Description

Pointsbet Holdings Limited (ASX:PBH)

Summary / Idea Overview

Online gambling in the US has become the next gold rush and, consequently, has become very crowded and very promotional very quickly. It’s also incredibly early, with less than half of US states currently allowing mobile sports betting and only a handful allowing iGaming (i.e., online casino). Like other early-cycle “gold rush” periods in other industries, the hysteria has added up to a convoluted field with hundreds of millions, if not billions, in burned cash and volatile stock charts and valuations. It’s also too early to figure out who the long-term winners will be with a high degree of certainty, especially given the convergence of gambling and media, which could easily result in a situation where the long-term winners include future entrants who aren’t even in the conversation today.

All that said, the current negativity around the sector - which is currently going through the “no one will ever make money here” phase - has provided a few interesting risk/reward opportunities, Pointsbet being one of my favorites. The core thesis comes down to the following 3 points: 

1) PBH has a clean-sheet, proven-at-scale, comprehensive in-house tech and operations platform across both online sportsbook (OSB) and iGaming, which is something few operators can say (despite the overuse of the term “tech stack” among operators) and represents both a durable competitive advantage and strategically-valuable asset;

2) PBH is a pure-play online operator focused on the entirety of the US/North American opportunity, which is also not as common or widespread as may appear on the surface, and which provides many practical advantages; and 

3) From an investment perspective, operational execution risk is meaningfully lower than for other operators, given the high likelihood that PBH is acquired in the next 18 months.

The above thesis points obviously carry several implicit views/beliefs about the field and I try to address those head on below. At the core, I fundamentally view gambling as a form of entertainment/attention monetization (just like subscriptions or advertising), and thus that the quality of the experience that is being monetized matters, such that “commoditized” experiences will lose long-term to those who strive to differentiate. Ultimately, those operators who focus too much on bringing customers in vs. keeping them there are set up to fail. Reasonable minds can disagree and I look forward to discussing further in the comments. 

Company Background

PBH is a pure-play sportsbook and iGaming operator, focused on the North American and Australian markets. While PBH was founded in Australia by Australians, it was purpose-built for the North American market. 

PBH was founded in 2015 by several former execs of TomWaterhouse.com, which has its own story and history that goes beyond the scope of this write-up. The short version is that TomWaterhouse was an online sports betting upstart in Australia that was acquired by William Hill a the end of 2013, <4 years after founding, as part of William Hill’s push into the Australian market (William Hill bought the Australian assets of Sportingbet around the same time; the rest of the Sportingbet assets were taken by what is today Entain). Following acquisition-close, Andrew Fahey (former marketing manager at TomWaterhouse.com) founded PBH, along with his brother Nick and Sam Swanell (formerly TomWaterhouse.com’s COO). They were joined 3 years later by TomWaterhouse.com’s former head bookmaker, Johnny Aitken (who ran trading & risk at William Hill Australia in the interim).

The core idea was to build a full-stack / vertically-integrated online gaming operator, purpose-built for the US market, which could be incubated abroad until state-side legalization. In layman’s terms - the PBH founders were dead-set on building a pure-play online operator that owned its entire technology and service stack (player account management, trading & risk, iGaming server, etc.) - which, even in the more mature non-US markets, is/was something of a rarity. Moreover, the goal was to build this to go after the US, which was expected to be “opening up” to online gaming in the years following PBH’s founding (challenges to PASPA were starting as early as 2011 with an NJ referendum to permit sports betting, which is what catalyzed what eventually resulted in Murphy vs. NCAA that overturned PASPA). 

Fahey and Swanell figured that the best way to get a head start was by building in advance in Australia, for several reasons: 1) the US wasn't legal yet, so in order to build something to be ready from the start, another country was needed to effectively incubate the entity; 2) beyond the founders themselves, Australia, as a mature gambling market, possesses a lot of experienced talent - in fact, a lot of the US operators have been ripping off UK and Australian talent from the beginning, given those guys have been doing this for years already; 3) as a mature market, Australia represented a suitable breeding ground to serve as an early source of cash flow, as well as a test ground for proving out technology/product engagement; and 4) Australia has meaningful sports betting overlap with the US, most notably NBA basketball being the largest sport by betting handle in Australia (as opposed to UK/Europe that's all about Soccer).

As noted, PBH was founded/built around a specific (and obsessive) focus on owning their technology stack and operations, based on the belief that, over time, the best product and customer experience wins and the only way to differentiate on both of those factors is to be in full control of its primary inputs. In addition, there is the economic benefit of scaling fixed costs (for sports betting in particular, which carries very high CAC and thus makes it difficult to turn a profit on a highly variable model, which is what happens when you outsource your technical and operations infrastructure) and the strategic benefit of owning a strategic asset (tech stack) vs. just being a customer acquisition business. 

Interestingly enough, the integral nature of owning the tech / operations stack is a view that all the major operators have come around to at some point or another, though many have paid dearly for not figuring this out early on (CZR, DKNG, and PENN all being notable examples, as well as much of the drama surrounding MGM and Entain). PBH has sung a very consistent tune around the need to own your stack to control, optimize, improve, and differentiate product experience and engagement. The original founding of the company in 2015 was not operational, but rather that was when the founders started building out PBH’s proprietary tech platform.

Key Thesis Points

1) Comprehensive in-house tech and operations is a valuable and unique asset and represents a durable advantage

Implicit in the above statement are 3 key assumptions: 1) a comprehensive in-house tech platform and sportsbook operation is valuable and strategically advantageous; 2) it’s also fairly unique, with few operators able to make the same claim; 3) most other “advantages” are not durable, but this is.

In the online gambling space, there has been much talk around “tech stack” and everyone’s technical capability. Unfortunately, much of this has become buzzword-ey and there is a degree of misrepresentation from operators on how much they rely on their own technology. There’s also a difference between the necessity of certain tech stack aspects for OSB and iGaming - on the iGaming side, the argument can be made that the games themselves are not a necessity to have in-house. With the advent of live dealer games this argument may fall apart over time, but the fact stands that many (most?) iCasino games are fairly standard (e.g., blackjack, slots, etc.) and there is significant value to the operator in focusing on other aspects of the tech stack (PAM, player analytics, UI/UX) and licensing games from specialist publishers. 

On the OSB side, this is not the case, as both turnover volume and hold % (i.e., the % of handle/turnover that operators keep in an otherwise fully-balanced sportsbook) increase with non-standard bets (live betting, parlays, prop bets, etc.). Multiple sources have been quoted over the last few years noting that >70% of sports betting volume in mature betting markets (e.g., Europe) is in-game/live; when you factor in parlays (particularly same-game parlays), it certainly rises above 80%. The only way to offer a more comprehensive betting menu and differentiated experience - both of which impact and bleed into promos, marketing strategy, and churn rate - is to own the full platform, from trading and risk operations to player account management to the gaming engine, etc.

The proof is in the pudding - most operators have spent significant resources on attempting to in-house aspects of the technology they rely upon. Most notably, on KIND SDB’s earnings call a few weeks ago, they announced they will be building out their own in-house sports platform, which is particularly notable, given KIND arguably pioneered the outsourced sportsbook concept, having spun off the leading outsourced sportsbook (KAMBI) in 2014. KIND’s dramatic 180, and the significant time they devoted toward explaining this strategic decision on the earnings call and in the call slides (see here - slides 20-26) makes the argument better than I can, and from the horse’s mouth, so to speak.

As far as how unique this capability is, very few operators own the entirety of their technology and operations (or at least the vast majority of it). Even those operators that do have varying levels of “quality” in their “stack”, with several operators running a patchwork platform consisting of multiple platforms from prior acquisitions. The operators that control the entirety or the vast majority of their own stack are DKNG, FLTR, BetMGM, ASX:PBH, CZR, 888, Bet365, and SGHC. 

“Commitment” will be discussed further below, but as a teaser, 888 and SGHC are explicitly not committed to the entirety of the US opportunity and are preferring to pick and choose where they compete. Bet365 isn’t public, but has shown almost zero interest in getting involved in the US knife fight today either, which leaves only 5 operators with the full stack that are truly focused on the entirety of the North American opportunity. Within this group, only BetMGM is considered to have a premium platform (indeed, they likely have the best technical and operational capability of any online gaming outfit in the world). 

DKNG is running a patchwork operation - they bought SBTech to bring their sports ops in-house, though SBTech is not considered to be all that great and is likely why DKNG made a run at Entain (i.e., more for the tech than the international exposure). DKNG also bought GNOG to bring in the iGaming tech because they weren’t having a great go of it building it from scratch. FLTR is also a patchwork operation, made up of the many acquisitions they’ve done over the years (Paddy Power, Betfair, etc.), though they are probably farther down the line than most others in terms of technical capability. CZR bought William Hill to save their online hopes and dreams, though I personally question their capabilities (their sportsbook has been fairly unimpressive next to the other 4 and their behavior seems to place a significant amount of value on their brand and marketing, which I don’t view as durable investments). 

Other big operators like PENN, RSI, WYNN, and KIND SDB are all missing key bits and pieces. PENN has largely been a disaster, with the fantastic Barstool acquisition propping up an otherwise weak technical back-end, which they will need to sharpen up fast given how committed they are to the online opportunity. The acquisition of SCR was insane in my view, since they paid a 100% premium, which they pitched as being all about the technology, of which SCR didn’t actually have anything proven or even fully-built and rolled out. The conversation on SCR has shifted to being how the R&D team is very talented there and are in the process of building out a platform from scratch, to be ready for US introduction in 18-24 months. Color me skeptical. RSI has been a somewhat-hidden gem, with a fantastic iGaming operation and real technical chops, but their sportsbook ops are outsourced to KAMBI, which has led to underperformance of their sportsbook relative to how well their iGaming has run. WYNN bought BetBull, but that went nowhere and you can tell if you use their app - wholly unimpressive. In addition, WYNN - like others - has also noted their distaste with competing nationwide and is also looking to pick their spots; they seem totally uncommitted to the sports business. KIND - as noted above - is now building out their own platform. 

As far as “durability” - the market is competitive (duh!) and operators are constantly in need of product development and evolution to attract and (more importantly) hold customers. In my view, the evolution never ends - many viewed iGaming as a fairly static market, but now live dealer games are turning that view on its head. Certainly, on the sports side, there is a lot of room for further product development, particularly as far as media integration. Those building platforms now are 2-3 years behind those already there, who will be 2-3 years ahead by the time competitors catch up, working on the next thing that consumers want. As long as development continues and management is sharp / non-complacent, I believe technical/product advantages are durable. 

This is as opposed to other supposed advantages, like branding, marketing spend, or market access. I don’t believe legacy casino brands are all that valuable in the online space. For one thing, the user bases are different, with online skewing far younger. For another, there’s been no issue with brands being created or alternative brands playing a role - FanDuel and DraftKings are household names in the sportsbetting world and they are both <15 years old. Barstool has done wonders for PENN and isn’t a casino brand. Conversely, the only big casino brands doing well are BetMGM and CZR, but BetMGM’s success is likely more about the world leader in online gambling (Entain) running that JV and CZR was dead-to-rights before buying William Hill. RSI’s parent ownership owns a few regional casinos and has been doing great (i.e., they are outplaying their brand’s value). WYNN is a huge brand and has been “eh”. The most successful operators have been those that are best at the business of online gaming, irrespective of brand. I view legacy gambling brands - as far as any advantage provided by being associated with a well-known casino outfit - as overrated and not at all durable as an advantage in the online space.

This relates to the next point - it’s not about bringing people in, it’s about keeping them there. Digital marketing is an amazing phenomenon and with enough capital, anyone can get a critical mass of people to try something. But online sportsbooks and casinos are not exclusive and insane promos may get people to sign up for free money, but won’t keep users there if the product isn’t all that great. Frankly, comments from CZR’s CEO on their call that they’ve accomplished what they’ve set out to do following an extremely aggressive marketing campaign seems strange - bringing in a bunch of users today shouldn’t be the goal, but rather how to keep them long-term. The casual assumption that all those users they paid hand-over-fist for will so obviously stick around seems negligent/careless and indicative of hospitality execs not understanding how to run a mobile gaming business (just because they both involve gambling, doesn’t mean they are the same thing).

As for market access, I don’t view this as a real advantage over the long-term. There are a plethora of available licenses in most states, mostly from one-off casinos (e.g., tribal casinos) that are just looking to turn an easy buck and don’t have the resources to really compete against nationwide operators. The cost of access will likely go down over time, outside of the handful of mega-populous states bold enough to leverage their position (e.g., NY) and PBH is a license holder in those states anyway.

Coming back to PBH - I believe they are durably advantaged due to ownership and quality of their platform. A good illustration is their most recent product announcement - PBH recently rolled out a product that no one else is doing and is incredibly complicated to do - live same-game parlay. Live betting on its own is incredibly difficult to do well (everything is moving so fast, you need significant technical chops to make it work more so than a seasoned trading operation - using a securities analogy, you need more of a quant trading team than an old-school institutional equity trading desk). Same-game parlay is also incredibly difficult to do well, given the need to build intense models that adjust for related markets (e.g., the odds parlaying the over on Lebron James points and a Lakers win needs to be adjusted for how likely it is for those 2 events to coincide, given they aren’t independent events). PBH is now allowing users to do both at the same time (i.e., live-bet a same-game parlay). No one else is doing that. It’s like juggling knives that are also on fire, while playing the piano.

The way these things tend to go, since in-game betting and same-game parlays were hit products at the earliest operators to employ them, everyone else has tried to mimic it. From the outside view, it may seem like these products have become commoditized quickly. The reality is that the differences in these products among operators is stark - the less capable operations have far less betting options available in either live or same-game products. Few sportsbooks offer both of these products, fewer have broad betting menus within these functions, and fewer yet offer decent pricing on these bets (i.e., super-high “vig”). FLTR and PBH are fairly far ahead of others in these areas. 

And it makes sense that those are the 2 leaders - PBH acquired Banach Technologies in April 2021 in a $43M acqui-hire. Banach was founded by former FLTR employees who built FLTR’s live-betting and parlay products - they left to make their own B2B outfit building products in those areas to be licensed to sportsbook operators. FLTR was the early leader in same-game parlay, having been the only one offering it for a while and with the product much better than competitor versions today (big betting menu, good pricing, easy to build bets, etc.). PBH brought the architects of that product in and - not coincidentally - is now first-to-market on the next generation of that product. I view that $43M far better of an investment than insane point-in-time promotional deals that other operators have been fond of. 

This is one example. There are others. The point being, PBH has a “clean” platform built from scratch, years in advance with significant amounts of cumulative EBITDA losses invested in it. It’s proven at scale and it keeps getting better. It is the primary focus of management and its a difficult-to-replicate asset. While PBH’s sports platform has been ahead of its iGaming platform (OSB was legalized first and is more broadly legalized today, whereas iGaming doesn’t have a broad legal jurisdiction yet), it's already integrated from scratch and the precedent for product excellence has been set. 

2) Pure-play operation, specifically focused on the entirety of the US opportunity

While the environment is super-intense right now as everyone is trying to “get theirs” in the gambling gold rush, the reality is that there are only a few operators with national ambitions going after a meaningful chunk of the TAM. As noted above, many European operators are simply not committed to the US market in its entirety. They are interested in dipping their toe in the water where it can be done safely and very profitably, from the perspective of requiring minimal state-side investment and getting “free” utilization of existing assets/infrastructure used to run the business in their “home” markets. 

There are also other state-side players who are one-offs playing a regional niche, but over the long-term they lack the scale required to compete. As was learned in the evolution of Europe’s online gaming market, scale is king because the investment in product development and customer acquisition required to build and maintain a leading product and experience is only justifiable (and affordable) if amortized over a wide base of users. Otherwise, those operators need to outsource, which eliminates differentiation. Either way, it becomes difficult to compete with national operators offering a robust consumer experience in the broadest sense of the term (most games, best games, best UI, best promos, etc.). 

Ultimately, those not fully-committed to this market due to other considerations - namely a different core business (be it online but based elsewhere or land-based) - are unlikely to have the resolve/commitment to be anything more than a bit-player over the long-term. We’ve already seen this come into play - seasoned European operators have stepped back or have opted to pick-and-choose their battles; after all, they run profitable operations in Europe and they aren’t looking to blow a hole in their income statements on an American experiment. CHDN just announced they were shutting down their online business altogether, fully-acknowledging they didn’t have the stomach to make this work, despite being very early. WYNN tried to spin and then sell their interactive segment. The list goes on. While many operators are technically out there, this is not a 20 horse race. There are only a handful of operators truly serious and committed to building a real nationwide operation.

Moreover, it would be a mistake to view online gambling as comparable to the land-based gambling business. Land-based casinos are fundamentally real estate / hospitality businesses. Online casinos and sportsbooks are fundamentally online gaming businesses. It’s like comparing a REIT to Zynga. I don’t think the operational expertise of one carries over to the other (or at least not obviously so) and, frankly, I think the management of retail casino operators that are going deep into online are potentially in over their heads. I also think many of the land-based operators understand this and have looked to insulate the online operations to some degree and/or bring in proper expertise to run those businesses. 

There are many examples - MGM cut a deal with Entain to make the BetMGM JV. The JV is run by former Entain people and runs on Entain technology, but get to use the MGM brand, customer database, and market access. It’s Entain in MGM clothing and, as a JV, its insulated from the larger MGM management and day-to-day decision-making that could get it in trouble. RSI is a controlled entity of Rush Street Gaming, where the Rush Street managers realized (very) early on the need to incubate online in a separate entity. WYNN looked to spin off their interactive segment before trying to sell it outright and then pulling back as valuations fell. BALY bought GYS and put GYS management in charge, but kept the BALY CEO to run land-based ops - all an acknowledgement that online operations are a different animal entirely than land-based and they require specialized talent/experience. 

As a result, I think the online pure-plays are advantaged against the field - they have expertise in their universe and no other considerations to worry about. Just as important, their shareholders know exactly what they are signing up for, whereas other operators may not have all that long of a leash to try and make the US work at the expense of their core business from the perspective of their shareholders. Ultimately, DKNG, FLTR, BetMGM, RSI, and PBH are playing on their home turf, whereas CZR and PENN are not, the rest aren’t committed, and BALY is still a wait-and-see experiment. 

3) Highly-strategic asset with multiple indications of ultimately getting acquired

To spell out the operational case for PBH alluded to above - over the long-term, only the committed and technically-resourced will survive (assuming management executes well and doesn’t step on any land mines) and at a ~$400M EV, PBH is quite attractive relative to being a long-term survivor capable of capturing 10% share of a $50-100B market at maturity. However, the more likely outcome is that PBH is acquired in the next 18 months.

Fundamentally, I don’t view being early as necessarily required in this market. Acquiring users is relatively easy; keeping them is incredibly difficult and I would bet dollars to donuts that there will be a top-5 holder of market share in the US online gambling market that isn’t currently there today (if known to us at all). Certainly, there have been rumors of Fanatics and ESPN potentially getting involved in the sports side of the market. In general, over the long-term, media and gambling will likely continue to converge, which will open up opportunities for others to get involved that aren’t currently in the iGaming or OSB business. PENN’s Barstool acquisition was ahead of its time and is a perfect example.

Further, there are operators today that have deficiencies but are “pot-committed” to the US market. RSI needs to do something on the sports side. PENN’s bet on SCR seems incredulous. DKNG’s SBTech platform may not have the goods DKNG really needs to satisfy their ambitions. BALY is looking to roll out a homegrown sports platform shortly, but who knows where that will stand in an otherwise technically competitive market.

Of course, there’s logic and then there’s “tea leaves”. PBH has a majority of its ownership tied up between insiders and strategic holders. Insiders own ~17% of the company, with co-founder Andrew Fahey holding 6.5% (some in his own name, some in a family trust), non-exec chairman Brett Paton owning ~6%, CEO Swanell with ~1%, and assorted board members and execs own a couple percentage points in aggregate. Non-exec chairman Paton in particular has significantly increased his stake over the last year, going from 4% to 6% of the company’s equity. 

Moreover, PENN recently exercised options (that were set to expire, to be fair) that gave them a 6% stake in PBH - when PBH cut deals with PENN for market access, they were largely paid for with equity and options. PENN already owns a piece of PBH, in addition to PBH’s handle already coming on PENN’s licenses (which makes a PENN acquisition of PBH highly-accretive). In addition to PENN, PBH struck a similar deal with CMCSA, trading equity for a media partnership. The deal is quite similar to what BALY and SBGI did, wherein CMCSA’s NBC Sports RSNs and digital assets exclusively promote and integrate with PBH (including user database, preferred media buys, etc.), in exchange for equity and options that could give CMCSA up to ~25% of PBH (CMCSA currently holds ~4% of PBH). 

The icing on the cake is HG Vora - the activist fund who effectively engineered the BALY rollup (including the GYS and SBGI deals) surfaced with a 5% stake in 3Q21, which then increased to a 10% state in 4Q21. Lo and behold! HG Vora also owns ~10% of RSI, with their RSI holding doubling on a similar timeline to PBH. Of course, none of this is definitive, but given the likelihood of industry consolidation in general, the strategically-compelling value of PBH, and what appears to be potentially circling acquirers, I think long-term execution risk is meaningfully offset by near-term buyout likelihood. 

Business Notes

Market Access - PBH was first launched on an operational basis (i.e., taking bets) in February 2017 in Australia, and beginning state-side in NJ in January 2019 (the first state-side launch for the industry was DKNG in NJ in August 2018). By mid-2019, PBH had market access agreements in 10 states. Today, PBH is live/operational in 10 states (CO, IA, IL, IN, MI, NJ, NY, PA, VA, WV) and will go live in the Canadian province of Ontario when the province goes live April 4 (if it was a US state, Ontario would be 5th-largest). Additionally, PBH has market access agreements or is otherwise involved in open licensing processes (i.e, no retail partner is needed and online-only licenses can be granted, with no current cap, at the behest of the gaming commission) in another 9 states (KS, LA, MD, MO, MS, OH, TN, TX, WY). Based on all the balls in the air, mgmt expects to be live in 18 states by the end of 2022. 

PBH’s market access comes from a mix of sources - 4 of PBH’s live states (and several others not yet live) are by way of a series of market access agreements with PENN, which included PBH issuing an equity stake to PENN as compensation (to be discussed more below). The remaining 6 are largely from “long-tail” land-based operators (e.g., small racetracks or tribal casinos). Of the other markets currently in-process, several have more open application rules, where no land-based partners are required (e.g., TN, WY, Ontario). Most market access agreements are for 10 or 20 years, with 5 year options thereafter.

There’s a contiguous regional aspect to all of this as well, given groups of states often matter with regard to customer acquisition, given common interstate commuting, shared sports team fandom, etc. For example, NY-NJ-PA is an important combination, as is MD-VA-DC and WI-MI-IL-IN. 

How does PBH compare to the field? Today, 33 states and the District of Columbia have gambling legal in some form, but only 20 currently have online gaming both legal and operational. Of those 20, only 16 have what would be characterized as an “open” system, where the state gaming authorities are (either implicitly or explicitly) philosophically in favor of licensing multiple operators - NH, OR, RI, and DC have essentially limited licensing programs that aren’t really available for operators to generally apply and the operators in those jurisdictions are either the state lottery and/or a single or 2 operators that have cut some deal with the legislature. 

There are 14 states with legal gambling but no online presence, with most of those states being somewhere in the multi-step process of online legalization (as opposed to existing land-based legalization) that runs from the legislature voting to legalize it, the gaming commission setting up rules/parameters, bidding processes for licensure, awarding licenses, and apps going live. There are another 8 states that have legislation in-motion and another 9 states with nothing currently going on. 

No one is operational in all states, but DKNG, FLTR, CZR, and MGM are close, with each of them in the 13-16 range. The next tier down includes RSI, PBH, WYNN, and PENN, who are in the 8-12 range. After this group, there is a (very) long-tail of operators in anything from 1 to a handful of states.

The only major state where PBH is totally absent is Arizona, where PBH effectively got screwed. Like many jurisdictions, the state authorized licenses to be issued to “existing” infrastructure, in this case tribal casinos and major sporting venues in the state. Arizona authorized 10 licenses for each (so 20 total), which prompted operators to partner up with tribal casinos and the sports teams that own their own venues in advance, including PBH, who partnered with the Yavapai-Apache Nation. In all, 16 tribal casinos applied (for the 10 licenses set aside for them) and 8 sports venues; all the sports venue applications were awarded licenses, while 6 tribal operators were denied. Strangely enough, the Yavapai-Apache were awarded a license, which was rescinded a few days later, with the sole explanation from the state being “administrative error”. 

In general, there was zero explanation publicly cited for those denied. The whole episode was strange, and largely amounted to PBH getting screwed by partnering with the wrong tribe. The episode was heavily implied to be unrelated to anything on PBH’s side and had something to do with the inner-workings of the tribal casino relationships in the state. Ultimately, there are still 2 unawarded licenses under AZ’s current authorization, in addition to some consolidation that will open up licenses, most notably GNOG’s sale to DKNG and CHDN’s recent announcement that they are exiting their OSB venture. At some point, PBH should surface in AZ, though it may move lower down the priority list, given all the launches slated for 2022 already. 

Handle and Revenues - PBH generates revenues from 4 channels: 1) online sports book (OSB); 2) retail sportsbook (“retail”); 3) iGaming; and 4) B2B technology sales. Currently, the overwhelming majority of handle/revs is from OSB. While PBH is a “pure-play” online operator, like several other online operators PBH operators some retail sportsbooks for land-based casinos (typically market access partners), given its effectively free money (a retail sportsbook is the same as OSB, except instead of the app UI you may have person behind a counter; all the back-end is the same). PBH currently runs retail books in CO, IA, and IL, with agreements to do so in KS and MD when legalized. 

PBH recently launched its iGaming product (in May 2021, in MI and NJ), with intentions to roll it out everywhere possible (i.e. where legal and with a license to do so). While the iGaming platform is built and live, it’s only running ~30-40 games right now, so build-out is still in-process. Similarly, handle/rev contribution is de-minimis right now, but, as with everything else in this industry, growth should be exponential (of a small base) in the near-term and become something of a real revenue contributor in the next few years. 

B2B revenue is largely the result of the recent acquisition of Banach Technologies, though PBH structured their business from the outset to have the company’s technology operations run as a standalone business segment (e.g., there are intercompany revenues from the Australian and US businesses to the Technology segment paying for its “services”), likely due to potential plans to license out the technology stack to other operators in the future. For now, only Banach is generating “external” revenues, though the Resorts World OSB in NY will be running off of PBH’s tech, which will represent an actual full-stack B2B customer. What about Banach - who are those guys? PBH acquired them in a pseudo-acqui-hire, for $43M in March 2021. Banach was formed from a group of guys that had built FLTR's quant division and was responsible for some of their more advanced products (I believe they helped build the in-game and same-game-parlay products). They left FLTR to form Banach for the purpose of building other similarly quant-heavy/dependent products to license to other sportsbooks, particularly specializing in in–play betting. More on this later.

On an LTM/CY21 basis, PBH’s total handle was ~$3B (~A$4.2B), with Australian handle ($1.64B) slightly ahead of US handle ($1.39B). US handle is growing triple-digits and trading margins have been climbing to more respectable levels as more individual state markets scale - LTM gross gaming revenue (GGR) margin for the US was 7.8%, which is starting to approach levels from seasoned operators in scaled markets - not everyone reports GGR and net gaming revenue (NGR) the same exact way, so its sometimes hard to compare apples to apples, but KAMBI typically reports in the HSD range and FLTR and Entain are typically HSD/LDD.  

GGR margin is indicative of the quality of the sportsbooks trading and risk operation, with GGR being the difference between bet payouts and bet receipts (i.e., the “vig”-based revenue sportsbooks receive). Typical hold % on a typical pre-event market, e.g., the posted spread, money-line, or over/under, runs ~4-5% (a typical spread bet will get priced at -110 on either side, which means it costs $110 to win $100; if both sides bet $110, total receipts are $220 and total payouts are $210 - the winner receiving his $110 back and his $100 in winnings - which leaves the sportsbook with $10 on $220 wagered, or 4.5%). The ability to offer a strong menu of “alternative” bets - parlays (especially same-game), prop bets, live bets, etc. - provide the opportunity to increase that margin as those markets typically run at a higher “vig”. The higher vig is supposed to compensate for the greater risk in pricing those markets accurately, so a good sportsbook operation is able to earn a significant amount of GGR from higher risk / higher vig bets without that vig being offset by the difficulty in pricing said markets. In other words, the art of pricing something that’s difficult to price and still coming out ahead.  GGR in the high single digits means the sportsbook is pushing more volume toward alternative bets (again, standard bets would yield something in the low/mid single digits) without “losing”. 

PBH’s US NGR margin is running around 4% right now, which is indicative of the aggressive promotional environment (pricing promotions, like free bets, typically come out of GGR and are an above-the-line item). Looking at FLTR’s US segment, their sportsbook net revenue margin (which isn’t explicitly defined, so may be GGR or NGR or some mix of both based on what is and isn’t included) was 6.3% for FY21, up from 4.6% in FY20 at ~10x the size of PBH in those periods. The point being, PBH is scaling their operation quickly and efficiently, given they are getting closer to FLTR levels at a fraction of the size.

Frankly, while Australia is not the focus of the business, its an excellent window into how strong PBH’s operation truly is. Australia is a mature market with serious, scaled operators, so PBH’s entrance into that market was definitionally “from behind”. Nevertheless, Australian handle has been growing in the strong double-digits (+47% in CY21, including +34% in 4Q, +20% in 3Q, +63% in 2Q) with a GGR margin of 13% and an NGR margin of 8%. In other words, PBH’s product and tactics are gaining share in a mature, scaled market of seasoned operators and without dropping their pants on promotions or running a high-risk strategy on bet pricing. FLTR is an excellent comparison, given they are one of the said scaled operators in that market - FLTR is ~10x the size of PBH in Australia as well, growing handle 20% in FY21 and running a net revenue margin of 11% for the last 2 years. PBH is taking share from the likes of FLTR and is moving their trading margin into comparable territory at a fraction of the scale. Oh and the Australian operation is EBITDA-positive already. 

Taken altogether, this is a window into what the US can (and should) look like as the promotional environment pulls back a bit and operators naturally consolidate via market exit/pull-back or acquisition. Indeed, looking at PBH’s disclosed state-by-state data, NJ is running GGR/NGR margins in the LDD/HSD range at this point.

The last piece here is the iGaming operation, which has only been live for 3 quarters and in 2 states. In 4Q21 it generated $4M in net win with only a handful of games and minimal rollout. It’s still ramping up, so the numbers are quite small and not indicative of what can be, but this business should grow fast in coming quarters/years (albeit off a low base). PBH’s iGaming is now live in 3 states (NJ, MI, WV), including live dealer games in all jurisdictions, with PA to be launched shortly.

Expenses / Financial Model Points

Because of the way the company segments out its technology stack, a large chunk of tech expense falls under COR. As a result, GP% is around 45-50%, moving around a lot based on investments, but ultimately growing as the company scales. 

Largest expense area is - obviously - marketing, which was $150M in CY21, most of $95M was in the US. As noted above, the Australian business is already profitable, though its also not a major growth focus and management won't throw major resources there (though for the time being, its growing quite nicely). 

Capex is low but there are large expenditures for "intangibles" which is mainly capitalized software dev (i.e., tech investments) or market access payments (often one-time upfront payments as part of market access deals (in addition to ongoing rev shares).

While cash is being burned at a healthy rate right now (>$100M in CY21), PBH is sitting on a ton of cash and no debt - ~$413M in cash on the balance sheet at year-end.

Quick comment on numbers

PBH did $188M in rev over the last 12 months, though that is likely an underearned amount of their handle, given the promotional environment and ramp-up stage of several states has more recent cohorts running at low GGR/NGR margins. LTM rev is up triple digits. By the end of 2025, I believe PBH should being generating in the range of $800M in rev with positive EBITDA, the margin of which will depend on the state of the opportunity at that point (i.e., to what degree significant customer acquisition investments will be worthwhile), but EBITDA margins of other scaled operators are in the 20% range (some better some worse, but all generally in that range). I think any way you cut it, operationally, they should be worth in the neighborhood of 3-5x their current EV over the next 3-4 years. 

Buyout multiples are hard to figure with any degree of real comfort, given the entire field is at an early stage and anyone with a serious commitment to the long-term opportunity is not likely looking to sell out for a quick cheap buck. Plus, we’ve seen PENN do crazy stuff (see the SCR deal premium), so who really knows. I find comfort in the idea that any buyout will come at a premium that would represent a nice IRR from today’s levels (e.g., >30%).

Quick Appendix - the gaming “tech stack”

The term “technology” or “technology stack” is overused and over-generalized in many fields, including online gambling. There are many aspects to the stack and what is incorporated in any given operator's stack is too often glossed over, given certain components are more important than others and not everyone owns everything, even though that is what’s often intimated. While the components of the gaming stack deserve their own primer, and certainly there have been bits and pieces of this fleshed out in other VIC writeups (notably the multiple GAN write-ups, among others), it's relevant to outline a few core points on this topic.

While there are several stack components shared by iGaming and OSB, they also diverge in a few ways. What is key to both areas is a player account management (PAM) system, which is what controls/manages registration, login, customer profiles, KYC/regulatory aspects, etc. There are several VIC write-ups that speak to PAM systems (write-ups on GAN, BRAG, GIG, KIND, PENN), so no need to belabor the point here. What’s important to understand is that PAM systems are integral to understanding the customer and generally serve as the collection system of key customer data. Thus, PAM systems are integral to targeting the customer experience at an individual level. For example, bonus engines - which are targeted and run differently than more general promos - come out of PAM systems. Everyone needs a PAM and the best operators put a significant amount of focus on / investment in their PAM systems in order to best target, acquire, monetize, and retain customers. 

The key components on the sportsbook side are the application, trading, and risk functions. Sportsbook trading is more operational than technological, but incorporates both; it’s the equivalent of a securities trading operation, except instead of securities, the desk is making markets in different sporting events. There are significant parallels and it helps to think of it in a similar way - sportsbooks are trying to match two sides of a market and take minimal risk by matching those sides as best as possible, while effectively making a spread (i.e., the hold or “vig”) that equates to a bid/ask spread on a security. The bigger and better your trading (and risk management), the more markets you can offer, the more bets you can take, the higher limits you can offer, etc.

Additionally, there is a whole universe of adjacent products that I would equate to quant funds in the securities trading universe. That is, while the core sports betting markets are the subject of a highly operational function (i.e., the trading & risk departments, that are people-intensive), many of the more “interesting” bet types are based more on technological ingenuity. A simple example is same-game-parlay, where the challenge is to properly price related markets when building a parlay bet (e.g., how many touchdowns Tom Brady throws is directly related to the over/under of the overall game, so allowing those markets to be parlayed at their independently-stated prices would be gross mispricing by the sportsbook and would provide a tremendous advantage to the bettor), which becomes more of a quantitative issue than an operational one. As a result, there are “technology” products within trading (and risk) that specialize in certain product-related aspects where the problem to be solved is more technical than operational.

Risk is related to trading and is more of the practical aspect of the sportsbook. Trading generally refers to coming up with the “correct” odds for different markets and making a market in those markets. The risk function informs who to take bets from, in what amounts, and how much to move a line based on a given bettor’s action. In other words, sportsbook lines start with the trading team, but get massaged/tweaked/adjusted by the risk team. Again, in general these functions are grouped together for obvious reasons. However, they can be separated out and - in many instances - are partially separated out, in terms of sportsbooks outsourcing a meaningful amount of core trading to others. A simple example would be that most trading desks are putting out odds on markets based on what other, more renown desks in specific areas are doing, as opposed to doing a lot of that grunt analytics work on their own. Trading desks typically source odds data from numerous parties - data providers, specialist firms, other sportsbooks - putting a greater focus on what their risk team does after lines open than where to open the lines. Basically, where a market opens is not as important as managing the book / exposures once a market is live.

The application refers to the core sportsbook application, which has a front-end (i.e., the user interface for consumers) and a back-end, which can be referred to a few different ways ("platform", "system", and/or "engine", usually with a prefix of "betting" or "sports"). Fundamentally, it’s the actual application that is used to run and manage the sportsbook (again, whether it’s a retail sportsbook or OSB). While variables like betting odds, sport event data, customer data, payment processing, etc. can be outsourced to other providers that specialize in those functions, all those functions plug into the core application. The application generates bet slips, adjusts account balances, handles customer support (e.g., live chat), etc. Before OSBs existed, retail books largely developed/built their own internal systems to handle retail bets.

An example of all these pieces being separate, and then coming together, would be the recent sale of SGMS’s sportsbook business (OpenBet) to EDR. SGMS acquired NYX Gaming in 2017; NYX owned OpenBet, which was a sportsbook application/platform. Shortly thereafter, SGMS acquired Don Best, which was an odds service and outsourced trading desk. By combining them, building out an outsourced risk function, and adding on some other product-specific technology bolt-ons (e.g., Sportcast, which was a specialist in daily fantasy and is probably used by OpenBet to power player prop bets), SGMS built a full turnkey OSB stack, all of which was grouped under the OpenBet brand (and recently sold to EDR).

Catalyst

1) Scaling of OSB business within existing footpring

2) Launches in new states through 2022 and beyond, for both OSB and iGaming

3) Market exit of bit players and subsequent natural consolodation of market share among committed and well-resourced operators

4) Likely acquisition in the next 18 month