The Stars Group Reports Third Quarter 2019 Results

TORONTO, Nov. 7, 2019 /PRNewswire/ -- The Stars Group Inc. (Nasdaq: TSG) (TSX: TSGI) today reported its financial results for the third quarter ended September 30, 2019 and provided certain additional highlights and updates. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

"Our third quarter results were robust and in-line with our expectations, supported by strong revenue growth in our United Kingdom and Australia segments, which helped offset both the ongoing disruption in certain of our lower-priority international markets and continued foreign exchange headwinds across the business," said Rafi Ashkenazi, The Stars Group's Chief Executive Officer. "We have also made rapid progress in the U.S. following our landmark FOX Sports deal in May, with the launch of our FOX Bet products at the start of the professional football season in New Jersey and Pennsylvania, and some very encouraging early signs from our FOX Sports Super 6 nationwide free-to-play games."

"Our highly cash generative business model also enabled us to reduce our net debt by over $100 million in the quarter and prepay yet another $100 million in October, bringing our total prepayments since the beginning of the year to over $450 million and around $600 million since July 2018," added Mr. Ashkenazi.

"Shortly after quarter end we also announced an agreement to combine with Flutter to create a global leader in online betting and gaming, and we are working diligently to bring the proposed combination to closing," continued Mr. Ashkenazi. "We remain excited about the opportunities in front of us as the combination will enhance and accelerate each company's growth strategy by providing a diverse portfolio of leading brands and complementary best-in-class products with a broad geographic reach."

"Ahead of closing, we remain highly focused on our key strategic priorities of integration, execution and debt reduction. Not only have we largely completed the integration of Sky Betting & Gaming, but we currently expect to exit 2019 with a run-rate of the full $100 million of expected cost synergies and are beginning to execute on our plans for revenue upside through Sky Bet in Italy and Germany and our developing U.K. ecosystem," concluded Mr. Ashkenazi.

• 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 the 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 (35.0% versus 27.7% in 2018), followed by online casino (31.3% versus 31.6% in 2018) and online poker (30.9% versus 37.7% in 2018), while 77% of consolidated revenues were derived from locally regulated or taxed markets (72% in 2018). Additional segment specific factors impacting revenue are described below.
• Debt and Cash - The Stars Group generated Free Cash Flow of $70.2 million in the third quarter of 2019, which was after, among other items, the cash impact of certain adjustments to EBITDA set forth in the Adjusted EBITDA reconciliation below under "Reconciliation of Non-IFRS Measures to Nearest IFRS Measures". Free Cash Flow was also impacted by the semi-annual interest payment of $35.0 million on the 7% Senior Notes. The Stars Group ended the quarter with approximately $405.8 million in operational cash and $5.0 billion of gross debt on its balance sheet, resulting in Net Debt of $4.6 billion, a reduction of over $100 million from the second quarter of 2019. In October 2019, 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.
• U.S. Update - In the eight weeks since launch, the FOX Sports Super 6 app had been downloaded more than 820,000 times, had more than 7.5 million total contest entries and has been ranked in the top 20 in the games tab and in the top 10 in the sports section in the Apple App Store. The Stars Group also launched the real-money wagering FOX Bet products in New Jersey and Pennsylvania ahead of the start of the professional football season, both on-time and on-budget, and has seen encouraging week-to-week customer activity levels with the overall performance of the products in-line with its expectations, and is on track to reach its previously disclosed expected loss of approximately $40 million in 2019. Following the end of the quarter, The Stars Group successfully launched PokerStars in Pennsylvania, the first poker product to launch in the state, and FOX Bet announced a multi-year agreement with the MLB to become an authorized gaming operator.
• Combination with Flutter Entertainment plc - On October 2, 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 intended to occur during the second or third quarter of 2020, subject to, among other things, shareholder, court and applicable regulatory approvals.
• Financial Guidance; Earnings Call and Presentation - The Stars Group currently anticipates full-year 2019 financial results to be within the guidance ranges previously announced in its August 12, 2019 earnings release. 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 third quarter and intends to suspend its practice of providing forward-looking financial guidance beyond its previously announced full-year financial guidance for 2019. 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."
• Board Observer - In January 2018, The Stars Group entered into an agreement with Mr. Tang Hao and his affiliated entity Discovery Key Investments Limited, which at the time collectively held approximately 17.9% of the outstanding common shares of The Stars Group, pursuant to which Mr. Tang appointed Mr. Melvin Zhang as his nominee to be an observer to the Board with the right to become a director upon the satisfaction of certain conditions. Based on publicly available information, The Stars Group understands that Mr. Tang and Discovery Key Investments held less than 1% of the outstanding common shares of The Stars Group as of September 24, 2019 and as such, Mr. Tang no longer has a right to nominate an observer or director to the Board and Mr. Zhang no longer serves as such observer. The previously disclosed terms of the agreement, including as it relates to certain restrictions on Mr. Tang's purchase of common shares of The Stars Group, remain in effect until after the 2020 annual general meeting of shareholders.

International

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¹ Sales and marketing includes $1.1 million and $3.8 million for the three and nine months ended September 30, 2019, respectively, that the Corporation 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 year-over-year, primarily as a result of adverse foreign exchange fluctuations and continued disruptions and regulatory headwinds in certain markets due to reduced deposits by customers as a result of 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 represent lower-priority markets, revenues were 32% lower year-over-year, slightly worse than the trend in each of the first two quarters of the year, with improvements in some markets primarily offset by the closure of PokerStars in Switzerland in July 2019. These markets now represent 14% of revenue for the International segment, from 20% in the prior year period. In the rest of the world, Constant Currency Revenue growth was 3% year-over-year, consistent with the trends in the first half of the year, with strong performance in Italy, where Constant Currency Revenue grew 9% year-over-year despite necessary changes to meet obligations of the advertising restrictions beginning in July.
• Poker - Revenue for the quarter decreased year-over-year, with Constant Currency Revenue 8.0% lower than the prior year period, primarily as a result of the same factors noted above. Underlying trends in the third quarter were similar to those in the first half of the year, with the primary negative impact being 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. The Stars Group believes that its new product pipeline and marketing plans for the fourth quarter and into 2020 supports its current expectations for a return to Constant Currency Revenue growth in 2020. 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 our ability to drive revenue growth through cross-selling to the International segments other product offerings. PokerStars also held the World Championship of Online Poker (WCOOP) during the quarter, which paid out a WCOOP record $105 million in prizes over the 20-day tournament series.
• Gaming - Revenue for the quarter increased year-over-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 rates 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 24%. The growth in gaming revenue was partially offset by the cessation of operations in certain markets since the third quarter of 2018, as well as similar restrictions on some methods of payment processing and adverse foreign exchange fluctuations as described above.
• Betting - Revenue for the quarter decreased year-over-year as a result of adverse foreign exchange fluctuations and reduced levels of Stakes, driven in part by the cessation of operations in certain markets as well as the positive impact of the FIFA World Cup in the prior year period. The relaunch of Sky Bet in Italy and Germany produced encouraging results with Stakes increasing 22% year-over-year on a local currency basis.
• Operational excellence - The quarter saw an underlying improvement in operations within the International segment, primarily driven by the implementation of an operational excellence program to optimize the cost base, including a reduction in headcount and the relocation and re-purposing of certain roles, which helped to offset some of the impact of the disrupted markets. For additional information, see below under "Reconciliation of Non-IFRS Measures to Nearest IFRS Measures".
• Customers – QAUs decreased year-over-year, primarily due to reduced activity in certain markets and the closure of certain markets, each as noted above.

United Kingdom