Revenues are high for Flutter Entertainment, but so are losses
Hearing Flutter Entertainment and Fan Duel make their big announcement this week about their record year-end revenue surge and hold on the world's sports wagering market reminds me of watching a drug commercial on television. Can you slow down the message enough for me to read the "small print" at the bottom of the screen?
The headline read that Flutter, also the owner of the Paddy Power, Betfair, and Poker Stars brands, reported $1.4 billion adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), an increase of 23% on a pro forma constant currency basis. In simpler terms - they made piles of cash. The company maintained its U.S. online leadership in 2020 with 40% sports betting and 20% gaming market shares in Q4. Wow.
Australia-based revenue continued the growth trend from Q3 and surged 59% last year to just over $1 billion. Revenue from the U.S. market soared by 81% on a constant currency basis to $695 million. Quite impressive.
That excluded an EBITDA loss of $170 million in the USA, which is currently a booming market and is expected to double its previously estimated size. Huh? What is that all about?
Missed That Day in Business School
Ok, so how does any company that earned that much revenue in one year and experienced those kinds of increases manage to LOSE that much dough? I realize I did not graduate at the top of my class, but did I miss that much time asleep in school?
To report a $170 million loss in what is currently a booming market needs some explaining.
In definition, the entire company changed its name to Flutter, born of the combination of Betfair and Paddy Power, the name of a betting exchange that Betfair bought in 2001 because they had so many brands under their corporate umbrella that naming itself after two didn't seem to make sense.
Flutter also owns the TVG Network, the horse racing television channel and wagering network, Adjarbet and Sportsbet, along with PokerStars. The Stars Group also owns SkyBet.
In their $6 billion dollar deal in late 2019 purchasing The Stars Group and forming Flutter Entertainment, the hidden message was that online poker was not at the peak it had experienced in prior years. That likely significant drop in popularity and revenue opportunity also affected the U.S.
At the time of the acquisition Stars Group COO Raft Ashkenazi reported this message:
"This exciting combination will allow us to enhance and accelerate our existing strategy. In recent years we have transformed TSG from a single product operator in poker to a diverse global leader with multiple product offerings across poker, gaming, and sports betting. The combination with Flutter will further enhance our company's core strengths and position us strongly for the future in this rapidly evolving industry. I'm delighted to be joining the Board of the Combined Group and to serve as its COO."
It seems apparent in the prior year Flutter must have absorbed some of those "diversity" changes. In poker terms, they will be waiting for the next better hand in the game to play.
Know My Name
If we took an identity test for anyone watching a sporting event in 2020 it is likely they would recognize the names FanDuel or DraftKings as much as Coke, Pepsi, or Budweiser. That is how much the top two U.S. sportsbook operators have invested into advertising and promotion in building their leading sportsbook market shares.
That has a steep cost, which also likely explains the somewhat disappointing bottom-line U.S. figures based on such spectacular wagering handle. Building that kind of name recognition does not come cheap. And neither does the cost of acquiring new customers.
Greatest Sign-up Opportunities in History
As each U.S. state rolls out new opportunities along come ultra-competitive sportsbook operators like FanDuel anxious to do about anything to sign-up new customers. Although that strategy has an excellent long-term effect, it has a high price to initially pay.
Also, remember the sports betting industry is not a retail business but a "risk business", where the average monthly hopeful rake or return averages 6%-8%. As proven in monthly reports by several U.S. states, some months return has averaged far less than 6%. Along with that is the hefty tax and licensing fees each state charges operators to be included in the numbers.
Flutter and FanDuel are not alone in this initial "bet on the future" business plan occurring.
Diamond Eagle Acquisition Corp., a special-purpose acquisition company (or SPAC), paid $2.7 billion in cash and stock for both DraftKings and sportsbook technology supplier SBTech in 2019. DraftKings reported a net loss of $142.7 million that year despite revenues rising 43% to $323.4 million.
The company said the higher loss came from continued platform development and expansion costs due to expansion into three new states.
Still, both companies continue to spend unlimited money on advertising in the U.S. with no end in sight. Flutter Chief Executive Officer Peter Jackson said in a recent statement, "Nowhere has our growth been more evident than in the U.S. with customer economics that continue to exceed our expectations."
Perhaps he is right, as in the first seven weeks of 2021 Flutter's revenues, including the Super Bowl numbers, have increased by 36%.
A Guaranteed Bet
Most recent estimates by economic experts and market pundits have tabbed the opportunity for U.S. sports wagering to be as high as $25 billion by the year 2025. That means you will be hearing FanDuel and DraftKings mentioned morning until night before, during and after every game you watch or listen to.
Your best bet is to carefully scan the list of top online sportsbooks to take advantage of every excellent FREE sign-up opportunity possible. To weigh not only the potential of what they might reward you but the competitive wagering advantage of the games you may bet upon.
I know they say, "the house always wins". But in carefully reading these sportsbook year-end reports, I'm not so sure . . .
Glenn Greene covers the games from a betting angle every week exclusively at OSGA.com. For weekly betting insights, including previews and picks from Glenn, click here.