A cold winter night in Scandinavia seems the perfect time to light a roaring fire, cozy up to your computer…and spend a few hours gambling. Winter or summer, online betting is a business that has proved highly successful for Stockholm's Betsson (BETSB.ST), a 45-year-old company whose recent surge earned it the No. 14 spot on this year's BusinessWeek European Hot Growth ranking.
For many years an operator of conventional casinos in Scandinavia and aboard cruise ships, Betsson—the name is a play on "bets on," with a double-s to add a Swedish twist—first ventured into online gaming in 1996. At the beginning, "it was just an investment, a very small part of the company," says 43-year-old Chief Executive Pontus Lindwall, who assumed the top job in 1998. "But we soon realized [the Internet] was the future, and we reoriented the company to that."
The payoff wasn't quick. As recently as 2005, Betsson's annual revenues amounted to just $20 million. But last year the business hit $82 million and could reach $150 million in 2009. Shareholders who bet on the company have been richly rewarded: Shares have more than quadrupled since mid-2006, to a recent close of 66.25 Swedish kronor ($8.45). Equity analysts think the company is undervalued and could hit 90 to 95 kronor per share in the next year.
In a crowded, competitive, and thin-margin business, the secret to Betsson's success comes from relentless attention to small details. The company now offers online poker, bingo, slots, casino games, sportsbook, and even betting on stocks. But after all, poker is poker, and there's little in the way of price competition among the scores of Web sites that implore gamblers to place online bets. "We're a bit faster [than our competitors] with new products. The site is a bit better than theirs. We offer a bit better customer service," says Lindwall.
Analysts say one of Betsson's smartest moves has been to line up an army of affiliates that earn a commission for referring customers to the site. In a business where marketing costs typically amount to 45% of revenue, that has helped Betsson steadily lower its marketing expenditures to just 34% of revenue, according to analysis from Handelsbank (SHBA.ST).
At the same time, Betsson has slashed personnel costs as a percentage of revenue from more than 19% in 2006 to 10% in the most recent quarter. It also has managed to boost the average revenue it pulls out of each customer by 54% over the past two years, to $900 annually, figures Swedish bank SEB (SEBA.ST). The result is enviable operating margins of 30%—one reason the company enjoys a relatively high price-earnings ratio among its peer group, which includes such companies as Unibet (UNIBsdb.ST), Party Gaming (PRTY.L), 888 Holdings (888.L), Bwin (BWIN.F), and Sportingbet (SBT.L).
Doubling Its Size
A few years ago, it wasn't clear that Betsson would enjoy such fortune. "The story of Betsson's success started pretty much in the summer of 2006," says analyst Dawid Myslinski of independent Stockholm equity research firm Redeye. Myslinski remembers a meeting with Lindwall two years ago, during which the CEO said the company would grow 100% in 2007. "Of course, I doubted him, because [Betsson] had so far not shown growth anywhere near that figure."
Time proved Lindwall correct. "The company has outperformed sector growth since then," Myslinski says. One reason is that the company fortuitously avoided building up a strong presence in the U.S., where strict policies against online gambling (BusinessWeek.com, 6/12/06) enacted in 2006 caused revenues and share prices for many Web gaming sites to swoon and led to the arrests of a handful of executives. Betsson gets half its revenue from the Nordic countries, and it's also present in Turkey and elsewhere in Europe.
What's next for Sweden's online gambling champion? Lindwall says he's aiming to boost business in Continental Europe, but he doesn't aim to compete in the overcrowded British market. To be sure, the global economic crisis is a concern. But so far, Betsson seems to be weathering the storm.
When the company announced third-quarter revenue this year was up 52%, Lindwall told analysts that October sales—even after all the turmoil in the markets—had hit a record high. The news "supports our view that while online gaming is not immune to a consumer recession, it is resilient," SEB analysts Stefan Nelson and Niklas Fhärm said after the earnings release. Times are tough, but Betsson looks like a pretty good bet.