November 25, 2020 Sports Betting, Online, Interview

Sportech CEO: Keeping costs down amid a pandemic

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Sportech CEO Richard McGuire walks Tim Poole through the company’s recently published H1 results, explaining the sports betting technology and horse racing business’ journey through the pandemic.

Following on from our discussion at the end of Q1, could you walk us through the company’s H1 results?

We spoke a lot in March and last year about managing our costs. We felt our operational costs were too high. Through the first half of this year, we managed our CapEx fairly aggressively, taking it down 44%, which was about £1.5m ($1.9m). We also managed our exceptional costs; they were £1.5m last year and £300,000 this year. And payroll being the biggest cost to our company – £27m last year – we had to take fairly swift action there in March this year. That said, at that time, like many other companies, we had to furlough the majority of our staff because the racetracks and clients were essentially closed. But we did maintain medical benefits, which I think was critical for our staff, particularly in the US.

Managing the costs is just going to give you a better platform, though, and a leaner company to work with. We had to deliver some real growth prospects as we navigate this COVID situation. And I’m pleased to say our online business, our retail online business, however small was up 48%. It was around 3% up only in Q1 and in Q2, with physical venues closed, so the online really took off. Our more important international tote business was up 23% and we also signed up a significant number of contract extensions with clients and a significant number of new clients. In our smaller Bump business, there were a record number of new clients signing up. We diversified in that business to really build on what we did in 2019 by expanding our online capabilities and signing a number of new clients. We diversified further away from our sole reliance on sports teams within the Bump business, signing up 28 non-profit organizations, which obviously are potentially significantly higher in terms of scale.

So we’re navigating through this. It was a real stress test for our business. Our cash position dropped from the end of February to the end of June to about £9.6m, a drop of £1.4m only, which was better than we’d forecasted. Analysts have forecasted about £9m cash by the end of the year – we wouldn’t disagree with that. The company has no debt. We have a leaner, more agile business going forward and we’ll focus on developing every digital opportunity. Our main KPIs will be creating operational and actual cash from the business to maintain investment. And we’re going to focus on the blindingly obvious: higher-margin business across the group. So that means some of the smaller businesses that don’t generate any profitability may be moved on and out of the group. I think historically there’s been a focus on revenue as a core metric and we’re changing that to focus on serious stable growth and profitability rather than revenue.

Considering your heavy focus on the US, how exactly did the pandemic affect your operations there specifically?

We have a number of different business units in the US including our Bump business, which relies on sports events taking place. Historically it relied on spectators attending those events, so they dropped off the radar in their entirety from mid-March, with no spectator sports. That business dropped off a cliff during that period. Thankfully, we did pick up our non-profit organizations and ability to deliver online, so we got people like the Chicago Blackhawks, Tampa Bay Buccaneers and a number of non-profit foundations using our online capability – with some serious success. In our Connecticut venues, we voluntarily closed the doors in mid-March and two days later the Governor announced all restaurants, bars, OTBs and casinos would have to close anyway. We did reopen our venues in July but realistically from the middle of March through the end of June, all our physical properties were closed.

Pretty much almost every racetrack in the US is now reopened and some are allowing a small amount of spectators. So it’s a steady recovery but again the online presence and the online business, not only ours but those across the industry, are actually doing very well as you’d expect. You’re seeing a lot of customers transitioning from going to a physical venue to signing up online for the first time.

Our online side continued, albeit there was very little product for punters to bet on, so our venues were essentially closed from March, as well as our Tote business, obviously because all racing with spectators was closed. However, there were a handful of tracks that did continue to run behind closed doors in the US. The revenues from US were down 92-95% from March to June, which makes the results we delivered as a group much better frankly. So it was a really challenging period in the US. Sports are now resuming and around 60% of our venues have reopened, and online and telebetting are still open. But in our some of venues it’s difficult, particularly some of our city center venues.

The Tote business is actually showing some serious growth. Pretty much almost every racetrack in the US is now reopened and some are allowing a small amount of spectators. So it’s a steady recovery but again the online presence and the online business, not only ours but those across the industry, are actually doing very well as you’d expect. You’re seeing a lot of customers transitioning from going to a physical venue to signing up online for the first time.

When I spoke with you and CFO Tom Hearne in March, you discussed how you would finance this company through the pandemic. Have the scale and its duration so far matched your predictions or was it worse?

It was actually better. I think we were looking at something like £8.5m cash at the end of June. Our international business continued, so although racetracks globally closed, we had got in place an ability to transact volumes globally. Hong Kong horse racing, which is the biggest in the world, still continued to run. They’ve been racing behind closed doors since January; that’s a significant part of our business.

Getting towards the end of June, we were getting more towards £8.9m. We managed to agree some rent reductions so it got to £9.6m. Our cash did drop by £1.4m from the end of February to the end of June. But that’s a four-month period where, realistically, we’re in a global shutdown. Historically, we had a £27m yearly payroll bill. So I think we did particularly well during that period, coming out the other end significantly better than our forecasts when we last spoke in March.

How exactly did you manage costs and limit your reduction in cash?

With all the race tracks closing and no content for people to bet on, we feared that would continue through the first half. It’s all very well having a platform; we don’t have online casino. You’ve got to have something people can bet on. A number of tracks did remain open and we started to see people bet on strange things like Swedish harness racing. There’s a growing appetite from people who want to invest and bet on various products. A couple of race courses in Florida continued and some in the US.

But the online improved for us, which was quite nice. And for some of our US clients, they had their own websites and customers were still betting through their platforms into some of those racetracks, through our technology. So we’re picking up revenue we probably didn’t forecast we’d get. It wasn’t significant but it was very stable. Our international business, where people bet around the globe through our technology, also did much better than we projected in Q2. Then we really took the knife to our cost base; it was a combination of cutting costs more than we thought and having slightly better revenues than we envisaged when we last spoke.

Despite a lack of clarity on sports events and spectators attending those events, how do you forecast 2021 going for Sportech and the wider industry?

In terms of spectator attendances at sports, I think it’ll be a fraction of 2019. They will be spaced out; it’s difficult at a sporting event not to be touching thighs with the person next to you, quite honestly. So they’re going to have to ease back steadily. 2021 we think is going to be a skeleton of 2019, somewhere in the region of 30-40% in terms of spectator attendances. Assuming we don’t get a major second wave, 2022 we would hope we would move back to normal conditions.

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