The Stars Group Reports Fourth Quarter and Full Year 2019 Results

TORONTO, Feb. 27, 2020 /PRNewswire/ -- The Stars Group Inc. (NASDAQ: TSG) (TSX: TSGI) today reported its financial results for the fourth quarter and year ended December 31, 2019 and provided certain additional highlights and updates. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

"In 2019, we continued to execute on our strategy to deliver long-term sustainable growth and become the world's favorite iGaming destination. We not only began to see the full-year benefits of our transformative 2018 acquisitions, but executed on delivering a landmark media partnership in the U.S., with the launch of FOX Bet, strengthening our position in this emerging market," said Rafi Ashkenazi, The Stars Group's Chief Executive Officer. "We also focused on creating shareholder value through efficient capital allocation, prepaying over $450 million of debt during the year."

"In-line with our expectations, we exited 2019 with a strong fourth quarter with Constant Currency Revenue growth of 7% year-over-year driven primarily by the continued impressive underlying performance of our primary sports betting brands," continued Mr. Ashkenazi. "With sports betting now our largest product vertical and 81% of our revenues coming from locally regulated or taxed markets, we are well positioned for diversified growth in 2020 and beyond."

"We entered 2020 with the full $100 million run-rate of expected cost synergies from our 2018 Sky Betting & Gaming acquisition and earlier this month prepaid an additional $100 million of debt, underpinning our ability to execute on complex integrations and the highly cash-generative nature of our business model. In addition to cost synergies, we have detailed plans in place to continue driving revenue synergies and to increase investments in product and marketing, giving us confidence in continued revenue growth in the years ahead. In 2020, we plan to further enhance the global appeal of the PokerStars brand, including by launching the PokerStars Sports brand, leveraging the operational capabilities of our Sky Betting & Gaming business, and launching television advertising for PokerStars Casino," continued Mr. Ashkenazi.

"Lastly, ahead of closing our combination with Flutter, which will enhance and accelerate each company's growth strategy, we remain focused on our key strategic priorities of integration, execution, and debt reduction," concluded Mr. Ashkenazi.

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¹  Non-IFRS measure. For important information on The Stars Group's non-IFRS measures, see below under "Non-IFRS Measures" and the tables under "Reconciliation of Non-IFRS Measures to Nearest IFRS Measures".

• Revenue – Revenue for the quarter increased primarily as a result of revenue growth within the United Kingdom and Australia segments, which were largely driven by strong underlying trends in customer activity and revenues across those segments, as well as a year-over-year increase in Betting Net Win Margin. During the quarter, online sports betting was The Stars Group's largest product vertical (39.1% versus 34.3% in 2018), followed by online casino (30.8% versus 30.1% in 2018) and online poker (27.5% versus 32.8% in 2018), while 81% of consolidated revenues were derived from locally regulated or taxed markets 76% in 2018). Revenue for the year increased primarily as a result of the Sky Betting & Gaming and BetEasy acquisitions and the same or substantially similar factors that impacted the fourth quarter as described above. Additional segment specific factors impacting revenue are described below.

• Debt and Cash –  The Stars Group generated Free Cash Flow of $98.9 million in the fourth quarter of 2019, which was after, among other items, the cash impact of certain adjustments set forth in the Adjusted EBITDA reconciliation below under "Reconciliation of Non-IFRS Measures to Nearest IFRS Measures". The Stars Group ended the quarter with approximately $321.0 million in operational cash and $4.9 billion of gross debt on its balance sheet, resulting in Net Debt of $4.6 billion, which was relatively stable compared to the third quarter and a reduction of approximately $443.9 million from the end of 2018. In February, The Stars Group prepaid an additional $100 million, including accrued and unpaid interest, of its USD first lien term loan using cash on its balance sheet, which brings the total amount repaid since completion of the SBG acquisition in July 2018 to over $700 million.

• U.S. Update –  Since its launch in September 2019, just four months after The Stars Group announced its U.S. media and sports wagering partnership with FOX Sports, the FOX Sports Super 6 app saw more than 1.3 million downloads in 2019, with an average of over 500,000 customers making at least one prediction each week during the fourth quarter. The Stars Group currently operates its FOX Bet real-money wagering products and PokerStars-branded real-money poker and casino products in New Jersey and Pennsylvania, and since the launch of FOX Bet in New Jersey and Pennsylvania in 2019, the performance has been in-line with The Stars Group's expectations, with strong progress in both active customers and revenue on a month-to-month basis, with approximately 65,000 combined QAUs in the fourth quarter. During 2019, FOX Bet's financial performance was in-line with its previously disclosed expected loss of approximately $40 million for the year.  So far in 2020, The Stars Group announced a market access agreement with the Little Traverse Bay Bands of Odawa Indians Gaming Authority for first-skin online betting and gaming market access in the State of Michigan, and currently expects to increase investments in the United States to support planned FOX Bet launches in further states, including Colorado.

• BetEasy minority acquisition –  In December 2019, The Stars Group announced that it agreed with the minority shareholders of BetEasy, its Australian-based sports betting business, to acquire the remaining 20% interest in the company for AUD$151 million following the earlier of the release of The Stars Group's full-year 2020 financial results or the completion of its combination with Flutter Entertainment Plc. As part of this agreement, The Stars Group also agreed to pay AUD$100 million to settle the previously disclosed performance, or earn-out, payment under the agreements for its 2018 acquisition of the initial 80% interest, which were subject to certain performance conditions primarily related to BetEasy's EBITDA and could have reached AUD$232 million, and to repay AUD$56.9 million of outstanding BetEasy minority shareholder loans.

• Combination with Flutter Entertainment plc –  In October 2019, The Stars Group and Flutter announced that they entered into an arrangement agreement providing for an all-share combination at an exchange ratio of 0.2253 and whereby immediately following completion, shareholders of Flutter would own approximately 54.64% and shareholders of The Stars Group would own approximately 45.36% of the share capital of the combined group. Completion of the combination is currently expected to occur during the second or third quarter of 2020, subject to, among other things, shareholder, court and applicable regulatory approvals.  As previously disclosed, in addition to Mr. Gadhia, The Stars Group's current Executive Chairman, and Mr. Ashkenazi, The Stars Group's current Chief Executive Officer, The Stars Group is entitled under the arrangement agreement to nominate three additional non-executive directors to serve on the combined group's board of directors post-completion of the combination. Accordingly, The Stars Group has nominated Messrs. Alfred F. Hurley Jr. and David Lazzarato and Ms. Mary Turner to also serve as directors on the combined group's board of directors.

• Financial Guidance; Earnings Call and Presentation – As a result of the pending combination of The Stars Group and Flutter, The Stars Group will not hold an earnings conference call for the fourth quarter and full-year 2019 and has suspended its practice of providing forward-looking financial guidance. This press release and an accompanying presentation will be available on The Stars Group's website at www.starsgroup.com. For additional information, see below under "Consolidated Financial Statements, Management's Discussion and Analysis and Additional Information".

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¹ Sales and marketing includes $1.2 million and $5.0 million for the three months and year ended December 31, 2019, respectively, that The Stars Group excluded from its consolidated results as it related to certain non-gaming related transactions with the United Kingdom segment.
² Non-IFRS measure. For important information on The Stars Group's non-IFRS measures, see below under "Non-IFRS Measures" and the tables under "Reconciliation of Non-IFRS Measures to Nearest IFRS Measures".

• Revenue – Revenue decreased for the quarter and for the year, primarily as a result of adverse foreign exchange fluctuations and continued disruptions and regulatory headwinds in certain markets due to local restrictions on some methods of payment processing and on certain methods of downloading The Stars Group's products, particularly related to casino and poker. In markets that have been impacted by such disruption, which are all lower-priority markets, revenues for the quarter were 29% lower year-over-year, similar to the trend in each of the first three quarters of the year, with improvements in some markets primarily offset by the closure of PokerStars in Switzerland in July 2019 (where The Stars Group is working with regulators and its local partner to operate in a newly regulated environment in due course). These markets now represent 14% of revenue for the International segment, down from 18% in the prior year period. In the rest of the world, Constant Currency Revenue for the quarter was 1% lower year-over-year, with continued strength in gaming partially offsetting revenue declines in poker. Constant Currency Revenue for 2019 was 3% higher year-over-year, with continued strong growth in gaming.

• Poker – Revenue decreased for the quarter and year, with Constant Currency Revenue decreasing 10.4% and 7.4% respectively, primarily as a result of the same factors noted above. Underlying trends were similar in the fourth quarter to those in each of the first three quarters of the year, with the primary negative impact related to the closure of PokerStars in Switzerland in July 2019, together with tougher operating conditions in other markets such as Spain and Sweden, following regulatory changes in those countries. The Stars Group has a deep pipeline of new product launches and marketing plans, in addition to expected new market expansion plans, which it believes will support the development of its International poker business throughout 2020 and into 2021 and help mitigate ongoing disruption in certain markets that will continue to weigh on poker revenues in 2020 before beginning to improve in 2021. The Stars Group believes that Poker remains an important driver of cost-effective customer acquisition, leveraging the awareness and trust of the PokerStars brand to create a large and low-cost customer acquisition channel, supporting The Stars Group's ability to drive revenue growth through cross-selling to the International segments other product offerings.

• Gaming – Revenue increased for the quarter and was relatively flat for the year, primarily as a result of organic growth in most markets, which continues to be driven by the roll-out of new casino games and innovative content, as well as ongoing improvements in cross-selling from poker to casino games. Constant Currency Revenue growth in The Stars Group's rest of the world markets (all markets excluding disrupted markets) was 21% for the quarter and 24% for the year. The growth in gaming revenue was partially offset by the cessation of operations in certain markets, as well as similar restrictions on some methods of payment processing and adverse foreign exchange fluctuations as described above. The Stars Group currently plans to increase marketing investment in its International gaming business during 2020, which it expects to deliver strong returns over time, but  to negatively impact profitability during 2020.

• Betting – Revenue for the quarter and year decreased year-over-year primarily as a result of a reduced Betting Net Win Margin, reflecting both the planned investment in the launch of FOX Bet in the United States, and operator-unfavorable sporting results in certain European markets. Stakes increased by 16%, primarily as a result of the launch of FOX Bet and continued organic growth in most key markets, partially offset by the cessation of operations in certain markets, as well as similar restrictions on some methods of payment processing and adverse foreign exchange fluctuations as described above. During 2020, The Stars Group intends to expand the range of products, features and marketing campaigns for its International betting business, leveraging increased expertise from the United Kingdom segment and leveraging the Sky Bet brand in Italy and Germany, as well as launching the new PokerStars Sports brand in certain markets.

• Customers – QAUs decreased, primarily due to reduced activity in and the closure of certain markets, each as noted above, but was partially offset by the launch of FOX Bet and PokerStars in Pennsylvania.