Coloradans may not recognize VGW Holdings, but they may recognize its games. It owns Chumba Casino and LuckyLand slots, two sweepstakes casinos available in Colorado. However, VGW Holdings also owns Global Poker. It’s the company’s sweepstakes poker site, which complements its sweepstakes slots platform.
Despite Chumba Casino’s and LuckyLand Slots’ strong performances, Global Poker’s performance has been dipping. Its revenue has been dropping steadily since 2018. And in the last six months of 2019, VGW Holdings had a net loss of $5.8 million. We have some theories about what could be causing performance to drop.
How Sweepstakes Games Work
VGW Holding’s games use two in-game currencies. One is a currency for free play–usually gold coins. The second is a premium currency that is available in smaller quantities than gold coins. However, they can be redeemed for cash prizes. There’s a minimum amount needed for redemption, and all redeemed sweeps coins have to be won in-play. That gives players who play for free and whales who buy coin packs equal chances to redeem cash prizes. This model sets VGW Holding’s products apart from traditional online casinos, which are outlawed under Colorado law.
Poker, however, is another matter.
Can A Sweepstakes Model Work For Poker?
Poker introduces skill in playing other users as much as a player’s own hand. A good poker play can learn to pull more chips out of their opponents or bluff to create a false sense of security. That’s a layer of strategy that’s absent in slots and table games.
The sweepstakes model works for casinos because prizes are awarded entirely by chance. Players have no control over whether all five slots line up for a jackpot. However, poker players have some control over the outcome of each hand. This introduction of skill means that better players can win more than other players, which strains the sweepstakes model.
Global Poker’s “Structural Factors”
Global Poker is the sweepstakes model under the most strain in VGW Holding’s portfolio. Here are the revenue figures for Global Poker from the fiscal year ending in 2018 until the final six months of 2019:
Further, in the half-year of 2019, Global Poker made $49.934 million in revenue, down from $80 million during the same period the previous year.
VGW Holding’s financial report is vague about which “structural factors” contributed to Global Poker’s revenue decline. It may be a coincidence that the “strained sweepstakes” product is the one losing revenue. However, I’m skeptical that it has nothing to do with it. The element of skill may not out-balance chance. However, as Global Poker grew, so did the sweepstakes prizes that VGW Holdings awarded.
Increased Sweepstakes Costs
Here’s how much sweepstakes prizes cost VGW Holdings as a percentage of revenue for the last three years:
From summer to summer, VGW Holding’s profit margin increased. They generated more revenue than they awarded prizes. Where’s the increase in prizes?
The increase comes in the half-year interim financial statements. Here are the cash prizes awarded as a percentage of revenue for the second half of 2018 and 2019:
The 2019 figures buck VGW Holding’s promising trend of increasing margins. It may be that the payouts on their two slots games were particularly generous in 2019, but that seems unlikely.
It could also be that Global Poker gained a more talented pool of players since its inception in 2017. Over many hands, player skill can mitigate the effects of chance. Skilled players could not only redeem more prizes over time but also buy fewer coin packs. In large enough volumes, skilled poker players could decrease the margin that VGW Holdings has spent the last three years improving.
VGW Holding’s financial report does not blame all the reduced revenue on Global Poker. It attributes the loss to:
- Lower Global Poker revenues
- Increased sweepstakes prizes
- Increased operating costs
Even though it’s distinct from Global Poker, the increased sweepstakes payouts could have come from Global Poker’s players. Because a poker player’s skill gives her an edge over time, Global Poker’s growing fan base could’ve reduced the number of coin packages purchased and increased the prizes redeemed. VGW Holding’s sweepstakes model could be burning Global Poker’s candle at both ends.
However, that still leaves the operational expenses that add up over time. Compared to the last six months of 2018, advertising costs increased by almost $9 million. Technology and communication expenses went up by about $1.2 million. Employee benefits went up by a little less than $6 million. Even merchant fees went up by $3.6 million.
With a $5.8 million loss for the last two quarters of 2019, these operational expenses could’ve nudged VGW Holdings into the red. However, the sweepstakes prizes paid out were almost 15% higher as a percentage of revenue in 2019 than in 2018. That means more revenue is being funneled toward cash prize payouts than any other operational expense. If VGW Holdings wants to get back in the black, that’s the figure it’ll have to address.
What To Look For In VGW Holding’s 2020 Statements
The first thing analysts should check in VGW Holding’s 2020 financial statements is the sweepstakes prizes paid out as a percentage of revenue. We want to know how high VGW Holding’s margins are after a full year so we can have a fair comparison against the other full fiscal years. Ideally, it’ll be lower than 52.13%–an improvement over 2019.
However, VGW Holding’s 2019 interim financial report also says there’s a recovery plan in place to fix Global Poker’s financial performance. The report expects the effects of this recovery plan to be visible in 2020. Hopefully, the details will be available in VGW Holding’s next financial reports.
Despite Global Poker’s setbacks, VGW Holdings has hope for its future. Its net cash flows are positive, which means it can pay its bills and sustain its business. First-time online poker players also increased by 255% during the pandemic. Global Poker also launched its Global Poker Home Series in March to take advantage of all the new online players stuck at home. It sounds like a promising pivot, but the proof will be in the numbers.
Hopefully, we’ll see these strategies pay off with higher margins, stronger revenues, and comparable growth to Chumba Casino and LuckyLand slots by the end of 2020.