Evolution RNG performance “embarrassing”, says analyst
Regulus’ take comes after Evolution announced on Thursday that its revenue growth had pushed net profit past €1bn (£853.5m/$1.1bn). It attributed this to growth across its live and RNG sectors.
However, while live casino revenue rocketed 28.1% to €1.52bn due to increased commission, RNG only climbed 2.6% to €275.3m. The fourth quarter also saw RNG revenue fall 3.7% to €69.8m.
Regulus believes Evolution is still “failing to execute” its RNG strategy, reserving particular criticism for its acquisition of NetEnt and its work with it since.
“Strategically Evolution’s RNG performance is now disappointing to the point of embarrassing, in our view,” Regulus said. “NetEnt was badly run, commercially over-priced and offers largely legacy content.
“Turnaround would have required a significant investment in product development and bravery on pricing which no amount of experience in Live infrastructure could be used as a guide. Put simply, Evolution was the wrong buyer for NetEnt, in our view.”
Due to Evolution’s size and its subsequent role as somewhat of a bellwether in the RNG market, Regulus believes any struggles could have a wider negative impact on the industry.
“Tough questions need to be asked about what value the division is adding to the group and to the sector under Evolution’s ownership,” Regulus continued. “In the longer-term, industry growth will suffer if Evolution continues to set too high a price for content (both asset values and commercially) and then fails to deliver segment growth.”
Evolution: Mixed success all over the globe
Evolution’s geographic growth was described as “encouragingly” spread out by Regulus, which also stated that Evolution remained “clearly the best live infrastructure provider”. However, Regulus also warned that there is reason to be concerned over the future, with a volatile Asian market and stagnation in Europe due to regulatory pressure.
The lack of regulation in the US also continues to be a barrier to growth, with igaming currently legal in just seven states. While North America has “high quality earnings”, it also has little chance of growing further without political support.
“It is hard to see how Europe sustains double-digit growth,” Regulus added. “The Asian market is still growing strongly and represented 67% of reported Q4 group growth, but the lack of regulatory and client visibility makes it hard to see as high quality revenue implied in the price, in our view.
“North America is clearly maturing quickly without further US state openings and Evolution is likely to see much stronger competition for this market.”
The analyst considers LatAm an area of growth for Evolution, however, labelling the region “arguably the single most attractive geography” for the group.
Regulus’ future view
Regulus pointed to Evolution’s growing reliance on its top clients, proposing that 1xBet was the company’s top customer with an implied live revenue footprint of over $2bn. Flutter and Entain were suggested to be among the next top four customers, with these groups growing by 36% thanks to organic and merger-and-acquisition-led consolidation.
The reverse was true for the long-tail, however, with 100 customers added, taking it to 800 in total and suggesting a flat year-on-year performance by operator.
As Regulus stated, Evolution’s “sheer scale” means its success or failure has a palpable overall impact on the industry.
In response to its slowing growth, Regulus says Evolution cannot simply buy its way out of trouble, explaining: “Without elusive RNG turnaround we struggle to see how this adds up to high quality double digit growth.
“If Evolution tries to buy its way out of slowing growth while its valuation is still high, this could cause material supply-chain issues given failing RNG operational execution to date, in our view.”