Content Published Last Week

1. Evolution Gaming's Asia and Crypto Risk

2. Microsoft Gaming: Xbox vs PlayStation Positioning

3. Copart: New Market Expansion Process & Challenges

4. United Parks & Resorts: US Theme Parks Industry

5. Trupanion: Pricing Challenges

6. LGI Homes: US Homebuilders Market Dynamics

7. Inchcape: Growth Oportunities

Evolution Gaming's Asia & Crypto Risks

At In Practise, we study the operating realities of high-performing companies through primary research. This is why Evolution Gaming piqued our interest: over the last decade, Evolution has compounded EPS at 66% and generated over 1.1bn EUR in annual operating profit last year. It’s the 10th largest listed company in Sweden and has been one of the best performing stocks in Europe.

But one thing has never been clear: where and how does it actually generate its profitability?

A core driver of EVO's performance is its unregulated Asia division which has compounded revenue at ~100% since 2018 and accounts for 37% of FY23 Group revenue. The growth in Asia has coincided with Group EBIT margin expansion from 36% to 63.5% over the same period. Yet, EVO doesn’t disclose where or how its Asia revenue is generated or the underlying profit of any country or jurisdiction globally.

Over the last 6 months, we’ve spent 100s of hours sourcing and interviewing Asian online casino operators, aggregators, and suppliers to understand how Evolution Gaming’s Asia business works. Although the market is opaque and unregulated, we sourced many experienced operators on the ground across Asia to explain how the business works.

We’ve followed EVO closely since 2019, including throughout the 2021 short report. This is not a short report. IP has no long or short position in Evolution. Our aim is to provide long-term investors with insight into the operating realities of Evolution’s Asia business.

We’re also not interested in rehashing issues from the 2021 report. EVO has since made its position clear: its customers have a license and they are responsible for KYC on end bettors. While this may well be true, our research has uncovered multiple potential risks that shareholders should be aware of.

We believe crypto provides the rails for 50%+ of EVO's EBITDA and over 30% of GGR is crypto gambling. Yet, crypto isn't mentioned once in any filing.

There also seem to be multiple layers of counterparty, credit, and crypto-fiat conversion risk throughout the crypto casino value chain in Asia:

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Screenshot 2024-03-26 at 14.57.47.png

Asia B2C online casinos use illegal middlemen to move payments in crypto and fiat and bypass authorities:

From that bank account, [the agent] will convert to cryptocurrency, to USDT for us, and he'll inform us of the exchange rates and everything. Although I've never spoken to the agent directly, our head of payments has. I firmly believe that he easily has over 100 bank accounts under him. That's a rough estimate. It could be more because we rotate about 10 new bank accounts every month. I'm confident that we are not his only client. He cannot reveal his other operators, but if there are 10 operators under him, and each of us rotates ten bank accounts a month, that's 100 accounts. - South East Asia iGaming Operator

Also, a key part of the EVO bull case is that it’s diversified by country. However, not only is the distribution channel to sell games into Asia is concentrated into few large aggregators, multiple sources also all separately confirmed that Korea and Japan could account for ~50% of EVO’s Asia GGR.

Primarily in Asia, which largely includes the Korean market. Evolution Gaming is very popular there, despite its illegality…Korea probably contributes 45% to 50%. That's the cash market. I believe the number might be double, including the crypto market.  - Former Deputy CEO of Large Asian Aggregator

We also question EVO's revenue reporting and its disclosure of unregulated market GGR. 2018 revenue reporting changes mean potentially unregulated GGR that flows through operators with Malta or Curaçao licenses can be recorded as ‘regulated revenue’.

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Screenshot 2024-03-26 at 15.11.35.png

This research shares our learnings from primary sources covering how the Asian iGaming value chain functions, estimates of EVO’s Asia GGR by country, EVO's reporting limitations, and, most importantly, the company’s EBITDA exposure to crypto.

We believe management has a fiduciary responsibility to improve its reporting and disclose its exposure to crypto and various other risks uncovered in this report. Over the last year, we've tried multiple times to speak to management with no success so we continued our research independently. We’ve sent the report and the list of questions below to Evolution and look forward to engaging in dialogue to help further understand how its Asia business works.

Microsoft Gaming: Xbox vs PlayStation Positioning

After interviewing former Microsoft and Google executives about cloud gaming and gaming subscriptions, we dove deeper into Microsoft's Xbox strategy. A former Xbox brand marketer describes Xbox and PlayStation's different approaches. 

Many people are still puzzled about why it didn't work. It wasn't just one or two factors, but a combination. Firstly, the experience was excellent in the US, but not globally. It worked well for cable in the States, but not in Europe or Asia due to a lack of similar partnerships. Secondly, PlayStation was winning because it had AAA titles. We had fewer AAA titles, with only Halo and Forza and a few others as our first-party offerings. - Former Xbox Director, MSFT

Xbox leaned on its entertainment capabilities to differentiate itself but lost to PlayStation as players didn't value entertainment as much as AAA titles.

Copart: New Market Expansion Process & Challenges

Copart's successful international expansion requires local expertise and a developed local network in the new market/geography, as it enables the company to develop the right contacts with all key stakeholders involved in its ecosystem, from subhaulers and dismantlers to insurance providers. Developing such local networks in Europe may prove more challenging than in the US due to different dynamics in each country.

"Their network is significant. If they're in the automotive industry, they would be familiar with potential partners and the local landscape. They would know how to interact with subhaulers, who are tow truck drivers. Logistically, they would understand the area and how to navigate it. Therefore, you would build the team starting with the managing director, appoint a local General Manager to oversee the facility, and then they would hire individuals for logistics, customer service, and yard receiving. It's crucial to have people in the yard dealing with cars and subhaulers, managing car pickups and loadings. - Former Senior Director of Sales at Copart

In this interview, a former senior director of sales at Copart sheds light on the company's new market expansion process & challenges.

United Parks & Resorts: US Theme Parks Industry

United Parks & Resorts, formerly known as SeaWorld Entertainment, is building its first hotel in Orlando. To understand the potential revenue opportunities, a Marketing Director at Cedars Entertainment describes how hotels are incremental to theme parks.

From a Cedar Fair perspective, when a customer stays at my hotel and books a ticket, as opposed to just booking a ticket, that customer generates three times more revenue for the company. There is a lot of potential for additional revenue. Consider a family of five who are already buying their $90 tickets. Suddenly, they're also paying a $375 room rate, likely eating breakfast there, using the spa, and so on.

PRKS is currently sharing the economics with affiliated hotels. By capturing this new revenue pool, it can monetize a relatively slow growing visitors number at higher rates.

Trupanion: Pricing Challenges

One of the main advantages Trupanion offers pet owners is the ability to minimize out-of-pocket expenses at the time of checkout, by directly paying the vet 90% of the bill. This is made possible through Trupanion Express, a proprietary software installed at the vet practice, that levers Trupanion's 20+ years of accumulated data on pet diseases. While Trupanion Express is claimed to be one of the company's competitive advantages, it seems like competitors are trying to replicate this model. If they succeed, Trupanion may see one of its main moats erode.

Competitors are already replicating it. My startup, for instance, is doing something similar because it's a significant issue for potential pet insurance customers. Many are reluctant to sign up if they have to pay $5,000 out of pocket and wait for the insurance carrier to reimburse them. They'd rather put that money in savings. Trupanion's model is excellent. The reason many didn't replicate Trupanion's model for years is that they have a patent on the business model. However, the patent only applies to the connection between the vet's system and Trupanion's system. Trupanion has been known to threaten legal action against anyone attempting to copy this, which has deterred many companies. But now, you'll see a few examples in the market of companies starting to do the same. - Former Director at Lemonade

In this interview, a former insurance product director at Lemonade sheds light on the pricing dynamics of US pet insurance market.

LGI Homes: US Homebuilders Market Dynamics

One of LGI Homes' keys to success is the company's higher-than-average absorption rate. This number is largely driven by the company's sales efforts which are focused on understanding the needs and caring about the potential home buyer. This seems to be rooted in the company's culture which is cascaded down from its founder Eric Lipar.

Eric, on the other hand, is very personable. For instance, during a large event for salespeople and corporate staff, he would personally write notes to every single attendee. When I visited the headquarters, he made time in his busy schedule to meet with me. Despite running a multi-billion dollar business, he took out ten to fifteen minutes to sit down with me, ask about my experience, and discuss my ideas. This approach has resulted in a loyal workforce. LGI may not offer the highest salaries or the biggest bonuses, but they do take care of their employees and make them feel valued. Many employees stay with the company for a long time, finding a sense of community and satisfaction in their work. - Former Land Acquisition at LGI Homes

In this interview, a former senior land acquisition & development analyst at LGI Homes sheds light on the US homebuilders' market dynamics.

Inchcape: Growth Opportunities

When it comes to the balance of power between auto OEMs and their distributors, it tends to shift to the distributor's advantage as it scales and ventures into new geographies. That's because it increases the switching cost to the OEMs, which in turn could make them more prone to tolerate that their distributors deal with competing brands.

Exactly. That's the first point. The second point is that they will become very dependent on the distributors, but on distributors which will diversify. For example, if we're talking about a model similar to Amazon or Alibaba, fully digital in the US. If as a dealer or distributor, you've developed a strong logistic platform to service your cars, even if the OEM enters the market directly, they will rely on you because they will need the logistics service support. Additionally, there's the charging infrastructure and body shop repair that no one else can probably do. These are the core elements of the value chain which would be more difficult for the OEMs to eliminate or absorb. - Former Managing Director of Sub Sahara Africa at Stellantis

In this interview, a former managing director of Sub Sahara Africa at Stellantis sheds light on the growth opportunities for auto distributors and how they are affected by their relationships with OEMs.