The Stars Group (TSG) published strong Q4 and 2019 full-year financial results on Thursday. Its annual revenues grew by about $500 million, while net earnings turned from a loss in 2018 into a profit of $62 million.
Those numbers may look impressive on the surface, but there’s a lot to unpack. The last few years have been busy for TSG, and the fundamental performance of its existing operation is outweighed by other factors — both internal and external.
A jump in revenue was predictable, and investors were apparently looking for a bit more. The TSG stock prices dropped 6.5% over the course of the day’s trading, though some of those losses likely stem from broader market concerns surrounding the COVID-19 outbreak.
Though TSG’s business has seen numerous changes in the past few years, the 2018 acquisition of Sky Betting and Gaming (SBG) is undoubtedly the largest. That deal cost TSG $4.7 billion — nearly as much as its predecessor Amaya paid to acquire PokerStars’ parent company Rational Group in 2014.
SBG was originally owned by the British media giant Sky, but the latter sold off 80% of the company to a private equity firm in 2015. It now comprises five companies covering sports betting, casino, slots, bingo, poker, and lottery.
The SBG purchase is largely responsible for TSG’s increased revenues, and for the fact that nearly half of these now come from the United Kingdom. Other important developments for TSG include its acquisition of the Australian bookmaker BetEasy and its expansion in the US.
As part of the latter, TSG struck a key partnership with Fox Sports to form the Fox Bet sportsbook. It’s not a big moneymaker yet, though. PokerStars and Fox Bet are middling contenders in New Jersey and only just launched in Pennsylvania late last year.
The investments TSG is making in the young US online gambling market represent a significant cost to the company as it waits to see the payoff.
TSG’s 2019 revenues totaled $2.53 billion, an increase of 24.6% from 2018’s $2.03 billion. It isn’t really a fair comparison, however, since the 2018 revenues only include SBG contributions for the latter half of the year.
The SBG acquisition accounted for the bulk of the revenue increase in 2019. It doesn’t account for the whole of it, though. Fourth-quarter revenues were up 5.4% year on year, and SBG was part of TSG for the full quarter in 2018. That figure is likely a much more accurate picture of the company’s overall performance.
Even in Q4, however, the company made all its gains in the UK and Australia thanks to new acquisitions in those markets. Revenues for the rest of the world were down 9%.
TSG attributes much of the gains made in the UK to cross-selling between Sky and its own, previously existing brands. In Q4, the UK accounted for 42% of its total revenues, with Australia contributing just 1% and the rest of the world 46%.
The US is still a small market for TSG, and neither of the newly acquired brands operate there.
Although it doesn’t bother separating US revenues from those of the rest of its international operations in its financial reports, we can get a reasonable estimate based on numbers published by the Pennsylvania Gaming Control Board and the New Jersey Division of Gaming Enforcement.
For PA, we have the exact numbers. Fox Bet was only active starting in September, however, and PokerStars from November. In those few months, the company grossed $12.5 million.
In NJ, its revenues are lumped in with those of DraftKings, which lacks a poker vertical. We know, then, that PokerStars made $7.2 million in gross poker revenue on the year.
We can only approximate the split between its casino and sports revenues, but a reasonable ballpark would likely be $50 million and $25 million, respectively.
All told, the company’s combined US revenues for 2019 were probably somewhere around $80 million-$90 million — less than 4% of its worldwide total.
In its financial report, TSG says that Fox Bet turned a net loss of around $40 million in 2019.
This was in line with the expectations it had set out for investors. Getting up and running in Pennsylvania likely means its other verticals operated at a loss as well.
TSG additionally spent $15 million on lobbying worldwide in 2019, including in the US. Although the US is a small market for now (and one in which TSG is still turning a loss), that investment could eventually pay off in spades as new states open up.
New brands and new markets aren’t the only things changing about TSG’s business. Although PokerStars maybe its best-known brand, online poker is no longer as central to the company’s business as it once was.
As recently as 2017, poker revenue accounted for two-thirds of TSG’s total global revenue. In 2019, however, the sector accounted for just 31%.
Once again, that’s due in large part to the acquisitions of SBG and BetEasy. Looking only at TSG’s prior brands and markets, poker’s share of revenues dropped to 62% in 2018 and 60% in 2019.
That said, even 31% is a far bigger poker vertical than any of TSG’s competitors. That figure is 9% for 888 Holdings and just 5% for GVC, which owns partypoker.
Although poker represents a diminishing part of its revenues, TSG stresses that it still sees value in the vertical.
Cross-selling is, of course, the primary benefit. Poker players tend to cost less per customer to acquire than casino users or sports bettors. Recruiting customers that way and then coaxing them to explore other products is one pillar of TSG’s overall strategy.
As significant as TSG’s acquisitions, US expansion and Fox Bet’s partnership have been, a still-bigger change is coming this year.
In October, TSG and Flutter Entertainment announced an all-shares tie-up.
Flutter is another massive gaming company, originally formed through a merger between the Irish bookmaker Paddy Power and the British Betfair. It additionally owns FanDuel, which would be a major rival to Fox Bet if not for the upcoming merger.
That deal should go through sometime in the second or third quarter, and how the resulting behemoth performs is a matter of speculation at this point. It will, however, certainly involve a continuation of the aggressive US expansion of PokerStars and Fox Bet.
At the same time, poker figures to be an even smaller cog in the longterm operations of the combined company.