Challenging UK market slows LeoVegas H1 growth

LeoVegas Gaming Group saw revenue grow in the first half of 2019, but challenging operating conditions in the UK eroded company profits over the period.

Revenue for the six months through to June 30, 2019 amounted to €180.7m (£167.4m/$202.0m), up by 10% year-on-year compared to €164.8m in 2018.

However, cost of sales increased from €30.3m to €34.9m, while gaming duties also climbed from €15.1m to €24.4m. LeoVegas saw gross profit climb from €119.3m to €121.6m, but operating profit slipped from €13.0m to €9.1m. Profit before tax fell from €9.0m to €8.0, while net profit for the period dropped from €8.4m to €7.4m.

The operator was also hit by a drop in earnings before interest, tax, depreciation and amortisation (EBITDA), which fell from €24.5m to €22.3m.

Financial results for the second quarter made for slightly more positive reading for LeoVegas, with revenue in the three months to June 30 up 8% year-on-year to €94.4m.

Organic growth in local currencies was 8% and growth was favourable in most markets, but LeoVegas was hit by tighter social responsiblity controls and increased Remote Gaming Duty in the UK. Excluding the UK, local currency organic growth was up 26%. This contributed to revenue from European markets outside of the Nordic region falling to 47% of group revenue, down from 49% in Q2 2018.

While the newly regulated Swedish market has proved challenging for many operators, Hagman said he was satisifed with LeoVegas' performance there, and believed it was taking market share from competitors. He claimed that it is now the largest online casino brand in the market, aided by the launch of complementary brands GoGoCasino and Pixel.bet. Despite this, the Nordic region saw its share of group revenue drop two percentage points to 40%.

However, president and chief executive Gustaf Hagman said that due to expansion into new markets, the operator had a more balanced geographic revenue mix. This was in evidence from revenue generated in other markets growing to 13% of the group total. 

“This means that we are not as sensitive to challenges that may arise in a specific market, which in turn means that we have lower business risk in the group,” he explained.

However, these challenges still hit LeoVegas' bottom line, with operating profit down from €9.3m to €8.5m.

EBITDA in Q2 was up slightly to €15.1m, with a margin of 16.0%. Second quarter pre-tax profit rose to €8.0m, with net profit after tax increasing from €6.6m to €7.4m.

This, Hagman said, showed the benefit of efforts to control costs and operate efficiently, with LeoVegas continuing to review external partner agreements and look to streamline its structure. 

“This work is helping to create necessary economies of scale and is countering the effect of that we are paying more gambling taxes,” he explained. “As previously communicated, our marketing investments also decreased compared with the first quarter of the year. A contributing factor to this is more restrained marketing in Sweden during the quarter.

“The external market environment in several key markets is currently more turbulent and difficult to predict than previously, which is creating new challenges and requirements, but at the same time it is presenting major opportunities for us to grow and take market shares.”

Key to future growth will be Spanish-speaking markets. Following the end of Q2, LeoVegas secured a Spanish operating licence, going live two weeks after securing approval.

“This shows the strength and speed of LeoVegas and further demonstrates that our experience from regulated markets benefits us,” Hagman noted. 

The operator has also expanded into Latin America, launching in Chile and Peru, as well as Brazil.

Looking at the operator's performance, analysts at Regulus Partners noted that LeoVegas continued to perform well as a disruptor in dot.com markets, helping offset increased taxes and operating restrictions in regulated markets.

“To some extent this demonstrates the resilience of operationally capable businesses with broadly based regulatory risk,” Regulus said. “However, for us sustainability must still mean profitable growth in domestically regulated markets, which appears to remain challenging for the group.”