Playtech (LON:PTEC)

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Company Profile

Playtech Limited develops unified software platforms for the online and land based gambling industry, targeting online and land based operators. Playtech’s gaming applications – online casino, poker and other P2P games, bingo, mobile, live gaming, land-based kiosk networks, land based terminal and fixed-odds games, which are inter-compatible and can be incorporated as stand-alone applications, accessed and funded by the licensees’ players through the same user account and managed by the operator by means of a single management interface. Playtech earns royalties based on a percentage of its licensees’ revenues, profiting from their growth without the direct risks and costs borne by the operators. The revenue share agreements are usually 1-4 years in duration, with a constant royalty percentage ranging from 10-20% of operators’ gross win - with most contracts at the upper end of this range.

Business Model

A one - to - many Business Model as a Pure Software Provider Software Provider Website Owners/Licensees Branded Website Branded Website Players Players A Vertical Model with Proprietary Software environment Branded Website Players Players In House Software Website Owner

Product Line

Playtech has developed a unified platform into which all its gaming activities – Online Casino, Bingo, Poker, Mobile Gaming, Fixed-Odds Games, Live Gaming and Land-Based Kiosk Networks - can be freely incorporated as stand-alone applications, accessed and funded by players through the same user account using the same username-password combination and managed by the operator by means of a single powerful management interface. The core product is a suite of 90+ online casino games that account for more than 70% of revenues. Casino games are a powerful revenue generator because it enables cross-selling & also retains customer funds as it has a high level of customer loyalty & reinvested funds. Poker became the key product area after the acquisition of Tribeca Tables & accounts for around 25% of revenues. Bingo & other new games accounts for the remaining revenues & also opens up future cross-selling opportunities.


Playtech’s competitors can be divided into two broad categories – 1. Gambling Software Developers 2. Online Gambling Operators Playtech is the biggest listed Online Gambling Software Developer in terms of Market Cap & the closest listed competitor, Cryptologic is almost six times smaller to it. Other direct competitors in this category are Boss Media, Microgaming & Gigamedia. Online Gambling Operators with proprietary software & in house development also competes with Playtech. Some of the major players in this space are 888 Holdings, Partygaming, BWIN, Sportingbet & Unibet.

Entry Barriers

Switching is Undesirable - Playtech started its operations in 2001 & since then has not lost any of its licensees. This reflects the potentially high switching costs involved when changing a software provider (lost revenue during the transition period due to: loyal customers or affiliates leaving, technical complications, delays, etc.) and Playtech’s product and service strength within the market.

Size & Liquidity – Scale & Liquidity is very important factor for the poker players to stay loyal to a provider. Poker players want to be able to join a game without having to wait for a seat at the table, and they want to be able to play at a stake level of their choice. If there is not sufficient liquidity at a customer’s desired level of play, a customer will change the provider. The bigger poker site gets more players naturally flock towards it because of the liquidity it provides. Playtech’s iPoker network allows the smaller operators to pool their poker players into one network & thus provide sufficient liquidity.

Industry Trend & Consolidation - Operators have started moving in favour of third party providers, as in-house development becomes a riskier and costlier option. Partygaming has already enhanced growth by extending into sub-brands that are on Playtech’s platform. Moreover, William Hill association with Playtech recently is also in Playtech’s favour. Moreover, Online gaming is getting more established & the changes in regulation will only give impetus to the industry consolidation.

Online Gaming/Gambling Industry

Playtech is the world’s largest publicly traded online gaming software supplier, almost six times the next largest listed direct competitor Cryptologic. It has around 15% of the online casino market share & about 10% of the poker market share. (Source: PokerSiteScout) It supplies innovative value-added solutions to the fragmented online gaming industry’s top operators. The Gambling Sector outperformed the market in Q4 2008. It has shown more resilience than the wider Consumer Discretionary sector. The Gambling sub-sector outperformance is basically due to lower cyclicality & debt levels as compared to the Travel & Leisure sector. Although the Offline Gambling mode do not command a high growth prospect, the sector would exhibit more resilience due to various reasons mentioned below – • Gambling is habitual & a low ticket item (Avg. betting size of £8) • Gambling falls on the high entertainment form of leisure spend with an opportunity to win money • The multiple income stream of retail betting space provides impetus to growth in this sector.

Online Gambling space is distinct to Offline mode & has some positive growth avenues as mentioned below – • Broadband penetration is expanding globally giving more reach to Online Gambling space & making customer acquisition & monetization effective. This is because the quality of game play is far much superior compared to dial up connection. • Regulatory outlook in Europe is also improving coupled with geographic expansion (France & Spain). • Technological & Product developments along with Consolidation opportunities. On a global scale, the online gaming market continues to grow across all major economic regions and as such still constitutes a young and growing marketplace. European poker and casino markets are likely to double by 2012 compared to their 2006 levels, implying around15% five-year CAGR in Europe alone. There is much to play for and Playtech’s world leading position means it is ideally placed to further benefit from growth in all of its operations. Playtech’s focus is on innovation, imagination, a diversified business model and strength as a software and platform provider. Moreover, gradual liberalisation of gambling markets will serve as a long-term growth trend in the Online gambling industry. Increased internet/broadband penetration coupled with the increasing social acceptance of gambling as a leisure pastime will give impetus & serve as an underlying growth dynamics.

Investment Rationale

Playtech’s poker and casino bias reflects its business model as a software provider. However, since Playtech started its operations in 2001, it has not lost any of its licensees, which partly reflects Playtech’s product and service strength within the market. The competitive environment among software providers has also moved in favour of Playtech recently given the changes among its competitors. PartyGaming still generates 19% of revenues from North America, which is mostly from Canada. While the legal environment is uncertain in Asia, Playtech is the only company with meaningful exposure to the region. Playtech generates the highest margins (65%) due to its operating leverage as a software provider. The average Industry margin is around 24%. In its recent 4Q08 KPIs, Playtech stated that current results from the Italian poker network (which was launched at end-December 2008) indicate that it could be ‘significantly revenue enhancing’ and was trading above management’s expectations. Playtech also enjoys the potential of Cross-Selling the additional products such as poker or bingo to a casino operator on their website. This gives Playtech an additional growth opportunity & enchanced earnings momentum. Moreover, Playtech will also benefit from its association with UK bookmaker William Hill during 2009. The agreement with William Hill is significantly earnings enhancing and locks Playtech into a long-term software contract with a major new client. Another key attraction is the low-tax, low-capex business model, leveraging off existing software IP. Playtech has a FCF yield of 6.7% and a dividend yield of 3.1% (50% payout) for 2008E. The major part of Playtech’s player base comes from Europe (71%). Asia comprises of 21% & Rest of World 8% of the player base. Playtech’s Asian online gaming market is growing rapidly which has a huge potential as it is less matured than the European market. At 8.9x 2009 P/E, Playtech presents a compelling entry point as the stock is trading at a discount of 11% to the Online Gaming Industry & 45% to the European Software Services.


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