It is tough being a billionaire, especially when your gains have come at the expense of folks addicted to gambling. The press is emboldened to question your every move and throw insults at you at every turn, but Teddy Sagi, our undaunted Israeli billionaire and precocious founder of Playtech, keeps plugging along, having already developed a thick skin long ago. First half earnings for 2016 have been released, and, although there were a few write-downs related to restructuring efforts, his top-line revenue growth is stellar, enough so that a dividend of €150 million has been declared for shareholders.
Regulators may frown upon his checkered past in the investment industry, but Teddy learned quickly from his mistakes in the nineties. After serving jail time, he focused on establishing a gambling software and services company juggernaut by the name of Playtech Plc. He currently owns 33.6% of the enterprise, whose market cap on the London Stock Exchange stands today at just north of £3 billion. Teddy’s broad and endearing smile will again be pasted across the London tabloids, brandishing his dividend check for over fifty million Euros. His smile might be more snicker than grin.
It was not that long ago that regulators in both the UK and Ireland balked at issuing approvals for Sagi’s intended takeover bids for Plus500 and Ava Trade, respectively. The Financial Conduct Authority (FCA) and the Central Bank of Ireland (CBI) may have thrown tandem monkey wrenches into the inner workings of Playtech’s M&A department, but the firm did not skip a beat. It continued with its long-term strategy to build a new “Financial Trading” division within Playtech around its previous acquisition of the Markets Limited franchise. Playtech’s treasury is also brimming with nearly $1 billion in cash to feed its merger appetite, a little less so after its declared dividend.
What has Playtech been up to over the first six months of 2016?
Mor Weizer, Playtech’s Chief Executive Officer, recently hinted to Reuters that the firm’s apparent buying sprees would continue after two new targets had been taken into the fold during 2016 to date: “We have a strong pipeline of M&A targets. We are in discussion in both gaming and finance divisions.” The FCA and BCI may have been formidable obstacles in the British Isles, but industry insiders expected Playtech to look beyond its headquarter’s locale for more promising prospects, where regulatory approvals might be more forthcoming.
The firm did make two new acquisitions. Per Weizer’s public disclosures, “We have been pleased with Group’s M&A activity to date in 2016, having spent €170 million on acquisitions including Quickspin, announced in the first half of the year; and BGT, announced after the period end. In May Playtech announced the acquisition of Quickspin, a fast-growing Swedish games studio that develops and supplies high-quality video slots to operators, both in online real money gambling as well as in the social gaming market. Last month, Playtech announced the acquisition of Best Gaming Technology GmbH (“BGT”) for €138 million. The consideration was paid from Playtech’s existing cash resources.” Sweden and Austria seem to have been more supportive.
Prior to these disclosures, the press had only been able to speculate on what had been transpiring within Teddy Sagi’s empire. Sensing that Teddy might be hobbling on one knee after being rebuked by regulators, reporters smelled blood and naturally began to kick the man while he was down. Reports began appearing of what were termed as “massive cutbacks” of employees and the release of tons of office space, sure signs that Sagi was literally sagging on the ropes, just waiting for the knockout punch to finish him. As was reported here, such was not the case.
What had been reported were cutbacks in staff in two areas of roughly 230 employees in total, all part of a restructuring plan to become more efficient and to use more automated means of new customer acquisition techniques. Cold-calling salesmen were seen as a thing of the past, considering the evolving target market for the firm’s activities.
Companies continually review and update internal long and short-range plans related to future strategies. These reviews can often result in staff terminations and the release of un-needed office accommodations. To put these moves in perspective, Playtech has an employee base that exceeds 5,000 on a global basis. Recently announced cutbacks represent a mere 4.6% trimming of this base, hardly a “massive cutback” by anyone’s standard of measurement.
How did the results for Playtech pan out for the first six months of 2016?
Gambling can be a very lucrative business, especially if your company is ensconced in the infrastructure of the industry and not dealing directly with the consumer. Playtech works through a global network of distributors and agents for casinos and owners of electronic gaming devices. In other words, gambling houses have outsourced the guts of what they do to a third party, which must be highly efficient and innovative in its product offerings. The gambling industry has been enduring a wave of consolidations over the past few years due to stiffer regulations, technology, and a less than robust global economy. It makes sense to outsource labor-intensive areas where prudent.
It is this groundswell that has propelled Playtech’s financial success, since its founding in 1999. The timing was right and ripe, so to speak. Its software filled a niche for online casinos, online poker rooms, online bingo games, online sports betting, scratch games, mobile gaming, live dealer games and fixed-odds arcade games online. The firm went public on the London Stock Exchange in March of 2006, and, besides its headquarters in the Isle of Man, it currently operates in 13 countries: The UK, Israel, Bulgaria, Estonia, Ukraine, Philippines, Sweden, Austria, Germany, Gibraltar, Latvia, Cyprus and Russia.
How lucrative is the gambling business for Playtech, a software provider? Revenues in 2015 were €630.1 million, and Net Income after taxes were €136.3 million, a hefty 21.6% margin on total turnover. The margin before taxes was 33.7%, revealing that one out of every three Euros of revenue was profit. Yes, Playtech is a very profitable venture and lucrative proposition by any measure.
Have the first six months of 2016 been as lucrative? Alan Jackson, the Chairman of Playtech, gave this overview: “The Gaming division continues to deliver strong growth, driven by our industry-leading Casino offering. We have “locked-in” future growth with important new licensees signed and significant contracts renewed. Seven of our top 10 licensees are now on contracts, which have at least three years remaining, and our pipeline of new licensees and structured agreements remains strong. First half results from our Financials division reflect the full-impact of the transitioning of the business and improvements made due to regulatory changes with Markets now having the right platform for sustainable growth.”
Sounds pretty lofty so far, but what story do the numbers actually tell us? Per its report, “Total revenue increased by 18% to €337.7 million (H1 2015: €286.0 million) and by 24% on a constant currency basis, with underlying growth of 17% (after excluding acquisitions at constant currency).” Comments from the firm’s CFO had much to do with the collapse of the Pound’s valuation, an aftermath of the Brexit referendum in June. Many of the figures in the report are stated, as above, before and after adjustments for currency fluctuations. At the end of the day, growth of 18%, including currency impacts, is outstanding, considering GDP growth estimates in the developed world are having a tough time reaching 2% in North America and 1% in Europe.
What about Net Income? The reported figures for Net Income were €79.5 million versus €115.0 million, when comparing the first two quarters for both 2016 to 2015, an obvious decline of 31% year over year. Was this decline due to a major operating problem? Not if you accept the explanations given by executives at Playtech. There were a number of one-time adjustments due to restructuring and a litany of excuses given for conversion losses due to currency impacts, but future periods will demonstrate the benefits of the former elective changes.
The one-time changes that would deliver future benefits were explained as follows: “The first half results reflect the full-impact of the business transition and improvements made due to the regulatory changes, including the cessation of relationships with Introducing Brokers; moving away from binary options; fundamental changes in on-boarding processes; financial promotions as well as the transition made from a salesperson based approach to automated funnels for customer acquisition and retention initiatives.
These types of adjustments are standard operating procedure for most corporations, at least the ones that focus on delivering excellent earnings for investors. The management team also mentioned that more cost reductions would occur going forward and that healthy growth had continued into the third quarter, as well. Investors like these types of announcements, too. After the news hit the street, the share price for Playtech rose 4.6% to an all time high of 944.5 pence. Market capitalization soared to over £3 billion.
What was the “moving away from binary options” part about?
In late August, press accounts began to surface that Playtech had exited the binary options space by selling for an undisclosed price its TopOption subsidiary to Lead Trade, another Israeli firm licensed to operate in Cyprus and the EU. Lead Trade owns such other binary option brands as PrestigeOption, ExcellenceOption and OptionsClick.
One analyst suggested that the move was kept quiet for good reason: “Small wonder, considering that the binary options brokers are in hot water and face mounting animosity from various European regulators. In the beginning of August the French regulator AMF tabled a proposal for the altogether banning of advertising of forex and binary options brokers. Belgium shortly followed suit.” Sagi is obviously steering well clear of any more regulatory skirmishes on his turf, at least the ones that he can control.
Is Teddy Sagi on the ropes? Is Playtech having financial difficulty? Perhaps, there are a few reporters and competitors out there that are wishing for these “rumors” to be true, but reality has a way of shutting up critics and dispelling rumors. Playtech is financially sound. It has nearly $1 billion in cash on its balance sheet, even after a hefty dividend.
CEO Weizer actually told the press that, “We didn’t want to put any constraints on our business and we wanted to be in a position to move quickly should a big opportunity present itself.” Translation – More acquisitions are on the way. Teddy Sagi has let his numbers speak for themselves, as he laughs and smiles all the way to the bank.