When Charles Butler took on the role of chief executive at Netplay TV (LON:NPT) last November he was immediately faced with turning around the fortunes of the interactive gaming group. In 10 years on London's Alternative Investment Market Netplay TV has evolved from selling telephone and online information services to establishing a niche position in the UK's gambling sector. In its first set of half-year results since Butler's appointment, the company moved back in to profitability and is now eyeing opportunities to expand through mobile gaming and into international markets.
For Butler – an accountant by trade and a seasoned gaming industry mover who previously ran and later sold Bowman International to Bet365 Group in 2006 – the strategic changes at Netplay have been plotted carefully. Having joined the company as FD in January 2010, his approach has involved stripping out loss-making contracts and focusing on nurturing its core Casino service. He is in little doubt that the critical aspect of the group's offering – it has deals with terrestrial broadcasters including ITV1 and Channel 5 – have set it apart in a burgeoning market. Every night (six nights on ITV1) its SuperCasino and Challenge Jackpot brands air to hundreds of thousands of viewers, providing, what he says, is a giant advert for Netplay TV's services and engaging new customers.
According to industry analysts H2 Gambling Capital, Europe is expected to continue to grow its share of the global eGaming market in 2011 with 47.2% up from 31.5% in 2006. This is being boosted by a wave of regulatory go-aheads from governments including Italy this year and the likely addition in the near future of the Netherlands, Greece, Belgium and Spain. By comparison, North America has seen its share of interactive gambling fall from 30.5% in 2006 to an expected 16.7% in the current year. Japan Asia/the Middle East is expected to account for 27.7% of the market this year though this is 4.5% lower than the region's share of the market five years ago.
Charles, tell me about how the interactive gaming market is changing and the opportunities your strategy at Netplay TV?
It is an industry that has moved quickly and I think is still moving incredibly quickly, I think it has grown up an awful lot over the last 10 years and become mainstream. I came across Netplay TV last year and saw a lot of potential in the business. My feeling with the online gambling world is that unless you have either got a huge scale, like Bwin.party Digital (LON:BPTY) and you can throw £20 million at a new project or you have got a USP, I don't really think there is a long term place in the market for you. What is interesting with Netplay TV is that it does have a USP around the TV. Fundamentally it is an online gaming company like everybody else but we have this USP that our customers like, which is either around participating and playing with the TV or predominantly using the TV as a four hour giant advert every night to acquire new customers. Two years into the relationship with Channel 5 it is performing very strongly – July, for example, was one of our best ever months.
I think what had happened over the course of the time before I was here was that it was trying to do too many things at once. It had acquired various other businesses and hadn't integrated them properly, as is often the case with acquisitions, and I just came in with a fresh set of eyes. I stripped it back to the core product and the core value that it started with, which is the live casino on TV, and put a full online team in place to extract maximum value from the customers. My forte is obviously numbers and I put in more teams of people analysing the data. Once you acquire a customer you need to make sure that you give that customer what they want and extract some value as well. So the business has been refocused and the first set of results has shown the benefits of that.
Tell me about your market position and your strategy and the challenges of operating in a regulated market like gaming?
One key factor for us is that our Casino business is 100% regulated. At the moment we take business from the UK, which is why I think it makes us a more interesting proposition. We are not taking any unregulated income like many of the other online operators, such as Sportingbet (LON:SBT), where over 50% of their business is in Turkey, Greece and Spain, all of which is unregulated at the moment. If we go down that route we could spend a lot of money in an unregulated territory only for it to be either chopped off by the Government or see the introduction of a tax regime that may be unfavourable and actually create a loss making operation. So our stance is that we only take regulated income and I think the City likes that at the moment, I think that's where the preference for stocks is. We have a very high exposure on television as well, so from a regulatory point of view we are scrutinised more than most. From a TV point of view we have to comply with Ofcom and from a licensing point of view we have to comply with the various gambling regulations. We are on Channel 5 and ITV1 every night and ITV's compliance department is probably harder to satisfy than any gambling commission. So this is a very robust business and that is one of the things that appealed to me when I came on board to transform it and get it going in the right direction.
You have come in and set a number of key performance indicators to track the progress of the business. What has that involved?
Apart from the business KPIs, one of the first things I did was to ensure that every individual within the company, whatever position they were in, had their own KPIs. You are only as good as the staff that work for you and their KPIs feed in to the overall group KPIs, which obviously leads to the revenue. So everybody is aligned in the same direction.
From a business point of view the key drivers are customer acquisitions and active users. Although we bring them through the door we need to make sure that we keep the users playing for as long as possible. Active users drive the deposits and that drives the revenue. I need to know that if I bring a customer through the door that I am going to keep them for as long as possible and also, when you deposit your £100, that I have got the techniques in place where, over a period of time, I can give you the service you want but that I can extract the highest percentage of that £100 as possible. Basically the new customer sign-ups plus the active users and the lifetime of a customer all go through to the lifetime value of each customer.
It is about understanding the data and understanding the customer so that I can build my models from an acquisition point of view. If I am on a new TV channel and I am looking at some marketing activities, I know what I can afford to spend and what I expect to get back from it. So apart from the techniques and the teams of people we have got in place it really is a numbers game. On average, in the industry, if somebody sees your advert or you are on TV and they sign up with you, they will open an account but only about 20% of those people will actually deposit money and play. One advantage that we have got is that we actually convert 50% of people, so we have got a very high conversion rate from players that actually deposit money. There are a couple of reasons behind that; the TV exposure gives a very high trust element for the customer, they see it on TV and they want to play so we become a destination – they want to play the product because it is unique compared to the competitors. Secondly, we have got a very good team of people in place internally, an outbound call centre, SMS and communication tools that mean as soon as you sign up you will be offered all sorts to come along and play. I think it is the whole process from having everything, from customer service right through to your acquisition team, that creates the good KPIs. It is everybody working to the maximum.
What did your restructuring of the business involve and are you satisfied with the way it responded during the first six months of the year?
I am very satisfied with the way the numbers have come out and I think one key point on that is that although Casino revenue has increased by 11%, which is very good in what is a very competitive environment, the overall increase would be more than that. As part of the restructuring last year I looked at various TV distribution contracts and stripped them back to the contracts that were profit making and then focused attention on them. So although we have taken off some revenue from some loss making contracts we have generated significantly more revenue from the profitable contracts. It is really about focusing on the key areas where the profit is driven and you can see that in the segmental analysis. Although our Casino revenue has only increased by 10%, from a segmental EBITDA point of view it has gone from loss making on £360,000 to profit making on £2.2 million. The margins are very strong and so I think that now we have got a very firm foundation and the cost base is very much under control we are in a position to leverage off that. If I bring in more revenue from my existing infrastructure via TV, I can take a very high percentage of that straight down to the bottom line.
How vital is your presence on TV to the overall strategy of the business?
It is the key USP but customers don't only play when they are watching you on TV. We analyse our data in five minute segments so we know exactly what happens every five minutes of the day, and there are only two or three five minute segments in the day when nobody is playing. So we have got a very strong number of customers that play consistently throughout a 24 hour period. It peaks when it is on TV but the fact is that the TV is primarily an acquisition tool – it is a giant advert. Once the customers are playing they are not just playing on the roulette on TV, they are playing on the slots and they are playing on the black jack. That reduces the risk in that it doesn't mean that if one day you weren't on TV the business model fails because the fact is the TV is acquiring new customers and is one of the methods of acquiring customers. As I said, the trust factor is there with the TV, because we are on every night and we get huge brand awareness from it. It works very well from an acquisition point of view and for building loyalty and retention. That combines to give us very, very low fraud levels because I think a lot of people will feel that if they were to try and charge back a credit card transaction they are actually defrauding the TV company. It also gives high lifetime values because we get increased loyalty from the customers, so we have very high value per player numbers compared to the rest of the industry.
What is your view on the way the gaming industry is changing and how do you see Netplay TV positioned within it?
I think there is certainly a lot more awareness in the public eye of online gaming now. There has been a big education process and I think there is a very high percentage of people in the UK that have either at least tried it once or, if they haven't, are fully aware that it is out there. One thing that we don't do is directly compete with the likes of William Hill (LON:WMH) and Ladbrokes (LON:LAD), we have got a very niche product that combines gaming and TV and so I think the big advantage we have got is that the barriers to entry to compete directly with us are very high. Somebody has got to set up a TV studio, which costs millions of pounds, they have got to have the knowledge on how to broadcast directly onto the terrestrial TV and then they have got to do a deal with a TV station. The big advantage that we have got is that we might have 700,000 or 800,000 viewers on ITV1 and Channel 5 that see us every night, so the barriers to entry are significantly higher than somebody just doing what we are doing and broadcasting it to the internet. That is why the model works. We have taken several years to optimise what we do best and you can see that. The fact is that the company has made a big loss before and has now been through an extensive learning curve, I can see now exactly how to make the clear profits and it's just a matter of ramping up and doing what we do.
Where do you see opportunities to grow the business?
There is still significant growth and one thing to be clear on is that I think that the company is worth more than it is valued at currently purely from the growth story in the UK – before taking any hope value into account for the international expansion. In the UK we are still driving increased KPIs, we are bringing in more customers and I think the other big thing for us in the UK is what we're doing on iPhone, iPad and Android. We only launched our iPad application in October last year and it is already accounting for more than 13% of all SuperCasino players. It is huge; several million pounds a month in bets just come via the iPhone. I think the key there is that we are on TV after midnight every night and while a lot of people might not sit there watching the TV with their laptop, the fact is a lot of people are sitting there with some form of tablet device or smartphone and it's easy for them just to press a button on it and they are playing. We have only launched on iPhone so far and it has been extremely successful. In Q3 we are launching iPad and Android applications so we will have the ability to acquire customers directly into iPad and Android, which gives us a whole new target market in the UK. To me, that is a very exciting proposition in the UK.
How about international expansion – how do you intend to navigate opportunities there?
The international side is very interesting. We will only go into new international markets if we do the right TV deals so that we are not going in and competing directly with the other online guys. We will stick to our USP, we will stick to regulated markets and TV and even if the taxes are higher than the UK the advantage we have got is if we can leverage on our existing infrastructure – we have got the TV studios, we have got everything in place – then it becomes incremental income on the top line. Italy has just opened up in the last couple of weeks for online casino, Spain is looking at the end of the year and Holland, where we are also looking, will probably open up in Q2 next year. We will be taking a considered approach, we are in discussions at the moment with various broadcasters and we are certainly working on it from a licensing perspective.
Looking ahead to the second half of the year, how confident are you that the company can continue to grow?
Online gaming is a seasonal business and July is normally a much quieter month; last year was quieter and the World Cup was obviously in there as well. But this July we had an extremely strong start and I've been hugely pleased with the start to the second half. I think that is a testament to all the work that the guys are doing here and I think they have probably had a little bit of help from the poor weather which has meant that more people are sitting at home watching TV. So yes, I am confident about the second half of the year and I think it is just a matter of keeping everybody focused on driving successive quarters of increased KPIs as the revenues flow through from driving the new sign-ups and active players. Now that we have got a clear growth story and have proved the model and the fact that the numbers are very strong, I think it is quite an interesting time to be looking at the stock. We have already seen some growth and I think there's a good story there.
Charles, thank you for your time.
Filed Under: Media,