The Midas touch: Why Golden Nugget values profit over market share

If the three years since PASPA’s repeal have taught us anything, it is that igaming is truly the underappreciated product vertical across the States. Monthly state revenue has presented a consistent picture of igaming gains across the five states where online casino is legal, particularly during Covid-related gaming property shutdowns last year.

In March, New Jersey reported record igaming revenue of $113.6m. A dip in revenue for February to $93.8m from the $103.8m racked up in January suggested land-based casinos could be beginning to see pre-Covid numbers return.

However, March figures prove igaming has yet to hit its ceiling, and analysts are noting that the vertical, and those leading it, are increasingly undervalued.

Jefferies managing director David Katz said in an analyst note in April that the productivity of igaming, coupled with higher LTVs and margins, suggested higher return on invested capital in igaming than in online sports betting.

Thomas Winter, GNOG president, says 2020 was a transformative year for the operator

Katz specifically wrote that New Jersey online casino mainstay Golden Nugget Online Gaming’s (GNOG) stock was particularly undervalued at the moment. “We believe the Street’s shifting focus to the merits of igaming from OSB (online sports betting) is underappreciated and, as proliferation evolves, GNOG’s positioning should be better reflected in the shares,” Katz noted.

GNOG’s 2020 annual earnings, released in March, were not to be sneezed at, with 64% year over year growth in net revenue to $91.1m. Adjusted EBITDA also grew from $17.8m in 2019 to $28.9m the following year.

2020 was a transformative year for GNOG as it became the second online gambling operator in the US to go public via a SPAC, Landcadia Holdings II, in an effort to raise public capital to fund its expansion efforts outside of New Jersey.

The Texas-headquartered operator has long outperformed many of its competitors in the Garden State’s oversaturated online casino space and has made it very clear that the vertical is where its long-term efforts will continue to be invested.

GNOG is equally as bullish as Jefferies’ Katz on the prospect of widespread igaming in the US, predicting the vertical could be worth $30bn-$37bn GGR at maturity.

“By the end of 2023 and then 2024 [legalized igaming] will be exactly what you are seeing now in sports betting, which went from eight to 15 and then nearly 20 states in the space of 18 months,” GNOG president Thomas Winter tells EGR North America.

“All the big sports betting states will allow igaming eventually and all states that regulate will ramp up their revenue and reach maturity much earlier [than previously predicted]. Instead of it being five years, it could be three,” he adds.

Especially in Michigan

Looking back on the last 12 months, Michigan’s move into online betting in January was a pivotal juncture in GNOG’s history, being the first state outside of New Jersey the operator entered.

Initial revenue figures released by the Michigan Gaming Control Board (MGCB) forFebruary placed Golden Nugget in seventh place out of 11 operators by online casino revenue with a market share of 2.7%, while top-earning operator BetMGM secured a 34% market share.

However, Winter insists that his executive team’s focus is not on market share, but rather long-term profitability. “What we are interested in is profitable market share, although profitable not immediately because we know that we will lose money in the first two years in any market,” says Winter.

“That’s really the name of the game when you build your database as you have your startup costs and you pay all your marketing expenses upfront while player lifetime value (LTV) comes over many years.”

Indeed, GNOG’s players are particularly sticky, with the company suggesting the average five-year LTV of a GoldenNuggetCasino.com player is ~$7,700. This is three times greater than an average DraftKings player ($2,400) in New Jersey.

In addition, new and returning active depositors hit a high of 30,000 in 2020, up 48% on 2019, while monthly ARPU reached $633 last year, up from $480 in 2016.

Winter highlights GNOG’s progressive rise to fourth highest igaming revenue earner (as estimated by Eilers & Krejcik Gaming) in New Jersey since 2013, when reflecting on its early performance in Michigan.

It took the operator 16 to 18 months after the Garden State’s launch to gain a significant share of the space, as BetMGM’s Borgata led with a 30%- 40% market share for the first year.

“We also started off with a 3% or 4% market share in New Jersey, then a year later we were at 12%. I’m not saying that it will be exactly the same in Michigan but a local brand with a strong, big land-based casino has an advantage [over us in the beginning].”

The difference in Golden Nugget’s approach to Michigan is its plan to invest much more into marketing spend than it has in New Jersey. The operator is known for its conservative budget, but this will change now it has a healthy balance sheet.

“We’ll have bigger losses for the first year because we’re investing more aggressively, but then I think as soon as year three, instead of being at breakeven, as we were in New Jersey, we should start being profitable and eventually bigger,” Winter interjects.

In its first full month of operation in February, GNOG achieved $2.2m in igaming revenue in the Wolverine State and racked up $3.2m in March after ramping up its marketing spend slightly.

“We want to more than double our revenue in the next 12 months, and by then we could be at 5% or 6% market share, and two years from now 8%, and three years from now 10%. I would be happy with that if the market is as big as we think it will be,” Winter admits.

“If you look at our revenue in March, they are the same as we had in New Jersey after four years and, to me, that is more important than the market share itself.”

The firm is plotting further expansion into four additional states in 2021 and is actively pursuing new market-access deals on top of the 10 it has already secured. Its plan mainly depends on which states move towards legalizing igaming this year and includes launching online sports betting in Virginia and Illinois, plus casino and sports in West Virginia.

Although igaming is GNOG’s priority, Winter recognizes the value of a complementary online sports betting offering. “As demonstrated in New Jersey, [igaming] is the most profitable product vertical in the US, so that’s our priority and sports for us is really an enabler and an acquisition tool,” the Frenchman notes.

“It’s a marketing channel in order to reach out and acquire a player that sees themselves as a sports bettor, not necessarily as a casino player, but who we know will have a high propensity to cross-sell to casino,” he adds.

Where it can, the operator will introduce gaming alongside betting, and is plotting a late summer launch for both verticals in Pennsylvania.

But Winter, who has been with GNOG since its inception in 2013, says there is great value in gaining access to betting-only states as skins and licenses are something of a commodity in this industry.

“The reason we’re going into these states is to have a license for when they regulate igaming. A year and a half ago, I would have told you I think it will take three or four years before sports betting states regulate igaming, now it’s a matter of one or two years because the states can see that it works.”

Having majorly overhauled its betting product during this last year, the GNOG sportsbook was re-introduced to the New Jersey market in March with a revised interface, courtesy of Scientific Games.

The shift from DraftKings’ SBTech betting engine to Scientific Games’ made sense for the operator as its casino offering and core-operational platform, including its PAM and business intelligence, were already operated by the Las Vegas-headquartered provider.

Winter comments: “It’s a bit early to draw any conclusions but the feedback we get from players is pretty positive. We have a stronger offer when it comes to US sports, especially college sports, and we have more features available now and new features that are coming out in the next few months.”

Prior to the revamp, Eilers & Krejcik Gaming reported the GNOG sportsbook secured a 0.2% share of the New Jersey betting market last year, bringing in an estimated $724,571 in revenue during the 12-month period.

But Winter says the firm will make a more material push in terms of marketing and promotions when the next NFL season rolls around in September.

“I would not expect in the next two or three years that we would spend more than 10% or 15% of our marketing dollars on sports, but we are very opportunistic and pragmatic. Decisions will be driven by the expected return on investment.

“And if we see that investing more in sports will create more value eventually, we will do that, but if we see that it’s the other way round, then we will focus even more on casino.”

GNOG’s president has no delusions of grandeur when it comes to expectations for its sportsbook and is pragmatic about the operator’s approach to the vertical.

Winter says marketing dollars and investment in product upgrades and differentiation are better invested in online casino for now but, at the same time, cross-selling is a powerful tool he is keen to exploit.

“At some point we will want to invest more in sports either on our own or through partnerships. We think that it’s a good asset to have for a company like ours,” he remarks.

Through its casino product, GNOG attracts a different sports bettor to the likes of DraftKings and FanDuel, which appeal to the younger and more casual user. Instead, GNOG is capturing the attention of a more mature user base with greater disposable income.

Fresh ideas

The operator has innovation at its core, having been the first online operator to bring live dealer games to New Jersey in 2016.

At the time, Winter said the live product would potentially have a greater impact on driving players to the brick-and-mortar casino rather than in the online figures.

But the launch clearly differentiated Golden Nugget from others in the market and drove its rise to number one online casino license holder in the Garden State for four years.

The Atlantic City property’s license held a 28% share of the New Jersey online casino market in March, according to the latest Division of Gaming Enforcement figures, as Borgata took the lead (32%).

Of course, Golden Nugget’s license also includes FanDuel’s Stardust casino, Rush Street Interactive’s PlaySugarHouse, and Churchill Downs’ BetAmerica. Eilers & Krejcik Gaming estimates that GNOG secured an overall casino market share of 11% in 2020.

“Live dealer was a unique product and we were one of the first to take a bet on it and bring it to the US,” Winter reflects. “But in slots we were [also] one of the first to focus on Steppers, a mechanical slot that is really like the old Vegas machines.

“We knew, based on our experience in land-based and what we were seeing online, that there was really a need for that.”

GNOG was the first operator to bring live casino games to New Jersey’s igaming scene

Winter says that although the operator is primarily focused on scaling and geographical expansion in the short-term innovation is still key to its mindset and ethos.

“You are probably able to dedicate more time to that when you are focusing on one state rather than when you are launching five or six states at the same time.”

But there are major tech updates in the pipeline, including bringing parts of its front-end and mobile application UI in-house.

He is also eager to build more exclusive casino games on the GNOG site to employ novel features around jackpots and free spins.

“Today we are renting our technology back-end and front-end casino and sports core platform, but what we really want to do is develop our own mobile applications because the front-end and the user interface is really a big part of our differentiation,” Winter acknowledges.

DraftKings highlighted the success and value of its in-house-developed casino games in its March Investor Day presentation. President for global product and technology Paul Liberman said DraftKings would continue to invest heavily in proprietary game development in 2021 after more than half (54%) of its igaming handle in 2020 came from these products.

Liberman told analysts that producing sports-themed casino games and table games that were seamlessly integrated into the betting product had been hugely popular in 2020 and helped increase cross-sell capabilities between the two verticals.

Elsewhere, there is also an emphasis on increasing GNOG’s player data capabilities to better understand user behaviors and adapt the customer value proposition and product to suit users’ needs.

“We will be building our own data warehouse and business intelligence tools this year. What we use today is already good and provided by Sci Games and was designed with a lot of input from us, but we want to go even further,” says Winter.

GNOG features its founder/majority- owner and well-known Texan billionaire Tilman Fertitta, who also owns the NBA’s Houston Rockets, in its marketing campaigns, another innovation that is unique to the operator.

“I think it creates the right balance between branding and direct response. It’s not a cheesy testimonial from someone you don’t know telling you they signed up and won a lot of money immediately or a big TV star.

“It’s really in the middle and I think it speaks to the roots of the brand which has been iconic, well-known, and trusted for 75 years in Las Vegas,” Winter adds.

The spin-off of the online arm of Golden Nugget into a public company has been a huge step, supported by significant operational growth and it is seeking to hire another 40 staffers to support its growth into new states.

“It very much reminds me of when I was working at Betclic over 10 years ago,” Winter remarks, looking back on the four years he spent at the French online operator between 2008 and 2011. The firm was established in 2005 in Bordeaux and maintains a presence in France, Germany, and Sweden after pulling out of the UK in 2019.

“When I joined the company, there were like 35 to 40 employees and three years later we were 400 and the business was 10 times bigger. But that hyper-growth management, depending on whether you do it well or not, will have some consequence on how you perform,” he warns.

Since completing its listing on the Nasdaq in December, GNOG has built up a healthy balance sheet and ended 2020 with $78m in cash reserves. Another $110.2m was raised in March this year via a warrant redemption, which Winter says will predominantly fund aggressive plans to move into new states.

He also alludes to potential bolt-on acquisition opportunities the firm is considering to drive product differentiation and customer acquisition efforts.

“In terms of bigger M&A, I don’t really have a comment at the moment, but the industry will eventually consolidate just like any newly regulated industry.

“If you look at sports betting today, there are 25 operators that are all targeting [the top] 10% of the market share, and that is not going to happen. I think three or four years from now you should see some consolidation, and likewise you will have the major operators wanting to address all segments or product verticals and all sub-segments in each product vertical,” he concludes.

2021 is expected to be another year of maturation for GNOG, with full year revenue anticipated to increase 14% on its initial projection to between $130m and $145m.

Analysts are seemingly as confident as Winter that the operator will gain market share in Michigan and execute its expansion plan well, so all that is left to further boost Golden Nugget’s position in the US is the widespread adoption of igaming Winter is so bullish about.

Las Vegas, Nevada, November 24, 2017: A neon sign high above the Fremont Street Experience, a popular, busy area downtown Las Vegas that offers many historical attractions plus shopping and dining.