Outlook dampened by regulatory expenses
Revenues: Social removed, but Aspers is contributing well
Reported net gaming revenues (NGR) from real money gaming (RMG) increased 12% to £43.9m, driven by a 21% increase in the proprietary platform (excluding Aspers). Non-proprietary revenues (from acquired assets) declined by 2% to £15.1m, in line with the group’s strategy to migrate players in house. Encouragingly, the Aspers JV is performing well and contributed £1.0m to adjusted revenues. In total, adjusted revenues grew 14% to £44.9m.
Given the ongoing limited visibility in the social gaming vertical, management has decided to focus on the core RMG business and social gaming no longer forms part of continuing operations. This was in line with expectations and InfiApps is now reclassified as held for sale with a book value of £4.3m. The discontinued operations resulted in a loss after tax of £2.3m (vs a loss of £9.3m in the prior period).
EBITDA: Including five months of 15% tax on bonuses
H118 EBITDA from continuing operations declined by 1% to £8.7m, broadly in line with expectations. This represents an RMG EBITDA margin of 19.8% vs 22.4% in the prior period. The margin decline was due to the increase in POCT, which took effect in October 2017 (including free bets into the tax). The impact of the tax on free bets was £1.7m and, on a like-for-like basis, EBITDA increased by 19%.
As the business continues to scale and drive revenues onto the proprietary platform, we expect underlying margin expansion. However, this is expected to be offset by increasing gaming taxes, as well as accelerated investment for regulatory compliance. In addition, we believe the expansion into international markets will affect FY19 EBITDA by c £2m.
Cash flow: £19.8m net cash, with earnout paid post period
Operating cash flow was £9.0m and the company ended the period with net cash (excluding £2.7m player balances) of £19.8m. Post period, the company made a final £9.6m cash payment in relation to the earnout for the Tarco assets. In addition, Stride has agreed to sell its 24.2% stake in QSB (Spanish online bingo and casino) to Rank Group for an initial cash consideration of £5m (plus deferred consideration of £0.5m and further potential upside of £7.0m).
An interim dividend of 1.3p has been announced, in line with our FY18 estimate of 3p per share.
Outlook: H218 hit by regulatory headwinds
Given the ongoing regulatory headwinds in the UK, Stride has provided a cautious outlook for the medium term. The company has steadily been investing in personnel and technology to comply with regulatory requirements, and we anticipate accelerated investment over the next 12-24 months. Additionally, with the commitment to expand internationally, we anticipate higher than usual marketing costs for H218 and FY19.
Lowering forecasts: FY18 EBITDA declines 17%
For revenues from continuing operations, we have lowered our growth expectations for the RMG division (excluding Aspers) from 14% to 8%, to reflect a slower overall market growth (due to regulatory issues). As a positive, however, the shortfall in RMG is broadly offset by the increasing contribution from the Aspers JV. Including the Aspers JV, our core revenue forecasts decline from £93.6m to £91.4m in FY18 and from £104.5m to £103.1m in FY19.
Reflecting the impact of stripping out social gaming, as well as the higher levels of investment into compliance and international marketing, we have lowered our group FY18 and FY19 EBITDA forecasts by 17% and 29% respectively.
Real money gaming: Organic growth and diversification
Proprietary platform (64% of revenues)
Stride reported strong organic growth in its RMG vertical, with net gaming revenues from its proprietary platform increasing 21% to £28.7m. This is slightly below our forecasts but still suggests that Stride is gaining market share on its proprietary platform.
Deposits increased 11% to £79m and yield per player increased 11% to £141, demonstrating a continued improvement in engagement and monetisation of players. However, RMG-funded players (active players, depositing within the last three months) declined 6% to 153,000, as a result of the group’s strategy to focus on high net value players and reduce the number of players associated with free bets. Mobile and touch devices now represent 68% of the group’s total gross gaming revenue vs 58% in the prior year.
Stride Together JV with Aspers (2% of revenues)
A significant positive in these results is the momentum achieved with the B2B JV with Aspers, which contributed £1.0m to adjusted revenues. We anticipate steady continued growth in this B2B division, contributing £3m to adjusted revenues in FY18 and £5m in FY19.
Non-proprietary platform (34% of revenues)
The non-proprietary platform RMG revenues (from acquired assets) declined by 2% to £15.1m, as players have begun to migrate to the proprietary platform. The earnout periods for all these assets have been completed and, going forward, the focus will be on continuing the migration and realising the anticipated synergies. Stride is already demonstrating synergies in distribution costs, which fell to 14.6% of sales (vs 16% in FY17).
As a reminder, 8Ball, Netboost Media and Tarco were acquired in 2016 and have boosted Stride’s market share in the UK online bingo market, from 5% to 12%. Stride has stated that it should achieve £2.5m of cost synergies and £3m of revenue synergies. Revenue synergies include increasing LTV, yield and cash hold, and cross-selling lapsing Tarco/8Ball players onto its higher-margin proprietary platform.
Investment and diversification into new verticals and markets
Given the regulatory burdens in the UK, Stride is now actively seeking to expand and reinvest internationally, as witnessed by last year’s £3m controlling stake in Passion Gaming, a rummy-focused Indian online skills gaming business.
The company has recently recruited a head of international development and the group plans to launch in Italy (sports and casino) by year end. Stride is also in the process of obtaining licences in three other European countries (Spain, Denmark and Sweden) with the intention of launching during FY19. Post-period, Stride signed an agreement with a sportsbook provider (Amelco) to enable cross-selling into casino and support the group’s expansion into Europe. This international expansion is expected to affect FY19 EBITDA by c £2m.
Other initiatives to diversify include a move into new product verticals, such as live casino, lottery-style games, scratch cards and rummy. In the period, Stride Gaming launched 14 new sites and 202 new games including 18 proprietary games on its mobile platform.
Stride Gaming operates almost entirely in the UK, which is currently facing a number of regulatory headwinds. The company pays significant gaming taxes (at 18% of NGR at H118) and we highlight the key issues below:
■
Remote gaming duty (RGD)/point of consumption tax (POCT): last year’s extension of 15% POCT to include free bets in the UK has affected financials from October 2017 and H118 EBITDA was affected by £1.7m (16% impact on EBITDA). In addition, the regulator has stated its intention to raise the RGD at the next budget, in order to offset the loss of other gaming taxes (specifically from the fixed odds betting terminals). Currently, industry speculation is that the RGD will be increased from 15% to 20%, which would have a meaningful impact on EBITDA (27% of EBITDA based on FY18 figures).
■
Other regulatory burdens: in addition to the increasing taxes, there are number of other regulatory measures that are weighing heavily on the sector, including self-exclusion, know your customer, anti-money laundering, online verification and affordability checks. In order to comply, we expect all gaming operators to invest heavily, with an inevitable impact on profits. For Stride Gaming, management has chosen to accelerate investment into compliance in FY18 and FY19.
Exhibit 1: Divisional summary
£m |
FY15 |
FY16 |
FY17 |
FY18e |
FY19e |
FY20e |
Real money gaming (RMG) |
26.7 |
35.0 |
81.8 |
88.4 |
98.1 |
107.9 |
Social gaming |
1.1 |
12.8 |
8.1 |
0.0 |
0.0 |
0.0 |
Net gaming revenue (NGR) |
27.8 |
47.8 |
89.9 |
88.4 |
98.1 |
107.9 |
Aspers JV |
0.0 |
0.0 |
0.0 |
3.0 |
5.0 |
7.5 |
Adjusted net revenue |
27.8 |
47.8 |
89.9 |
91.4 |
103.1 |
115.4 |
COS (POC gaming tax) |
(2.8) |
(5.4) |
(11.6) |
(15.9) |
(18.1) |
(20.0) |
% of RMG NGR |
10.3% |
15.4% |
14.2% |
18.0% |
18.5% |
18.5% |
Gross profit |
25.1 |
42.4 |
78.3 |
72.5 |
79.9 |
87.9 |
Marketing cost |
(7.0) |
(10.9) |
(22.6) |
(23.2) |
(26.5) |
(27.0) |
Marketing % |
25.2% |
22.8% |
25.1% |
26.2% |
27.0% |
25.0% |
Other distribution costs |
(2.9) |
(7.8) |
(16.0) |
(13.7) |
(15.2) |
(16.7) |
Other distribution % |
10.4% |
16.2% |
17.8% |
15.5% |
15.5% |
15.5% |
Admin costs |
(7.8) |
(11.4) |
(19.4) |
(19.6) |
(21.9) |
(24.1) |
Admin % |
28.2% |
23.9% |
21.6% |
22.2% |
22.3% |
22.3% |
Adjusted EBITDA |
7.3 |
12.3 |
20.2 |
16.0 |
16.4 |
20.2 |
Adjusted EBITDA margin |
26.3% |
25.8% |
22.5% |
18.1% |
16.7% |
18.7% |
Source: Edison Investment Research
We have lowered our revenue and EBITDA estimates, as a result of the following:
■
Removal of social gaming from continuing operations. Our forecasts previously included social revenues of £5.0m and £5.8m for FY18 and FY19, with a corresponding EBITDA of £0.6m and £1.1m. The assets are now held for sale, with a book value of £4.3m.
■
In line with recent results from Jackpotjoy plc, we believe that growth in the UK online bingo-led market is slowing. Revenue pressures are partially due to regulatory measures (eg self-exclusion, GDPR, source of funds etc) that are requiring operators to block a larger number of customers. We have consequently lowered our expectations for the RMG business to 8% growth (vs 14% previously). Including an increasing contribution from Aspers, our RMG revenue estimates go from £93.6m to £91.4m in FY18 and from £104.5m to £103.1m in FY19.
■
Increased costs: this includes an accelerated investment to comply with regulatory changes, as well as increased investment into new geographies. We estimate that FY19 EBITDA will be affected by c £2m due to international investments. Our RMG EBITDA margin forecast for RMG goes from 19.9% to 18.1% in FY18 and from 21% to 16.7% in FY19.
■
Note that we have not forecast any additional increase in remote gaming duty, which may occur after the next budget. Please see our May 2018 sector update discussing the outcome of the Triennial Review.
Exhibit 2: Edison estimate changes
|
Revenue (£m)* |
EBITDA (£m) |
Adjusted, fully diluted EPS (p)** |
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
2018e |
98.6 |
91.4 |
(7.3) |
19.2 |
16.0 |
(16.6) |
20.2 |
14.3 |
(29.2) |
2019e |
110.3 |
103.1 |
(6.5) |
23.0 |
16.4 |
(28.7) |
23.9 |
16.6 |
(20.0) |
2020e |
119.2 |
115.4 |
(3.2) |
25.7 |
20.2 |
(21.4) |
27.0 |
21.7 |
(19.6) |
Source: Edison Investment Research. Note: *Revenues are adjusted to include the contribution from the Aspers JV. **EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. They exclude losses from discontinued businesses.
Exhibit 3: Financial summary
|
|
£m |
2015 |
2016 |
2017 |
2018e |
2019e |
2020e |
August |
|
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
|
NGR |
|
|
27.8 |
47.8 |
89.9 |
88.4 |
98.1 |
107.9 |
Adjusted Revenue (inc share from Aspers JV) |
|
27.8 |
47.8 |
89.9 |
91.4 |
103.1 |
115.4 |
Cost of Sales |
|
|
(2.8) |
(5.4) |
(11.6) |
(15.9) |
(18.1) |
(20.0) |
Gross Profit |
|
|
25.1 |
42.4 |
78.3 |
72.5 |
79.9 |
87.9 |
EBITDA |
|
|
7.3 |
12.3 |
20.2 |
16.0 |
16.4 |
20.2 |
Operating Profit (norm) |
|
|
7.3 |
12.0 |
19.4 |
14.9 |
14.1 |
17.9 |
Amortisation of acquired intangibles |
|
(2.5) |
(4.2) |
(7.8) |
(7.0) |
(7.0) |
(7.0) |
Exceptionals |
|
|
(3.3) |
(5.1) |
(36.1) |
0.3 |
0.0 |
0.0 |
Share based payments |
|
|
(1.0) |
(1.9) |
(1.8) |
(1.4) |
(1.4) |
(1.4) |
Operating Profit |
|
|
0.4 |
0.8 |
(26.2) |
6.9 |
5.8 |
9.5 |
Net Interest |
|
|
(0.1) |
(0.7) |
(0.5) |
(0.9) |
(0.5) |
(0.5) |
Contribution from jvs/assocs. |
|
|
0.0 |
0.0 |
0.0 |
0.1 |
0.5 |
1.0 |
Profit Before Tax (norm) |
|
|
7.2 |
11.3 |
18.9 |
14.2 |
14.1 |
18.4 |
Profit Before Tax (FRS 3) |
|
|
0.4 |
0.1 |
(26.7) |
6.0 |
5.3 |
9.0 |
Tax (reported) |
|
|
0.1 |
(0.5) |
1.1 |
(0.6) |
(0.6) |
(0.7) |
Profit After Tax (norm) |
|
|
6.2 |
10.9 |
18.2 |
13.7 |
13.5 |
17.7 |
Profit After Tax (FRS 3) |
|
|
0.4 |
(0.4) |
(25.6) |
5.5 |
4.7 |
8.3 |
Average Number of Shares Outstanding (m) |
|
43.8 |
51.5 |
67.3 |
74.5 |
76.0 |
76.0 |
EPS - normalised (p) |
|
|
14.2 |
21.2 |
27.1 |
15.4 |
17.8 |
23.2 |
EPS - normalised fully diluted (p) |
|
|
14.0 |
20.3 |
25.8 |
14.3 |
16.6 |
21.7 |
EPS - (IFRS) (p) |
|
|
0.9 |
(0.8) |
(38.1) |
7.3 |
6.2 |
10.9 |
Dividend per share (p) |
|
|
0.00 |
2.50 |
2.70 |
3.00 |
3.50 |
4.00 |
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
90.1 |
88.7 |
87.1 |
82.0 |
81.5 |
81.5 |
EBITDA Margin (%) |
|
|
26.3 |
25.8 |
22.5 |
18.1 |
16.7 |
18.7 |
Operating Margin (before GW and except.) (%) |
|
26.1 |
25.0 |
21.6 |
16.9 |
14.4 |
16.6 |
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
37.1 |
78.7 |
61.1 |
62.4 |
55.4 |
48.7 |
Intangible Assets |
|
|
36.4 |
73.6 |
57.8 |
51.7 |
44.4 |
37.3 |
Tangible Assets |
|
|
0.2 |
0.7 |
0.7 |
1.0 |
1.3 |
1.6 |
Investments |
|
|
0.5 |
4.4 |
2.7 |
2.7 |
2.7 |
2.7 |
Assets Available for sale/other |
|
|
0.0 |
0.0 |
0.0 |
7.0 |
7.0 |
7.0 |
Current Assets |
|
|
11.7 |
27.1 |
36.5 |
33.7 |
43.9 |
55.7 |
Stocks |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Debtors |
|
|
4.2 |
5.8 |
9.9 |
7.0 |
8.0 |
8.0 |
Cash |
|
|
7.4 |
21.1 |
26.2 |
26.2 |
35.4 |
47.2 |
Other |
|
|
0.0 |
0.2 |
0.5 |
0.5 |
0.5 |
0.5 |
Current Liabilities |
|
|
(7.7) |
(26.1) |
(35.7) |
(15.8) |
(17.6) |
(17.6) |
Creditors |
|
|
(5.2) |
(16.3) |
(31.3) |
(13.3) |
(15.0) |
(15.0) |
Player balances |
|
|
(1.4) |
(1.8) |
(2.4) |
(2.5) |
(2.6) |
(2.6) |
Short term borrowings |
|
|
(1.1) |
(8.0) |
(2.0) |
0.0 |
0.0 |
0.0 |
Long Term Liabilities |
|
|
(10.2) |
(10.5) |
(7.1) |
(6.5) |
(6.5) |
(6.5) |
Long term borrowings |
|
|
(8.0) |
0.0 |
(4.4) |
(4.0) |
(4.0) |
(4.0) |
Other long term liabilities |
|
|
(2.2) |
(10.5) |
(2.6) |
(2.5) |
(2.5) |
(2.5) |
Net Assets |
|
|
30.8 |
69.2 |
54.9 |
73.8 |
75.2 |
80.2 |
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
4.6 |
14.4 |
14.3 |
14.4 |
14.7 |
18.2 |
Net Interest |
|
|
0.0 |
(0.6) |
(0.6) |
(0.9) |
(0.5) |
(0.5) |
Tax |
|
|
(0.1) |
(0.7) |
(1.4) |
(0.6) |
(0.6) |
(0.7) |
Capex |
|
|
(0.6) |
(1.9) |
(2.0) |
(2.3) |
(2.3) |
(2.5) |
Acquisitions/disposals |
|
|
(18.1) |
(22.2) |
(1.9) |
(22.5) |
0.0 |
0.0 |
Financing |
|
|
10.4 |
25.9 |
(0.5) |
16.1 |
0.0 |
0.0 |
Dividends |
|
|
(3.0) |
(0.6) |
(1.8) |
(2.0) |
(2.3) |
(2.7) |
Net Cash Flow |
|
|
(6.6) |
14.4 |
6.1 |
2.4 |
9.1 |
11.8 |
Opening net debt/(cash) |
|
|
0.0 |
3.1 |
(11.3) |
(17.4) |
(19.7) |
(28.8) |
Moving in player balances |
|
|
1.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other adjustments |
|
|
2.5 |
0.0 |
0.0 |
0.0 |
(0.0) |
(0.0) |
Closing net debt/(cash) |
|
|
3.1 |
(11.3) |
(17.4) |
(19.7) |
(28.8) |
(40.6) |
Source: Company accounts, Edison Investment Research. Note: Losses from discontinued operations were £2.3m in H118.
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