Evolution’s strategic performance in random number generator (RNG) gaming is “embarrassing,” according to an analyst at Regulus Partners.
Regulus’ assessment comes after Evolution said on Thursday that its sales growth pushed net profit to over 1 billion euros (853.5 million pounds/US$1.1 billion). The company attributed this to growth in its Live and RNG sectors.
While live casino revenue increased by 28.1% to €1.52 billion due to increased commissions, RNG only increased by 2.6% to €275.3 million. In the fourth quarter, RNG sales also fell by 3.7% to €69.8 million.
Regulus believes that Evolution is still unable to execute on its RNG strategy and reserves particular criticism for its acquisition of NetEnt and its collaboration with NetEnt since then.
“Strategically, we believe Evolution’s RNG performance has now ranged from disappointing to embarrassing,” Regulus said. “NetEnt was poorly managed, commercially overpriced and offered largely outdated content.
“The turnaround would have required significant investment in product development and boldness in pricing, without much experience in live infrastructure to guide us. Simply put, in our opinion, Evolution was the wrong buyer for NetEnt.”
Due to Evolution’s size and its consequent role as a pioneer in the RNG market, Regulus believes that any difficulties could have a far-reaching negative impact on the industry.
“Tough questions need to be asked about what value the division brings to the group and sector under Evolution ownership,” Regulus continued. “In the long term, industry growth will suffer if Evolution continues to price content (both asset and commercial) too high and then fails to deliver segment growth.”
Development: Mixed success around the world
Regulus described Evolution’s geographic growth as “encouraging” and also noted that Evolution remains “clearly the best live infrastructure provider.” However, Regulus also warned that there was cause for concern about the future given the volatile Asian market and stagnation in Europe due to regulatory pressure.
The lack of regulation in the US continues to be a barrier to growth, as iGaming is currently only legal in seven states. While North America has “high-quality returns,” it has little chance of further growth without political support.
“It is difficult to see how Europe can sustain double-digit growth,” Regulus added. “The Asian market is still growing strongly, accounting for 67% of reported group growth in the fourth quarter, but the lack of transparency from regulators and customers makes it difficult to recognize quality revenue in price, in our view.
“North America is clearly maturing quickly without additional U.S. states opening, and Evolution will likely see much greater competition for this market.”
However, the analyst sees LatAm as a growth area for Evolution, calling the region “arguably the most attractive region” for the group.
Regulus’ view of the future
Regulus noted Evolution’s growing reliance on its top customers and suggested that 1xBet was the company’s top customer with implied live sales of over $2 billion. Flutter and Entain were expected to be among the next four top customers, with these groups growing 36% thanks to organic and M&A consolidation.
For the long tail, the opposite was true: 100 new customers were added, bringing the total to 800, indicating that the operator’s performance was stagnating compared to the previous year.
As Regulus noted, Evolution’s “sheer size” means its success or failure has a noticeable overall impact on the industry.
In response to slowing growth, Regulus says Evolution cannot simply buy its way out of the crisis, stating: “Without an elusive turnaround in RNG, we find it difficult to see how this translates into high-quality double-digit growth.”
“If Evolution attempts to buy its way out of slowing growth while its valuation is still high, we believe this could create significant supply chain issues given the failure of RNG operational execution to date.”