The Stars Group Reports Fourth Quarter and Full Year 2018 Results; Provides 2019 Full Year Guidance

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The Stars Group Inc. today reported its financial results for the fourth quarter and year ended December 31, 2018 and provided 2019 full year financial guidance ranges, as well as certain additional highlights and updates. Unless otherwise noted, all dollar ($) amounts are in U.S. dollars.

“2018 was a landmark year for the company,” said Rafi Ashkenazi, The Stars Group’s Chief Executive Officer. “We completed the acquisitions of Sky Betting & Gaming in the U.K. and BetEasy in Australia, extended our licensed footprint to 21 jurisdictions around the world and began laying the foundations to grow our presence in the U.S.,” stated Mr. Ashkenazi.

“Our International business saw strong organic growth in the year despite restrictions in certain markets and lapping the initial roll-out of our Stars Rewards program. Our United Kingdom and Australia segments both performed in-line with our expectations during the fourth quarter, and we believe they are currently well-positioned to continue gaining market share in 2019,” said Mr. Ashkenazi.

“As we look at 2019 and beyond, we are excited to take advantage of the opportunities ahead of us by leveraging our leading positions in attractive markets, strong brands, technology and operating expertise. We are pleased with our performance in the first two months of the year, underpinning our confidence in our financial guidance for 2019, and we are currently on track to deliver the full $70 million in cost synergies from the acquisition of Sky Betting & Gaming within the current year alone, with potential opportunities for incremental synergies under review,” concluded Mr. Ashkenazi.

Fourth Quarter and Full Year 2018 Summary

Consolidated

• Revenue – Revenue for the quarter and year increased primarily as a result of the contribution of revenue from Sky Betting & Gaming and BetEasy. Revenue for the year was also driven by growth in the International segment, primarily through the continued development of its real-money online casino and sports betting offerings.
• Debt and Cash – During the quarter, The Stars Group fully repaid the $100 million outstanding on its revolving credit facility, ending the year with approximately $393 million in operational cash and $5.45 billion in of debt on its balance sheet, resulting in Net Debt of $5.05 billion. In February 2019, The Stars Group continued to reduce its debt by prepaying $100 million on its first lien term loans using cash on its balance sheet.
• Kentucky – At the end of December, the Kentucky Court of Appeals ruled in The Stars Group’s favor and reversed in its entirety the $870 million judgment issued against it by a trial court judge in December 2015 under a centuries old statute and relating to alleged losses by Kentucky residents who played real-money online poker on PokerStars’ website during a period between 2006 and 2011. The Supreme Court of Kentucky is currently considering whether to hear the Commonwealth’s appeal of the reversal.
• U.S. Sports Betting – In the second half of 2018, following the U.S. Supreme Court decision relating to sports betting, The Stars Group entered into various market access agreements with Mount Airy Casino and Eldorado Resorts, Inc. (NASDAQ: ERI) which, when combined with its existing market access deal in New Jersey with Resorts Casino Hotel, gives The Stars Group potential access to 13 states. The Stars Group also launched its BetStars online sports betting brand in New Jersey and became an authorized gaming operator of the NBA.

International

• Poker – Poker revenue slightly increased for the year, in-line with expectations, and showed overall resiliency against continued headwinds, which primarily negatively impacted the quarter, including foreign exchange fluctuations, reduced deposits by customers in certain markets as a result of local restrictions on some methods of payment processing and on certain methods of downloading The Stars Group’s poker applications, as well as increased cross-selling of customers to The Stars Group’s online casino offerings. Poker revenue in 2018 also continued to see the positive impact of shared poker liquidity across France, Spain and Portugal, but was offset by exiting certain markets, such as Australia, and lapping the launch of the Stars Rewards loyalty program.
• Gaming and Betting – Gaming and Betting revenue for the quarter and year both increased primarily as a result of product and content improvements, including, with respect to Gaming revenue, through the introduction of over 350 new casino games during the year, the launch of its real-money online casino and sports betting offerings in certain new markets and the continued success of cross-selling customers from poker to casino.
• Customers – QAUs decreased primarily due to reduced activity in certain markets as a result of local restrictions on some methods of payment processing and on certain methods of downloading The Stars Group’s poker applications.

United Kingdom

• Revenue – Revenue for the quarter was positively impacted by a high Betting Net Win Margin as compared to the historical long-term average of approximately 9%, which was driven by the mix of Stakes across different sporting events and bet types throughout the quarter as such sporting events and bet types can have different average Betting Net Win Margins. The comparable prior year period, which was before The Stars Group’s acquisition of Sky Betting & Gaming, saw a sustained run of operator-favorable sporting results, leading to a high Betting Net Win Margin of 14.0%.
• Customers – Growth in QAUs and Stakes remained strong for the quarter primarily driven by Sky Bet as momentum from the 2018 FIFA World Cup and start of the English Premier League season continued into the period. QAUs also benefited from the continued roll-out of personalized promotions and new and exclusive content across the Sky Gaming brands.

Australia

• Revenue – Revenue for the quarter was marginally impacted by a lower Betting Net Win Margin as compared to the historical long-term average of approximately 8.5% which was due to a combination of operator-unfavorable sports results as well as promotional spend relating to the migration of William Hill Australia customers to the BetEasy platform.
• Customers – The Stars Group’s migration of William Hill Australia customers to the newly rebranded BetEasy platform (formerly CrownBet) continued with approximately 85% of customers successfully migrated by the end of the quarter.

For additional information regarding The Stars Group’s reporting segments and major lines of operations, please see The Stars Group’s consolidated financial statements for the year ended December 31, 2018 (the “2018 Annual Financial Statements”), including note 7 therein, and management’s discussion and analysis thereon (the “2018 Annual MD&A”).

2019 Full Year Guidance

The Stars Group currently expects the following 2019 full year consolidated financial guidance ranges:

• Revenue of between $2,640 million and $2,765 million;
• Adjusted EBITDA of between $960 million and $1,010 million; and
• Adjusted Diluted Net Earnings per Share of between $1.87 and $2.11.

The above Adjusted EBITDA guidance range includes currently expected foreign currency headwinds of approximately $33 million previously announced expected headwinds from applicable duty increases or regulatory developments of approximately $85 million and an incremental benefit from expected cost synergies related to the acquisition of Sky Betting & Gaming of approximately $60 million. Excluding the impact of these items and certain changes to applicable accounting standards, would imply an expected Adjusted EBITDA growth of between 10% and 15% as compared to Adjusted EBITDA for the year ended December 31, 2018. For additional assumptions, see below.

The Stars Group currently intends to provide certain expected growth target ranges for the next three to five years, including Revenue and Adjusted Diluted Net Earnings per Share, as well as its expectations for Adjusted EBITDA Margin over the same time periods, and certain related information immediately prior to its Investor Day on March 27, 2019.

In addition, to provide further clarity with respect to certain key assumptions and the impact of its 2018 acquisitions on its full year 2019 expected results, The Stars Group is also providing information for certain financial items:

• Depreciation and amortization (excluding purchase price allocation amortization) of between $75 million and $85 million;
• Cash interest expense of between $290 million and $300 million;
• Effective tax rate (applied to Adjusted EBITDA less cash interest expense and non-purchase price allocation related depreciation and amortization) of between 8% and 10%;
• Diluted Shares of 277 million; and
• Capital expenditures, which include estimated spend on intangible assets, property, plant and equipment and certain development costs, of between $110 million and $150 million.

These unaudited expected results and other information reflect management’s view of current and future market and business conditions, including certain accounting assumptions and assumptions of (i) expected Betting Net Win Margin of approximately 9%, (ii) no material changes in the current challenging operating conditions in certain markets from prior regulatory changes, including constraints on payment processing, and no material changes to current expectations with respect to certain macroeconomic or political events, including Brexit, (iii) no other material regulatory events or material changes in applicable taxes or duty rates, (iv) no material investments associated with the entry into new markets, (v) no material foreign currency exchange rate fluctuations, particularly against the Euro, Great Britain pound sterling and Australian dollar, (vi) no material impairment or write-down of the assets to which depreciation and amortization relates, (vii) no material change in the prevailing EURIBOR or LIBOR rates as at December 31, 2018 and no material adverse impact on applicable hedging counterparties, (viii) no material change in the mix of taxable income by jurisdiction, rate of corporate tax or tax regimes in the jurisdictions in which The Stars Group currently operates; (ix) no material change in the geographies where The Stars Group currently offers its products, and * no material change in The Stars Group’s Diluted Shares. Such guidance is based on a Euro to U.S. dollar exchange rate of 1.135 to 1.00, a Great Britain pound sterling to U.S. dollar exchange rate of 1.31 to 1.00 and an Australian dollar to U.S. dollar exchange rate of 0.712 to 1.00.

Annual Information Form, Consolidated Financial Statements, Management’s Discussion and Analysis and Additional Information; Internal Control Over Financial Reporting

The Stars Group’s annual information form for the year ended December 31, 2018 (the “2018 AIF”), 2018 Annual Financial Statements, 2018 Annual MD&A, and additional information relating to The Stars Group and its business, can be found on SEDAR at www.sedar.com, Edgar at www.sec.gov and The Stars Group’s website at www.starsgroup.com. The financial information presented in this news releases was derived from the 2018 Annual Financial Statements.

Management has identified internal control deficiencies that constitute material weaknesses in The Stars Group’s internal control over financial reporting as of December 31, 2018. These deficiencies relate to the foreign exchange translation of intercompany loans to reporting currency and the timely assessment of inputs and assumptions used in the valuation of embedded derivatives. The Stars Group has identified and implemented, and continues to implement, steps to remediate these deficiencies. There were no restatements required in the 2018 Annual Financial Statements or otherwise as a result of the foregoing. The impact of translation of intercompany loans was correctly recorded in the 2018 Annual Financial Statements and there was no correction required in relation to the valuation of embedded derivatives. For additional information, see “Disclosure Controls and Procedures and Internal Control Over Financial Reporting” in the 2018 Annual MD&A.

In addition to press releases, securities filings and public conference calls and webcasts, The Stars Group intends to use its investor relations page on its website as a means of disclosing material information to its investors and others and for complying with its disclosure obligations under applicable securities laws. Accordingly, investors and others should monitor the website in addition to following The Stars Group’s press releases, securities filings and public conference calls and webcasts. This list may be updated from time to time.

Conference Call and Webcast Details

The Stars Group will host a conference call today, March 6, 2019 at 8:30 a.m. ET to discuss its financial results for the fourth quarter and year ended December 31, 2018 and related matters, and provide additional detail with respect to the information in this news release, its webcast presentation, and related annual reports and filings. To access via tele-conference, please dial +1-877-451-6152 or +1-201-389-0879 ten minutes prior to the scheduled start of the call. The playback will be made available two hours after the event at 1-844-512-2921 or 1-412-317-6671. The Conference ID number is 13687915. To access the webcast please use the following link: http://public.viavid.com/index.php?id=133404.

Reconciliation of Non-IFRS Measures to Nearest IFRS Measures

The tables below present reconciliations of Adjusted EBITDA, Adjusted Net Earnings and Adjusted Diluted Net Earnings per Share to net (loss) earnings, which is the nearest IFRS measure. For additional information, see “Reconciliations” in the 2018 Annual MD&A.