The sports betting wave from a few years ago was a monster, but the thing about a giant wave is, it tends to crash down hard around you.
Sports betting, like online poker a decade before it, quickly became a race to the bottom; a business financed increasingly by questionable off-shore players, who would sling around millions to bring in thousands of customers. There was a point where FanDuel and DraftKings were Pepsi vs Cokeing each other to death.
So how would a Canadian pubco playing by the rules compete with all that?
Simple; by being the guy those other guys spend their millions with to get more customers.
FansUnite Entertainment Inc (FANS.T) is a sports and entertainment company based in Vancouver, British Columbia, focusing on services related to regulated and lawful online sports betting, casino, and other related products. The company operates under International Financial Reporting Standards (IFRS) and focuses on acquiring customers for bigger players, which is a space where good margins exist and something they’re increasingly good at.
In just released quarterly financials, FANS announced they have achieved their goal of going adjusted EBITDA positive.
Which is good, but it comes with a $6 million net loss for the quarter, and with current cash reserves of $1.5 million (at least at the end of September), that’s going to see some big changes necessary at FUHQ.
To get here, they’ve already offloaded some non-core assets, streamlined operations, ran up revenues a smidge, ran up margins a smidge, and pushed costs down a smidge.
But the fat SG&A line item of nearly $8 million just crushes the company every quarter and it must be addressed if they are to survive. A healthy wedge of that – $4.9 million n fact – is down to amortization of assets, so the real world downside may be less harsh on an ongoing basis than one might immediately think, but it still leaves the company needing an infusion of funds to find its feet in the next quarter. There’s a little debt, but not a crazy load, and the current $16m market cap isn’t unjustified in any way.
Here are some key points for potential investors:
- Business Focus Shift: In 2023, FansUnite shifted its focus to its subsidiary American Affiliate, moving away from business-to-business (B2B) and business-to-consumer (B2C) sports betting services. This strategic change was aimed at optimizing the business for cash flow positivity which, as noted, they haven’t yet achieved.
- Sale of BetPrep: The sale of the BetPrep digital affiliate brand to Stram Entertainment Limited was part of FansUnite’s financial optimization strategy. The deal includes a 30% revenue share for 36 months starting September 1, 2023, with a minimum monthly guarantee, so that’ll be a positive for a while.
- Super Bowl Weekend Success: Betting Hero, a brand of FansUnite, registered a record 6,700 new depositing customers for its sportsbook partners over Super Bowl LVII weekend, demonstrating the company’s effective customer acquisition strategy. From information I can find, it would appear most referrers to sportsbooks on a set rate agreement earn around $50-200 per customer, so if we assume $100 is going to Betting Hero, they’re bringing maybe $670,000 per quarter in the door there.
- Expanding U.S. Footprint: American Affiliate expanded its U.S. presence, participating in regulated wagering launches in Ohio, Massachusetts, and Kentucky, contributing revenue of $4,822 and $17,176 for the three and nine months ended September 30, 2023.
- Revenue Trends: For the nine months ended September 30, 2023, revenue decreased to $17,176 from $17,469 in the same period in 2022. The decline was partly due to changes in New York’s sports betting affiliate regulations and a cyber attack on a customer.
- Improved Gross Margin: The cost of revenue was $6,250 for the nine months ended September 30, 2023, with a gross margin of 63%, showing an improvement from 54% in the same period in 2022.
- Net Loss Increase: The net loss for the nine months ended September 30, 2023, was $14.3m compared to a net income of $23.8m for the same period in 2022. This change was due to a revaluation gain in the previous year and an increase in non-cash expenses.
- Financial Position: As of September 30, 2023, the company had net working capital of $1.47m, an improvement from a -$4,15m on December 31, 2022..
- Operational Challenges: FansUnite faced operational challenges, including a violation of one of its debt covenants with a carrying value of $2.7m and an upcoming earnout payment of $4.0m due in November 2023.
Investment Opportunity Rating: C
This rating reflects the company’s recent shift in business focus and efforts to become cash flow positive. While there are signs of strategic growth and improved gross margin, the company still faces challenges, including a significant net loss, operational challenges, and a dependence on external funding. You can’t fault management for seeing the challenges ahead and working to pivot, but this next quarter will be an important one. FANS needs to make a big ballsy move to get things right.
— Lucy Copperpot
FULL DISCLOSURE: FansUnite has been an Equity.Guru marketing client, and the authour doesn’t own stock in the company, though Equity.Guru does
