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The Stars Group released its Q4 and full-year results for 2017 this morning. During the accompanying conference call to investors, Chief Executive Rafi Ashkenazi said that the Group’s performance and financial position meant that in the company was now in its “strongest position in its history.”
Full-year revenues came in at $1.312 billion, up 13.6 percent on 2016 with Q4 figures of $360 million up 16.1 percent compared to the same quarter in 2016.
The improved numbers were ascribed to better performance from poker after the introduction of the new cross-product Stars Rewards program and growth in the new casino and sports betting verticals.
“2017 marked our evolution and transformation into The Stars Group. We maintained our global dominance in online poker, with the business experiencing year-over-year growth in that vertical, our online casino has already become one of the largest in the world since its launch in 2014, and our emerging online sportsbook not only recorded meaningful growth in turnover and revenues, but started to become a secondary customer acquisition channel.”
The market was not so impressed, and within an hour of the investor call ending, the company’s share price was down 8.5 percent. It closed the day down just 1.5 percent.
In August 2017, the company updated its forward guidance on revenues for the year saying that it expected:
“Revenues of between $1,285 and $1,315 million, as compared to the prior range of $1,200 and $1,260 million. The revised guidance implies 2017 revenue growth of between 11% and 14% compared to the prior year and includes an expectation that real-money online poker revenue will be slightly higher year-over-year as The Stars Group, among other things, continues to experience a very positive consumer response to Stars Rewards, which was rolled out globally in July…”
The figures released today show that revenues came in at the absolute top of that range, so the share price fall isn’t the result of the management team failing to meet its published targets.
Overall, in 2017, online poker revenues grew at a rate of 3.7 percent, with that growth accelerating in the final quarter of the year where revenues of $234.4 million provided an increase of 7.9 percent compared with 2016.
However, a substantial part of that increase came from changes in foreign exchange rates. Absent the currency fluctuations, online poker revenue growth would have been a less impressive 0.9 percent annually, and 1.9 percent for the quarter.
Positive factors were given as the new focus on recreational players, and the impact of the new Stars Rewards scheme. Later in the investor call, the company also mentioned that the recent pooling of the previously segregated player pools in France and Spain had been very positive.
The revenues for online poker were negatively impacted by the company’s withdrawal from the Australian and Colombian markets. In previous investor calls, Ashkenazi has said that Australia represented less than three percent of Stars’ revenues – nevertheless a significant chunk of revenue that will have made the revenue figures look less rosy for the full year.
New online gaming laws have been introduced in Colombia, so PokerStars can be expected to return to the market once it has gone through the licensing process. This was not mentioned in the conference call, but looks to be inevitable at some point.
Stars confirmed that it is applying for a gaming license in the newly regulated market in Pennsylvania. It also expects that in relatively short order, Pennsylvania will take the necessary steps to join the shared liquidity pool created by New Jersey, Nevada and Delaware.
Listed in the slide presentation as an “Opportunity,” Stars pointed out the advantages that it can expect when Italy and Portugal join the Southern European shared liquidity pool created by Spain and France.
In reply to an investor question, the company said that it had already seen “encouraging” growth as the result of merging the French and Spanish player pools. When pressed further to quantify what this meant, investors were told that PokerStars had seen an improvement of approximately 30 percent, although it was not clear whether this applied to player numbers or revenues.
As by far the dominant operator in the formerly segregated and regulated European markets, Stars should see similar increases when Italy and Spain join the combined player pool. Given the size of the Italian market in particular, that is likely to have a substantial positive impact on revenues.
That 30 percent number may or may not map across to shared liquidity in the US markets. The merger of the player pools in Delaware and Nevada had much less success than most commentators expected, mainly because the Delaware laws and gaming taxes disincentivize any large marketing spend to expand the player pool.
If Pennsylvania joins the shared liquidity pool to add its players to those in New Jersey, then Stars may well see equivalent-sized revenue gains. At the moment only the 888 Poker / WSOP NV / WSOP NJ partnership can benefit from shared liquidity since the other US licensed operators are not present across the other markets.
The new Stars Rewards scheme was not well received by high volume winning online poker players. Their complaints failed to shift the company’s new recreational player strategy, and Rafi Ashkenazi posted some figures that suggest that the new scheme is having a positive impact.
Deposits are up by 15 percent year on year, and quarterly net yield per player is up to $160 compared to $127 a year ago. With those numbers, players can abandon any hopes of a return to the old rewards scheme.
In fact, Stars is doubling down on the new scheme with plans to introduce Stars Rewards 2.0 which will further increase the company’s ability to target rewards at high-value players.
Stars reports sports betting and casino as a combined vertical so there isn’t full transparency over how revenues are split. To help with guidance, Stars does give some information on how the respective parts of the vertical are performing.
So, while the combined increase in revenues for the year came in at $384 million – a 45.4 percent increase on the year – approximately 80 percent of those revenues came from casino.
Rafi Ashkenazi told investors that the Stars casino is now among the top five online casinos in public ownership in terms of revenues.
Clearly 2018’s sportsbook results will be much higher when the newly acquired Australian businesses are included. These will not be aggregated into the existing reporting numbers, but will be kept as a separate business.
There are also no plans to merge brands or technology platforms, although some synergies with the BetStars brand are expected.
Still hanging over the company’s head like the sword of Damocles is the legal appeal against the Kentucky judgment that demands Stars pays $870 million for operating illegally between 2006 and 2011.
The case is expected to be resolved in late summer or early fall, depending on the judges’ availability.
The company told investors that oral arguments will be heard next month and that it is “happy” with the judges selected for the three-person panel established to hear the appeal.
The Stars Group’s new Chief Financial Officer, Brian Kyle, said that:
“Any outcome in Kentucky would be relatively neutral for our leverage level.”
Executive Vice-President, Chief Legal Officer and Secretary, Marlon Goldstein added the interesting comment that the Group was “practical,” strongly implying that if they are given an acceptable offer to settle the case out of court, they would accept.
Under the previous CEO David Baazov, the company strongly maintained its innocence and resolve to fight the judgment. This did not go down well with investors who want more legal certainty over a potential liability that is not far short of a billion dollars.
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At the end of the investor presentation, Stars provided future guidance on its financial expectations for 2018. Kyle emphasized that the management team sees this guidance as a “commitment” to investors.
“The Stars Group currently expects the following 2018 full year financial guidance ranges:
Revenues of between $ $1,390 and $1,470 million;
Adjusted EBITDA of between $625 and $650 million;
Adjusted Net Earnings of between $487 and $512 million; and
Adjusted Net Earnings per Diluted Share of between $2.33 and $2.47.”
A quick calculation shows that the guidance equates to revenue growth of between six percent and 12 percent. The guidance takes account of likely headwinds that may be encountered during the year, including the impact of financial blocking to its Russian business, which may come in May.
Kyle told investors that the company had made plans to mitigate any such problems, but was not prepared to go into any further detail.
All in all, the revenues paint a picture of a company doing well, growing both organically and through acquisition, with a management team that hits the targets it has promised.
The markets may be have given the company an initial share price pounding because the growth expectations in the guidance seem relatively unambitious, and the potential threats to the business from the Kentucky ruling and international market risks leave too much uncertainty on the table – despite the management team’s espoused optimism.