The full-year 2021 financial results: A game of two halves

The results are in: 2021 was a game of two halves, which the online gambling sector narrowly won. But it looks like it could be facing a tricky return leg in 2022. The industry is having to adjust to living without Covid and while it’s not clear yet just how tough this is going to be, there are signs of some harder times ahead.

While the early half of the year saw the industry benefiting from continued lockdowns and a stacked sports calendar, the second half saw some much harder conditions. Player spend fell as the world began to open up again, while sporting results went the way of the players, with Q4 in particular not a good one for the brave men in trading.

Flutter was first up with its FY 2021 results and the headlines were group revenue up 15% (17% in constant currency) year-on-year (YoY) to £6bn but EBITDA down 19% (18% in constant currency) to £1bn, with US expansion acting as a big factor in both of those numbers. Flutter now is a business that is too large and too sprawling to have a simple group narrative so you need to dig into its four core business units to find the real stories. So, dig we shall…

Trouble ahead in the UK

The UK and Ireland segment remains the largest part of the business, with £2.1bn in revenue in FY 2021, and £1.9bn of that coming from online. The headline numbers here were player growth of 25%, revenue growth of 3% and EBITDA flat YoY. Bearing in mind the promise of the first half, this is a fairly disappointing end to the year, but it’s also a business facing a ton of headwinds and some very tough comparatives in the second half.

Sports revenue was up just 2% for the full year, with margin taking a dive down 2% to 9.7% for the year, which is still a chunk above the UK long-term average and management pointed to a big increase in bet builder activity over the year. Results were clearly against them though, along with everyone else in the period, and were reportedly behind a £150m swing in revenue. It’s hard to know which brands from the UK&I portfolio performed best, as they don’t tell us, but a read through from that is Paddy Power did better in the year than Sky Bet.

And certainly there are signs Sky Bet is not quite the force it once was and the product no longer stands ahead of the chasing pack. Management was pretty candid about this, noting: “We feel that some of our products lacked the sharpness towards the end of last year, and we’re making changes to address that.” They didn’t say Sky Bet, but we can be fairly sure they meant Sky Bet.

But the comments on the wider market were more revealing and ultimately far more interesting. CEO Peter Jackson said the “Covid unwind” had caused a decline in customer engagement generally, most notably in sports betting. And this is a trend that is apparent across all of its key competitors.

There is a real sense the momentum that gathered in mid-2020 has run out. While the player numbers aren’t falling away at a rapid rate, they are spending a lot less than they were. Once again, Flutter management was quite open about this, noting unit economics in online gambling were set for a bit of an adjustment period depending on the outcome of the pending Gambling Act 2005 review.

“While we don’t know what specific recommendations will be made in the white paper, we know that customer economics in the UK are going to continue to evolve, and so we’re doing work now to make sure our structures and cost base are optimised to the future shape of the sector,” Jackson noted.

For those not fluent in management speak, we think there might be a fairly big drop in player values so we need to make sure we cut back our operational, acquisition and retention costs to match this. Bearing in mind, there were already £93m in costs related to safer gambling changes for Flutter in the year, and it has already made some fairly large changes including a £10 max slots stake and £500 affordability limits for under 25s, along with an in-house safer gambling monitoring system and increased player checks, that suggests there could be some tough times ahead for the UK.

Entertaining the masses

This message was less clear from Entain which was more buoyant about the UK market, with revenue growth of 10% YoY in 2021 and online actives up 15%. It should be noted Flutter’s relative numbers were 3% and 25%, so there are clearly differing dynamics at the two operators, with the implication that Ladbrokes and Coral were taking a greater share of wallet in the UK with those brands up 12% YoY, although it wasn’t clear how much of this was gaming growth, an area Entain is notably strong in.

There was much talk about Ladbrokes’ rebirth as a mainstream recreational product, with its mini-bet builder 5-A-Side game an apparent highlight with “over 50%” of its football active customer base playing 5-A-Side during Euro 2020, and two major new ad campaigns in the period looking to reposition the brand in the UK. No breakdown of sports versus gaming revenue was given for the UK, but gaming is undoubtedly a key component here though with increasing investment in the Ladbrokes and Coral gaming products during the period.

Gaming brands – which are Gala, Party and Foxy in the main – in the UK were up 9% for the year, with Foxy the highlight up 46% YoY as some major investment in both product and marketing saw the brand brought back to life in the UK in the period, albeit from a smaller base. But the net impact of all these moving parts should be continued growth in 2022, according to management, with a prediction of a slow start to the year and activity picking up in H2.

It’s not a view totally discordant with Flutter or other UK-facing brands, although Entain’s outlook is obviously mitigated by its broad international focus, and the general view throughout the sector is a weary ‘yeah, probably single-digit growth this year’ prediction. You sense this is formed as much in hope as expectation, with so many potential headwinds in the UK and such an unclear outlook on the wider macro-economic factors facing the whole of Europe in terms of inflation and post-Covid recovery.

Flutter’s International division remains one of what might be, and amusingly its results contained the line “excluding the impact of Covid and the regulatory headwinds referenced above, revenue would have increased by 14%” in its latest results, as if those were issues that could broadly be overlooked. Overall, in International, which is mostly PokerStars, gaming revenue was 13% lower (in constant currency) for the year with poker the big drag, and “underlying” casino growth of 25% in H2 when stripping out regulatory issues.

The UK is a good proxy for the wider European space in terms of the end of the big Covid boom, but there will be big variance between the major European markets in 2022 in terms of growth prospects, mostly due to market maturity levels. But with Europe such a disparate and heterogenous market in 2022, M&A feels the only viable option for tier-one operators. Organic launches with existing brands are beginning to feel ever more like a money bonfire.

This is perhaps less true for Flutter, which has an ace up its sleeve in PokerStars, but it still struggles to cross-sell to sports and while the poker sector briefly caught a huge wave in 2020, in reality it is a constant battle to stay afloat. And you sense that choppy water is coming for casino in several markets in 2022, not least in the UK. After the bright skies of lockdown, there are more than a few clouds ahead.