PokerStars One Piece Of The Pie, But Stars Group Hungry For Sports Betting

On Wednesday, The Stars Group (TSG) published its first quarterly results since completing acquisition of Sky Betting & Gaming (SBG) in July. As expected, the addition of SBG’s businesses has been truly transformative.

Look how the group’s revenue chart has changed since the acquisition:

• Poker accounts for 36 percent of revenue, down from 63 percent.
• Sports betting accounts for 32 percent of revenue, up from 5 percent.
• Casino games account for 28 percent of revenue.

The entity formerly known as PokerStars has evolved into a highly diversified behemoth these days. In fact, its market cap north of $5 billion makes it the largest publicly traded online gambling company in the world.

Though online poker remains TSG’s primary business for now, it is no longer the only vertical in the spotlight. In this new era of expansion, CFO Brian Kyle says PokerStars has been partially reduced to “a large and low-cost customer acquisition channel.”

Full Q3 results here.

Forecast: single-digit growth for online poker

In the call with investors, Kyle projected that online poker would see future growth in the low single digits.

PokerStars’ Q3 revenue actually fell by 4 percent year-over-year — or grew by 0.3 percent adjusted for fluctuating exchange rates. Pro forma poker revenue came in at $221.8 million for the quarter.

The “flat” performance pleased Stars. As Kyle touched on, the group’s size makes it more resistant to market conditions than some of its competitors.

“We continue to grow as smaller players trade market share among themselves,” he said.

Online poker, as a global industry, is not growing with any urgency these days. The Stars Group likely sensed a need to diversify into higher-growth verticals, like sports betting and online casino, to remain at the top of the class.

PokerStars focused on recreational players

PokerStars has spent the last three years pursuing a recreational model for its poker ecology. In particular, it clamped down on the use of third-party software, a trend which will continue:

“The Stars Group has implemented, and continues to implement, policies and controls to significantly reduce or eliminate the use of certain sophisticated technology that may provide an artificial competitive advantage for certain poker customers over others.”

The VIP program has refocused benefits on casual players, too, and an adjusted Stars Rewards program will increase that emphasis:

“Since the beginning of 2016, The Stars Group has improved its poker ecosystem to benefit and attract high-value, net depositing customers (primarily recreational players) and reduce incentives for high-volume, net-withdrawing customers, and adjust the pricing on poker games and tournaments (also known as rake and tournament fees) on certain offerings (which resulted in an effective increase in pricing). The Corporation launched the Stars Rewards program in July 2017, which is an integrated cross vertical loyalty program focused on improving customer engagement, retention and the player experience.”

Market access essential for US expansion

The expansion of state-regulated US sports betting represents one of the best opportunities for growth. CEO Rafi Ashkenazi set out Stars’ strategy, which is markedly different from its peers:

• Partypoker owner GVC has entered into a joint venture with MGM.
• 888 has a long-term relationship with Caesars, including WSOP NJ and WSOP NV.
• William Hill has a multi-state agreement with Eldorado Resorts.
• FanDuel Sportsbook has a broad market-access deal with Boyd Gaming.

Stars has not yet announced a deal that would provide a multi-state sports betting footprint. It does have a point of entry into Pennsylvania alongside Mount Airy, but that’s the extent of its current US reach beyond New Jersey.

The importance of securing a gateway into multiple markets cannot be overstated. This is becoming especially true as lawmakers continue to pass legislation that gives land-based casinos the keys to the kingdom. Online-only providers, like Stars, sometimes have to find a partner to avoid being shut out.

Ashkenazi stated the facts plainly for investors. “The plan in the US, basically, has to go through a market access,” he said. “You can’t operate in the US without market access.”

Although he would not go into detail about potential partners, Ashkenazi indicated that discussions were progressing.

Media partnership could provide competitive edge?

One interesting element of the Stars strategy is that it intends to add a major US media partner, too.

As Ashkenazi explained, SBG achieved enormous success in the UK by exploiting the media presence of its corporate parent. The company was formerly part of BSkyB, one of the leading European telecom companies. The possible synergies between a major sports broadcaster and a major sports betting operator are self-evident.

“The success we had in the UK is unique,” Kyle said. “Our ability to export that to the US is a competitive advantage.”

Ashkenazi agreed with an investor who suggested that Stars would be the preferred sports betting partner for US media outlets. He explained that TSG was currently in discussions with several such companies but shied away from details and timelines.

More from TSG presentation

Other highlights of the Q3 presentation included:

• Total Revenue: Revenues increased 73.6 percent year-over-year, primarily due to the acquisitions of SBG and BetEasy.
• Online casino: Associated revenues grew 29 percent amid product and market expansion.
• Sports betting: Associated revenues increased 80 percent for a number of reasons, including the World Cup.
• BetStars: Will be discontinued as a brand in the UK and Italy. SkyBet will carry the flag for TSG in those markets going forward. TSG is, however, “happy” with the BetStars traction in NJ.
• Pennsylvania: Stars is partnered with Mount Airy and expects all verticals to be online in 2019. Start-up costs will drag future earnings a bit.
• Kentucky: No news on the active legal case in the Bluegrass State. Stars is currently appealing a $650 million court ruling.
• Switzerland, Sweden, Netherlands: TSG expects to launch nationally regulated online gaming in all three countries in 2019. Each is currently working on new gaming regulations.

Askenazi summarized the year to date for TSG like so:

“We are pleased with our quarterly results, which reflect both continued organic growth from our International business and contributions from both BetEasy and Sky Betting & Gaming, despite unfavorable sporting results during the period.

“As we continue our transformation and look towards 2019, we are excited to take advantage of the opportunities ahead of us by leveraging our leading positions in attractive markets, strong brands, technology and operating expertise.”