Betting exchange operator Smarkets slipped to a pre-tax loss of £8.9m (€10.0m/$11.0m) in the 12 months ended December 31, 2018, despite recording a sharp increase in trading volume for the period.
Revenue for the year totalled £11.9m, down 42.0% on £20.6m in the previous 12 months. In comparison, trading volume, or the total amount of bets placed in the year, increased by 46.3% from £3.1m to £4.6m.
Smarkets put this revenue decline down to a number of factors, including a drop in commission revenue, which slipped 20.3% from £9.2m to £7.4m. The operator also noted a negative impact of reduced spreads on quoted prices, which helped to increase volume but compressed margins.
Betting revenue more than halved from £11.7m in 2017 to £5.5m last year, with Smarkets citing adverse outcomes from larger events in 2018. The operator said the Cheltenham Festival UK horse racing meeting and football’s FIFA World Cup in particular had a significant impact on betting revenue.
In terms of spending, cost of sales climbed by 37% from £3.4m to £4.6m, which Smarkets said was in line with the rise in trading volume.
The operator also saw administrative expenses increase from £10.6m to £16.2m, primarily as a result of it increasing its average headcount from 88 to 113. This included expansion of its Los Angeles office in the US, as well as higher costs to support the operation of the exchange, as well as advertising and marketing spending to drive user acquisition around key sports events such as the World Cup.
Higher spending and lower revenue meant gross profit took a heavy hit, with this falling 57.6% year-on-year from £17.2m to £7.3m.
The business loss before tax of £8.9m represented a substantial drop of 235.6% on a profit of £6.6m in the previous year. This left Smarkets with an overall loss of £9.2m, compared to a profit of £8.5m in 2017.
Reflecting on the results, chief executive Jason Trost said the decline in revenue and increase in costs were expected, and were the result of major investment in market share and users. He said record trading volume in 2018 served as proof of this strategy in practice.
“As part of the major investment in market share and users, we adopted a new commission structure and new strategy for our exchange liquidity provider, Hanson Applied Sciences Limited,” Trost said.
“As expected, revenues decreased and costs increased during this campaign period resulting in a loss, when the previous two years had seen us post fantastic profits. We’ve now completed the changes and look forward to a recovery in profitability.
“We on-boarded several new API users, a key part of our roadmap, and successfully introduced the first alterations to our commission structure in several years: selectively offering 0% commission to some customers, and introducing our Pro Tier, received far more favourably than the equivalent moves by competitors, and designed to protect revenue going forward.
“These changes will allow us to further tweak the structure to find the right balance in the trading ecosystem.”
Trost added: “Smarkets is now in the best shape it has ever been in and we can push ahead with expanding our activities, focusing on the more profit-generating areas of our business, and more efficiently monetising our growing trading volume, as well as taking the company out into the huge sportsbook sector and new international markets.”