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The Stars Group Reports Second Quarter 2018 Results

George Miller

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The Stars Group Reports Quarter 2 2018 Results
Reading Time: 24 minutes

TORONTO, Aug. 13, 2018 — The Stars Group Inc. (NASDAQ: TSG) (TSX: TSGI) today reported its financial results for the second quarter ended June 30, 2018, updated its full year 2018 financial guidance, and provided certain additional highlights and updates. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

“The Stars Group’s quarterly results reflect both continued organic growth within our International business and the contributions of our Australian acquisitions,” stated Rafi Ashkenazi, The Stars Group’s Chief Executive Officer. “We continued enhancing our products and user experience across all verticals and executing on our cross-selling strategy.”

“The continued emergence of our sports betting and casino offerings and the addition of our 2018 acquisitions have transformed our business and greatly enhanced the foundation and diversity of our consolidated revenue base, which will now be nearly equally split among verticals and roughly 75% locally regulated or taxed,” said Mr. Ashkenazi.

“We are now focused on the next stage of our transformation—integration,” concluded Mr. Ashkenazi. “While this will be a phased and measured process, we expect that it will prepare us to not only be a leader within the world’s largest regulated markets but to also leverage the strength of our combined platform to take advantage of new opportunities and markets.”

Second Quarter 2018 Consolidated Financial Summary

Three Months Ended June 30,

Six Months Ended June 30,

In thousands of U.S. Dollars

(except percentages and per share
amounts)

2018

2017

%
Change

2018

2017

%
Change

Total Revenue

411,512

305,305

34.8%

804,403

622,625

29.2%

Gross Profit

327,875

252,637

29.8%

640,502

507,496

26.2%

Operating Income

1,064

105,517

(99.0%)

114,930

216,403

(46.9%)

Net (Loss) Earnings

(154,824)

70,483

(319.7%)

(80,463)

136,236

(159.1%)

Adjusted Net Earnings ¹

131,023

114,028

14.9%

269,785

227,396

18.6%

Adjusted EBITDA ¹

168,270

146,539

14.8%

343,292

297,540

15.4%

Adjusted EBITDA Margin ¹

40.9%

48.0%

(14.8%)

42.7%

47.8%

(10.7%)

Diluted (loss) earnings per
Common Share ($/Share)

(1.01)

0.35

(388.6%)

(0.52)

0.67

(177.2%)

Adjusted Diluted Net Earnings per
Share ($/Share) ¹

0.60

0.56

7.1%

1.27

1.13

12.7%

Net cash flows from operating
activities

164,011

130,426

25.8%

296,080

225,973

31.0%

Free Cash Flow ¹

84,856

94,857

(10.5%)

167,115

159,722

4.6%

____________________________________
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”.

 

Second Quarter 2018 Segmented Financial Summary
International

Three Months Ended June 30,

Six Months Ended June 30,

In thousands of U.S. Dollars
(except otherwise noted)

2018

2017

%
Change

2018

2017

%
Change

Stakes

248,572

144,352

72.2%

471,557

287,448

64.0%

Betting Net Win Margin (%)

7.9%

6.1%

29.0%

7.7%

5.5%

39.7%

Revenue

Poker

216,986

202,897

6.9%

462,861

421,559

9.8%

Gaming

101,941

80,726

26.3%

208,651

160,488

30.0%

Betting

19,635

8,836

122.2%

36,321

15,853

129.1%

Other

11,673

12,846

(9.1%)

24,169

24,725

(2.2%)

Total Revenue

350,235

305,305

14.7%

732,002

622,625

17.6%

Gross Profit

281,076

252,637

11.3%

586,131

507,496

15.5%

Gross Profit Margin (%)

80.3%

82.7%

(3.0%)

80.1%

81.5%

(1.8%)

General and administrative

105,257

104,208

1.0%

208,581

190,338

9.6%

Sales and marketing

42,255

31,302

35.0%

87,226

65,290

33.6%

Research and development

8,358

5,383

55.3%

16,176

12,483

29.6%

Operating Income

125,206

111,744

12.0%

274,148

239,385

14.5%

Adjusted EBITDA ¹

164,317

145,828

12.7%

350,796

307,386

14.1%

Adjusted EBITDA Margin (%) ¹

46.9%

47.8%

(1.8%)

47.9%

49.4%

(2.9%)

 

Australia

Three Months Ended June 30,

Six Months Ended June 30,

In thousands of U.S. Dollars
(except otherwise noted)

2018

2017

%
Change

2018

2017

%
Change

Stakes

710,269

100.0%

867,726

100.0%

Betting Net Win Margin (%)

8.6%

100.0%

8.3%

100.0%

Revenue

Betting

61,277

100.0%

72,401

100.0%

Total Revenue

61,277

100.0%

72,401

100.0%

Gross Profit

46,799

100.0%

54,371

100.0%

Gross Profit Margin (%)

76.4%

100.0%

75.1%

100.0%

General and administrative

40,288

100.0%

44,562

100.0%

Sales and marketing

12,262

100.0%

16,472

100.0%

Research and development

768

100.0%

984

100.0%

Operating Loss

(6,519)

(100.0%)

(7,647)

(100.0%)

Adjusted EBITDA ¹

13,471

100.0%

12,625

100.0%

Adjusted EBITDA Margin (%) ¹

22.0%

100.0%

17.4%

100.0%

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”.

As a result of its previously announced Australian acquisitions and in anticipation of the future integration of Sky Betting & Gaming and potential future geographic expansion, The Stars Group revised the composition of its reporting segments and the manner in it reports its operating results as set forth above.  The Stars Group believes that the new presentation will better reflect its current and expected management and operational structure. The Stars Group previously had one reporting segment, gaming, with two major lines of operations, real-money online poker and combined real-money online casino and sportsbook. Given the timing of the recent acquisitions, this is now divided into two reporting segments, International and Australia, and four major lines of operations, Poker, Gaming, Betting and Other, as applicable. The International segment currently includes the business operations of The Stars Group’s existing business prior to the Australian acquisitions and Sky Betting & Gaming acquisition, and the Australia segment currently includes the business operations of CrownBet and William Hill Australia.

Second Quarter 2018 and Subsequent Financial Highlights

  • Consolidated Total Revenues – Revenues for the quarter increased 34.8% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, revenues for the quarter would have increased by 30.7%. Real-money online Poker, Gaming, and Betting revenues represented 52.7%, 24.8%, and 19.7% of revenues for the quarter, respectively.
  • Consolidated Adjusted EBITDA and Adjusted EBITDA Margin – Adjusted EBITDA for the quarter increased 14.8% year-over-year, primarily driven by increased gross profit from organic growth within the International segment. Adjusted EBITDA Margin for the quarter decreased 14.8% year-over-year, primarily driven by higher contribution from the Betting vertical within both the International and Australian segments.
  • Poker Revenues – International– Poker revenue for the quarter was $217.0 million, or an increase of approximately 6.9% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, Poker revenues for the quarter would have increased by 3.8%. The increase was primarily driven by the continued positive impact of the Stars Rewards loyalty program, foreign exchange fluctuations, and the introduction of shared poker liquidity in France and Spain in the first quarter and Portugal in the second quarter, as offset by, among other things, the cessation of operations in Australia in September 2017 and Colombia in July 2017, and continued negative operating conditions in Poland due to certain prior regulatory changes in that jurisdiction.
  • Gaming Revenues – International – Gaming revenue for the quarter was $101.9 million, or an increase of 26.3% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, Gaming revenues for the quarter would have increased by 21.0%. The increase was primarily the result of product and content improvements to PokerStars Casino, including the introduction of over 150 new casino games since the beginning of the year, foreign exchange fluctuations, and the launch of PokerStars Casino in certain new markets. This was partially offset by, among other things, continued negative operating conditions in Poland due to certain prior regulatory changes in that jurisdiction.
  • Betting Revenues – International – Betting revenue for the quarter were $19.6 million, or an increase of 122.2% year-over-year. Excluding the impact of year-over-year changes in foreign exchange rates, Betting revenues for the quarter would have increased by 106.1%. The increase was primarily the result of increases in Stakes and Betting Net Win Margin. These increases were primarily driven by increased wagering activity due to product and content improvements to BetStars, the launch of BetStars in certain new markets, and the 2018 FIFA World Cup.
  • Consolidated Debt and Cash – The total principal amount owing on long-term debt outstanding at the end of the quarter was $2.73 billion with a weighted average interest rate of 4.9%. The Stars Group ended the second quarter of 2018 with approximately $1.05 billion in operational cash on its balance sheet. Following the end of the quarter, The Stars Group completed the Sky Betting & Gaming acquisition and incurred additional debt in connection with the same.

Second Quarter 2018 and Subsequent Operational Highlights

  • Quarterly Real-Money Active Uniques (QAUs) – International–QAUs were 2.02 million, which represents a decrease of 5.2% year-over-year. This decrease was primarily the result of The Stars Group’s continued strategy of focusing on high-value customers (primarily recreational players), the cessation of online poker operations in Australia and Colombia, and an impaired market in Poland, as offset by the growth and expansion of the casino and betting product offerings. Approximately 1.86 million of such QAUs played online poker during the quarter, a decrease of approximately 7.3% year-over-year, while The Stars Group’s online casino offerings had approximately 0.6 million QAUs, an increase of 11.4% year-over-year. The Stars Group’s BetStars had approximately 0.2 million QAUs, a 78.3% increase year-over-year.
  • Quarterly Net Yield (QNY) – International – QNY was $167, an increase of 21.9% year-over-year, and QNY excluding the impact of year-over-year changes in foreign exchange rates was $161, an increase of 17.5% year-over-year. QNY is a non-IFRS measure.
  • Net Deposits – International – Net Deposits were $322 million, an increase of 19.3% year-over-year. The increase was primarily driven by the implementation of the Stars Rewards loyalty program and continued focus on high-value customers (primarily recreational players), foreign exchange fluctuations and continued development of the casino and betting product offerings.
  • Stakes and Betting Net Win Margin – International – Stakes were $248.6 million, an increase of 72.2% year-over-year, and Betting Net Win Margin was 7.9%, an increase of 1.8 percentage points year-over-year. The increases in the quarter were primarily due to product and content improvements to BetStars driving incremental QAUs, the launch of BetStars in certain new markets, and the World Cup.
  • CrownBet and William Hill Australia On April 24, 2018, The Stars Group increased its equity interest in CrownBet from 62% to 80% and CrownBet acquired William Hill Australia. The aggregate purchase price under the agreements for these transactions was $435 million (inclusive of $117.7 million to acquire the previously announced 62% equity interest in CrownBet in February 2017), which was paid in a combination of cash and the issuance of approximately 3.1 million newly-issued common shares. As part of the purchase of the additional 18% equity interest in CrownBet, the management team of CrownBet is entitled to an additional payment of up to $182 million in 2020 subject to certain performance conditions and payable in cash, additional common shares or a combination thereof, at The Stars Group’s discretion.
  • U.S. Sports Betting – On May 14, 2018, the United States Supreme Court struck down, as an unconstitutional exercise of federal power, the nearly 30-year ban on sports betting under the Professional and Amateur Sports Protection Act. The Stars Group believes that the decision by the Court is an important step forward in the regulation of sports betting in the United States and that it is well-positioned to take advantage of any new business and market opportunities as they develop. Currently, more than 20 states have either existing sports betting laws or have pending legislation to legalize or study sports betting. On August 2, 2018, The Stars Group and Resorts Casino Hotel announced the extension of their existing partnership in the New Jersey regulated online gaming market to include online and mobile sports wagering through the BetStars brand alongside the already existing online poker and casino offering available through the PokerStarsNJ brand. On August 10, 2018, The Stars Group and Mount Airy Casino Resort announced a partnership to enter Pennsylvania’s online sports wagering and gaming market, where The Stars Group will offer to customers in Pennsylvania its online poker, casino (including slots and tables) and sports wagering products.
  • Sky Betting & Gaming – On July 10, 2018, The Stars Group completed the Sky Betting & Gaming acquisition. The aggregate purchase price under the transaction agreements was $4.7 billion, of which $3.6 billion was paid in cash and the remainder was paid through the issuance of approximately 37.9 million newly issued common shares. To finance the cash portion of the purchase price, repay the existing first lien term loans and repay Sky Betting & Gaming’s existing long-term debt, The Stars Group used cash on its balance sheet and raised $4.567 billion in first lien term loans, $1.00 billion in senior notes and $621.8 million of net proceeds (before expenses and excluding the overallotment option, which was exercised in full by the underwriters at the end of July) from the issuance of additional common shares in a public equity offering. The Stars Group also obtained a new revolving credit facility of $700.0 million of which it had drawn $100.0 million as of completion of the acquisition.
  • Preferred Shares – On July 18, 2018, The Stars Group completed the previously announced mandatory conversion of all of its issued and outstanding convertible preferred shares as of such date and issued approximately 52 million common shares to the holders thereof.

2018 Full Year Guidance

  • Full Year Guidance – The Stars Group is updating its 2018 full year financial guidance ranges on a consolidated basis to reflect expected partial year contributions from the Australian acquisitions and the Sky Betting & Gaming acquisition and the impact from changes in The Stars Group’s capital structure as a result of such acquisitions, including increases in The Stars Group’s long-term debt outstanding and number of common shares issued and outstanding:
    • Revenues of between $1.995 and $2.145 billion, as compared to between $1.390 and $1.470 billion;
    • Adjusted EBITDA of between $755 and $810 million, as compared to between $625 and $650 million;
    • Adjusted Net Earnings of between $485 and $545 million, as compared to between $487 and $512 million;
    • Adjusted Diluted Net Earnings per Share of between $1.99 and $2.22, as compared to between $2.33 and $2.471; and
    • Capital Expenditures of between $110 million and $150 million.

These unaudited expected results reflect management’s view of current and future market and business conditions, including assumptions of (i) expected Betting Net Win Margin of between 8.0% and 10.5%, (ii) continued negative operating conditions in Poland and potential negative operating conditions in Russia resulting from prior regulatory changes, including constraints on payment processing, (iii) no other material regulatory events or investments associated with the entry into new markets, (iv) no impact from the gaming advertising ban in Italy, and (v) no material foreign currency exchange rate fluctuations, particularly against the Euro, Great Britain pound sterling and Australian dollar. Such guidance is also based on a Euro to U.S. dollar exchange rate of 1.17 to 1.00 as compared to 1.20 to 1.00, a Great Britain pound sterling to U.S. dollar exchange rate of 1.32 to 1.00 and an Australian dollar to U.S. dollar exchange rate of 0.74 to 1.00, Diluted Shares of between 241,000,000 and 243,000,000 for the high and low ends of the Adjusted Diluted Net Earnings per Share range, respectively, as compared to between 207,000,000 and 209,000,000, respectively, and certain accounting assumptions.

Capital Expenditures include estimated spend on intangible assets, property, plant and equipment and certain development costs.

Financial Statements, Management’s Discussion and Analysis and Additional Information

The Stars Group’s unaudited interim condensed consolidated financial statements for the three and six months ended June 30, 2018 (the “Q2 2018 Financial Statements”), management’s discussion and analysis thereon (the “Q2 2018 MD&A”), as well as additional information relating to The Stars Group and its business, can be found on SEDAR at www.sedar.com, Edgar at www.sec.gov and The Stars Group’s website at www.starsgroup.com. The financial information presented in this news releases was derived from the Q2 2018 Financial Statements.

In addition to press releases, securities filings and public conference calls and webcasts, The Stars Group intends to use its investor relations page on its website as a means of disclosing material information to its investors and others and for complying with its disclosure obligations under applicable securities laws. Accordingly, investors and others should monitor the website in addition to following The Stars Group’s press releases, securities filings and public conference calls and webcasts. This list may be updated from time to time.

Conference Call and Webcast

The Stars Group will host a conference call today, August 13, 2018 at 8:30 a.m. ET to discuss its financial results for the second quarter ended 2018 and related matters. To access via tele-conference, please dial +1 877-451-6152 or +1 201-389-0879 ten minutes prior to the scheduled start of the call. The playback will be made available two hours after the event at +1 844-512-2921 or +1 412-317-6671. The Conference ID number is 13682288. To access the webcast please use the following link: http://public.viavid.com/index.php?id=130894

Reconciliation of Non-IFRS Measures to Nearest IFRS Measures

The tables below present reconciliations of Adjusted EBITDA, Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share to net (loss) earnings, which is the nearest IFRS measure:

Three Months Ended June 30, 2018

In thousands of U.S. Dollars
(except per share amounts)

International

Australia

Corporate

Consolidated

Net earnings (loss)

126,274

(6,519)

(274,579)

(154,824)

Income tax recovery

3,404

3,404

Net financing charges

(160,360)

(160,360)

Net earnings from associates

1,068

1,068

Operating income (loss)

125,206

(6,519)

(117,623)

1,064

Depreciation and amortization

35,987

8,588

10

44,585

Add (deduct) the impact of the following:

Acquisition-related costs and deal
contingent forwards

95,627

95,627

Stock based compensation

3,265

3,265

(Gain) loss from investments and
associates

(270)

5

(265)

Impairment of intangibles assets and
assets held for sale

958

958

Other costs

2,436

11,397

9,203

23,036

Total adjusting items

3,124

11,402

108,095

122,621

Adjusted EBITDA

164,317

13,471

(9,518)

168,270

Six Months Ended June 30, 2018

In thousands of U.S. Dollars
(except per share amounts)

International

Australia

Corporate

Consolidated

Net earnings (loss)

275,216

(7,647)

(348,032)

(80,463)

Income tax recovery

2,249

2,249

Net financing charges

(198,710)

(198,710)

Net earnings from associates

1,068

1,068

Operating income (loss)

274,148

(7,647)

(151,571)

114,930

Depreciation and amortization

73,956

9,868

19

83,843

Add (deduct) the impact of the following:

Acquisition-related costs and deal
contingent forwards

110,818

110,818

Stock based compensation

5,649

5,649

Loss from investments and associates

247

247

Impairment of intangibles assets and
assets held for sale

1,074

1,074

Other costs

1,371

10,404

14,956

26,731

Total adjusting items

2,692

10,404

131,423

144,519

Adjusted EBITDA

350,796

12,625

(20,129)

343,292

 

 

Three Months Ended June 30, 2017

In thousands of U.S. Dollars
(except per share amounts)

International

Australia

Corporate

Consolidated

Net earnings (loss)

111,744

(41,261)

70,483

Income tax recovery

4,018

4,018

Net financing charges

(39,052)

(39,052)

Operating income (loss)

111,744

(6,227)

105,517

Depreciation and amortization

36,530

70

36,600

Add (deduct) the impact of the following:

Stock based compensation

2,452

2,452

(Gain) loss from investments

(8,452)

12,944

4,492

Reversal of impairment of intangibles assets
and assets held for sale

(629)

(629)

Other costs (income)

6,635

(8,528)

(1,893)

Total adjusting items

(2,446)

6,868

4,422

Adjusted EBITDA

145,828

711

146,539

Six Months Ended June 30, 2017

In thousands of U.S. Dollars
(except per share amounts)

International

Australia

Corporate

Consolidated

Net earnings (loss)

239,385

(103,149)

136,236

Income tax recovery

1,330

1,330

Net financing charges

(81,497)

(81,497)

Operating income (loss)

239,385

(22,982)

216,403

Depreciation and amortization

72,188

147

72,335

Add (deduct) the impact of the following:

Stock based compensation

4,616

4,616

(Gain) loss from investments

(8,572)

13,217

4,645

Reversal of impairment of intangibles assets
and assets held for sale

(5,043)

(2,268)

(7,311)

Other costs (income)

9,428

(2,576)

6,852

Total adjusting items

(4,187)

12,989

8,802

Adjusted EBITDA

307,386

(9,846)

297,540

 

Three Months Ended June 30,

Six Months Ended June 30,

In thousands of U.S. Dollars (except per share amounts)

2018

2017

2018

2017

Net (loss) earnings

(154,824)

70,483

(80,463)

136,236

Add (deduct) the impact of the following:

Interest accretion

12,726

12,147

24,777

24,940

Loss on debt extinguishment

124,976

124,976

Acquisition-related costs and deal contingent forwards

95,627

110,818

Amortization of acquisition intangibles

31,482

31,075

62,858

62,150

Deferred income tax recovery

(4,890)

(4,098)

(5,814)

(4,732)

Stock based compensation

3,265

2,452

5,649

4,616

(Gain) loss from investments and associates

(1,333)

4,491

(821)

4,645

Impairment (reversal of impairment) of intangibles assets
and assets held for sale

958

(629)

1,074

(7,311)

Other costs (income)

23,036

(1,893)

26,731

6,852

Adjusted net earnings

131,023

114,028

269,785

227,396

Adjusted net earnings attributable to

Shareholders of The Stars Group Inc.

129,237

114,028

269,469

227,396

Non-controlling interest

1,786

316

Weighted average diluted number of shares

215,380,175

203,467,303

212,449,078

201,969,186

Adjusted Diluted Net Earnings per Share attributable
to Shareholders of The Stars Group Inc

0.60

0.56

1.27

1.13

The table below presents certain items comprising “Other costs” in the reconciliation tables above:

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017

In thousands of U.S. Dollars

$000’s

$000’s

$000’s

$000’s

Integration costs

11,467

11,467

Financial expenses (income)

4,370

(6,622)

2,049

(9,066)

Termination of employment agreements

1,387

682

2,058

2,808

AMF and other investigation professional fees

2,875

2,764

4,659

5,153

Lobbying (US and Non-US) and other
legal expenses

2,665

4,598

5,658

9,318

Non-recurring professional fees

102

842

553

1,504

Retention bonuses

117

615

234

1,230

Loss on disposal of assets

41

202

41

261

Austria gaming duty

(5,000)

(5,000)

Termination of affiliate agreements

407

Other

12

26

12

237

Other costs

23,036

(1,893)

26,731

6,852

The table below presents a reconciliation of Free Cash Flow to net cash flows from operating activities, which is the nearest IFRS measure:

Three Months Ended June 30,

Six Months Ended June 30,

In thousands of U.S. Dollars

2018

2017

2018

2017

Net cash inflows from operating activities

164,011

130,426

296,080

225,973

Customer deposit liability movement

(14,090)

9,053

(13,901)

25,282

149,921

139,479

282,179

251,255

Capital Expenditure:

Additions to deferred development costs

(9,759)

(6,013)

(16,190)

(10,426)

Additions to property and equipment

(5,676)

(1,398)

(9,261)

(2,254)

Additions to intangible assets

(9,415)

(212)

(11,842)

(919)

Interest paid

(34,790)

(31,017)

(66,278)

(65,064)

Debt principal repayments

(5,425)

(5,982)

(11,493)

(12,870)

Free Cash Flow

84,856

94,857

167,115

159,722

The Stars Group has not provided a reconciliation of the non-IFRS measures to the nearest IFRS measures included in its full year 2018 financial guidance provided in this news release, including Adjusted EBITDA, Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share, because certain reconciling items necessary to accurately project such IFRS measures, particularly net earnings (loss), cannot be reasonably projected due to a number of factors, including variability from potential foreign exchange fluctuations impacting financial expenses, and the nature of other non-recurring or one-time costs (which are excluded from non-IFRS measures but included in net earnings (loss)), as well as the typical variability arising from the audit of annual financial statements, including, without limitation, certain income tax provision accounting, and related accounting matters.

For additional information on The Stars Group’s non-IFRS measures, see below and the Q2 2018 MD&A, including under the headings “Management’s Discussion and Analysis”, “Limitations of Key Metrics, Other Data and Non-IFRS Measures” and “Key Metrics and Non-IFRS Measures”.

About The Stars Group

The Stars Group is a provider of technology-based product offerings in the global gaming and interactive entertainment industries. Its brands have millions of registered customers globally and collectively are leaders in online and mobile betting, poker, casino and other gaming-related offerings.  The Stars Group owns or licenses gaming and related consumer businesses and brands, including PokerStars, PokerStars Casino, BetStars, Full Tilt, BetEast, Sky Bet, Sky Vegas, Sky Casino, Sky Bingo, and Sky Poker, as well as live poker tour and event brands, including the PokerStars Players No Limit Hold’em Championship, European Poker Tour, PokerStars Caribbean Adventure, Latin American Poker Tour, Asia Pacific Poker Tour, PokerStars Festival and PokerStars MEGASTACK. The Stars Group is one of the world’s most licensed online gaming operators with its subsidiaries collectively holding licenses or approvals in 19 jurisdictions throughout the world, including in Europe, Australia, and the Americas. The Stars Group’s vision is to become the world’s favorite iGaming destination and its mission is to provide its customers with winning moments.

Cautionary Note Regarding Forward Looking Statements

This news release contains forward-looking statements and information within the meaning of the Private Securities Litigation Reform Act of 1995 and applicable securities laws, including, without limitation, certain financial and operational expectations and projections, such as full year 2018 financial guidance, and certain future operational and growth plans and strategies, including as it relates to certain recently announced acquisitions. Forward-looking statements and information can, but may not always, be identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “would”, “should”, “believe”, “objective”, “ongoing”, “imply”, “assumes”, “goal”, “likely” and similar references to future periods or the negatives of these words or variations or synonyms of these words or comparable terminology and similar expressions. These statements and information, other than statements of historical fact, are based on management’s current expectations and are subject to a number of risks, uncertainties, and assumptions, including market and economic conditions, business prospects or opportunities, future plans and strategies, projections, technological developments, anticipated events and trends and regulatory changes that affect The Stars Group, its subsidiaries, and its and their respective customers and industries. Although The Stars Group and management believe the expectations reflected in such forward-looking statements and information are reasonable and are based on reasonable assumptions and estimates as of the date hereof, there can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. Forward-looking statements are inherently subject to significant business, regulatory, economic and competitive risks, uncertainties and contingencies that could cause actual events to differ materially from those expressed or implied in such statements. Specific risks and uncertainties include, but are not limited to: the heavily regulated industry in which The Stars Group carries on its business; risks associated with interactive entertainment and online and mobile gaming generally; current and future laws or regulations and new interpretations of existing laws or regulations, or potential prohibitions, with respect to interactive entertainment or online gaming or activities related to or necessary for the operation and offering of online gaming; potential changes to the gaming regulatory framework; legal and regulatory requirements; ability to obtain, maintain and comply with all applicable and required licenses, permits and certifications to offer, operate and market its product offerings, including difficulties or delays in the same; significant barriers to entry; competition and the competitive environment within addressable markets and industries; impact of inability to complete future or announced acquisitions or to integrate businesses successfully; The Stars Group’s substantial indebtedness requires that it use a significant portion of its cash flow to make debt service payments; The Stars Group’s secured credit facilities contain covenants and other restrictions that may limit its flexibility in operating its business; risks associated with advancements in technology, including artificial intelligence; ability to develop and enhance existing product offerings and new commercially viable product offerings; ability to mitigate foreign exchange and currency risks; ability to mitigate tax risks and adverse tax consequences, including, without limitation, the imposition of new or additional taxes, such as value-added and point of consumption taxes, and gaming duties; The Stars Group’s exposure to greater than anticipated tax liability; risks of foreign operations generally; protection of proprietary technology and intellectual property rights; ability to recruit and retain management and other qualified personnel, including key technical, sales and marketing personnel; defects in product offerings; losses due to fraudulent activities; management of growth; contract awards; potential financial opportunities in addressable markets and with respect to individual contracts; ability of technology infrastructure to meet applicable demand and reliance on online and mobile telecommunications operators; systems, networks, telecommunications or service disruptions or failures or cyber-attacks and failure to protect customer data, including personal and financial information; regulations and laws that may be adopted with respect to the Internet and electronic commerce or that may otherwise impact The Stars Group in the jurisdictions where it is currently doing business or intends to do business, particularly those related to online gaming or that could impact the ability to provide online product offerings, including, without limitation, as it relates to payment processing; ability to obtain additional financing or to complete any refinancing on reasonable terms or at all; customer and operator preferences and changes in the economy; dependency on customers’ acceptance of its product offerings; consolidation within the gaming industry; litigation costs and outcomes; expansion within existing and into new markets; relationships with vendors and distributors; and natural events; contractual relationships of Sky Betting & Gaming or The Stars Group with Sky plc and/or its subsidiaries; counterparty risks; failure of systems and controls of The Stars Group to restrict access to its products; reliance on scheduling and live broadcasting of major sporting events; macroeconomic conditions and trends in the gaming and betting industry; bookmaking risks; an ability to realize projected financial increases attributable to acquisitions and The Stars Group’s business strategies; and an ability to realize all or any of The Stars Group’s estimated synergies and cost savings in connection with acquisitions. Other applicable risks and uncertainties include, but are not limited to, those identified in The Stars Group’s annual information form for the year ended December 31, 2017, including under the heading “Risk Factors and Uncertainties”, in The Stars Group’s prospectus supplement dated June 21, 2018 to the short form base shelf prospectus dated January 16, 2018 under the heading “Risk Factors”, and in the Q2 2018 MD&A, including under the headings “Risk Factors and Uncertainties”, “Limitations of Key Metrics, Other Data and Non-IFRS Measures” and “Key Metrics and Non-IFRS Measures”, each available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and The Stars Group’s website at www.starsgroup.com, and in other filings that The Stars Group has made and may make with applicable securities authorities in the future. Investors are cautioned not to put undue reliance on forward-looking statements or information. Any forward-looking statement or information speaks only as of the date hereof, and The Stars Group undertakes no obligation to correct or update any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.

Non-IFRS Measures

This news release references non-IFRS financial measures, including QNY, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Earnings, Adjusted Diluted Net Earnings per Share, and Free Cash Flow. The Stars Group believes these non-IFRS financial measures will provide investors with useful supplemental information about the financial performance of its business, enable comparison of financial results between periods where certain items may vary independent of business performance, and allow for greater transparency with respect to key metrics used by management in operating its business. Although management believes these financial measures are important in evaluating The Stars Group, they are not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with IFRS. They are not recognized measures under IFRS and do not have standardized meanings prescribed by IFRS. These measures may be different from non-IFRS financial measures used by other companies, limiting its usefulness for comparison purposes. Moreover, presentation of certain of these measures is provided for year-over-year comparison purposes, and investors should be cautioned that the effect of the adjustments thereto provided herein have an actual effect on The Stars Group’s operating results. In addition to QNY, which is defined below under “Key Metrics and Other Data”, The Stars Group provides the following non-IFRS measures in this news release:

Adjusted EBITDA means net earnings before financial expenses, income taxes expense (recovery), depreciation and amortization, stock-based compensation, restructuring, net earnings (loss) on associate and certain other items as set out in the reconciliation tables under “Reconciliation of Non-IFRS Measures to Nearest IFRS Measures” above.

Adjusted EBITDA Margin means Adjusted EBITDA as a proportion of total revenue.

Adjusted Net Earnings means net earnings before interest accretion, amortization of intangible assets resulting from purchase price allocations following acquisitions, deferred income taxes, stock-based compensation, restructuring and certain other items as set out in the reconciliation tables under “Reconciliation of Non-IFRS Measures to Nearest IFRS Measures” above.

Adjusted Diluted Net Earnings per Share means Adjusted Net Earnings attributable to the Shareholders of The Stars Group Inc. divided by Diluted Shares. Diluted Shares means the weighted average number of Common Shares on a fully diluted basis, including options, other equity-based awards, warrants and the Preferred Shares. The effects of anti-dilutive potential Common Shares are ignored in calculating Diluted Shares. Diluted Shares used in the calculation of diluted earnings per share may differ from diluted shares used in the calculation of Adjusted Diluted Net Earnings per Share where the dilutive effects of the potential Common Shares differ. See note 7 in the Q2 2018 Financial Statements. For the three and six months ended June 30, 2018, Diluted Shares used for the calculation of Adjusted Diluted Net Earnings per Share equaled 215,380,175 and 212,449,178, respectively, compared with 203,467,303 and 201,969,186 for the same periods in 2017. For the purposes of the full year 2018 financial guidance provided in this news release, Diluted Shares equals between 241,000,000 and 243,000,000 for the high and low ends of the Adjusted Net Earnings per Diluted Share range, respectively.

Free Cash Flow means net cash flows from operating activities after adding back customer deposit liability movements, and after capital expenditures and debt servicing cash flows (excluding voluntary prepayments). The Stars Group believes that removing movements in customer deposit liabilities provides a more meaningful understanding of its free cash flows as customer deposits are not available funds for The Stars Group to use for financial or operational purposes.

To calculate revenue on a constant currency basis, The Stars Group translated revenue for the three and six months ended June 30, 2018 using the prior year’s monthly exchange rates for its local currencies other than the U.S. dollar, which The Stars Group believes is a useful metric that facilitates comparison to its historical performance.

For additional information on The Stars Group’s non-IFRS measures, see the Q2 2018 MD&A, including under the headings “Management’s Discussion and Analysis”, “Limitations of Key Metrics, Other Data and Non-IFRS Measures” and “Key Metrics and Non-IFRS Measures”.

Key Metrics and Other Data

The Stars Group provides the following key metrics in this news release:

QAUs means as active unique customers (online, mobile and desktop client) who (i) made a deposit or transferred funds into their real-money account with The Stars Group at any time, and (ii) generated real-money online rake or placed a real-money online bet or wager on during the applicable quarterly period. The Stars Group defines unique as a customer who played or used one of its real-money offerings at least once during the period, and excludes duplicate counting, even if that customer is active across multiple lines of operation (Poker, Gaming and/or Betting, as applicable). The definition of QAUs excludes customer activity from certain low-stakes, non-raked real-money poker games, but includes real-money activity by customers using funds (cash and cash equivalents) deposited by The Stars Group into such customers’ previously funded accounts as promotions to increase their lifetime value.

QNY means combined revenue for its lines of operation (i.e., Poker, Gaming and/or Betting), excluding Other revenues, as reported during the applicable quarterly period (or as adjusted to the extent any accounting reallocations are made in later periods) divided by the total QAUs during the same period. The Stars Group provides QNY on a U.S. dollar and constant currency basis. QNY is a non-IFRS measure.

Net Deposits means the aggregate of gross deposits or transfer of funds made by customers into their real-money online accounts less withdrawals or transfer of funds by such customers from such accounts, in each case during the applicable quarterly period. Gross deposits exclude (i) any deposits, transfers or other payments made by such customers into The Stars Group’s play-money and social gaming offerings, and (ii) any real-money funds (cash and cash equivalents) deposited by The Stars Group into such customers’ previously funded accounts as promotions to increase their lifetime value.

Stakes means betting amounts wagered on The Stars Group’s applicable online betting product offerings, and is also an industry term that represents the aggregate amount of funds wagered by customers within the Betting line of operation for the period specified.

Betting Net Win Margin is calculated as Betting revenue as a proportion of Stakes.

The Stars Group is in the process of the integration and migration of customers and platforms with respect to the Australian acquisitions and once complete, The Stars Group intends to report certain key metrics for the Australia segment in addition to Stakes and Betting Net Margin.

For additional information on The Stars Group’s key metrics and other data, see the Q2 2018 MD&A, including under the headings “Limitations of Key Metrics, Other Data and Non-IFRS Measures”, “Key Metrics and Non-IFRS Measures” and “Segment Results of Operations”.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

 

Three Months Ended June 30,

Six Months Ended June 30,

In thousands of U.S. Dollars
(except per share amounts)

2018

2017

2018

2017

Revenues

411,512

305,305

804,403

622,625

Cost of revenue

(83,637)

(52,668)

(163,901)

(115,129)

Gross profit

327,875

252,637

640,502

507,496

General and administrative

(262,786)

(110,395)

(404,093)

(213,250)

Sales and marketing

(54,899)

(31,342)

(104,319)

(65,360)

Research and development

(9,126)

(5,383)

(17,160)

(12,483)

Operating income

1,064

105,517

114,930

216,403

Net financing charges

(160,360)

(39,052)

(198,710)

(81,497)

Net earnings from  associates

1,068

1,068

(Loss) earnings before income taxes

(158,228)

66,465

(82,712)

134,906

Income tax recovery

3,404

4,018

2,249

1,330

Net (loss) earnings

(154,824)

70,483

(80,463)

136,236

Net (loss) earnings attributable to

Shareholders of The Stars Group Inc.

(153,645)

70,494

(78,194)

135,905

Non-controlling interest

(1,179)

(11)

(2,269)

331

Net (loss) earnings

(154,824)

70,483

(80,463)

136,236

(Loss) earnings per Common Share
(U.S. dollars)

Basic

$

(1.01)

$

0.48

$

(0.52)

$

0.93

Diluted

$

(1.01)

$

0.35

$

(0.52)

$

0.67

Weighted Average Common Shares
Outstanding (thousands)

Basic

152,788

146,703

150,523

146,136

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As at June 30,

As at December 31,

In thousands of U.S. Dollars

2018

2017

ASSETS

Current assets

Cash and cash equivalents – operational

1,052,146

283,225

Cash and cash equivalents – customer deposits

274,862

227,098

Total cash and cash equivalents

1,327,008

510,323

Restricted cash advances and collateral

12,077

7,862

Prepaid expenses and other current assets

32,058

29,695

Current investments – customer deposits

106,074

122,668

Accounts receivable

96,071

100,409

Income tax receivable

16,161

16,540

Derivatives

2,037

Total current assets

1,589,449

789,534

Non-current assets

Restricted cash advances and collateral

45,739

45,834

Prepaid expenses and other non-current assets

29,892

26,551

Non-current accounts receivable

12,472

11,818

Property and equipment

54,405

44,837

Income tax receivable

19,013

14,061

Deferred income taxes

6,110

5,141

Goodwill and intangible assets

4,950,655

4,477,350

Total non-current assets

5,118,286

4,625,592

Total assets

6,707,735

5,415,126

LIABILITIES

Current liabilities

Accounts payable and other liabilities

265,439

194,187

Customer deposits

380,936

349,766

Current provisions

22,227

17,590

Derivatives

60,347

Income tax payable

71,881

35,941

Due to related party

926

Current portion of long-term debt

21,700

4,990

Total current liabilities

823,456

602,474

Non-current liabilities

Long-term debt

2,705,179

2,353,579

Long-term provisions

3,145

3,093

Derivatives

61,868

111,762

Other long-term liabilities

88,777

Due to related party

35,124

Income tax payable

6,676

24,277

Deferred income taxes

105,098

16,510

Total non-current liabilities

3,005,867

2,509,221

Total liabilities

3,829,323

3,111,695

EQUITY

Share capital

2,644,866

1,884,219

Reserves

(336,980)

(142,340)

Retained earnings

527,019

561,519

Equity attributable to the
Shareholders of The Stars Group Inc.

2,834,905

2,303,398

Non-controlling interest

43,507

33

Total equity

2,878,412

2,303,431

Total liabilities and equity

6,707,735

5,415,126

 

 

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

In thousands of U.S. Dollars

2018

2017

Operating activities

Net (loss) earnings

(80,463)

136,236

Add (deduct):

Income taxes recognized in net earnings

(2,249)

(1,330)

Net financing charges

198,710

81,638

Depreciation and amortization

83,843

72,335

Unrealized loss (gain) on foreign exchange

68,996

(6,512)

Unrealized gain on investments

(164)

(779)

Impairment (reversal of impairment) of
intangible assets and assets held for sale

1,074

(7,312)

Net earnings from associates

(1,068)

Realized loss (gain) on current investments
and promissory note

28

(7,127)

Income taxes paid

(15,772)

(7,025)

Changes in non-cash operating elements
of working capital

18,525

(11,357)

Customer deposit liability movement

13,901

(25,282)

Other

10,719

2,488

Net cash inflows from operating activities

296,080

225,973

Investing activities

Acquisition of subsidiaries, net of cash acquired

(310,563)

(6,513)

Additions to intangible assets

(11,842)

(919)

Additions to property and equipment

(9,261)

(2,254)

Additions to deferred development costs

(16,190)

(10,426)

Net sale of investments utilizing customer deposits

16,044

6,682

Settlement of promissory note

8,084

Net investment in associates

1,068

Other

(3,850)

(3,584)

Net cash outflows from investing activities

(334,594)

(8,930)

Financing activities

Issuance of common shares

646,000

Transaction costs on issuance of common shares

(24,225)

Issuance of common shares in relation with
exercised employee stock options

27,627

7,222

Issuance of debt

425,041

Repayment of debt

(106,493)

(12,870)

Transaction costs on long-term debt

(23,061)

(4,719)

Loan from related party

30,918

Interest paid

(66,278)

(65,064)

Payment of deferred consideration

(197,510)

Gain on settlement of derivatives

13,904

Acquisition of further interest in subsidiaries

(48,240)

Other

(7,602)

Net cash inflows (outflows) from financing activities

861,289

(266,639)

Increase (decrease) in cash and cash equivalents

822,775

(49,596)

Unrealized foreign exchange difference on cash
and cash equivalents

(6,090)

9,346

Cash and cash equivalents – beginning of period

510,323

267,684

Cash and cash equivalents – end of period

1,327,008

227,434

George Miller started his career in content marketing and has started working as an Editor/Content Manager for our company in 2016. George has acquired many experiences when it comes to interviews and newsworthy content becoming Head of Content in 2017. He is responsible for the news being shared on multiple websites that are part of the European Gaming Media Network.

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Almost Two-Thirds of Japanese Oppose Plans for Integrated Resorts

Niji Narayan

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Almost Two-Thirds of Japanese Oppose Plans for Integrated Resorts
Reading Time: 1 minute

 

Japanese citizens continue to oppose the plans for integrated resorts. According to a recent poll, 57.9% of the respondents disagree with the plan and 26.6% agree with it. Among the supporters, 62.8% said they would back the establishment of a casino resort in their area and 29.0% said they would not.

Japan’s public opinion may play a key role in whether some prefectures decide to press ahead with plans to host an IR. Yokohama recently announced it was planning to enter the race and swiftly became the firm favourite amongst major IR operators. However, public opinion against IRs is particularly strong there and may ultimately sway political opinion.

The continued opposition comes despite a concerted effort by operators to win hearts and minds in Japan, sponsoring local festivals and sports events and promoting non-gaming and other elements of IRs.

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MyChance Renovates its Platform

Niji Narayan

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MyChance Renovates its Platform
Reading Time: 1 minute

 

Online casino MyChance has undergone a major renovation in its platform, providing a new, elegant, look and feel. MyChance has also added a number of personalisation and gamification features through the redesign.

The added features include a search tool and the “favourite” and rating games options, as well as an updated player reward system which rewards points that can then be used to rank and unlock additional benefits and exclusive deals.

“Our mission from day one has been to give back to our players and to provide them with the best possible online casino experience in the market. Our new look and improved offering achieve this aim; from our generous loyalty scheme to our thrilling and exciting races that run round the clock, we know how to look after our customers. We look forward to hearing feedback from our existing players and also to welcome new customers through our doors and to provide them with an online casino experience like no other,” Eric Holmberg, CEO of MyChance casino said.

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DAW Sets Out Wish List for Re-regulation of German Gambling Market

Niji Narayan

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DAW Sets Out Wish List for Re-regulation of German Gambling Market
Photo Source: kayak.com
Reading Time: 2 minutes

 

The Deutsche Automatenwirtschaft (DAW), the umbrella organisation for Germany’s gaming machine associations, has created a wish list for the re-regulation of the country’s gambling market.

DAW explained that the current regulations for commercial gambling undermine the objectives of the State Treaty on Gambling, in particular when it comes to channeling players towards the legal market.

It said establishments should be permitted to offer multiple game verticals, and that updated regulations should maintain the state lottery monopoly on draw-based games.

New regulations must ensure that legal providers can offer a competitive and economically viable alternative to unlicensed operators, the DAW said.

“The amendment of the State Treaty on Gambling is a great opportunity to counteract the undesirable developments – above all the rapid growth of the black market – with a holistic approach. Only a coherent regulation of all forms of gaming, including the use of commercial slot machines based solely on quality standards, and a strengthening of legal providers can curb the black market and effectively protect consumers,” Georg Stecker, chief executive of DAW said.

DAW calls on state lawmakers to introduce uniform standards for responsible gaming training and player protection measures across all sectors. These controls, it says, must be constantly developed and regularly evaluated by professionals to ensure they are fit for purpose.

A nationwide biometric system that would ensure voluntary restrictions on players’ gambling should also be rolled out. It also believes a certification system for all gaming halls and outlets offering slot machines should be implemented, to help consumers distinguish legal from illegal offerings. In addition, the association argues in favour of a qualification system for gaming machine professionals.

Finally, the DAW argues in favour of regulations governing the exterior design of gaming establishments. It says these should ensure there are no inducements to gamble for minors and vulnerable people, while allowing the operator to inform and educate players about the range of games on offer.

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