Flutter's existential crisis
Is Flutter more than the sum of its parts or are some brands trapped inside a monster firm that has to keep feeding FanDuel?
Flutter is the largest and most profitable online gambling operator ever, and it keeps on growing. Revenues were up 27% in CY22 to £7.7b ($9.2b) with EBITDA up a more modest 4% to £1.04b ($1.25b), which includes a £250m loss from the rapidly growing but cash burning US business.
It's an absolute monster. It's 50% of the US online sports betting market, 50% of the Australia online sports betting market, 40% of the UK online sports betting market, by far the biggest online operator in Italy with Sisal and PokerStars, and so big it doesn’t even mention its leading positions in many other countries.
But really....what is Flutter? Fundamentally it's a bit like a holding company. Or an asset accumulation company. It goes around snapping up some of the best online businesses from around the world. But is it really more than the sum of its parts?
Many of these businesses run pretty independently from one another. Yes there is a shared technology and trading resource and that does bring significant cost synergies. But they tend to have distinct management teams and strategies and products and goals. This is a good thing.
The land down under
Australia has pretty much always been this way. Sportsbet is such a runaway success and such a dominant brand that you would be an idiot to mess with it. And it continues to do big numbers. £1.26b in CY22 revenue. Down 2% y/y. EBITDA down 11% (13% in CC) to £390m but pretty tough comparisons with lockdowns ending in 2022 and costs continuing to increase.
Player numbers were up 8% and it continues to power away. But you sense the days of endless growth are at an end. Unless it buys someone you feel like Australia is going to start heading the way of the UK, managing cost efficiencies and small incremental margin improvements from increased same game multi products and the like.
The notion that Australia is approaching or has already hit a growth ceiling is one that should concern investors and Flutter alike. There is a clear case that this has happened in the UK and been accelerated by responsible gambling measures. And let's not think about what happens when/if Australia's regulators have a safer gambling moment of clarity....
But while those struggles are the same the Flutter UK business is markedly different. This is not one you can just leave alone to power away. Headline numbers look.....fine. Online revenues down 1% y/y, but a tough year with lots of safer gambling impacts and still some covid unwind going on. All valid. All fair.
Revenues of £1.9b is still gigantic. EBITDA of £612m is bigger than most people's UK revenues. But nobody is forecasting much growth in the future, all the talk is of cost efficiency savings and of small product and marketing improvements. A lot of the talent is moving to the US or to other firms or to other firms in the US.
The existential problem
And there is a larger existential problem. Flutter UKI is three brands that overlap, directly compete and have quite big cultural differences. Does the Flutter structure really maximise the potential of Sky Bet? Of Betfair? I find it very hard to form an argument that it does.
While we still wait for the white paper which could be anything from big negative to medium positive for the sector it would be mad to make any big changes. But you also sense the value of some of these assets to Flutter is as much that nobody else can have them. You could say the same, in fact I absolutely would say the same, for PokerStars in the International division.
International feels unloved, buried at the end of the report. But it’s another massive business unit. Revenues up 31% to £1.7b or 7% to £2.1b if Sisal was included on the full year basis. And all the talk was about Sisal. The sexy growth story in Italy and Turkey (lottery) alongside the Indian definitely not betting operator Junglee that has real breakout potential should laws change there.
But where are the operating synergies? International is without doubt the oddest segment in the business. Hard to see much overlap between most of the brands, and hard to see PokerStars role within the wider business these days. PokerStars, aside from references in footnotes, was not mentioned once. Adjarabet also apparently isn't important anymore too. But is still there ticking away.
Flutter says it has "invest" markets such as Italy, India and Turkey and one would assume Brazil, which is where PokerStars might come into its own. And "maintain" markets, which I assume is everything else. But that is hard to get high quality staff motivated about. Maintain and optimise. Great stuff. Are there any jobs going in the US?
Party in the USA
So finally we come to the big one. The US. This is undoubtedly the engine of growth and of share price values. It is without doubt the biggest greenfield opportunity in the industry and it can still get so much bigger and infinitely more profitable.
US revenues were up 67% in US$ to $3.2b (£2.6b) for the full year. That's some £500m more than the UKI division including retail. That's.....a lot Still made a £250m EBITDA loss though. Which is nice. But profits are absolutely on the way. The issue in the US is they keep opening new states, which requires huge investment and that keeps depressing profitability.
It's not an excuse. It's true. It's what happens. And they will be profitable next year. They do need to try and get a handle on costs as does everyone else. Taxes in some states are very high, partner costs aren't negligible, payments are high and so on. Marketing costs are also crazy high but that will soften and ARPUs will rise. It's a good market.
The US will remain the centre of gravity through this year and next I am quite sure. And this is both good and bad. There is no doubt the US acts as a brain drain on the rest of the industry at the present time. And investor attention is fixated on it too.
Flutter HAS to maintain its dominance there so has to continue to pour resource, talent and money into the FanDuel business. It's market share there is absurd, and you sense can only come down in time. But not yet. They need to hold it for a bit longer.
What does that mean for the rest of the business? Good? Bad? Nothing? I honestly don't know. Are some of these brands trapped in Flutter or benefitting from the scale? Again hard to say. It's extremely unlikely any of them get sold, but they need to be careful of competitors.
This is an industry that smells blood and attacks. Always has been. And there are places you can attack some of these Flutter brands for sure. You already see it in poker, in the UK and you may start to see it in other markets and products too.
But right now you'd not bet against Flutter. It's an amazing business and it has some of the best brands in the industry. I think ultimately you'd rather be inside the tent pissing out. But a year is always a long time in this business....