Half Yearly Report

Betfair Group plc ("Betfair")

Interim results for the six months ended 31 October 2015

H1 highlights

· Revenue up 15% to £274.4m against a comparative period containing the World Cup

· Growth driven by Sportsbook, with volumes up 93%

· EBITDA up 9% to £80.5m, notwithstanding £26.8m of additional POC tax

· Interim dividend up 67% to 15.0 pence per share reflecting continued strong cash flow and the higher payout ratio target of 50% introduced in December 2014

Q2 highlights

· Number of active customers in sustainable markets up 31%

· Revenue up 16%, including a 25% increase in sustainable markets

· Sustainable revenue mix now 88% (Q2 FY15: 82%)

· Mobile remains the key growth driver across all products and now represents 76% of Sportsbook revenues

· Betfair US revenue up 35% following the successful integration of HRTV and strong casino growth

Recommended merger with Paddy Power

· All relevant regulatory filings have been submitted

· Shareholder documentation will be published on 27 November 2015

· On track for completion in Q1 2016, subject to shareholder and regulatory approval

Breon Corcoran, Betfair's Chief Executive Officer, said:

"Betfair traded strongly in its key markets throughout the first half of FY16. These results, which came against a tough comparative period featuring last year's football World Cup, are ahead of our original expectations and demonstrate the Group's continued strong momentum.

Our strategy of focusing investment in markets with good regulatory visibility continues to pay off. Betfair's relatively low exposure to unregulated jurisdictions meant that even though revenue decline in these markets accelerated, primarily due to the impact of suspending operations in Portugal, it was more than offset by growth in sustainable markets.

Betfair's two largest markets, the UK and the USA, accounted for most of this growth. Our Sportsbook continued to take market share, with stakes up 93% year on year. In the US, TVG's acquisition of HRTV in February 2015 gave it greater distribution and access to premium content, which, together with the business' existing momentum, resulted in H1 revenue growth of 38%.

Our markets remain highly competitive and, alongside our strategy of giving customers generous pricing and promotions, we believe it is essential that we continue to invest. Over the last twelve months we have added more than 100 people to our product development teams, and, adjusting for the World Cup, our sales and marketing costs were up 13%.

Notwithstanding this investment, and the significant burden of higher gaming taxes, strong revenue growth and continued cost discipline resulted in 9% higher EBITDA."

1 Underlying figures in FY15 exclude the profit on disposal of the Group's share of Betfair Australia. A reconciliation of reported figures to underlying figures is set out on page 7.

For more information, please contact:

Analyst and investor results webcast

There will be a live webcast of the results presentation at 10:00 a.m. GMT. Please pre-register for access to the webcast by visiting the Group website (http://corporate.betfair.com). A copy of the webcast and slide presentation given at the meeting will be available on the Group's website later today.

OVERVIEW

Revenue increased by 15% to £274.4m (H1 FY15: £237.6m), with double-digit growth in each of Sports, Gaming and Betfair US. Revenue from sustainable markets was up 24% to £238.9m (H1 FY15: £192.0m), reflecting a significant increase in the number of new customers, increased activity from existing customers, successful cross-selling of Gaming products and further growth in Betfair US.

Revenue from other markets was down 22% to £35.5m (H1 FY15: £45.6m), partly as a result of our decision to suspend operations in Portugal from July 2015 while licensing in the country is concluded and also due to the focus of investment in sustainable markets.

The revenue growth led to a 9% increase in EBITDA despite the introduction of the UK point of consumption tax ("POC") in December 2014, which amounted to £26.8m in the period.

We have continued to make good progress towards delivering our goal of achieving sustainable growth by:

· Focussing on sustainable markets;

· Investing in our product and brand to address a wider recreational market;

· Growing our business internationally; and

· Expanding operating margins.

Focus on sustainable markets

We continue to target investment in jurisdictions that we believe have good regulatory visibility; these 'sustainable markets' are currently considered to be the UK, the USA, Australia, Bulgaria, Denmark, Gibraltar, Ireland, Italy, Malta, Romania and Spain.

These markets, having grown by 24% in H1, are driving our overall growth and they contributed 88% of revenue in Q2 FY16 (compared to 82% in Q2 FY15 and 77% in Q2 FY14).

Investment in product and brand

We see product differentiation as a key driver of both customer acquisition and retention and we continue to invest heavily. In the first half, gross technology spend increased by 17% as we expanded the number of developers building new products. Recent enhancements include the roll out of our 'partial Cash Out' tool across both the Exchange and Sportsbook; launch of a new Exchange website and mobile app with a number of customer benefits including faster pricing updates and bet placement; expansion of our range of in-play Sportsbook markets, in sports such as tennis, rugby and basketball; introduction of a new virtual sports product; and significant improvements to our Italian products to ensure they were competitive ahead of the new football season.

For the new football season we launched our 'More to Play For' TV campaign across Sky Sports and BT Sport, alongside marketing partnerships with five Premier League clubs and a significantly increased presence on stadium perimeter boards in the Premier League, La Liga and Serie A. This investment has contributed to a 47% increase in UK&I activations since the start of the season.

International

Betfair's two most significant international investments are our startup businesses in New Jersey, where we operate an online casino, and Italy, where we operate Exchange, Sportsbook and Gaming products.

Revenue in the online casino in New Jersey doubled to £3.8m, driven by strong growth in the number of active customers.

In Italy, while our business remains at an early stage of its development, the Exchange is successfully attracting new customers despite the limitations that result from product restrictions and ring-fenced national liquidity. Cash Out, which is only permitted on exchanges in Italy, is proving very popular and compares favourably with Cash Out usage on Betfair.com; in October, 55% of Italian Exchange football customers used Cash Out compared with 35% in other regions. This is reflected in customer satisfaction, with 85% of customers now rating the Exchange positively, compared to 63% in the prior year.

We recently also launched an Exchange in Spain having previously ceased offering the product in 2012 following the introduction of new regulations. While liquidity is ring-fenced, we are, unlike in Italy, able to use largely the same product as in the rest of the world and we are hopeful that our differentiated product will help us to grow our presence in the market.

Expanding operating margins

We have continued to demonstrate good operating leverage in the business. In the first half, operating expenses increased by 6% while revenues were up 15%. This would have resulted in significant operating margin expansion had it not been for £26.8m of additional costs relating to point of consumption tax.

Recommended merger with Paddy Power

Relevant filings have been submitted to applicable regulators and shareholder documents will be published on 27 November 2015. Betfair will hold a Court Meeting and a General Meeting for shareholders on 21 December 2015. Subject to receiving the necessary approvals, we continue to expect the merger to close in the first quarter of 2016.

OPERATING REVIEW 

In H1 the number of active customers in sustainable markets increased by 21% to 1,043,000 (H1 FY15: 861,000) driven by the UK and Betfair US. The growth rate was dampened by the large number of customers acquired during the World Cup last year. The number of active customers in the second quarter, which was not impacted by the direct World Cup comparison, was up 31%. The number of active customers in other markets fell by 13% to 146,000 (H1 FY15: 167,000), reflecting the ongoing focus of investment on sustainable regions and the recent suspension of operations in Portugal.

Sports

Sports revenue increased by 11% to £184.8m (H1 FY15: £166.6m), representing a strong performance against a comparative period that included £15.9m of revenue from the 2014 World Cup and abnormally high sportsbook margins. The Sportsbook continued to be the key contributor of growth and saw a 93% increase in volume to £0.8bn.

Football remains our most important sport and is the focus of most of our advertising and promotional spend. Accordingly, it is key to driving our new customer activations and future revenue growth. The new season has started well, picking up where the last season ended, and detailed planning is already well underway for Euro 2016. We have been encouraged by early trials of our 'Acca Edge' product innovation, which offers customers the ability to tailor 'insurance' on their accumulators within the betslip.

Improving our racing product has been a major area of focus in the last twelve months and this made a positive impact in H1. Royal Ascot saw record betting activity across Betfair's Exchange and Sportsbook, and there were strong performances at several UK autumn meetings and in the Breeders' Cup, which benefitted from the launch of in-play betting on US racing.

The Rugby World Cup in October, while being small relative to the football equivalent, was an opportunity to showcase significant improvements in our rugby product as well as providing incremental betting opportunities. Several close-fought ties enabled Betfair's signature 'Cash Out' and 'Price Rush' products to come to the fore; one Sportsbook customer who bet £10 in-play on Japan to beat South Africa received a 'Price Rush' from 11/1 to 250/1, netting over £2,000 of extra winnings.

Betfair's Exchange remains a key platform for political betting and £31m was traded on two of the biggest upsets in political betting history; the Conservatives traded at 10/1 shortly before their shock majority victory in May's General Election and Jeremy Corbyn was matched as high as 980/1 before claiming an easy win in the Labour leadership contest.

Gaming

Gaming revenue increased by 18% to £49.7m (H1 FY15: £42.0m) driven by a 32% increase in the number of customers using the product. The customer growth is primarily due to increased cross-selling from Sports, with record numbers of Sports customers trying Gaming products for the first time.

We have placed significant focus on improving our mobile Gaming product and the channel has continued to drive growth. Mobile revenue was up 86% and 57% of all Gaming customers used the channel in the period (H1 FY15: 46%).

Betfair US

Betfair US revenues increased by 38% to £39.3m, driven by growth in both TVG and our online casino in New Jersey, and EBITDA increased to £8.3m (H1 FY15: £3.5m).

In TVG, handle and revenue increased by 14% and 25% respectively (both in constant currency). This growth was helped by the acquisition of HRTV in February 2015, which increased TVG's access to premium content leading to higher customer engagement and, in turn, wagering volumes.

The mobile channel continues to show strong growth, with handle up 75%, following the launch of a new mobile website to complement TVG's native iOS app.

Betfair's online casino increased revenues by 100% to £3.8m (H1 FY15: £1.9m).

Regulation

Following the entry into force of the Betting (Amendment) Act in April 2015, Betfair was awarded a licence to operate a sportsbook and betting exchange in Ireland.

In September, we were awarded an interim licence to offer our products in Romania and we are currently applying for a licence in Portugal under the gambling law that entered into force in June. In accordance with a request from the Portuguese regulator we switched off our site in July whilst the process is concluded. The impact of this on Betfair's profitability in FY16 is estimated to be c.£10m.

FINANCIAL REVIEW

Summary

1 EBITDA is defined as Group operating profit before net finance expense/income, tax, depreciation and amortisation.

2 Underlying figures in FY15 exclude the profit on disposal of the Group's share of Betfair Australia. A reconciliation of reported figures to underlying figures is set out on page 7.

Revenue increased by 15% to £274.4m (H1 FY15: £237.6m) and EBITDA was up 9% to £80.5m (H1 FY15: £73.9m).

Reported profit before tax, which in the prior year included a £6.4m gain relating to the disposal of our joint venture in Australia, was down 1% to £66.3m (H1 FY15: £67.3m), and reported earnings per share was up 10% to 60.3 pence (H1 FY15: 55.0 pence).

Underlying earnings per share, which excludes the gain on disposal, increased by 23% to 60.3 pence (H1 FY15: 48.9 pence).

Gross margin

Gross profit for the year increased by 7% to £214.0m (H1 FY15: £200.4m). This represents a gross margin percentage of 78.0% (H1 FY15: 84.3%), with the year-on-year reduction driven by higher gaming taxes following the introduction of UK point of consumption tax in December 2014.

Administrative expenses

Sales and marketing spend increased by 1%, with additional investment in TV, print and stadium perimeter boards largely offset by the lack of a major international football tournament. Adjusting for the World Cup spend last year, sales and marketing costs were 13% higher.

Gross technology costs before capitalisation of internal development expenditure were 17% higher than the prior year, driven predominantly by additional headcount. In H1 FY16, £2.9m of internal development expenditure was capitalised (H1 FY15: £3.1m). Technology expenses after this capitalisation were up 19% on the prior year.

Operations spend was up 1% in the period, with greater demand placed on customer services resources as a result of the growing customer base broadly mitigated by efficiency savings, including increased use of live chat.

General & administrative ("G&A") costs were up 2%, predominantly reflecting inflationary increases in salary costs.

Depreciation and amortisation of £13.3m was 5% lower than the prior year (H1 FY15: £14.0m) primarily as a result of assets becoming fully depreciated.

Average headcount of 2,056 was 13% higher than the prior year (H1 FY15: 1,827), largely driven by increased technology headcount and additional operational staff to serve the growing customer base.

EBITDA

EBITDA excluding Betfair US increased by 3% to £72.2m (H1 FY15: £70.4m), with strong revenue growth mostly offset by higher gaming taxes as a result of UK point of consumption tax.

Betfair US EBITDA increased by 137% to £8.3m (H1 FY15: £3.5m), with further growth in TVG, aided by the acquisition of HRTV, and reduced losses in our online casino.

Finance income and expenses

Net finance expense was £0.9m (H1 FY15: income of £0.9m). This includes interest on corporate funds of £0.3m (H1 FY15: £0.7m), net foreign exchange translation losses of £0.1m (H1 FY15: £0.2m gain) and non-cash charges of £1.1m (H1 FY15: nil) relating to deferred and contingent consideration for the acquisition of HRTV. 

Taxation

The Group had a tax charge of £10.3m in the period (H1 FY15: £9.7m). The Group's underlying effective tax rate was 15.5% (H1 FY15: 15.9%) and we continue to expect the long-term sustainable tax rate to remain around this level.

Dividend

The Board has declared an interim dividend of 15.0 pence per share (H1 FY15: 9.0 pence). The increase reflects the increased profitability of the business, continued strong cash flow and stated dividend policy of targeting a payout ratio of approximately 50% in the medium term (up from 40% previously).

This will be paid on 15 January 2016 to holders of relevant shares on the register at 18 December 2015.

Capital expenditure

Capital expenditure ("capex") increased to £12.2m (H1 FY15: £7.4m), driven by increased investment in technology infrastructure.

Cash and cash flow

Free cash flow in the period decreased by 15% to £57.4m (H1 FY15: £67.2m). The year-on-year movement was primarily due to UK POC tax payments, higher corporate tax payments relating to FY15, increased capex spend and working capital timing differences, offset by the strong business performance.

Cash at 31 October 2015, excluding customer funds which are held off-balance sheet, was £139.4m (31 October 2014: £271.4m). The reduction was predominantly due to the return of £199.7m of capital to shareholders, which was completed in January 2015, partly offset by the cash generated from operations.

1 Other is comprised of the net purchase of own shares and proceeds from the issue of share capital.

2 Excludes the effect of exchange rate fluctuations on cash held.

Reconciliation of Reported to Underlying

Responsibility statement of the Directors in respect of the half-yearly financial report:

The Directors confirm that to the best of their knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board of Betfair Group plc

Breon Corcoran Alexander Gersh

Chief Executive Officer Chief Financial Officer

25 November 2015 

Understanding and managing our principal risks

The Board continuously assesses and monitors the key risks of the business. The key risks that could affect the Group's performance and the factors that mitigate those risks have not significantly changed from those set out on pages 24 to 26 in the Group's Annual Report and Accounts 2015 (which is available to download at http://corporate.betfair.com). The principal risks facing the Group, together with the Group's risk management process in relation to these risks, continue to be monitored, reviewed and re-assessed. A summary of the principal risks and uncertainties that are most relevant to the remainder of the current financial year is included below:

· Online gambling regulation and licensing - new licensing regimes which make it commercially unviable for us to operate our products can restrict our ability to grow the business. While opportunities exist, they are not without risks - such as commercial viability, delays in licensing of betting exchanges compared with other products, how our products are taxed and licensing one section of the online market, such as sports betting, but not another, such as casinos or poker. Restrictions on advertising can reduce our ability to reach new customers and market new product offerings. We work closely with regulators and governments throughout the EU and elsewhere to try to secure favourable regulation for our products. We have dedicated internal and external legal, tax, compliance and public affairs resources with responsibility for advising business units in these matters and through appropriate policies, processes and controls. External third parties help us to substantiate evidence to support using a gross profits tax model. We monitor developments in advertising practice.

· Competition/our brand, products and customers - online gambling is a very competitive industry. Our competitors are constantly looking to gain advantage through aggressive marketing campaigns, pricing, promotional behaviour and new product features which could impact revenue or margins. Product and delivery to market is vital to gain competitive edge over other operators. Our customers are at the heart of the business, reduced activity by major customers and/or a significant number of customers could have a material negative impact on our financial performance and growth. We aim to mitigate this risk by investing in brand and marketing tools and activity, monitoring competitors and their promotional offers and the continuous development of product, with emphasis on mobile products and innovative features as well as acquisition through marketing. We closely monitor the behaviour of our customers and have teams focused on their acquisition, management and retention. We aim to ensure we provide a service and platform which grow value for both the customer and Betfair, and reduce the risk of customers leaving.

· Technology infrastructure, systems stability and availability - a major failure of the Group's and/or third party infrastructure could lead to significant costs and disruptions that could reduce revenue and harm our business reputation. Reduced availability of our products arising through software, infrastructure and systems issues could result in a poor customer experience and may impact customer loyalty. Continuous investment in a cost effective technology platform and infrastructure to ensure stability and availability, eliminate single points of failure and improve performance. Focus is on a secure and scalable offering across all products.

· Taxation - changes in tax regimes can undermine existing tax planning creating unexpected liabilities. Adherence to tax planning is monitored through regular reviews of governance structures. Proactive involvement of tax specialists in key business decisions ensures tax planning remains effective. Revenue growth and operating leverage is helping to offset increased tax liabilities.

· Reliance on third parties - we rely on third parties across our business. All of our products are dependent on third party suppliers for content/data. Operational functions also rely on third parties for software solutions and infrastructure. Where possible we limit reliance on a single supplier to reduce potential single points of failure. We use formal contract and service level management processes supported by continuous communication to focus on quality and availability of services delivered by our key suppliers. We assess their resilience and review the potential options in the event of a need to change.

· IT disaster recovery and business continuity - availability of our product is paramount. A significant outage or unavailability of any of our products can cause reductions in revenue and loss of customers. Delays in restoring services following an outage or incident could result in loss of customers and reputational damage. We regularly review our Business Continuity Plans and our IT Disaster Recovery capability and have service level agreements in place with third parties. Where possible we have failover solutions available and seek to limit single points of failure.

· Recruitment and retention of key employees - continued success and growth is dependent on the performance of key directors, managers and staff. Retention and recruitment of these individuals is a key component in securing our ability to grow and develop our business. Our ability to continue to attract, retain and motivate passionate and highly skilled employees in an intensely competitive environment means that competitive packages and development opportunities must be available. The Board reviews key positions through the Remuneration and Nomination Committees. Key senior staff and directors are part of long term incentive plans which reward high performance and loyalty. All staff are offered regular salary reviews, a comprehensive benefit package and are able to join (subject to local jurisdictional requirements) share save schemes which give them a long term stake in our success. Group HR actively manage succession planning and processes which are in place throughout the business to identify key roles, conduct regular appraisal, succession and talent reviews, and to provide competitive package and career development opportunities. Our employees participate in engagement surveys which help us to link improvements to achieving our corporate goals while reducing employee turnover and improving productivity and wellbeing.

· Security of customer funds and reliance on financial institutions - some jurisdictions continue to put pressure on banks to refuse to process transactions from online gaming companies. A reduced ability to transact with customers can impact our growth and expansion into new territories. Actual or perceived mismanagement of customer funds could have severe reputational and/or financial impacts. There is the possibility of loss arising in the event of failure of counterparties. We have strong relationships with key financial institutions and banking and payment suppliers. Wherever possible we avoid reliance on a single provider. We regularly assess their resilience and alternative options in the event of a need to change supplier. Under the terms of a Trust Deed, approximately 94% of all customer funds are held on trust in separate bank accounts which are ring-fenced from our corporate funds. The remaining sums are customer funds which certain regulators require Betfair to hold in separate non set-off bank accounts in the name of the licence holder. Daily and monthly reconciliations of customer funds take place to ensure timely detection of potential fraud or error. All customer funds are subject to the Group Treasury policy which is reviewed annually by the Audit Committee on behalf of the Board. At 31 October 2015 the majority of the Group's customer and corporate funds were held with major systemically important counterparties or pooled AAA rated money market funds. Exposure to counterparties are regularly reviewed by the Chief Financial Officer and adjusted accordingly.

· Data management and security - breach or loss of customer or other sensitive data and information could lead to significant costs and disruptions that could impact revenue and harm our business reputation. Specialist monitoring and detection solutions teams are used across development and live product offerings to mitigate this risk. Access to customer and other sensitive data and information is restricted and monitored in a variety of ways. We have appropriate policies, processes and controls and mandatory security awareness training. We comply with the relevant data protection and privacy legislation. An independent review of cyber threat has been undertaken and supports our approach to managing this threat. 

Condensed Consolidated Income Statement

* EBITDA is defined as Group operating profit before net finance (expense) / income, tax, depreciation and amortisation. It excludes amounts in respect of the Group's equity accounted investments and profit on disposal of joint venture in the prior year and is considered by the Directors to be a key measure of its financial performance.

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Balance Sheet

Condensed Consolidated Statement of Changes in Equity

For the six month period ended 31 October 2015

Attributable to equity holders of the Company

Condensed Consolidated Statement of Changes in Equity

For the six month period ended 31 October 2014

Attributable to equity holders of the Company

* Employee Benefit Trust is defined as EBT.

** Following shareholder approval at the Annual General Meeting on 4 September 2014 and court approval on 8 October 2014, the Company cancelled its share premium account, transferring £22.2m to the retained earnings account within reserves.

Condensed Consolidated Statement of Changes in Equity

For the year ended 30 April 2015

Attributable to equity holders of the Company