Company Interview / Pick & shovel opportunities in the gaming industry

Key points:

Flutter Entertainment's strategic expansions and acquisitions in key markets.Brazil's shift from grey market operators and Flutter's competitive edge.Australia's regulated market, with focus on innovative suppliers and promising investments.

Flutter Entertainment is expanding its influence in the global online gaming industry, focusing on acquisitions and smart entry into new markets. Tom Waterhouse of Waterhouse VC highlights their recent investments, including Sportsbet in Australia, Betfair, Sky Bet in the UK, and FanDuel in the US, which boasts a 38% market share. Flutter’s (NYSE: FLUT) marketing strategy, financial leverage, and operational scale make it a dominant player, especially in regulated markets.

Tom points out Brazil as a pivotal market, noting its open regulatory environment and the potential to shift away from grey market operators. Flutter’s recent multi-million-dollar acquisition in Brazil underscores their readiness to dominate this emerging market. Tom also mentions the $6 million licence fee and the significant number of applicants as a positive indicator for the regulated betting future in Brazil.

Tom discusses the competitive landscape in Australia, describing a highly taxed and regulated market. He sees consolidation among operators but praises innovative players like Dabble, who manage to grow despite challenges. Tom emphasises the importance of suppliers and mentions promising investments in Racing and Sports as well as Food Fight in the US.

Full unedited transcript:

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Flutter Entertainment has established itself as a dominant force in the global online gaming sector and continues to expand its footprint across key markets to discuss it and more news in the legal betting industry. Tom Waterhouse, CIO of Waterhouse VC, joins me in studio. We're talking about flutter. Last time. Tom and I know they had an investment day recently. I think last week they're planning on doubling their profit in the next couple of years. Yeah. Look, they're doing they're very savvy operators, obviously led by Peter Jackson who's done a great job since coming to the company in 2018. They, um, they're very good at acquiring businesses as a value. Obviously, you saw that in the Australian market where they acquired Sportsbet here in 2008, 2009. Uh, they also have done very good acquisitions of Betfair, Sky bet in the UK, uh, Sizzle in Italy and probably the jewel in the crown now is, is FanDuel in the US. Um, they've got 38% market share in the US. And, and they go into these markets that are opening up or looking like opening up and acquire at a savvy

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price, put in their management team and their expertise and knowhow, and then they just put the foot down in terms of marketing. And in that Investor Day, they really talked about that flywheel effect, where they put money into marketing, money into the customer experience. The product get better returns out of the customer because they've got a great product, and then they plough it back in, and then they use that scale and that operational leverage to accelerate ahead, because all of these markets are getting more and more taxed and regulated. You need that that scale and that operational leverage. And they've got it. They're a huge 40 billion plus market cap company now. So uh, very impressive. And they're the dominant scale operator in the regulated markets. When you talk about the regulated markets, I mean, there's obviously the population growth as well. And there I think that was saying something like more and more Americans are going to start in this space now that it is more regulated. What does that mean, I guess, for further growth for them as well, because they think they said that they expect most Americans will eventually engage in sports betting of

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some kind. Yeah. So for them, uh, it's very exciting because they've got that scale. I think it's hard for the smaller operators in the US because obviously you need to have a licence and then you need to new York's 50% tax. You know, you've got large taxes in these states. They've realized that they want to regulate, but they want a tax. And you need that scale and flutter through their their business. FanDuel in the US has got that scale that those companies, FanDuel and DraftKings, are spending like $1 billion a year on marketing. It's a huge businesses. And as more states open up, they'll roll out the same playbook. They'll use those operational efficiencies and provide a great experience. They'll have all the markets, the best product, and they'll retain those customers, get higher lifetime value out of those customers, and then keep playing the profits back in, in great marketing and great giveaways. And in a regulated market, they they have the playbook. They've been doing it now for nearly 20 years. They were successful, took over the large incumbents in the

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UK and then rolled it out in Australia and have done it the rest of the world. And I you've seen their acquisition recently in in Brazil, they're going to, um. They're going to be hard to beat in, in Brazil as well. So they're dominating there and perhaps swallowing some of those smaller subscale players. Where else do you see growth though in the regulated market? Well, Brazil is a very interesting, um, market because obviously they've got they've just opened up and regulated. And I think it's a really interesting test case for the global gambling industry in regulated markets, because they've taken the path of we're going to regulate and we're going to allow everything. We're going to allow sports betting casino we're going to tax. But they've got this other interesting play in that they've been such a great grey market for grey market operators, because gray market operators could use their picks payment solution. But they're now saying, well, look, you can no longer use picks, which is the payment solution. It's controlled by the central bank there in Brazil. You need to be licensed and regulated to be here. So from a customer's point of view, the licensed

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regulated players that can market and advertise, they've got all the offerings. So there's no reason to go offshore. And the offshore operators are going to find it really hard because they can no longer use the Pix payment solution. So I would be surprised if most people don't come in and licensed their. It's a $6 million license fee. I think they've got 130 applicants. Uh, I think it's a really good test case of what a regulated market could do to stamp out as much as they can the gray market. And yeah, Flutter's already gone in there and shown their hand large a few hundred million dollars acquisition. You wouldn't be surprised. They're going to be the market leader there in Brazil. All right. Speaking of pix not the payment solution but picks and shovels and opportunities in emerging markets. What are you seeing there. Well look we don't invest in the operators. So we think it's because it's it's generally a one horse race or two horse race fee that we have with flutter. They're so dominant in the regulated markets. We think the edge is finding the supplies because they don't have the same exposure to regulation

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taxation that the operators do. Um, and we really like the Australian company racing in sports. We've talked about previously. Uh, we think that they're very interesting because they've got a data play in horse racing and they've got some very interesting products in terms of managed trading services and platform solutions. Thought they'd deal with stake. That they did just a little while ago is very interesting. Largest crypto operator in the world. Um, so we like them and we also have done a very interesting deal in the last few weeks with an affiliate business in the US called Food Fight, and they are very good at acquiring customers at a very cheap cost per acquisition and activating them. And we think that any business that can attract customers at a cheap CPO or cheap customer acquisition is very interesting for operators because that's the game acquire customers and retain them. And so we think that business has got some growth in it. And speaking of growth, what are you seeing in terms of overall growth here in Australia particularly we mentioned last time footy final season, just

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the emergence of how I guess active people are being. Look, Australia is uh, largest gambling per capita in the world. You know it's uh, it's an amazing market for sports betting and racing. But it's in a period where you're not seeing the operator growth, because it's got to a quite high taxes here and regulation restriction you're seeing with the advertising restrictions. So it's a period. I think that there's probably more consolidation. There's probably operators pulling back a little bit in terms of marketing and all those sort of things. So it's not in a growth phase like it was ten years ago. Um, but then you see people that do things differently like dabble. Amazing what they've been able to do in the Australian market. Tabcorp made that investment. They're now making, uh, significant growth in the US. So you need to think about markets differently. And that's why we look at the the look at the suppliers. Because if you're coming out with innovative product and Australia is a hotbed of coming up with innovative product because there's so many people that are interested in betting here.

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Well, Australia might not be growing, but you can take that product like double to the US, or you can take racing in sports to the UK or US. And um, yeah, I think Australia is a great place for betting, but in terms of operators it's a little bit tougher at the moment.