a consumer slowdown, CFO Laurence van Lancker repeated the message from elsewhere about resiliency in the gaming space. “So far, spending is holding up well. We’re not seeing a pinch on the consumer, yet.”

Feeling the heat: CEO Guglielmo Angelozzi said that the worst of the energy price shock could also be mitigated by the retail betting and gaming machine outlets where energy consumption could be “fine-tuned”.

“The number of machines in use, the opening hours, the air-conditioning, you can play a lot with the volumes of energy you use without affecting the operations of retail.”

Earnings in brief

STS: The Polish sports-betting operator grew first-quarter EBITDA 17% to $16.7m on revenue that grew 6.3% to $65.6m. The company said a decline in actives was due to the company pushing its customer acquisition into the second half due to the timing of the World Cup.

LVS and IGT analyst updates

Singapore sling: Credit Suisse analysts say Las Vegas Sands is “increasingly attractive” based on its ~$6.5bn of cash and the potential for high growth in Singapore and New York.

They note that the rising EBITDA trend for LVS’ MBS property - $17m in Jan, $46m in Feb and $58m in Mar - suggesting it will be closer ot $80m in Apr “and it sounds like trends continue to accelerate”.
We think Singapore could pick up some play when Chinese players begin to travel again and Singapore is potentially viewed as a more attractive market.

The Macau recovery, however, remains more opaque and is a “function of the Covid situation in China which seems increasingly difficult to predict (zero tolerance policy).

Idea generation: The team adds that IGT is “still one of our best ideas” and that despite the stock volatility, “nothing fundamentally has changed”. Italy trends should improve sequentially and capital return should accelerate as IGT pays down debt (payments sale).

“Ironically, lottery is probably the most resilient space in our entire coverage should there be a recession, although the stock is not getting credit for that currently, in our view.

TLC analyst update

No scrubs: The team at Macquarie the creation of the pure-play The Lottery Corporation (TLC) was positive for “other lottery exposed companies within our coverage, such as IGT and NeoGames”.

Don’t go chasing waterfalls: Having listed on the Australian Stock Exchange on May 24 with an initial market value of AU$10.5bn, Macquarie said the group is trading at 18x and 17x its ‘22E and ‘23E EBITDA estimates.

They noted that from an operating perspective, the business has long-dated and generally exclusive licenses across lotteries and keno within Australia where it operates across retail and digital channels.

Crazysexycool: Lotteries are “remarkably stable and consistent” and “have grown at a 3.6% CAGR over the past 15 years, proving resilient even during the GFC and COVID”.

New entrants also faced “high barriers to entry driven by long-term relationships that are hard to displace, significant scale and capital requirements, and specialized/comprehensive technology”.

Sector watch - crypto

Luna landing: The collapse of the stablecoin Terra has led to fears of another crypto winter, according to Coinbase CEO Brian Armstrong.

Terra and its sister crypto token Luna effectively went to zero after its attempt to peg itself to the dollar went spectacularly awry. The collapse contributed to an $83bn call in the crypto sector’s value.

Do Kwon 🌕 @stablekwon

Those of you waiting for the earth to become unstable- I'm afraid you will be waiting until the age of men expires Cities have returned to the dust Oceans have gone bone dry The map of continents have been drawn anew And dinosaurs once again roam the earth Gluck

Untethered: The wave of selling forced Tether, the biggest stablecoin in the market, to ‘depeg’ from USD for a short while. The market has apparently stabilized now, but the value of cryptocurrencies is very much linked to tech and US equities and the crypto contraction has happened at the same time as the broader selloff of tech and digital stocks in the past two months.

In that time, Bitcoin dropped from $48K in March to $38K at the start of May and is now valued at around $29K.

Now you tell me: The Terra disaster cast a spotlight on the crypto exchanges which have helped promote the many thousands of crypto currencies now available on the market. Binance, for instance, promoted terraUSD as a “safe” investment just weeks before the collapse.

Binance CEO Changpeng Zhao acknowledged via his blog late last week that “it’s now obvious that the whole thing was built on a self-perpetuating, shallow concept”.

What’s a ponzi scheme again? “While terra did have an ecosystem with some use cases, the speed of growth of the ecosystem did not match the speed of the incentives used to attract new users.”

Further reading: Crypto exchanges and the key role they play when it comes to listing coins.

Newslines

Kambi: A spokesperson offered no comment on recent share-price movement which has prompted speculation linking the sports-betting backend provider with pretty much every other company in the sector.

King’s Gambit: Gaming affiliate provider XLMedia has appointed David King as CEO and joins the group on 1 July. King was most recently CEO at JPIMedia and succeeds Stuart Simms.

Virgin territory: The 888-powered SI Sportsbook has gone live in Virginia. The launch follows that of the Sports Illustrated-branded online sportsbook in Colorado in September.

Slam dunk: NBA franchises cleared $1.2bn in sponsorship revenues during the 2020-21 season and were bolstered by sports betting spending, according to the latest Marketing & Partnerships Annual Report by consultancy SponsorUnited.

Get off of my cloud: The Champion’s League final will be the biggest event in crypto-betting history according to Cloudbet.

What we’re reading

This can only end well: Kalshi, a new prediction market, lets people bet big and as the article notes, Commodity Futures Trading Commission concerns were “overruled by the agency’s politically appointed commissioners, one of whom has since joined Kalshi’s board”.

“Perhaps one day, Robinhood users could be given access to Kalshi so that, after picking up their phones to buy shares in GameStop, they’d be prompted to place a bet on the Oscars or the next Federal Reserve commissioner.”

What we’re writing: Clear as mud. Super Group results lead to even more questions.