BetFair: FY2011 results
Betfair has announced preliminary results for 12 months ended 30 April 2011. The company reported core revenue growth of 7.8% to £330m; core adjusted EBITDA up 29% to £80.2m; underlying earnings per share up 56% to 33.9p. Core Betfair gross margin was £282.9m (FY10: £258.6m), representing a gross margin percentage of 85.7% (FY10: 84.5%). Pre-tax profit for the 12 months to 30 April totalled £26.6m, up 50% from £17.8m a year earlier.The company tried to throw the investment community a sweetner with an announcement that it would pay a maiden final dividend of 5.9 pence per share. Betfair said that it had a cash position as of 30 April 2011 of £155.0m with no debt (FY10: £150.9m). Customer funds held on deposit as of 30 April 2011 were £305.6m (FY10: £284.0m).
Betfair said that the total number of Active customers during the year had increased by 15.2% over the year to 949,000 (FY10: 823,000), with overall average revenue per user falling 6.6% to £344 (FY10: £369). During the year Betfair said that it had added 466,000 new Actives (FY10: 441,000), an increase of 5.7%, with a third of those acquired in the run-up to the World Cup.
Betfair said that sports revenues for the year had grown by 10%, aided by the World Cup. Within the Sports product segment, Betfair said that football revenue had grown by 24%; with over the year, revenue from football generating 42.3% of total Sports revenues. Horseracing accounted for 42.1% of total sports revenue. Horseracing revenues were marginally down over the year to £103m (FY10: £105m) due to, the company said, a reduced level of ARPU from existing customers.
Betfair said that it's Games segment (Casino, Arcade and Exchange Games) now account for 18% of Core Betfair revenue. Betfair said that it had grown Games revenue by 9% over the year, up from 1% in the previous year. Betfair said that following on from the migration of its Poker network to Ongame, Poker revenue had dropped 14% compared with the previous year and now accounted for only 7% of Core Betfair.
Betfair said that TVG, its US facing horse racing totalisator product, had grown revenue by 10% (7% in local currency)during the year and increased handle by 18% against an overall decline in US horseracing handle of 7%. It also increased its market share of the Advance Deposit Wagering (ADW) market. Active customers were up 12% over the year, while revenue per customer declined 6%. Betfair noted that legislative change in California and New Jersey will allow state residents to place horseracing wagers on an exchange for the first time, with exchange wagering in California is expected to be available from May 2012.
The update on LMAX< Betfair's new trading platform, was perhaps more thin on the ground than many analysts had expected. However, the company does say that the launch of the LMAX platform has had mixed success. They also acknowledge that it has yet to achieve good traction with target customers and that sign-ups are "SIGNIFICANTLY" below original expectations.
Betfair said that during the year under review Betfair Australia had achieved revenue growth of 11% (local currency), driven by 28% growth in average monthly active users.
As regards the all important Italian betting market, the Betfair report notes; "We have a licence to operate a traditional sports betting product in Italy through our betfair.it website. We also allow Italian customers to access products on our betfair.com site which are not currently licensed in Italy. In November 2010 AAMS gave notice that our Italian sports betting product (on betfair.it) would be suspended pending a review of the licence. That review continues and we are in regular discussion with AAMS in order to reach a satisfactory conclusion. Operating restrictions placed on Betfair will continue to impact revenue from Italy until licences for the Betting Exchange are issued."
Betfair said that it was pleased with trading for the first eight weeks of FY12 for non-risk Sports, Games and Poker which was in-line with the company's expectations. It noted, however, that revenue in the more volatile area of risk Sports, was currently below expectations due to an adverse margin performance during May. The company also said that core Betfair revenue in the year to date was lower than the prior year comparative period, which it says had been significantly inflated by the World Cup and was also the last quarter prior to the migration of its Poker product.
At the very least, Betfair's plan to buy back fifty million pounds worth of its shares displays a distinct lack of imagination; at worst, it reveals that the big global growth story touted at the time of the company's flotation nine months ago was total and utter bullshit (although those that knew of the regulatory position in the US and Europe did know that, and happily shorted the shares). Fourth quarter revenue growth of just 3%, alongside a decline in first-quarter year on year revenue, and a poor start to the new financial year, reveals that the revenue projections made at the time of flotation were also wide of the mark. The thrity million thrown into the LMAX black hole, suggests that Betfair as a company should have stuck to what it was good at: running a betting exchange. A slow down in customer acquisition rates, combined with an increase in exposure to risk, are also causes for concern; as is David Yu's acknowledgement that the betting exchange model has its limiations; "We want to be a one-stop shop for betting and at the moment, if you are going to bet on the next ace in tennis, it's better to go to a fixed-odds bookmaker."
It has become clear that Betfair is unable to deliver the growth and margin rates that were touted by some at the time of the company's flotation in October 2010. The fact that the company did not mention in detail the potential regulatory shocks that it faces in Spain, Greece, Germany and Cyprus is also likely to raise a few eyebrows. Growth in the US is likely to be slow.
Until Yu departs and the company manages to improve its revenue growth, the current P/E ratio of 33 looks unjustified.