Q2 2019 Earnings Call
Good morning, ladies and gentlemen, thank you for standing by at this time all participants are in a listen only mode. A question and answer session for analysis will follow the formal presentation.
As a reminder, this conference is being recorded today Monday August 12 2019.
Replay details are included in the Starz groups earnings press release issued earlier. This morning, I will now turn the call over to Yvonne Lewis as VP of communications.
Thank you and good morning, some of our comments today will contain forward looking information statements under applicable securities laws that reflect management's current views with respect to future events I think such information statements are subject to risks uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward looking information statements undue reliance should not be placed on such information. All statements. Please refer to today's press release and the webcast presentation for more information.
During the presentation, we will reference non <unk> financial measures for more information about nice measures and reconciliations to the nearest <unk> for US measures. Please refer to the appendix of the presentation. Today's earnings press release and presentation will be available on our website I will now turn it over to our Chief Executive Officer Rafi Ashkenazi.
Good morning, and thank you for joining us on the call today.
With me is Bryan <unk>, our CFO , who will provide further details about the second quarter financial results and 2019 outlook and robbing shubra. The C O folks that who will expand on our plans for the launch of books, but in the U.S.
Turning to slide four I would like to start with an overview of our second quarter 2019 highlights.
Over the past few years, we have built the leading company in the online gaming industry Swit combined strategy organic and inorganic growth.
Importantly, we have de risk in diversifying our revenue base and we have transformed from a poker only company with less than half of our revenue generated from locally regulated or tuck jurisdiction to a balanced in highly diversified betting and gaming company with nearly 80% of revenues regulated or tax with a prospect to increase that figure to over 90% over the next 18 months.
In line with this strategy, we continue to execute against our top three strategic priorities for 2019 during the second quarter.
As we continue to position the business for strong long term sustainable growth.
First integration.
The Sky betting and gaming acquisition has already benefited the company in multiple ways and we are now beginning to realize even more significant revenue synergies after migrating Skype it it'd be fair base to our Pokerstars platform. We are pleased to report that Skype. It by stars in Italy had a great quarter with betting revenue growth of over 25%.
We are expecting further revenue synergies as we reinforce the partnership with Sky Italia.
I'm also delighted to confirm that we just launched Skybitz by stars in Germany.
And we'll begin cross selling players from sports betting to poker and casino in the near term.
In addition to further accelerate revenue synergies, we are working on what we refer to internally as the UK ecosystem.
Beginning in early 2020 customers in the UK will have their accounts paired across our brands avoid available in the market, enabling quick and easy fun transferred between walnuts with Skype book are being re launched a Skype Walker by Pokerstars and providing UK customers with access to some of the best Poker Casino and Sportsbook product offering in the world.
Second we remain focused on execution and we are encouraged by the strong momentum we are seeing in our business. We reach a number of key milestones during the quarter.
SPG reported record quarterly revenue, earning revenues in local currency with impressive adjusted EBITDA growth of over 50%.
Pokerstars posted a new record online poker tournament with over $100 million in prices.
We cemented our very exciting launch plans for fourth best in Pennsylvania, and New Jersey, and secure further market access.
And Betty easy signed a strategic partnership with cable sports.
In Australia in a multi sports streaming service.
Third as we remain focused on rapid debt repayment, we have repaid $350 million of our first lien term loans. So far this year and have repaid over $500 million since completing the SPG acquisition last year, we are on track to reducing leverage towards our target ratio of net debt to adjusted EBITDA of under three and a half times in the medium term.
Moving on to slide five I'll recap, our financial results for the quarter.
The second quarter of 2019 was a busy quarter for the quarter started international business with growth in most markets offset by certain markets closures and disruption in some other markets.
Overall constant currency revenues were down just 2.5% despite these headwinds.
Which I will explain further in a moment.
Sky betting and gaming was the key driver for our overall performance in this quarter the investment in in promotions that we made in the first quarter are paying off as the UK segment added $253 million of revenue with quarterly active uniques revenues and adjusted EBITDA hitting all time highs for the business.
All while our bedding net margin was 9.7% just slightly above our historical long term average.
Our Q2 results reflect the underlying strength of the business and we remain on track to see low double digit growth in revenue for the full year.
We believe this has an excess has been an exceptional acquisition for the company and given the strong future growth prospects for the business as well as our unique ability to replicate the proven skybitz model in Fox Pitt in the U.S. I'm very confident that this acquisition will drive strong shareholder returns.
Moving on to our second quarter highlights on slide six.
We continue to drive innovation and product leadership in all key geographies within our international segment, we hosted the world's first online tournament serious pay out over $100 million with our spring championship of online poker and we continue to cement our leadership in poker tournament.
Because you know had another great quarter with underlining growth over over around 20% as we continue to roll out new casino games and further improved growth in rate.
Within SBG in the UK as previously mentioned the business saw a record performance.
We were very pleased to see the strong an immediate return on investment from our Cheltenham Festival promotion during the first quarter why the Grand nationally Nappy alone was the biggest single event in Sky, but history, which takes up by more than a third from last year.
In addition to racing we saw record soccer stay is stakes on the Champions League final, which even exceeded the levels. We saw during last year World Cup games.
Very easy also had another solid quarter with 13% growth in steaks, and adjusted EBITDA margin of 11% in line with our expectations.
We signed an exciting strategic partnership deal with cable sports during the quarter that we believe positions us well to expand further into the recreational market in Australia going forward.
Leveraging the media integration strategy for our SBG business to drive effective customer acquisition and retention through sports media.
Turning to slide seven.
I'd like to expand on some of the factors that are impacting the reported performance of our international segment and why the strength of our underlying operation is not being fully reflected in our reported results.
As you can see the chart on the left our rest of the world or top tier markets, which now represent 83% of the international revenue are seen organic growth with 4% growth in constant currency.
This growth rate is relatively consistent with the 6%.
Rate that we saw in Q1 2019.
And we believe it broadly reflects the current underlining growth profile of the segments.
We then have a group of disrupted markets, where our product marketing or payments have been disrupted or where we have had to suspend or otherwise adjust our offering as part of the regulatory or licensing process.
These market now only represent around 15% of our international revenue compared to 20% in Q2 2018.
The main markets within the segments are Russia, Norway, the Netherlands, Switzerland, and Slovakia.
On the top right you can see the impact of the strength that we are experienced these markets over the last few quarters.
Within this market in the aggregate constant currency revenues were down 27% in both Q1 and Q2 2019.
That being said, we have seen encouraging signs of recovery in these markets most of which are largely stabilizing and we are optimistic about our prospects for the future with encouraging trends in Russia strong potential in the Netherlands, as we move towards the full local license and our plans to re launch our Swiss poker business on a local license basis in the second half of 2019.
The recovery in these markets have been little slower than expected and the launch of our license poker business in Switzerland is slightly delayed as a result, we now expect our international segment revenues for the full year to be lower by mid single digit percentage.
Nonetheless, we have taken rapid action to reassess and optimize our cost base in the segment in order to mitigate the adjusted EBITDA impact and free up funds to invest in product and marketing in our top tier market.
Markets supporting our medium growth targets.
There are many exciting opportunities emerging in the segment, including newly regulated markets and our plans to increase marketing spend on direct customer acquisition for casino embedding. These initiatives gives us confidence that our revenue growth will accelerate as we begin to lap the majority of the disruption in certain markets from the beginning of 2020 .
As we move to slide eight I would like to take a moment to reiterate our confidence in our strategy to deliver strong sustainable future growth.
We are operating in large and high growth markets with encouraging regulatory progress in the us and Latin America.
We are a diversified global leader in this industry and I'm pleased with the progress we've made during the quarter to leverage the capabilities across the group as evidenced by the operating momentum we saw we describe it in Italy and the development of our plans in our UK ecosystem integration that will enable our UK customer base to benefit from our leading pokerstars products.
We believe we have significant sustainable competitive advantages and we continue to leverage these to grow market share in our attractive end markets. We further strengthened our market share in key markets in the second quarter and continued to launch further innovative proprietary products and content.
Our business is uniquely set up for scale benefits with our strong brand proprietary technology and operating expertise, we have the ability to replicate our products in new markets. These competitive advantages also provide us with an immediate headstart in new markets and I'm really excited about the forthcoming launch of folks, but in the us which Robyn will expand on shortly.
Finally, we believe we have highly attractive financial model and continues to generate strong cash flow, which we currently intend to use for debt reduction while investing for future growth with that I'll turn the call over to Robin who will provide additional detail on our plans to launch Fox pit in the second half of 2019.
Thanks, Ross and good morning.
The U.S. spending market is the largest and most exciting medium term growth opportunity for our company.
We believe our proprietary technology operating expertise and sports betting and our unique Fox sports brand partnership positions us ideally to become a leader in this market.
You can see a couple of examples of how our folks that products and all will be seamlessly integrated into Fox sports broadcast on slide 11.
This provides us with huge sustainable competitive advantages significantly broader access to recreational sports fans as potential customers I trusted authentic incredible brand and a series of free to play games that will become part of the day to day Sporting and entertainment narrative.
Sports views into us into driving ongoing engagement with our products.
The scale of Fox Sports is impressive and we'll creates a wide funnel of potential customers for both a free to play games and in relevant states, our real money bedding products.
Our partnership with Fox Sports also provides us with direct access to nearly all us households in fact, the Fox broadcast network is a leader in like sports viewing broadcasting more offense with viewership over $20 million more than any other sports network and is available in 99% of us households.
Okay Sports is also one of the leading cable sports networks and is available in over 80 million us households, featuring more than 800 live sporting events annually.
Since we last spoke in May we have been focused on securing the plans for our launch as highlighted on slide 12.
We have built a strong experienced team, including great operate some sky bet Betstars and from other leading sports operators. We've also transferred some fantastic creative talent from Fox sports over to Fox pets, and signed up many Fox sports presenters all household names to be brand ambassadors for folks that which will increase our alignment with this great brand.
Eric Shanks his team at Fox sports have been incredibly engaged and we believe we have the operational plans in place to begin replicating the success of the Skype at model in the us.
We have more most of our partnerships in place with potential market access and up to 20 states, including recent deals with the Mohawk Casino resort in New York and Penn National Gaming.
Without plans in place I would like to provide some additional color on our expected investment. We currently expect to invest approximately $40 million in the second half of 2019, primarily focus on customer acquisition launching the Fox Pitt brand in Pennsylvania.
Re launching of betting product in New Jersey, with Fox Pitt building strong and talented operational and marketing teams and product development across real money and free to play apps.
We expect to continue investing in this business next year.
Based on our expectations with the regulatory environment state openings skin availability unexpected addressable market size, we anticipate the U.S. business to breakeven by the end of 2020 two.
To put this investments into context as previously discussed we see an addressable market opportunity of around $9 billion of revenue by 2025.
We are not planning to sits at the side lines now that we have one of the strongest media partners in the world and a strong strategy in this emerging markets. Rather we are planning to ensure that we become once the market leaders in this industry across all product verticals and free to play games.
I couldn't be more excited about the launch of Fox bet with our World class proprietary technology and strong operating expertise and with a Fox Sports brand partnership we are poised for an effective launch with that I will hand over to Brian for more details about Q2 results.
Thanks, Robin and good morning.
As Youve heard from Raffi, we have continued to make significant strategic progress during the quarter and it is really exciting to outline our plans for Fox bet in the U.S.
I'll now provide a bit more context on the second quarter, starting on slide 14, with a summary of our financial results.
As reported net earnings for quarter, one was $5 million.
After adjustments, including removing the amortization related to purchase price allocations. Adjusted net earnings was 138 million, giving us adjusted diluted net earnings per share of 48 cents on a pro forma basis revenue declined by 2% year over year. However, we saw constant currency growth of 4% as most of our major currencies.
Were weaker year over year compare to the us dollar.
As we lap the World Cup and were impacted by disruption and closures in certain markets. This underlying growth of 4% was in line with our expectations.
As highlighted on the slide the acquisitions, we made last year have significantly improved our mix of revenue from regulated and taxed markets and de risk our business with 79% of revenue now from regulated or tax markets and a further 12% from markets that are in the process or potentially regulating.
Lastly, we continue to rapidly pay down debt and ended the quarter with net debt of 4.75 billion down from 5.06 billion at the end of March 2019.
Over the next few slides I'll provide an overview of our quarterly performance by segment.
Turning to slide 15, I would like to start with additional details about our performance in the international segment.
As you heard from Rafi encouraging trends in most markets were offset by headwinds in certain disrupted markets.
Despite these headwinds as reported revenue were down 8% with constant currency revenue is down only 2.5%.
Within poker revenues were down 12% in the second quarter or down 7% in constant currency.
In line with last quarter, we are experiencing low single digit poker growth in most markets offset by headwinds in certain disrupted markets.
As a reminder, we will begin to lap the majority of the disruptions from quarter four 2019 onward in poker.
And continue to believe that we will see low single digit growth in constant currency over the medium term.
Our casino revenues were up 2%, which represented 9% growth in constant currency, despite the impact from certain disrupted markets and some closures.
The strong underlying performance reflected the continued success of our product and content rollout with new game launches continuing at about 30 per month as well as continued progress in cross sale, which reached new record levels during the quarter.
Excluding the markets, where we have seen disruption on a like for like constant currency basis underlying casino revenue growth was approximately 20% year over year.
Betting revenue was down 7% as reported with stakes flat as we lap the World Cup in the prior year period and faced the impact of certain market closures.
We also continue to rollout new products, including virtual racing and more requested that variance from Sky bet.
During 2020, we plan to ramp up direct acquisition through our international Sports business and currently expect to see strong growth rates following suit in the coming years.
Our adjusted EBITDA margin was down 2.5 percentage points at 44.5% during quarter two.
The gross margin was 3.7 percentage points lower as we continue to increase the mix of revenue from regulated and tax markets and saw a higher taxes in certain markets.
But this gross margin decline was partially offset by our continued efficiency gains and the delivery of acquisition synergies.
Turning to the UK segment financials on slide 16, which currently comprises the SPG business and are presented in pound Sterling.
The second quarter was an exceptional period setting new record levels in local currency for financial and operational performance for the business.
Stakes grew 15% to new record levels, a strong performance against tough Comparatives, which were boosted by the World Cup in the prior year.
We saw strong engagement from new customers that were acquired during the Cheltenham Festival in quarter one 2019.
And with a new record level of quarterly active uniques, we continued to see strong returns from this investment.
Gaming revenue was up 20% also a strong performance that reflected the growth in actives and the continued rollout of premier products content and promotions.
The bedding net when margin was 9.7%, which was broadly in line with our long term historical average of around 9%, but slightly below the same period last year, resulting in bedding revenue growth of 9%.
Overall revenues were up 13% to an all time high in pound sterling of $196 million.
The adjusted EBITDA margin was up 11 percentage points during the period benefiting from the phased investment in marketing and customer acquisitions in quarter one 2019.
With that said, we believe that the year to date adjusted EBITDA margin of 33% is a fair reflection of the ongoing profitability of this segment. After a focused on efficiency and streamlining of the cost base to mitigate the higher gaming duties that came into effect during quarter two in the UK.
The SPG business reported impressive adjusted EBITDA during the quarter and remains on track with our cash flow and adjusted EBIT expectations from the time of the acquisition.
Turning to slide 17, we provide an overview of the financial results for the Australian segment.
As a reminder, this is in local currency to provide increased clarity about the underlying operating trends.
State growth in the quarter was 13% to a 1.1 billion Australian dollars with continued solid trends driven by the rollout of our personalization plan and successful player management.
The prior year period includes the acquisition of William Hill, Australia from April 2018, with three weeks at the start of the period that only relate to crown bed.
If we include the full contributions from William Hill, Australia in quarter, two 2018 staking growth on that basis would be 5% a strong performance considering the trends in the William Hill, Australia business prior to the acquisition and migration of its customer base to the bed easy platform.
The bedding net when margin of 8.5% in the period was broadly in line with our expectations with adjusted EBITDA of $10 million at a margin of 11% consistent with the range of 10% to 20% that we previously outlined and reflecting the impact of the new point of consumption taxes that were in place at the first of the quarter.
Looking at the rest of 2019, we expect to capitalize on the personalization of our products to increase customer engagement and satisfaction and drive profitability through our focus on high value recreational customers.
We therefore expect a slightly higher bedding net when margin in the second half of the year, assuming normal sporting results and we are on track to continue to achieve an adjusted EBITDA margin within the range of 10% to 20% in 2019.
Turning to slide 18, I'd like to reiterate the strength of our cash generation.
Our adjusted EBITDA in the period was $237 million.
After working capital and adjustments.
This covered our cash interest costs of $51 million and taxes of $39 million of which 18 million reflected onetime tax payments related to pre acquisition periods in Australia.
Capex was $37 million and we had integration cost of $5 million.
Overall this meant we saw a free cash flow of $85 million in the period.
Excluding the items that are more onetime in nature, including the integration costs and the historical tax settlements and adjusting for the prepayment of debt. This would have been around $120 million available for debt repayment.
We have already repaid $350 million of debt this year.
Following a 100 million repayment in quarter four 2018.
As we prioritize debt reduction with our strong cash flow, we continue to monitor the debt capital markets in order to optimize our capital structure given prevailing market conditions.
Turning to slide 19, I'd like to provide an update on our 2019 guidance.
We now expect revenues in the range of $2.5 billion to $2.575 billion.
And this represents growth of 5% to 8% on a constant currency pro forma basis.
The change in our revenue guidance reflects the impact of updated FX rates.
A historical low bedding net when margin in the first quarter in the UK.
The slower than planned recovery in our disrupted markets and some delays in launching our new licensed operations in certain jurisdictions, such as Switzerland.
We previously indicated that we would likely be at the low end of our adjusted EBITDA guidance range of around $960 million and we're now updating this range to reflect the following main factors first as Robin outlined here, we plan to invest around 40 million in are very exciting us opportunity.
And we look to build a leading prominent presence with the launch of Fox Pitt.
With our proprietary technology Sportsbook operating expertise and leading brand. We are excited for the tremendous opportunities. This investment brings.
And second a $15 million increase in FX headwinds compared to previous assumptions with the U.S. dollar further strengthening against our major currencies.
Taking these factors into consideration, we now expect adjusted EBITDA in the range of $905 million to $930 million.
Excluding the impact of the change in FX and investment in the US our adjusted EBITDA guidance range would be $960 million to $985 million relatively consistent with our prior guidance.
After taking into account our affected depreciation interest and tax this amounts to adjusted EPS of $1.68 to $1.83 based on 283 million diluted shares.
For a detailed discussion of the factors and assumptions underlying our guidance and changes to the same please refer to this morning's earnings release and the appendix to this webcast.
We now expect total capital expenditures this year of about 150 million at the high end of our previous guidance range due to our investments in the us.
Importantly, during 2019, we remain focused on our strategic priorities of integration execution and debt reduction and we are laying the foundation for strong future growth.
With that I'll now turn the call over to Rafi to conclude.
Thanks, Brian .
To conclude then recap the quarter, we continued to build our US plans with further market access deals and preparation for our folks bed launch and we are ready to build folks bid into a market leader. We saw all time highs in our UK segment with strong returns from our Q1 investment in Blair acquisition, and we saw over 25% growth in Sky bet in Italy, and just relaunched Sky bet in Germany. We believe the transformation of our business is paying off and we are confident that we have built a strong platform to deliver our medium term growth plans.
And with that I would like to hand, the call over to the operator to begin the QNX session.
As usual Mara Goldstein, our chief legal officer, joining us for the question.
Thank you we will now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request we ask that you limit yourself to one question and re queue should you have a follow up.
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Once again to join the question queue. Please press Star then one we will pause for a moment as callers join the queue.
Our first question comes from the line of Thomas Allen with Morgan Stanley . Please proceed with your question.
Hey, good morning, everyone will depending on where you are.
Just to touch on the box bad first.
You know how are you thinking about how should we think about kind of the 2020 and 2021, how this business thing a trend.
If it's $40 million of losses in the second half of this year does that mean 80 million next year should that go down.
I know you said the breakeven targets late 2022, but just wanted to think how we should think about our models and also are you going to reported as a separate segment. Thank you.
Hi, Thomas this.
Yes, they can get a speedy again, yes.
As for them.
I said in my prepared remarks.
We're going to invest heavily in this opportunity we are talking about the biggest opportunity. This that this industry is seeing for generation and given the assets that we've amassed we're certainly not going to sit on the sidelines, yes, certainly the comps should we thought we have a strong brand amazing marking.
[laughter].
Great technology, great operating expertise you to seed the market access that we have with El Dorado with Penn Mobile command, Terry and results and of course, we've got the legal funds to invest from the cash generation from the rest of the group. What I'd also say is that we will invest in a disciplined manner and thus we have natural benefits here with the brand with the marketing integrations, we can attract a lot of customers compared to the CPR ace.
The product that we have with the operating expertise that will drive player values and we will be taking advantage of the scalable global platform.
So that.
So that folks that will have an efficient cost structure. So Paul so, yes, we will invest but the ROI should be very very good now when it comes to 2020, I wouldn't necessarily extrapolate the $40 million.
Annualize that especially for any looking at just a.
Pennsylvania, and New Jersey, we are sitting on the business a subset of costs won't repeat.
Revenues this year will be low because we're investing to build a customer base rapidly and that involves quite a lot of cost in terms of bonuses and offset some that will dissipate over time that said look if there were a couple of big states opening at the end of next year.
And with that I want to launch strongly and we will do so that will lead to short term cash outflows, but that will be the right thing to do for the business. So said, we're not sitting on the sidelines, we are going to invest in this opportunity and.
And we expect to drive strong returns as a result of all the assets and capabilities that we have.
Thomas with Brian just to to answer your second question on reporting it as a separate segment definitely this is going to be one of our most strategic business opportunities that we're going to be focused on.
We are aligning it to be structured as a separate segment.
We expect to report is the second segment beginning in 2020.
Thank you both and then in the quarter.
As for your UK business really stood out with really strong margins and.
I appreciate the commentary that we can kind of extrapolate first half margins going forward.
But but can you just talk about the sustained like the sustainability of the strength there.
And should it continue to be that's kind of a lumpy.
One period of investment and then you reap the rewards.
As we go forward. Thank you.
Hi, Thomas.
So yes, we do expect sustainability in this business. This business is a strategic asset that we have in the UK.
We will continue investing exactly the same way that we are investing that we have invested so far.
We just had the beginning of the season.
This last weekend and we've been doing quite a lot of investment for the beginning of the season, we because we want to we want to ensure that we are set up well.
For the start of the season for the rest of the year. So I would I would say, yes, we do believe that there will be sustainability. This business. We are not planning to operate on those hotly high level margins going forward exactly as we said we are seeing this this business operating unit at approximately 33% margin.
But.
In terms of the investment profile. This will continue going forward and we still expect this business to grow its in our belief that this asset in the UK. There is no reason in the world not to continue investing and not to continue taking market share and not to continue to build our customer base.
Okay helpful. Thank you.
Thank you. Our next question comes from the line of Patrick Coffee with Barclays. Please proceed with your question.
Mr. coffee please check to see if your line is on mute.
Our next question comes from the line of Chad Beynon with Macquarie Group. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
On the disrupted markets that you you parsed out on one of your slides you noted that the business has stabilized from.
From a loss standpoint.
Reflecting kind of a similar type of loss as you saw in the first quarter.
As we think about the algorithm, particularly for international going forward is the goal to really stabilize this or is there hope that.
Given some of the things that you're doing internally in those markets that these markets could could eventually grow off of where they are just trying to figure out how this kind of plays into the medium term outlook. Thanks.
Not a problem so.
We are planning to grow this business I mean, we have been in the same situation situation before.
Where we had FX impact and versus the headwinds.
And we have demonstrated quite a great recovery over the past three years 16, 17 and 18.
This business in my view has the biggest opportunity outside of the U.S. simply because the business you saw global markets are opening up all the time now opportunities in Brazil, where we are about to launch in Argentina, we are still working and hoping for the the leisure liquidity, we are going to launch will coming to us even though it's going to be reported obviously the U.S. segment.
The Netherlands is now in the process of regulating and we see the Netherlands is a great opportunity.
And we're doing some work around rebranding.
Within the international business essentially the concept that we have is really to promote tool to muster brand. If you wish one is the Pokerstars brand.
And the other one would be describing so in markets, where we operate pokerstars and we don't have great day.
Brand equity in Sky, but we are likely to move away from Betstars and started promoting Pokerstars sports and also focused our casino and then have focused our system must brand and we believe that we threw that we can we can get more marketing efficiencies in those markets and obviously markets, where we do have a skype it as the brand and its available and we do believe that we have a good relationship that we can build with with the local sky broadcaster like Sky Italia and Sky Deutschland, then obviously, we will start investing in those spreads.
So yes, we are not looking at this business on on you know on a base of stabilizing it. We're looking at this business on the basis of what do we do in order to continue growing this business and we do believe we will continue growing this business.
Okay. Thanks, and then my follow up is just back on the U.S. market. Some of your competitors have given very broad targets in terms of market share are you willing to provide some goalpost on what kind of your internal expectations could be a few years out after the programming and the integration is fully launched and and we're at a better steady state.
Sure.
With the assets and capabilities that we have them.
We expect to do very well in this market.
Look we're not going to give up market share targets.
Now, let's see how we evolve, but we we are planning to invest in the market said 40 million. This year 40 million as a starting point for for next year.
And as I said with the brand with a technology with maxing integrations that we have we expect to do very well in this market, but at this stage, we're not giving out target market yet.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Omar Sander with JP Morgan. Please proceed with your question.
Hi, guys. Thanks for taking the question.
Hi can you help us understand your 2019 guidance how much of this reduction has to do with disrupted markets and then I know it's what's included in that other cost bucket looks like it was up 65 million from prior.
And then just on top of that how did these kind of moving pieces a flow into there was medium targets we provided previously.
Yeah, Hi, I think I think the way to look at our guidance going into the balance of the year.
Starting with.
Where we landed in quarter two so basically the quarter two results were in line with our expectations. I mean, these were reflecting record results in SPG not only from a financial perspective, but also from an underlying operational perspective. So we were very very pleased with that the other point I want to highlight is the cash flow and the free cash flow generation again, you know this was this was an exceptionally strong levels coming in on an on an adjusted basis at about 120 million.
And we continue to execute on our.
Yes reduction strategy paying off about $250 million in the quarter and making this our third consecutive debt repayment quarter since basically since we closed on SPG.
Looking at it specifically adjusted EBITDA, we were tracking at the lower end of the guidance range in quarter, one after reflecting the low net when margin that that was realized in the quarter coming in at about 6.1%.
Quarter, two we are back in line with our 9% average and again all we are doing is adjusting from that low end average to reflect FX impact, which is about 15 million based on current spot rate.
And at the investments that Robyn outlined in in our U.S., which is about $40 million. So adjusting for those two items only we're going from the low end of our range. The historic with the original guidance range down to our new range of 95 to 930.
Thank you that's helpful. And then second on the U.S. has it become easier I know, it's early but has it become easier to find partnerships given the relationship Fox sports and how was the rollout I proceeded relative to your expectations. Both on the regulatory on the partnership side.
Sure so.
Yeah, I think we're very happy with where we are in terms of access we have access to potentially 20 states and you would have seen the recent announcements on mobile in the key assays and yield obviously Penn National gaming.
So we are absolutely confident we will get only access we require on you as you correctly said.
Like becomes even easier now we have folks as a partner so no issues that I think I would agree with no.
Not not my patients in the set.
When I say that the pace of legislation has been more rapid than we saw which is obviously very good news for the entire market. So we are seeing more states go lives off than we anticipated we are seeing more bills pending than we anticipated, which is which is which is all very good news for us.
I just want to add one oneneck, we call it here.
It's being only three months since we since we signed the deal we for only three months I mean, just just.
We need to consider that into bigger in the big picture since we signed four.
We are going to roll out very soon.
A range of free to play games, and we are going to launch for but in Pennsylvania ahead of the NFL season, and re launch based on a four bit in New Jersey, and obviously, we've already built up further market DOCSIS positions in more markets and it's being only three month since we signed this deal. So yes, we are expecting steel allowed to happen in these markets obviously.
All right. Thank you.
Thank you. Our next question comes from the line of Tim Casey with BMO. Please proceed with your question.
Thanks for sticking with the U.S. opportunity you've got a line in the slide where you talk about.
Breakeven in 2022 can you talk to us about what is in that assumption.
And you also Robin mentioned 40 million as a starting point for for 2020.
You know how many.
Reasonably how many states should we expect you will you will light up in addition to Pennsylvania, New Jersey in 2020. Thanks.
So they are all of them, but we know Weve, obviously run out.
A number of scenarios there are number of factors, which you will appreciate the pace of legislation the size of the market that legalize tax rate.
The number of verticals, which are legalized side, obviously influences cross sell rates.
And also the number skins that available to that because the influences.
Competitive intensity in those states. So it's based on a reasonable assumption on each of days that we get to a brief break even position at the backend of 2022 clearly.
A material change in life Sciences could could lead to.
A change of outlook our positive reasons why that may be pushed back because we are gaining lots and lots of market share do you need to economics are very close to the returns on investment.
Our very strong but based on what we see today Thats a thats our best estimate in terms of state by state by state rollout I would imagine that we are looking anywhere between say two to four states every year, we always prioritize those states, which are the largest which present the best opportunities for US also west also particularly strong as well there are a number of factors. So again, we will prioritize based on potential economic returns.
Thank you.
Thank you. Our next question comes from the line of Joe stuff with Susquehanna. Please proceed with your question.
Thank you good morning.
I wanted to ask about the sky bed and and the stakes growth the yard in the second quarter and how to think about that.
You had mentioned and and.
The.
The newer subscribers and customers that you had.
Achieve basically yet at the horse race.
It certainly contributed to that but I was wondering if you can help us understand other drivers.
That really help.
Generate that type of stakes growth in the quarter.
Sure I mean, its eighth seventh I would say.
Going back to all the basics that Skybitz is doing.
So well.
First of all and above everything the retention level I think I mentioned it several times when we when we looked at the company before acquiring before acquiring Scribing a gaming we were highly impressed by the retention levels all of their customers, it's not something that we see in the gambling industry. It's something that you can see in other industries not very frequently in the gaming industry.
As a matter of fact, I've never seen that degree or retention levels.
In any company in the gaming industry.
So the ability to continue to retain customers and obviously monetize those and increase the ARPU of those customers will continue.
To contribute to the state level that we have.
Secondly, sky bit in general is a category builder.
We are investing in promoting sports focused we are.
We are investing in a making the market bigger.
And we've been quite successful doing so.
When you when we look at the market share in terms of the customers. We do have the largest market share in the UK from a customer base perspective, and Thats, obviously, another area, where we believe that we are going to continue generate or increases stakes level.
Other than that I mean, it will be all the usual tactics that every gaming company is doing in terms of the you know promotions and CRM and bonuses et cetera.
Okay. Thank you and my my follow up is on the disrupted markets.
Russia is correct me if I'm wrong, a large contributor just in terms of that aggregate disrupted markets.
I know in past quarters Conference Quarterly Conference calls you had provided some update in terms of trends can you provide that for your Russian business in the second quarter on a sequential basis.
Sure. So we do see sequential improvement in the in the Russian market and it is improving.
You can't really compare Q1 to Q2, because in Q1, even though we said its stabilizing maybe 20% 27%.
And at a lower.
In those both quarters there were some other impacts that have happened in Q1 that happened later, so just as an example, we still had the Switzerland for a period of time in Q1, we'd we'd casino, we still had Slovakia till the end of Q1. So we do see sequential improvement in Russia, and I'm quite excited about this market because there are more opportunities that we're seeing in this market first of all we just signed the USA deal were going to launch the you will see a TV campaign in Russia very soon.
On top of that we are planning to apply for Sportsbook license in Russia under the Pokerstars Sports brand.
And we are seeing again as I mentioned sequential improvement in the market.
We ended the more and more payment methods. So as time goes by I do expect Russia to continue growing.
Thank you.
Thank you. Our next question comes from the line of Simon Davis with Deutsche Bank. Please proceed with your question.
Hi, good morning, guys.
Good luck kick off asking about Germany you've.
Launch to a sports product in the German market. Obviously, they are planning to launch a licensing process for sports in the new year can we assume that you're planning to apply for a license and if so do you see any risk that that might impact on your ability to offer a casino and poker product in the German market.
Simon highest marlin how are you.
Let's see.
Thank you.
I can tackle this one for you.
Look if we look in Germany, I think for the foreseeable future. We anticipate the status quo to continue for quite some time.
We've talked previously that we have a license from us lesser the cole team and that permits us to operate all verticals in the market not just sports.
In terms of the current state Treaty as you know that expires in June of 21.
And we're hopeful that as things progress. The next day Treaty is going to include a broad commercial framework similar to what it's less of the closing has already adopted.
This is going to allow the operation of all products not just sport.
So we are hopeful I'm looking forward.
But currently we expect the status quo to continue.
And if there is a lot licensing rounds over the next three four months would you expect to participate in that sports licenses.
I think thats something we would take a good look at.
And certainly, we'll we'll kind of evaluate it as it comes.
Right and just secondly in terms of your target breakeven in the U.S. can you give us some kind of indication of what kind of revenue run rate you need to achieve that breakeven level.
We're not going to be providing that information at this time as I said.
And once we launch as we get some data three will that will will shambled on own funds.
And in the future, but nothing for now.
I'm going to add one more quick comment around Germany.
As I mentioned on the call, we have launched sky bit in Germany under the the Pokerstars ecosystem. So now Skype. It is fully integrated into the Pokerstars ecosystem and we have signed a relationship or partnership with Sky Deutschland, and we're going to be integrated and obviously continued to develop this business in there in the market. So we're quite excited about this market overall.
Great. Thank you.
Thank you. Our next question comes from the line of David Mcfadgen with Cormark Securities. Please proceed with your question.
Hi, Thanks for taking my questions. Let me just first of all just start off.
With that the international business you know you talk about actually you didn't talk about about apples said that.
Starting I think in early September the bedding apps are all the apps have to be completely native iOS apps can have any HTML five components. So I'm just wondering if you're going to be compliant. There I'm just wondering about the risk as it did in asset because I guess specifically poker.
Maybe you can address that and then I'll follow up.
Sure the answer there when it comes to current Pokerstars is very simple this is all native.
There is essentially no risk.
By the way same goes for Betty and same goes for some of the some of the other features that we have within the Pokerstars business and all the rest of the business is taking whatever preparation and adjustments in order to make sure that we are in complied with the iOS policies.
Okay great.
And then just a question on Fox Bad.
I'm kind of surprised.
At the level of investment I guess, it's for customer acquisition. So I was kind of surprised given the pokerstars database. The U.S. database that you guys can use and then.
Fox is.
You asked digital database that you can obviously use is wow sounds just there's just kind of surprise what what is really the factors driving those EBITDA losses are in the short term.
I wasn't sure. If you are asking if youre surprised because it's too low, but we still high but I I guess, you manage potentially too high in your view.
I thought it was a little high but anyways.
You talk about it.
We we want to take full advantage of this opportunity and we want to take market share and.
Substantial custom basis.
On top of the ones we are.
Two.
Yes, it's a very important vertical in the U.S the sports betting is far more mainstream far more widespread and will attract a wider.
Number of people, so we need to look beyond Oh database.
We want to become one of the leaders in this market as I said I think yes, I think I think fuel.
We will deliver very good returns on investments as a result of the Fox brand as a result of marketing integrations and some of the exclusive.
We have with them. So I feel confident that we will generate positive returns for shareholders from that investment, but as said we need to look beyond the those existing databases. If we want to become a leading player in this market and that is clearly our intention.
Okay.
All right. Thank you.
Thank you. Our next question comes from the line of James Rowan Clark with Barclays. Please proceed with your question.
Hi, a couple please.
Just first one is just a point of confirmation on the U.S. losses.
You I think you said earlier that 40 median affords me lost as a good starting point for next year.
I just wanted to double check that and does that mean to say that the 40 million of losses. This year have about 20 million, all sort of nonrecurring or accelerated costs in that number.
And then second you know in the past you've given us a flavor of how the quarter is progressing so far it's going better. So I wonder if you could just give us a flavor of how it's going bad performing so far in Q3.
And then finally.
On the on the guidance.
You've had a fairly regular stream of downgrades in the last 12 months.
So is it fair to say that your new guidance is a little bit more conservative than usual.
Thank you.
I'll take the question on the losses of $40 million for this.
Calendar year.
2019, 40 million as a starting point for next year, but what I said was that I wouldn't necessarily annualize fat.
If we just looking at New Jersey, and Pennsylvania, and obviously the loan.
For free to play what could change that would be.
Launches.
Particularly in the second half of next year in launching new states, where there could be significant investments to two.
The two customer bases. So that's all.
I thought that the the positions saws the losses.
The investment is concerned.
When it comes to Sciverse in Q3, we started Q3.
In a very positive way and we actually had to start of the season, which kicked off this last weekend and we had a very good start.
So.
Skybitz for Sky betting and gaming is doing well too so far and I'm expecting them to continue to do well.
Throughout the year and going forward the general I mean, I do genuinely believe it's the best asset in the UK.
When it comes to the guidance.
I wouldn't say that we are too conservative here I would say that we are realistic with our estimation for it.
For the year.
Okay, great. Thank you.
Thank you. Our final question comes from the line of Jim will get to cheat with Echelon partners. Please proceed with your question.
Yeah, Hi, good morning, guys. Just a question on your efforts in Italy on their own rebranding. So what are some of the takeaways. There that you can apply to your other jurisdictions in integrating your your existing platforms.
So yeah, we are actually very happy with the way that we rolled out sky, but they may need to be as part of the of the Pokerstars ecosystem.
The same thing happen just now in Germany, We launched only a few days ago, and we've signed the partnership with Sky Deutschland, and we are expecting to see essentially the same type of trend also happening.
In Germany.
In terms of the other markets I think I mentioned it before we are planning to use cases that were available and obviously were sky has brand equity and our few considerations around around those markets. They operate in five key markets and win and we are exploring those and.
Some of the adequacy ratio that we have around the brand is again something that I mentioned before we are looking to move into focused ours is the master brand and in markets, where we don't have.
Sky or Skype, it and were Sky doesn't have like strong brand equity we are going to start using corporate stars sports and for that matter also were going to use Pokerstars casino.
So.
That's the plan going forward, we are looking to ensure that we are that we are you know as efficient as we can in terms of the marketing and we are really.
You know extracting the value from the assets that we've.
That we've managed to build and acquire over the course of the years.
Okay, great. Thanks for asking just ER.
And follow up to that question is can you give us an update I guess, Brian on how the synergies across your.
Assets that you acquired last year are advancing and how much are still to be generated for the balance of 19. Thanks guys.
[noise] 30 before before Brian answer I, just want to add one more comment I think maybe.
And maybe it was last in what we said.
Previously but.
We are planning also to have the UK ecosystem rolled out towards the beginning of next year and we also believe that this will actually drive very meaningful revenue synergies overtime. The UK acquisition, just to maybe add a little bit of a you know of substance to to what this project actually means it means that were going to put their pokerstars and describing it betting and gaming a per customer basis into one ecosystem and allow customers to transfer funds between one ecosystem in the underwriting system, essentially allowing the customers on sky Sky bidding and gaming access to the best Poker business in the World Best Poker offering the best poker product in the world and obviously, allowing pokerstars access to millions of overlay of customers on that.
Describing and gaming business, which they required over the course of the year is India in the UK. So thats another quite exciting opportunity that we see this is something that we are hoping to.
To roll out at the beginning of May of next year, and there will be follow up.
Projects relating one offs relating to obviously the extracting the value of the revenue synergies.
As time goes by and and as we.
No tighten the integration between the two way the two eco systems.
So that's just.
A falloff remark on your previous question sorry, dry go it and then just answering the question on synergies synergies are tracking very well.
The only point that I would add is that the.
Large proportion of those will be realized through h. too. So again from a phasing perspective, they were heavily weighted into the back half of 2019.
We continue to look at other cost optimization opportunities and again the whole objective here is to ensure that were operating effectively and allowing us to free up funds to continue to invest back into our business through marketing efforts. The overall synergies are tracking exceptionally well.
Thanks, guys.
Thank you. This concludes time allocated for questions on today's call I would like to turn the conference back over to Mr. Ashkenazi for any closing remarks.
Okay. So thank you everyone for participating on today's call and the ongoing support and interest in the stars group. Thank you Goodbye.