FY17 results: Slightly above recently raised estimates
Reported NGR grew 88% to £89.9m, equating to a pro-forma NGR growth of 18%. Like-for-like RMG revenues increased 28.7% to £81.7m, driven by the scale of the enlarged group, multi-brand strategy and significant improvements in player engagement and monetisation. As discussed at the interim results in May, there is limited visibility in the social gaming vertical and management has taken a £9.9m impairment against its InfiApps assets. Revenues from this division declined by 37% to £8.1m, with an EBITDA of £0.6m.
For the group, FY17 adjusted EBITDA of £20.2m was slightly above our recently raised forecasts. This represents an EBITDA margin of 22.5% vs the prior year of 21.4%. As the business continues to scale and drive revenues on to the proprietary platform, we expect underlying margin expansion going forward. However, this is expected to be offset by increasing gaming taxes, which specifically include the addition of free bets into the point of consumption tax (effective from August 2017).
Operating cash flow of £14.3m represents a 70% conversion rate and the company ended the year with net cash (excluding player balances) of £17.4m. A final dividend of 1.5p brings the full-year dividend to 2.7p.
In terms of acquisitions and investments, the two notable events were:
■
An increased contingent consideration for the Tarco assets of £17.4m from £5.6m, as a result of better than expected performance in the business.
■
A £3m investment into Passion Gaming, an Indian online rummy gaming business.
Stride reported strong organic growth in its RMG vertical, with revenues from its proprietary platform increasing 39% to £48.6m. Encouragingly, non-proprietary platform RMG revenues (from acquired assets) grew 16% to £33.3m and we anticipate this growth to accelerate now that the earnout periods are ending.
Deposits increased 26% to £147m and yield per player increased 29% to £147, demonstrating a continued improvement in engagement and monetisation of players. However, RMG-funded players (active players, depositing within the last three months) declined 10% to 146,000, 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 66% of the group’s total gross gaming revenue vs 56% in the prior year.
Impact of 2016 acquisitions
The acquisitions last year (8Ball, Netboost Media and Tarco) have boosted Stride’s market share in the UK online bingo market, from 5% to 12%. The resulting business now has significant scale and liquidity and its multi-brand strategy will enable it to target broader demographics and cross-sell to lapsing players. Stride has taken advantage of opportunities presented by the introduction of the UK POC gaming tax in 2014, which has squeezed smaller operators and left larger multi-product operators focusing more on sports, casino and M&A, rather than bingo. We expect this trend to continue with the extension of POC tax to ‘free bets’ from August 2017. The impact of the tax on free bets is estimated at 3-4% of RMG EBITDA and will largely be accounted for from 1 October 2017.
Following all the earnouts, Stride believes it can 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.
Stride is already demonstrating synergies within distribution costs, with 8Ball distribution costs having declined from 35% of revenues in H116 to 27% of revenues in H217. As a comparison, Stride’s proprietary platform distribution costs are approximately 10%, with total distribution costs at approximately 18% of revenues. Stride’s long-term target is to reduce the acquired assets’ distribution costs to approximately 15-18%, as more customers migrate to the proprietary platform.
Diversification into new products and verticals
During 2017, Stride has continued its diversification into new product verticals, such as lottery-style games, scratch cards and rummy. It has developed and launched 17 new proprietary slots and instant win games, launched 28 new casino sites with a slots focus and entered the B2B vertical with the launch of Stride Together, which notably includes the B2B JV with Aspers.
Diversification into new markets
As part of its strategy of expanding into new growth markets, Stride has made a £3m controlling investment in Passion Gaming, a rummy-focused Indian online skill gaming company. Management estimates that the Indian skills market will reach c $3.6bn by 2022 and Stride has the option (but not the obligation) to acquire the remaining 49% of Passion Gaming from the existing shareholders over a three- to five-year period, using a combination of cash and shares. Stride’s investment will primarily be directed towards marketing spend, and the company estimates that Passion Gaming will become profitable from the third year. The £3m investment is included in our RMG forecasts and importantly, there is no earnout associated with this investment.
Additionally, Stride owns an Italian remote gaming licence and is in the process of obtaining Spanish and Danish licences, with the intention of launching in Spain and Denmark during FY19.
Social gaming: 9% of revenues
Stride entered the social gaming market with the acquisition of Israel-based InfiApps in July 2015. However, as announced at interim results, market dynamics in this vertical have been very challenging and Stride has recognised a £9.9m impairment for the business, which compares to a total acquisition cost of £19m.
FY17 revenues declined by 37% to £8.1m with an EBITDA of £0.6m. Given the high acquisition costs in social gaming, marketing spend has been reduced and numerous changes to the pricing model have been implemented. The board is currently reviewing its progress in the improvement plans and we anticipate a further announcement in mid-2018.
As detailed in the table below, our forecasts assume a limited contribution to group EBITDA over the next two years.
Exhibit 1: Divisional forecasts
Year-end 31 August (£m) |
FY15 |
FY16 |
FY17e |
FY18e |
FY19e |
RMG |
26.7 |
35.0 |
81.8 |
93.6 |
104.5 |
Social gaming |
1.1 |
12.8 |
8.1 |
7.4 |
8.3 |
NGR |
27.8 |
47.8 |
89.9 |
101.0 |
112.8 |
COS (POC gaming tax) |
(2.8) |
(5.4) |
(11.6) |
(16.8) |
(19.3) |
% of RMG NGR |
10.3% |
15.4% |
14.2% |
18.0% |
18.5% |
Gross profit |
25.1 |
42.4 |
78.3 |
84.1 |
93.5 |
Marketing cost |
(7.0) |
(10.9) |
(22.6) |
(24.9) |
(27.8) |
Marketing (%) |
25.2% |
22.8% |
25.1% |
24.6% |
24.6% |
Other distribution costs |
(2.9) |
(7.8) |
(16.0) |
(18.4) |
(20.2) |
Other distribution( %) |
10.4% |
16.2% |
17.8% |
18.2% |
18.2% |
Admin costs |
(7.8) |
(11.4) |
(19.4) |
(21.6) |
(22.5) |
Admin (%) |
28.2% |
23.9% |
21.6% |
21.4% |
19.9% |
Adjusted EBITDA |
7.3 |
12.3 |
20.2 |
19.2 |
23.0 |
RMG EBITDA |
7.0 |
8.2 |
19.6 |
18.6 |
22.0 |
Social gaming EBITDA |
0.3 |
4.1 |
0.6 |
0.6 |
1.1 |
Adjusted EBITDA margin |
26.3% |
25.8% |
22.5% |
19.0% |
20.4% |
RMG EBITDA margin (%) |
26.4% |
23.5% |
24.0% |
19.9% |
21.0% |
Social gaming EBITDA margin (%) |
24.3% |
32.0% |
7.1% |
8.0% |
13.0% |
Source: Edison Investment Research
The 2017 income statement includes a number of meaningful exceptional charges, which we summarise here:
■
Impairment: a £9.9m impairment charge against the InfiApps assets, as discussed above.
■
Contingent remuneration: this relates to the earnout payment for the acquisitions of 8Ball (£4.0m cash and £10.1m shares) and InfiApps (£0.9m).Both earnouts were settled in September 2017.
■
Contingent consideration: this relates to the Tarco earnout liability to the period ending 31 December 2017. The liability has increased during the year due to better than expected EBITDA performance. The fair value of the contingent liability is £17.4m (vs £5.6m in 2016) with the increase of £10.8m and unwinding of interest of £1.0m being recognised in the P&L. The contingent liability will be payable as 51% cash and 49% shares.
Exhibit 2: Tarco and 8Ball acquisitions
|
Date |
Initial consideration |
Earnout |
Earnout period |
Tarco Assets/Netboost |
31 August 2016 |
£18.2m cash + shares |
£17.4m (51/49 cash/shares) |
12 months to December 2017, EV/EBITDA 7.5x |
8Ball |
31 August 2016 |
£12.0m cash |
£13.1m (£4.0m cash/ 4.1m shares) |
12 months to August 2017 |
Source: Stride Gaming, Edison Investment Research.
As shown below, our revenue and EBITDA estimates for 2018 and 2019 remain largely unchanged. The 2017 adjusted EPS was 17.8% higher than our estimate, largely due to lower interest and tax charges. This also flows through to 2018 and 2019, offsetting the increase in share count from the Tarco earnout.
Exhibit 3: Edison estimate changes
|
Revenue (£m) |
Adjusted EBITDA (£m) |
Adjusted, fully diluted EPS (p) |
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
2017 |
89.5 |
89.9 |
0.4 |
20.0 |
20.2 |
1.0 |
21.9 |
25.8 |
17.8 |
2018e |
100.7 |
101.0 |
0.3 |
19.0 |
19.2 |
1.0 |
19.0 |
20.2 |
6.3 |
2019e |
112.5 |
112.8 |
0.3 |
23.0 |
23.0 |
0.0 |
23.1 |
23.9 |
3.5 |
Source: Edison Investment Research
Exhibit 4: Financial summary
|
|
£m |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
August |
|
|
UK GAAP |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
PROFIT & LOSS |
|
|
|
|
|
|
|
|
Revenue |
|
|
8.5 |
27.8 |
47.8 |
89.9 |
101.0 |
112.8 |
Cost of Sales |
|
|
0.0 |
(2.8) |
(5.4) |
(11.6) |
(16.8) |
(19.3) |
Gross Profit |
|
|
8.5 |
25.1 |
42.4 |
78.3 |
84.1 |
93.5 |
EBITDA |
|
|
1.2 |
7.3 |
12.3 |
20.2 |
19.2 |
23.0 |
Operating Profit (norm) |
|
|
1.2 |
7.3 |
12.0 |
19.4 |
17.5 |
20.8 |
Amortisation of acquired intangibles |
|
(0.3) |
(2.5) |
(4.2) |
(7.8) |
(7.8) |
(7.8) |
Exceptionals |
|
|
(0.1) |
(3.3) |
(5.1) |
(36.1) |
0.0 |
0.0 |
Share based payments |
|
|
0.0 |
(1.0) |
(1.9) |
(1.8) |
(1.8) |
(1.8) |
Operating Profit |
|
|
0.8 |
0.4 |
0.8 |
(26.2) |
7.9 |
11.2 |
Net Interest |
|
|
0.0 |
(0.1) |
(0.7) |
(0.5) |
(0.5) |
(0.5) |
Profit Before Tax (norm) |
|
|
1.2 |
7.2 |
11.3 |
18.9 |
17.0 |
20.3 |
Profit Before Tax (FRS 3) |
|
|
0.8 |
0.4 |
0.1 |
(26.7) |
7.4 |
10.7 |
Tax (reported) |
|
|
0.0 |
0.1 |
(0.5) |
1.1 |
(0.7) |
(0.8) |
Profit After Tax (norm) |
|
|
1.2 |
6.2 |
10.9 |
18.2 |
16.3 |
19.5 |
Profit After Tax (FRS 3) |
|
|
0.8 |
0.4 |
(0.4) |
(25.6) |
6.7 |
9.9 |
|
|
|
|
|
|
|
|
|
Average Number of Shares Outstanding (m) |
|
31.2 |
43.8 |
51.5 |
67.3 |
74.5 |
75.5 |
EPS - normalised (p) |
|
|
0.0 |
14.2 |
21.2 |
27.1 |
21.8 |
25.8 |
EPS - normalised fully diluted (p) |
|
|
4.0 |
14.0 |
20.3 |
25.8 |
20.2 |
23.9 |
EPS - (IFRS) (p) |
|
|
0.0 |
0.9 |
(0.8) |
(38.1) |
9.0 |
13.1 |
Dividend per share (p) |
|
|
0.00 |
0.00 |
2.50 |
2.70 |
3.00 |
4.00 |
|
|
|
|
|
|
|
|
|
Gross Margin (%) |
|
|
100.0 |
90.1 |
88.7 |
87.1 |
83.3 |
82.9 |
EBITDA Margin (%) |
|
|
14.6 |
26.3 |
25.8 |
22.5 |
19.0 |
20.4 |
Operating Margin (before GW and except.) (%) |
|
14.6 |
26.1 |
25.0 |
21.6 |
17.3 |
18.4 |
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
|
|
|
|
|
|
|
Fixed Assets |
|
|
0.1 |
37.1 |
78.7 |
61.1 |
53.9 |
46.1 |
Intangible Assets |
|
|
0.0 |
36.4 |
73.6 |
57.8 |
50.2 |
42.1 |
Tangible Assets |
|
|
0.0 |
0.2 |
0.7 |
0.7 |
1.0 |
1.3 |
Investments |
|
|
0.1 |
0.5 |
4.4 |
2.7 |
2.7 |
2.7 |
Current Assets |
|
|
5.7 |
11.7 |
27.1 |
36.5 |
33.9 |
49.8 |
Stocks |
|
|
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Debtors |
|
|
5.7 |
4.2 |
5.8 |
9.9 |
7.0 |
8.0 |
Cash |
|
|
0.0 |
7.4 |
21.1 |
26.2 |
26.4 |
41.3 |
Other |
|
|
0.0 |
0.0 |
0.2 |
0.5 |
0.5 |
0.5 |
Current Liabilities |
|
|
(1.2) |
(7.7) |
(26.1) |
(35.7) |
(15.8) |
(17.6) |
Creditors |
|
|
(0.8) |
(5.2) |
(16.3) |
(31.3) |
(13.3) |
(15.0) |
Player balances |
|
|
(0.4) |
(1.4) |
(1.8) |
(2.4) |
(2.5) |
(2.6) |
Short term borrowings |
|
|
0.0 |
(1.1) |
(8.0) |
(2.0) |
0.0 |
0.0 |
Long Term Liabilities |
|
|
0.0 |
(10.2) |
(10.5) |
(7.1) |
(6.5) |
(6.5) |
Long term borrowings |
|
|
0.0 |
(8.0) |
0.0 |
(4.4) |
(4.0) |
(4.0) |
Other long term liabilities |
|
|
0.0 |
(2.2) |
(10.5) |
(2.6) |
(2.5) |
(2.5) |
Net Assets |
|
|
4.6 |
30.8 |
69.2 |
54.9 |
65.4 |
71.8 |
|
|
|
|
|
|
|
|
|
CASH FLOW |
|
|
|
|
|
|
|
|
Operating Cash Flow |
|
|
0.0 |
4.6 |
14.4 |
14.3 |
17.3 |
20.7 |
Net Interest |
|
|
0.0 |
0.0 |
(0.6) |
(0.6) |
(0.5) |
(0.5) |
Tax |
|
|
0.0 |
(0.1) |
(0.7) |
(1.4) |
(0.7) |
(0.8) |
Capex |
|
|
0.0 |
(0.6) |
(1.9) |
(2.0) |
(2.3) |
(2.3) |
Acquisitions/disposals |
|
|
0.0 |
(18.1) |
(22.2) |
(1.9) |
(26.8) |
0.0 |
Financing |
|
|
0.0 |
10.4 |
25.9 |
(0.5) |
17.5 |
0.0 |
Dividends |
|
|
0.0 |
(3.0) |
(0.6) |
(1.8) |
(1.9) |
(2.3) |
Net Cash Flow |
|
|
0.0 |
(6.6) |
14.4 |
6.1 |
2.5 |
14.9 |
Opening net debt/(cash) |
|
|
0.0 |
0.0 |
3.1 |
(11.3) |
(17.4) |
(19.9) |
Moving in player balances |
|
|
0.0 |
1.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Other adjustments |
|
|
0.0 |
2.5 |
0.0 |
0.0 |
0.0 |
0.0 |
Closing net debt/(cash) |
|
|
0.0 |
3.1 |
(11.3) |
(17.4) |
(19.9) |
(34.7) |
Source: Stride Gaming accounts, Edison Investment Research
Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Stride Gaming and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investments Pty Ltd (Corporate Authorised Representative (ACH 161 453 872) of Myonlineadvisers Pty Ltd (AFSL: 427484) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. 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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com DISCLAIMER
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