24 August 2016

 

Sportech PLC ("Sportech" or the "Group")

Interim results for the six months ended 30 June 2016

 

Sportech, one of the world's leading pool betting operators and technology suppliers, focused on highly regulated markets worldwide, is pleased to announce its interim results for the six months ended 30 June 2016.

 

Group Highlights

·      Total Group EBITDA of £11.1m in line with that reported in prior year (£11.0m)

·      EBITDA from continuing channels¹ increased by 5% to £11.1m from £10.6m

·      Sportech Racing and Digital - previous investment in technologies and opening of Singapore office continues to deliver new international customers

·      Sportech Venues - construction of flagship Stamford venue has commenced; sports bar opened in San Diego, California

·      Football Pools - completed key modernisation milestones and demonstrating earnings stability

·      VAT claim - The Court of Appeal unanimously ruled in favour of the Group in the £97m Spot the Ball VAT refund case. The Group expects the outcome of HMRC's direct appeal to the Supreme Court in Autumn 2016

·      Discussions continue regarding a possible sale of the Football Pools

 

Financial Highlights

 

	Reported 2016 H1 £m	Reported 2015 H1 £m	Change %
Revenue	48.7	51.0	-5%
EBITDA2	11.1	11.0	1%
Adjusted profit before tax3	5.6	5.4	4%
Statutory profit before tax	2.7	7.9	-66%
Net cash/(debt)	36.2	(61.1)	159%
Adjusted net debt 4	(59.8)	(63.3)	6%

 

·      Adjusted profit before tax has grown by 4%

·      Reduction in statutory profit before tax owing largely to the £8.1m profit generated last year on the one off disposal of our online gaming interests in New Jersey in 2015 to NYX

·      Following the receipt of the £93.3m VAT repayment, the Group holds net cash of £36.2m, improved from a net debt position of £61.1m at June 2015  - adjusted net debt has reduced by 6% from June 2015

·      On a constant currency basis, EBITDA from continuing channels increased by 1% (2015: £11.0m) whilst revenue declined by 3% (2015: £50.1m)

·      Sportech Racing and Digital - recovered from loss of contracts in California and Germany, with efficient redeployment of capital and new contract wins delivering margin growth and preserving EBITDA at £4.3m

·      Sportech Venues - online handle growth delivered overall earnings in line with prior year, largely offsetting the anticipated industry handle decline to deliver EBITDA of £1.5m

·      Football Pools - EBITDA from continuing core channels of £7.0m in line with prior year

 

 

Ian Penrose, Chief Executive of Sportech PLC, said:

"I am pleased to report that the Group had a good first half and is trading in line with management's expectations. We have reached a key stage in our development, as our US business makes progress in both existing and new markets around the world, and our Football Pools business has reached expected stability after a number of years of modernisation.

 

Overall, the Board is pleased with the strategic position that each of its divisions has secured, whilst recognising that each division will require further investment, ahead of anticipated revenue and profit benefits, to enable them to deliver their full potential. 

 

We look forward to delivering further progress in 2016 as we endeavour to return the Group to growth."

 

 

⁽¹⁾    2015 revenue and EBITDA from continuing channels are those at reported currency excluding the results of the closed collector channel.

⁽²⁾    EBITDA is stated before exceptional costs, impairment of assets and share option expense.

⁽³⁾    Adjusted profit figures are stated before amortisation of acquired intangibles, impairment of assets, exceptional items, share of loss after tax and impairment of joint ventures and associates, and other finance income.

⁽⁴⁾    Adjusted net debt represents cash balances net of overdrafts and bank debt, excluding the Spot the Ball VAT repayment and customer funds.

 

 

For further information, please contact:

 

Sportech PLC                                                                                Tel: +44 (0)20 7268 2400

Ian Penrose, Chief Executive

Mickey Kalifa, Chief Financial Officer

 

Brunswick Group LLP                                                                   Tel: +44 (0)20 7404 5959

Mike Smith, Stuart Donnelly

 

Investec Bank PLC                                                                        Tel: +44 (0)20 7597 4000

Patrick Robb, Henry Reast

 

Peel Hunt LLP                                                                               Tel: +44 (0)20 7418 8900

Dan Webster, Adrian Trimmings

 

Forward-looking statements

 

Certain statements in this Interims Statement are forward-looking. Although the Group believes that the expectations reflected in this forward-looking statement are reasonable, it can give no assurance that these expectations will prove to be correct. As these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

 

Sportech PLC ("Sportech" or the "Group")

Preliminary results for the six months ended 30 June 2016

 

Group Overview

Sportech is one of the world's leading pool betting operators and technology suppliers, focused on highly regulated markets worldwide.

 

The Group comprises three divisions: Racing and Digital, Venues and The Football Pools. Both the Racing and Digital (which processes over $11 billion bets annually) and Venues (which operates legal betting exclusively and in perpetuity in Connecticut in venues, online and mobile) divisions are based in the US and Canada, where we employ 630 people across field operations and four corporate offices. We are licensed by gaming regulators in 28 US States. The Football Pools is based in the UK, and is the oldest football gaming business in the world.

 

The Group is benefiting from its strategic initiatives to grow its international operations, and now generates nearly 70% of its revenues overseas.

 

Group Financial Overview

 

	Revenue		EBITDA
£m	2016 H1	2015 H1*	2016 H1	2015 H1*
Sportech Racing and Digital	17.8	18.1	4.3	4.3
Sportech Venues	17.4	18.0	1.5	1.6
Football Pools - continuing channels	14.0	14.4	7.0	7.0
Trading divisions	49.2	50.5	12.8	12.9
Inter-segment elimination and corporate costs	(0.5)	(0.4)	(1.7)	(1.9)
Results from continuing channels	48.7	50.1	11.1	11.0
Football Pools - closed collector channel	-	2.8	-	0.4
Total Group at constant currency	48.7	52.9	11.1	11.4
FX effect	-	(1.9)	-	(0.4)
Total Group	48.7	51.0	11.1	11.0

* 2015 divisional results are at "constant currency", retranslated using 2016 exchange rates.

 

At constant currency, excluding the results of the closed collector channel in the Football Pools, Group EBITDA has increased by £0.1m and revenue has reduced by £1.4m (3%).

 

Sportech Racing and Digital

(i)   Sportech Racing and Digital: Business Review

Over the past five years, we have substantially invested in new and improved betting technology products and licensing in order to create a leading gaming technology business, servicing the global horseracing industry and more recently, the North American sports industry.

 

In order to build upon our long term market strength in North America and Europe and to increase our global presence, we have established a base in Singapore with the aim of driving expansion into the significant Asian market. This has led to several new contracts for the supply of Tote system software and hardware this year. New customers include the Macau Jockey Club, Royal Sabah Turf Club in Malaysia, and Vung Tau greyhound track in Vietnam, to whom we have supplied a full range of betting software and hardware, including our Quantum™ Tote System and newly developed BetJet Aero™ terminals. Contracts include ongoing software licensing, maintenance and support services.

 

The installation of our Quantum™ Tote system for Betfred in the UK is now largely complete and fully operational. The system now processes all Tote bets on live UK Racing from all UK domestic and international sources. We continue to provide licensing and software maintenance services to Betfred under its existing contract. Additional new customer facing products will shortly be trialled by Betfred.

 

We continue to renew existing contracts and to secure new business in our core North American market, and are pleased that we opened live racing for new customers including Lone Star Park in Texas, Remington Park in Oklahoma, and Kentucky Downs.

 

Our Bump 50:50 business which supplies in-stadia electronic lotteries to professional sports teams is growing rapidly, from a customer base of seven in June 2014 to 33 professional sports teams today. Importantly the business is also now profitable. New customers obtained in the first half of the year include the Dallas Cowboys and Miami Dolphins from the NFL, Dallas Stars (NHL) and our first MLB team, San Diego Padres.

 

In February 2016, the Group's existing joint venture with Playwin, India's largest lottery provider, commenced supplying technology to an Indian company engaged to provide pool services for a Sikkim license holder. Initial feedback has been positive as the market for gaming in Sikkim develops.

 

(ii)   Sportech Racing and Digital: Financial Review

	Revenue		EBITDA
£m	2016 H1	2015 H1*	2016 H1	2015 H1*
Tote services and maintenance contracts	13.0	14.4	2.3	3.1
System software and equipment sales	3.5	2.4	1.7	1.0
Digital service contracts	1.3	1.3	0.3	0.2
FX effect	-	(0.9)	-	(0.2)
Total	17.8	17.2	4.3	4.1

* 2015 channel results are at "constant currency", retranslated using 2016 exchange rates.

 

Total revenue has increased to £17.8m (2015: £17.2m) and EBITDA for the division was also ahead for the first six months, at £4.3m (2015: £4.1m). Variances to prior year include foreign exchange benefits in revenue and EBITDA of £0.9m and £0.2m respectively.

 

Our results demonstrate the effective repositioning of the business following the loss of our former California Tote contract in October 2015 (which alone contributed revenues of $1.8m in the six months ended June 2015) and the exit from our loss making German Tote contract at the end of 2015. A significant amount of the hardware from these tote service contracts has been redeployed as part of our contract renewal process and in securing new business. New service contracts, including Lone Star Park and Remington Park, have each made a positive contribution towards earnings for the division.

 

Revenue from system software and equipment sales has increased by £1.1m (46%), much of which has been generated as a result of our increased activities in Asia, demonstrating the benefit of our expanded international focus in recent years.

 

Digital has performed in line with prior year and our expectations for H1, and is positioned well for growth as we roll out our digital solutions to customers, most notably with Penn National Gaming in the US.  

 

Sportech Venues

(i)   Sportech Venues: Business Review

In the State of Connecticut, Sportech Venues operates all betting on horseracing, greyhound racing and Jai Alai under an exclusive and in perpetuity licence for retail, telephone and online. The business, which is operated with close consultation and oversight from the State, is the only legally permitted betting operator in Connecticut outside of the tribal casinos.

 

We continue to develop our retail estate as we endeavour to broaden our revenue streams, increase the product offering and create a modern environment to eat, drink and place bets. We have now commenced the construction of a $7m flagship sports bar, restaurant and betting venue in downtown Stamford, due to open in Spring 2017. This venue, in common with our venue in Bradley, is being developed in partnership with Bobby Valentine, who will relocate his existing Stamford sports bar and restaurant into the new facility. Additional smaller refurbishments were carried out in Manchester and Putnam.

The business currently offers wagering on horseracing, greyhounds and Jai Alai. In due course, dependent on there being changes in the regulatory environment, we intend to develop these operations into a wider portfolio of sports and gaming products. This will help earn additional revenues from a balanced and complementary suite of products, and also generate additional tax revenues and employment opportunities for the State. We remain in close contact with the appropriate regulatory authorities.

 

We have appointed CBRE as property agents to unlock value at our 9 acre Sports Haven site in New Haven, Connecticut, which will enable us to reinvest in other opportunities across the Group.

 

Our business strategy has been extended from Connecticut into California, where the Group has an agreement to develop up to ten new sports bar, restaurant and betting venues across Southern California under the brand name "Striders". The first of these had its official launch in San Diego in January 2016, and is performing in line with expectations.

 

In the Netherlands, we operate a number of OTBs, point-of-sale terminals and online betting on horseracing, all on an exclusive basis under a licence from the Ministry of Justice.

 

(ii)   Sportech Venues: Financial Review

	Revenue		EBITDA
£m	2016 H1	2015 H1*	2016 H1	2015 H1*
Venues             -  Connecticut	14.7	15.4	1.4	1.4
Other Venues    -  Netherlands	2.5	2.3	0.1	0.1
-  California	0.2	0.3	-	0.1
FX effect	-	(1.0)	-	(0.2)
Total	17.4	17.0	1.5	1.4

* 2015 channel results are at "constant currency", retranslated using 2016 exchange rates.

 

Overall revenues and EBITDA for the division are broadly in line with prior year at £17.4m and £1.5m respectively. On a constant currency basis, revenue has fallen by £0.6m, and EBITDA has reduced by £0.1m.

 

Handle was impacted this year against prior year with no triple-crown contender in the biggest sequence of three races in the US in May and June. Last year, American Pharaoh won the triple-crown for the first time in 30 years, and grabbed the nation's attention. We also continue to see the decline in industry handle across the US impacting our Connecticut retail business. However our online betting platform ("ADW") benefitted from the continual drift towards digital products with a 19% increase in handle. We also saw betting volumes on Jai Alai increasing by 38% following the reopening of the Dania venue in Florida.

 

We are encouraged that our innovative sports bar, restaurant and betting concept is beginning to produce positive results. At our Bradley venue we generated EBITDA of $0.4m and revenues were up by 18%, with our food and beverage operation moving into profit for the first time. This bodes well for our new flagship venue which will open in downtown Stamford, close to the New York border.

 

The business remains focused on its cost base, which is tightly controlled. In June, we completed the relocation of our offices in New Haven into our Sports Haven location in order to drive better operational integration and further cost savings.

 

In the Netherlands and California the combined revenues and EBITDA were in line with prior year.

 

The Football Pools

(i)   Football Pools: Business Review

We have spent many years implementing significant operational and technological change in order to turn around the fortunes of our 93 year old football gaming business. We are pleased therefore that the final important stages in this process were implemented in the first half of the year, such that the business now has strong foundations to move forward.

 

The logistically challenging and cost intensive paper coupon collector network, which has been in decline for many years, was closed. Customers from this network are now transacting with the business on a subscription or digital basis. A new database system is now in operation following a lengthy process to move away from old legacy systems.

 

Having made significant improvements in technology, we are now able to extend the distribution of our products digitally through the launch of The Football Pools App. Such digital initiatives make the Pools games more accessible, thereby attracting new customers, new revenues and stronger customer retention levels.

 

We have also continued to develop new products to drive additional revenues and increase customer engagement. This summer, we have introduced pool games with cash out functionality to footballpools.com (in partnership with Colossus) and a new online Spot the Ball game to replace the traditional Spot the Ball paper coupon offering.

 

Our strategy for The Football Pools has been to achieve stability in 2016 and to provide the firm foundations for growth thereafter.

 

(ii)   Football Pools: Financial Review

	Revenue		EBITDA
£m	2016 H1	2015 H1	2016 H1	2015 H1
Continuing channels - Subscription and Wallet	14.0	14.4	7.0	7.0
Closed collector channel	-	2.8	-	0.4
Total	14.0	17.2	7.0	7.4

 

We are pleased that the results for the first half of 2016 are in line with expectations, with EBITDA of £7.0m equivalent to prior year after excluding the results of the closed collector channel. Revenues of those continuing channels are down by only 3%.

 

Weekly spend per Classic Pools customer has increased by 2% to £3.08 per week. Total new player acquisition in the six month period was 10,000, with 53% being recruited online. Total customer numbers at June 30 2016 were 220,000 (2015: 234,000), with 63% of our Classic Pools customer base now playing by direct debit.

 

These initiatives were complemented by a continued focus on the cost base, which reduced from previous year.

 

The first half of 2015 also benefited from a contribution of £0.4m from the now closed collector channel. Losses of £0.2m incurred subsequent to the announced closure of the collector channel in 2016 are treated as exceptional costs.

 

Corporate costs

Corporate costs of £1.7m (2015: £1.9m) have been reduced by 11% and remain tightly controlled. In addition, we also have a non-cash share option expense under IFRS 2 of £0.1m (2015: £0.3m).

 

 

Depreciation and amortisation

The Group's normal depreciation and amortisation charge increased in the period to £4.0m (2015: £3.7m), owing principally to the ongoing capital expenditure of our businesses in North America.

The Group incurred a non-cash amortisation charge of £0.3m (2015: £0.6m) on the intangible assets acquired with eBet in 2012, Datatote in 2013 and Bump in 2014.

 

Exceptional costs

The Group has incurred exceptional administration costs of £4.5m (2015: £0.9m) in the six-month period. Of those costs, £2.5m relates to the modernisation of the Football Pools division (representing £2.3m of restructure costs and £0.2m of losses in winding down and closing the collector channel). Costs of £1.5m (2015: £0.3m) have been incurred in relation to ongoing corporate activity. A further £0.5m of other exceptional costs have been incurred in the period. 

 

Net finance costs

The Group has reduced its net interest costs in the period to £1.4m (2015: £1.6m) due to the lower average levels of net debt. In addition, other finance income amounted to £2.3m (2015: £nil) representing foreign exchange gains on inter-company loans and cash balances held.

 

Taxation

A tax charge for the period of £0.9m (2015: £3.8m) has been provided at the weighted average applicable tax rate for the Group of 21.0% (2015: 17.0%) together with the tax effects of permanent differences and other adjustments. The reduction in the Group's tax charge owes largely to the 2015 disposal of Sportech-NYX Gaming, LLC which incurred a deferred tax charge of £3.1m that is non-recurring. The underlying effective tax rate has increased as a result of increased profits generated in higher tax rate jurisdictions.

The Group has a net deferred tax asset of £0.9m (2015 net liability: £1.8m), representing primarily foreign taxes withheld which can be utilised against future profits. Tax payments of £1.1m were made during the period (2015: £0.8m), principally representing final payments for prior-year tax liabilities and overseas tax deducted at source.

 

VAT claim

On 4 May 2016 the Court of Appeal judges found unanimously in favour of the Group in respect of its £97.0m VAT reclaim relating to its "Spot the Ball" game. On 13 May 2016, HMRC sought permission from the Court of Appeal to appeal to the Supreme Court, which was refused. We announced on 6 June 2016 that HMRC had lodged an application to appeal directly to the Supreme Court with a decision on whether to hear the appeal expected in Autumn 2016.

HMRC has paid the Group £93.3m, with the remaining balance still to be paid to the Group. The Group will not recognise any income in respect of this claim until its final determination.

 

Net debt

Following the receipt of the £93.3m VAT claim from HMRC, the Group has a net cash position of £36.2m at 30 June 2016. Excluding the VAT repayment and cash held on behalf of customers, the Group has reduced its adjusted net debt by 6% to £59.8m.

The existing bank facility of £75.0m is in place until August 2018 with a banking syndicate of Royal Bank of Scotland plc, Barclays Bank PLC and Bank of Scotland plc. The Group's bank leverage ratio for covenant testing purposes (adjusted net debt/adjusted EBITDA) at the reporting date is 2.57x, comfortably satisfying the covenant test of 3.00x. This leverage covenant reduces to 2.75x in December 2016 and 2.50x in June 2017.

 

 

Foreign exchange

The Group is now generating nearly 60% and 10% of revenues in USD and Euros respectively. Movements in overseas currency rates are closely monitored by management and action taken to minimise cash flow risk arising from this. The Group has benefited in its reported results from the weakening of GBP from H1 2015, with an EBITDA benefit versus prior year of £0.4m. The Group expects to receive further benefit in H2 as a result of recent fluctuations.

 

Capital expenditure

Capital expenditure in the period of £5.1m (2015: £3.5m) includes platform and product modernisation in the Football Pools, commencement of the Stamford venue build out, and improvement in the Group's Digital offering.

 

Dividend

The Board will continue to consider the most appropriate dividend policy for the Group. This will take into account ongoing strategic initiatives, the timing of the final outcome of the VAT claim, the underlying performance and capital structure of the Group, and its investment opportunities.

 

Shareholders' funds

Total equity and the Group's net assets at 30 June 2016 have increased to £132.3m (31 December 2015: £126.2m).

 

Board and employees

The Group is delighted today to announce the appointment of Richard McGuire as a Non-Executive Director to the Board. Richard has extensive experience in capital markets and the leisure and gaming industries. He previously held a number of Non-Executive directorships, including at Mitchells and Butlers Plc, one of the largest operators of restaurants, pubs and bars in the UK, and Timeweave plc, the joint owner of TurfTV, a dedicated TV channel providing horseracing pictures and data to the vast majority of Licensed Betting Offices in the UK and Ireland.

The Group announces today that David McKeith, who has been a Non-Executive Director since August 2011, has resigned from the Board. We would like to thank David for his contribution and wish him well in the future.

Sportech is a geographically diverse business which places significant demands upon executives and employees. The Board would like to thank them for their dedication and commitment to the Group.

 

Corporate activity

Discussions continue regarding a possible sale of the Football Pools. A further update will be provided in due course.

 

Outlook

Sportech has established a unique position in the regulated gaming market worldwide, most notably with our licensed gaming businesses in the US. Following a number of years of significant investment in our technology and licensing, we are now in the position to grow our business, dispose of surplus property assets, benefit from regulatory change and deliver increased value to our shareholders.

 

We have had a good first half, are trading in line with management expectations, and are looking forward to delivering further progress in 2016.

 

 

 

 

Ian Penrose

Chief Executive

 

24 August 2016

 

Interim consolidated income statement
For the six months ended 30 June 2016

		Six months ended 30 June 2016 (Unaudited)	Six months ended 30 June 2015 (Unaudited)	Year ended 31 December 2015 (Audited)
	Note	£m	£m	£m
Revenue		48.7	51.0	100.2
Cost of sales		(29.1)	(29.8)	(58.2)
Gross profit		19.6	21.2	42.0
Distribution costs		(0.1)	(0.2)	(0.6)
Administrative expenses		(17.3)	(19.2)	(36.3)
Other operating income		-	8.1	8.1
EBITDA before exceptional items, share option expense and impairment of assets		11.1	11.0	23.1
Share option expense		(0.1)	(0.3)	(0.5)
Depreciation and amortisation (excluding amortisation of acquired intangibles)		(4.0)	(3.7)	(7.6)
Amortisation of acquired intangibles		(0.3)	(0.6)	(1.2)
Impairment of assets		-	(3.7)	(6.1)
Exceptional income	5	-	8.1	8.1
Exceptional costs	5	(4.5)	(0.9)	(2.6)
Operating profit		2.2	9.9	13.2
Finance charges	6	(1.4)	(1.6)	(3.2)
Other finance income	6	2.3	-	0.6
Net finance income/(charges)	6	0.9	(1.6)	(2.6)
Share of loss after tax and impairment of joint ventures and associates	10	(0.4)	(0.4)	(0.9)
Profit before taxation		2.7	7.9	9.7
Adjusted profit before taxation *		5.6	5.4	11.8
Taxation	7	(0.9)	(3.8)	(3.0)
Profit for the period		1.8	4.1	6.7
Attributable to:
Owners of the Company		1.8	4.1	6.7
Non-controlling interests		-	-	-
		1.8	4.1	6.7
Earnings per share attributable to owners of the Company
Basic	8	0.9p	2.0p	3.3p
Diluted	8	0.8p	1.9p	3.1p
Adjusted earnings per share attributable to owners of the Company
Basic	8	2.1p	2.1p	4.4p
Diluted	8	2.1p	2.0p	4.2p

* Adjusted profit before taxation is profit before taxation, amortisation of acquired intangibles, impairment of assets, exceptional items, share of loss after tax and impairment of joint ventures and associates, and other finance income.