By Wandering Eyes in NZRB Performance 23On the third of April 2018 the New Zealand Racing Board (NZRB) CEO, John Allen, announced a "Good Half Yearly Result." Content from that press release is in italics below. BOAY takes an indepth look to find the Devil in the Detail and conclude that it was really a "Terrible Half Yearly Result"! BOAY has attached the pdf of the full result for your reference.
The New Zealand Racing Board (NZRB) today announced an underlying operating profit for the first half of 2017/18 of $83.4 million, up $2.8 million or 3.4% on last year (excluding the net impact of strategic initiatives costs and benefits of $4.4 million). Including the planned investment and associated benefits from the strategic initiatives, reported net profit was $79.0 million, $1.1 million (1.4%) below last year however this was $2.9 million above Budget.
In a nutshell the "good result" was 1.4% BELOW last year or a reduction in profit of $1.1m.
NZRB Chief Executive John Allen says this good interim financial performance is the result of a strong uplift in digital turnover and customer acquisition combined with ongoing disciplined cost management.
“Successful customer acquisition campaigns, growth in digital channels and increased betting from high staking Elite customers has seen a growth in total revenue to $188.1 million, up 3.2% on last year and a corresponding growth in total turnover to $1.430 billion, up 3.9% on 2016/17,” says Mr Allen.
Well that is a bit of spin! A "strong uplift in digital turnover" we assume means more turnover was achieved via online betting. Turnover was up 3.9% but this is on the back of low yield Elite customers and low yield Fixed Odd Betting on sports. Much of the profit from sports gets distributed to sports entities. Looking at the turnover figures to date as of 22 April 2018 Racing turnover is only up 0.64% ($7m) and total NZRB turnover up just 2%. We assume that turnover figures have been bolstered by the giveaway voucher promotions e.g. open a new account and get a $20 free bet.
The "ongoing disciplined cost management" is an amusing statement. The turnover related expenses have risen 6% which tends to support our assumption that turnover has been bought. Total operating expenses are up 7%. Granted this increase in cost has been driven by a rise in depreciation and amortisation. It looks like the poor technology decisions of the past are coming home to roost.
"Our rolling average monthly active account bettors grew to more than 106,000 per month over the 12 months to January 2018, up 16.4% on the previous 12 month period, and in January 2018 alone there were 112,250 active customers betting, up 19.5% on last year. The Spring customer acquisition campaign run across the second quarter delivered a massive 23,737 new customers, up 28% on target. These newly acquired customers continue to bet regularly with the TAB supported by our CRM initiatives that has contributed to the growth in Betting Turnover and Revenue.
On the face of it an increase of nearly 20% in active customers should be applauded however there is a devil lurking in there. How many of these customers were bought through the promotions and are still active? What does "active" actually mean? Does it mean they have had a bet since opening the account or that they are active every week? They can't be betting that much if a 20% increase in customers only equates to a 3.5% increase in turnover. Three quarters of the way through the financial year and that turnover increase has dropped to only 2%.
Underlying operating expenses were $68.4 million, up 1.4% on last year largely driven by ongoing investment in technology platforms and PCI regulatory compliance while staff expenses, broadcasting and property costs have all been reduced.
We are still trying to work out how John got to that $68.4m figure.
During the first half of 2017/18, the NZRB increased its distributions to the racing industry by 11.5% or $9.1 million on last year to $88.2 million while funding for national sporting organisations also increased by $1.0 million or 22.3% up to $5.5 million and another $1.3 million in grants were paid to amateur sport from gaming.
Now BOAY readers this is where the dirty big red devil hides with sharp pointy horns! So if net profit was down $1.1m (an appalling result) where did the increase in distributions to the codes of $9.1m come from? It should be noted at this point that the national sporting organisations paid their way and their increase comes from an increase in gambling on their product. Well there is only one place the extra $9m can come from - capital reserves. Yes the extra distributions to racing was funded from capital reserves!
From 31 January 2017 to 31 January 2018 General Reserves have dropped from $75m to $61m - that is a decline in reserves of $14m. Conceivably in order to meet the promises to the racing codes and an end of year profit that will be not much different to last year the potential decline in reserves may surpass $20m!
Mr Allen says the NZRB is on track to deliver its challenging full year underlying operating profit target of $153.9 million in the 2017/18 year and remains committed to lifting distributions to the industry.
Really John? Which track is that you are on?
“We remain committed to lifting distributions to racing while facing a number of challenges. The industry continues to be plagued by an unusually high number of abandonments - 19 over the past six months (many of which occurred throughout January at Thoroughbred meetings), equating to $1.5 million in lost profit. The cost of these abandonments is also significant to trainers, jockeys and drivers incomes and returns to owners not to mention the flow on effect to other races,” says Mr Allen.
More spin that doesn't add up. Yes there have been abandonments BUT the number of meetings and races held are UP on last year! But just like the increase in customer accounts this hasn't translated to an increase in revenue.
In February, NZRB along with the three racing codes launched a process to address the issues our industry faces around infrastructure - leading the development of a future venue plan to help generate maximum benefits for racing’s stakeholders by delivering strategic investment in fit-for-purpose infrastructure and increased financial returns.
When's the process going to kick in John? Even if your overly optimistic returns from Racefields legislation comes to fruition you will still be substantially short of cash. If the DIA estimates are correct then we will be out of reserves inside one racing season.
The next question......what is the sneaky little devil called Intangible Asset Purchase? At $16m it seems a big ticket item. More on that later!
NZRB Interim Financial Statements 2017-18.pdf
Turnover Report to 22 Apr 2018.pdf