Playtech’s 2016 interim results show an increase in revenues of 24% on a constant currency basis to € 337.7m. Net profit was up 84%. Superb results. But on an actual reporting basis the profit is reduced, down from € 83.9m to € 48.8m
The Chief Finance Officer, Ron Hoffman, explained on a call to investors that in the previous year the currency fluctuations had gone in Playtech’s favour producing a gain of € 27m. In 2016, on the lead up to and the aftermath of the EU referendum, the fall in Sterling and other currencies had cost Playtech € 43m. It has not ended there either. Since the cut off date for the interim results (30 June 2016) the company has incurred a further currency loss of another € 13m.
None of this detracts from the overall underlying strength in the performance of Playtech which has been excellent.
But it does raise one question – why report in Euros in the first place when forty percent of your customers are located in the sterling area, and thirty five percent are located in the Philippines?
The decision to report in Euros instead of US dollars was made in 2008 when the company said that most of its income was likely to be sourced in Europe. At the time it seemed sensible since the US had introduced UIGEA which effectively closed the lucrative US market. All operators turned their attention to Europe. But as we know only too well the EU countries followed a path of protection, regulation, and high taxes which caused operators to switch their attention to the reasonably taxed UK and Asia.
Playtech has done well to market it services in the UK, winning William Hill, Ladbrokes, Coral, Bet 365 and many more. Even though a large proportion of its income was derived in GBP it still continued to report in Euros. Overall it has most likely done well from the trade. From January 2013 to January 2016 GBGC believes reporting in Euros has created a tailwind of five percent a year for Playtech’s profits. This last twelve months has seen a reversal with the GBP falling against the Euro by 14.5%.
Could Playtech have hedged against the fall in the GBP? Yes, they could have, but why would they? The bookies and pollsters had Remain clearly in the lead on the UK’s referendum on EU membership.
How can such a dilemma be avoided for any company in the future? There are two risks. One is structural where there is a mismatch between where the company resides and where the customers are based.
The other risk is transactional which result from the contractual timing difference between a commitment and actual cash flows. For example you are based in the UK (GBP) and invoice a client in mainland Europe (Euros). The contract allows 30 days for settlement and the GBP – Euros exchange rate changes substantially to cause a loss during the settlement period.
Transactional risk is more manageable by shortening the payment terms or in the case of a large transaction adopting a hedging strategy.
Structural risk is far more difficult to control but not impossible. Japanese car companies, for example, that export to the US choose to manufacture in the US and thus reduce the exchange rate risk of the USD – Yen.
Generally, it is best to report in the same currency that matches the payments to the company from the large majority of your key customers.