Tabcorp changing focus, adding more digital wagering

The business is changing to match regulatory environment, and grow revenue.

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The challenge for Tabcorp (ASX: TAH) in 2014 and beyond is to transition from having the Victorian Tabaret licence, which had a business segment NPAT of $179 million on its own, to growing its new gaming services business, TGS. Starting in August 2012, TGS began offering maintenance of gaming machines and systems to the organisations and venues that now control the operational licences Tabcorp lost.

During the 45 weeks of FY 2013, it generated $86.3 million in revenue and $37.5 million in EBIT. Tabcorp initiated this business in Victoria to offset the loss of the decommissioned Victorian gaming business, and is working on expanding it into New South Wales.

The other hole in the income statement is the reduced profits from the loss of the 75/25 split of Victoria racing. The business now operates under a 50/50 joint venture with the Victorian Racing Industry. Thus, Tabcorp misses out on one-third of the original takings.

Tabcorp plans to make up for the profit shortfall by further developing its digital gaming platforms. The annual report stated that digital wagering turnover in general grew 13.6% to $2,452.6 million. This continued strong growth was predominantly driven by mobile transactions and fixed odds product expansion. The consumer uptake of mobile transactions is evidenced by mobile betting accounting for 43% of the Tabcorp Group’s digital turnover in the second half of the financial year (up from 28% in the first half).

In addition, it has Luxbet, a racing, sport and novelty product bookmaking service to Australian customers by phone, internet and mobile devices based in the Northern Territory. This year it has grown its revenues to $39.1 million — up 40.1%. This licence expires in June 2015, and Tabcorp will be applying for a renewal, yet there is always the possibility it can lose that just as it did Tabaret.

There is growth in revenue for fixed odds betting, up 25.8% to $404.2 million. Fixed odds margins also increased through a combination of risk management initiatives and product expansion.

Foolish takeaway

Licences are unique barriers to entry for competitors, but when your company has lost the licence, you are suddenly the one on the outside looking in. Tabcorp is a “wait and see” story, as it must strive to replace that lost revenue, and investors have to keep up on the story to judge the progress. Don’t expect any great share price gain until it can clearly show growth.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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