XLMedia’s little local difficulty

The market reaction to XLMedia's profit warning last week reflected uncertainty over growth potential in both regulated and unregulated portions, but CEO Ory Weihs remains upbeat. By Scott Longley

It seems to be an axiom of listed online gambling companies that investors are absolutely fine with grey market risk – until they are not.

This would appear to have been proved once again by London-listed super affiliate XLMedia which saw its share price suffer a 30% reverse in mid-June off the back of a profit warning driven by “regulatory changes”.

The company cited Australia, where the authorities moved in late 2017 to close the loopholes around online gaming, and also said there was “uncertainty regarding the regulatory status of certain European markets.”

Investors took fright but it won’t have come as a shock to everyone. Indeed, anyone paying attention to what was going on with the marketing of online gaming in the UK and elsewhere in the past few years can’t profess to be surprised by XL’s comments.

Ory Weihs, speaking to iGaming Business, pointed out the European markets in question were the UK and Germany. And the well-publicised ongoing investigations of the Competition and Markets Authority (CMA) into affiliate marketing techniques have been the primary cause of the turbulence.

“Unfortunately, the interpretation of these new measures have confused the market substantially,” says Weihs. “We are now starting to see this stabilise, but while there is uncertainty around the impact of regulations there is naturally a disruption to (our) normal course, both with online gambling operators and affiliates.”

He added that the issues mainly revolved around the “constant changes” to the guidance on advertising as well as “awareness” among operators of the spend on CPAs and fixed-rate campaigns. Weihs hopes for “clear advertising guidelines and tax rates” in the future.

Analysts at Cenkos say volume growth has been harder to achieve while upfront payments have been less of a feature this year and this has a negative impact on short-term earnings.

Germany is trickier, something that Weihs acknowledges, saying there is the “question mark around the future of online gaming”. The “ripple effect” of VAT provision issues for many of customers there is but the latest manifestation.

“While there has been some short-term implication as a result of this uncertainty, we believe that in the long term, gambling will still be a main growth engine for the business including in these regions,” Weihs says.

The heart of greyness
This gets to the nub of the issue. In both the regulated and unregulated portions of XL Media’s gambling revenues, what the share price reaction reflects is the uncertainty over growth potential.

Weihs says that XLMedia has no concerns over its long-term revenues or its sectoral (gaming) and geographical (white and grey markets) focus.

But XLMedia’s trading update does highlight the changing relationship between online gambling operators and affiliates. As the statement said, the regulatory changes have “triggered a re-alignment in how operators and marketers can work, which should lead to a clearer and more functional environment.”

The consolidation within the affiliate sector is another symptom of the changes that are taking place. In the re-alignment process it is the smaller affiliates that are being sidelined while the larger super affiliates grab a greater slice of operators’ affiliate spend.

XLMedia has played a big part in the consolidation process – iGaming Busness counts six online-gambling focused acquisitions since 2014 – and in January the company raised $43.6m to fund further deals.

However, other than an undisclosed amount laid out on buying out the WhichBingo interests in April, XL has yet to dip into that reserve, raising questions around strategy.

“While we can appreciate a degree of frustration among investors following a lack of M&A after the $43m capital raise in January 2018, we believe XLM has a strong track record of completing deals and that finding the right asset is only a matter of time,” said the analyst team at Berenberg.

Weihs says that other, smaller deals have also gone through since January. “In addition to these, we continue to undertake due diligence on a healthy pipeline of potential targets and see plenty of opportunities to further strengthen the business through this channel,” he adds.

The business case for further affiliate M&A remains in place, as much because of the regulatory bumps as in spite of them. Cenkos pointed out that XL’s revenue-sharing agreements “in general remain unchanged”, no doubt on the basis that most operators still need the affiliate relationships.

XLMedia’s investors might have displayed some understandable nervousness – no one likes a profit warning – but the case for affiliates remains strong within online gaming. Just beware the bumps in the road.

Scott Longley has been a journalist since the early noughties covering personal finance, sport and gaming. He now runs his own editorial consultancy Clear Concise Media