What drove the increase in revenue and earnings in 2017?

The MD&A attributes the revenue increase primarily to continued development of casino product offerings, expansion of casino and sportsbook into eligible markets, positive foreign exchange impacts, the Stars Rewards loyalty program launched in July 2017, sportsbook user experience improvements, and the relaunch of online poker and casino in Portugal. Net earnings also benefited from gains on investments of $34,524 thousand, including dispositions of NYX Gaming Group securities and Jackpotjoy shares, partially offset by a $26.5 million income tax provision for a Canadian transfer pricing dispute.

How is the company's debt position and debt service expected to look?

At December 31, 2017, long-term debt principal was about $2.36 billion in carrying amount, and the filing describes approximately $2.45 billion of outstanding long-term indebtedness. Management estimates 2018 debt service of approximately $150 million including principal and interest. The company made $40 million and $75 million prepayments on the USD Second Lien Term Loan in 2017, leaving $95 million outstanding, and the First Lien Term Loans mature in August 2021.

What are the main legal and regulatory risks disclosed?

Key matters include the Kentucky Proceeding, where a judgment of approximately $870 million after trebling is under appeal and the company believes the action is frivolous; an AMF investigation in Quebec relating to trading in the company's securities and alleged nominee arrangements; a review of possible improper foreign payments, which has been voluntarily reported to Canadian and U.S. authorities; and pending U.S. and Quebec securities class actions. The filing also notes a Russian Financial Blocking Bill with enforcement expected to start May 25, 2018, and the Supreme Court's pending review of PASPA.

What is the status of the planned CrownBet and William Hill Australia transactions?

The company acquired a 62% interest in CrownBet in February 2018 for $117.7 million in cash. On March 6, 2018, it agreed to increase its interest to 80% and for CrownBet to acquire William Hill Australia, with an aggregate price of approximately $315 million, of which $234 million is cash for William Hill Australia and the remainder is about 3.1 million newly issued Common Shares. The company obtained committed financing for a $325 million incremental USD First Lien Term Loan and expects the transactions to close in April 2018, subject to regulatory approvals including the Northern Territory Racing Commission.

Does the company pay dividends or have significant shareholder concentration?

The company has never declared or paid cash dividends and intends to retain earnings for growth. As of early March 2018, GSO Capital Partners LP, Caledonia (Private) Investments, Tang Hao and BlackRock beneficially owned or controlled approximately 15.4%, 13.6%, 12.2% and 9.1% of outstanding shares on a fully diluted basis, respectively, giving them significant influence over shareholder approvals. Preferred Shares, which are convertible into about 58.8 million Common Shares, carry no dividend entitlement.

FLUT 10-K FY2017 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 40-F filed March 14, 2018. Cited figures are marked; the original filing is the authoritative source.

The Stars Group Inc. (Toronto, Ontario; Nasdaq and TSX listed) filed this Form 40-F annual report on March 14, 2018, incorporating its annual information form, audited IFRS consolidated financial statements for the year ended December 31, 2017, and MD&A.

The company is a provider of technology-based products and services in global gaming, with its primary business being online real-money poker, casino and sportsbook operated through Stars Interactive Group, plus a majority equity interest in CrownBet acquired in February 2018. For 2017, revenue was $1,312,315 thousand^a (about $1.31 billion), up from $1,155,247 thousand in 2016, and net earnings were $259,285 thousand, compared with $135,550 thousand in 2016. Poker revenue was $877.3 million and Casino & Sportsbook revenue was $384.0 million.

Adjusted EBITDA was $600,306 thousand^b. Long-term indebtedness totaled approximately $2.45 billion at year end, and management estimates fiscal 2018 debt service of about $150 million. The filing highlights a shift in strategy toward casino and sportsbook diversification alongside poker, a loyalty program (Stars Rewards) introduced in July 2017, and planned CrownBet and William Hill Australia transactions with total purchase price of about $315 million.

Key risks disclosed include regulatory and licensing uncertainty, a Kentucky judgment that the company disputes and is appealing (trebled to approximately $870 million^c, with a $100 million bond posted), an AMF investigation in Quebec, a foreign payments review, pending class actions, and a $26.5 million Canadian transfer pricing tax provision. The company reported that material weaknesses identified at year-end 2016 were remediated as of December 31, 2017.

02—Key points

Key Highlights

Revenue rose to $1,312,315 thousand in 2017 from $1,155,247 thousand in 2016, with Poker at $877.3 million and Casino & Sportsbook at $384.0 million.
Net earnings were $259,285 thousand in 2017 versus $135,550 thousand in 2016; diluted earnings per Common Share were $1.27 versus $0.70.
Adjusted EBITDA was $600,306 thousand for 2017 compared with $524,093 thousand in 2016, per the MD&A non-IFRS reconciliation.
Long-term indebtedness was approximately $2.45 billion at December 31, 2017, with estimated fiscal 2018 debt service of about $150 million including principal and interest.
Acquired a 62% equity interest in CrownBet in February 2018 and agreed on March 6, 2018 to increase that stake to 80% and acquire William Hill Australia, for an aggregate price of about $315 million, expected to close in April 2018.
Kentucky Proceeding: a trial court order of approximately $290 million, trebled to approximately $870 million, is under appeal; the company posted a $100 million supersedeas bond and believes the action is frivolous.
Management reported that two material weaknesses identified at December 31, 2016 (derivative valuation and hedge accounting; foreign exchange rate information) were remediated as of December 31, 2017, and that internal control over financial reporting was effective at that date.

03—Questions

Frequently Asked Questions

What drove the increase in revenue and earnings in 2017?
The MD&A attributes the revenue increase primarily to continued development of casino product offerings, expansion of casino and sportsbook into eligible markets, positive foreign exchange impacts, the Stars Rewards loyalty program launched in July 2017, sportsbook user experience improvements, and the relaunch of online poker and casino in Portugal. Net earnings also benefited from gains on investments of $34,524 thousand, including dispositions of NYX Gaming Group securities and Jackpotjoy shares, partially offset by a $26.5 million income tax provision for a Canadian transfer pricing dispute.
How is the company's debt position and debt service expected to look?
At December 31, 2017, long-term debt principal was about $2.36 billion in carrying amount, and the filing describes approximately $2.45 billion of outstanding long-term indebtedness. Management estimates 2018 debt service of approximately $150 million including principal and interest. The company made $40 million and $75 million prepayments on the USD Second Lien Term Loan in 2017, leaving $95 million outstanding, and the First Lien Term Loans mature in August 2021.
What are the main legal and regulatory risks disclosed?
Key matters include the Kentucky Proceeding, where a judgment of approximately $870 million after trebling is under appeal and the company believes the action is frivolous; an AMF investigation in Quebec relating to trading in the company's securities and alleged nominee arrangements; a review of possible improper foreign payments, which has been voluntarily reported to Canadian and U.S. authorities; and pending U.S. and Quebec securities class actions. The filing also notes a Russian Financial Blocking Bill with enforcement expected to start May 25, 2018, and the Supreme Court's pending review of PASPA.
What is the status of the planned CrownBet and William Hill Australia transactions?
The company acquired a 62% interest in CrownBet in February 2018 for $117.7 million in cash. On March 6, 2018, it agreed to increase its interest to 80% and for CrownBet to acquire William Hill Australia, with an aggregate price of approximately $315 million, of which $234 million is cash for William Hill Australia and the remainder is about 3.1 million newly issued Common Shares. The company obtained committed financing for a $325 million incremental USD First Lien Term Loan and expects the transactions to close in April 2018, subject to regulatory approvals including the Northern Territory Racing Commission.
Does the company pay dividends or have significant shareholder concentration?
The company has never declared or paid cash dividends and intends to retain earnings for growth. As of early March 2018, GSO Capital Partners LP, Caledonia (Private) Investments, Tang Hao and BlackRock beneficially owned or controlled approximately 15.4%, 13.6%, 12.2% and 9.1% of outstanding shares on a fully diluted basis, respectively, giving them significant influence over shareholder approvals. Preferred Shares, which are convertible into about 58.8 million Common Shares, carry no dividend entitlement.

04—Continue

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