IG Group Holdings plc (IGG) Earnings Call Transcript

Good morning, and welcome to the Underdog Shareholder seminar for IG Group. I would like to remind all participants that this call is being recorded. I will now hand over to Breon Corcoran, CEO, to begin the presentation. Please go ahead.

Thank you. Good afternoon, folks, and thank you for joining us. Jeremy Levine here on my left, Co-Founder and CEO of Underdog and Clifford Abrahams, IG Group CFO on my right, to join me today. We announced the Underdog acquisition at the end of July, and I recognize that it's incumbent on me to explain clearly the conviction I have and that we have that the Underdog acquisition will create real value for you, my fellow shareholders. In a few minutes, we'll take you inside the business and later take questions. But before we do that, I'd like to briefly comment on IG's Q3 trading statement issued last week. I'm more convinced than ever of the business that we're building. As I said in July 2024, we needed to close product gaps and simplify our propositions to grow active customers sustainably. In Q3, organic active customer growth was 17% year-on-year. In July 2025, we announced measures to increase revenue retention in our over-the-counter business. Since implementation, over-the-counter revenue retention has averaged 80% through the end of Q3 2026. We're pleased with this, and we see the potential to increase it further over time. Q3 results themselves were disappointing, reflecting customer positioning in the period, although consistent with our modeling of possible outcomes. Our model is working as expected, and I remain convinced it will deliver better returns over the long term. This slide, which you've seen before, summarizes why we're doing this transaction. Underdog gets us into a high-growth adjacent category spanning daily fantasy sports, prediction markets and more. Prediction markets are growing quickly, led by sport and underdog is built and designed for sport. Underdog performed well in Q3, heading into its busiest quarter of the year, which includes more of the NFL season and the start of the NBA season. The business has strong momentum, and I remain convinced that Underdog will accelerate IG's scale and growth profile. With that, let's start with a short video introducing the company. And after that, Jeremy will take you inside the business that he has built.

I'm really excited to be doing this, my first one of these public market events. So I'm looking forward to you back after. Hopefully, I can help answer your questions and give you some context on Underdog and why we're so excited about our performance and the opportunity ahead. I'm going to take you through a bit of our history, how we win with product, and our results year-to-date. And I'll make sure to answer the questions we've heard most since announcing our deal. How do we succeed in a competitive environment, how we capture margin and how we're well set up for the regulatory developments to come. One thing to keep in mind as we go, at its core, Underdog has been built for fans to express their opinions on sports. We've always had the view that it's our job to handle the underlying regulatory complexity gracefully so that the customers can express the opinions they want. Today, I'm excited to show you how we've done that. First, our team. There's 2 things I talk about every company in all hands, people and product to the point where the company is definitely sick of hearing me say it. I'm very proud of the team we have at Underdog. My background quickly, I sold my first company, Star Street to DraftKings in 2014, my second draft to Flutter in 2017, and that's where I might bring on. At Star Street, we had built the first Pickam fantasy game. At Draft, we built the first mobile draft game, both games we now offer at Underdog. At Underdog, we were the first to offer peer-to-peer pickam and later the first sports operator to put prediction markets in our app. A few key folks to highlight on the team. Nick Lundren, our Chief Legal Officer, led the first self-certification of sports event contracts well at crypto.com. His doing so largely created the sports prediction markets category. Will Twin led risk and trading for FanDuel and now runs our market maker. And my co-founder, Brandon, is the best product line I've ever worked with. We've got an amazing team of innovators, domain experts, and we've leaned aggressively into AI across the business, especially in how we develop software, and we've seen our velocity improve massively as a result. Through our first 6 years, we were the fastest-growing sports gaming company in U.S. history. Net revenue grew from $9 million in 2021 to $441 million in 2025. We grew fast even though we were limited in what we could offer by the regulatory frameworks we operated under. Our core product was a fantasy game called Pickhm. In Pickhm, customers pick how players will perform for set stats. They must always pick multiple players from multiple teams. That's what makes it fit under the Fantasy Sports regulatory framework. There are no game outcomes or team options at all, and they have no ability to make just a single selection. They had no ability. With Pickhm, we were able to offer about 1/3 of the experience sports fans want in about 2/3 of the states. It was enough for us to grow extremely fast, especially in the states without legal sports betting, but there was more our customers wanted. You can see on this slide some examples of what our customers could do in the fantasy regulatory framework versus what is available via online sports betting. In sports betting, customers can pick a team, a single player, players and teams together, players all from the same team, all things we couldn't offer. That is in prediction markets. Once sports event contracts became possible, it was clear we could offer a better product to our customers, especially in the key states like California, Texas and Georgia. So we ran at it. In 10 months, we've moved to 3 structures: a technology partnership with Crypto.com, our FCM connected to Kashi and our own full stack exchange UDX, which we launched in July. Each step improved the product for our customers and improved our economics. We've now got the full stack of necessary pieces, all 3 of the critical U.S. derivative licenses, an FCM, DCM and a DCO. We're the only sports-first operator live with all 3. Owning the full stack allows us to offer the best customer experience and capture structurally higher margins. A key piece of our offering is our proprietary orchestration layer. Via the orchestration layer, we're able to route customer orders depending on where the order is and where it's made, depending on what the order is, where it's made, all in service, we're providing the best experience to our customers. You can see here how owning the full stack and having the orchestration layer shows up for our customers. All those entry types from a few slides up that our customers couldn't do earlier with us, now they can. Singles, combos of any kind, players often the same team, a single player, really any opinion they want to express, now they can. The orchestration layer is the plumbing. It handles the regulatory complexity, so the customer never has to think about it. And it all sits in a seamless single app with one account and wallet. A customer in California used to have player fix only. Now they have players, teams, singles, combos and everything just works, the full offering in almost every state. Now that we have the core experience nailed, we get to focus more on net new innovation. Since we announced the deal just over 2 months ago on July 30, we've launched 2 new games, Crash and rips. And this month, we're launching Supercharge, a new market type we think our customers will love. Games are driving more and more of our activity, and they're a great example of our product velocity and how it's a key driver of our success. And just like the core experience, everything we offer is seamless in the same app. Hopefully, you can see we've consistently innovated across regulatory frameworks. We started offering single-player fantasy. We then built champions, the first peer-to-peer picking game to help satisfy some regulator concerns. We launched sports betting under the state regulatory framework. But then when prediction markets came, we quickly sprinted towards the opportunity, operating as a technology service provider and FCM and now a full stack exchange, leveraging our DCM and DCO. Our product ability and velocity is a massive advantage in our ability to navigate uncertain regulatory environments. And there is, of course, uncertainty with prediction markets. We believe the uncertainty is likely to be largely resolved by the U.S. Supreme Court, and we think the final resolution is quite likely to come next year. There are 2 directions of travel, and we're well prepared no matter the direction. If federal oversight holds as is, you've seen how we're set up in that direction. If the Supreme Court defers authority to the states, there's different variations to what could happen, but would largely go back to the setup that made us the fastest-growing revenue company in the category through our first 6 years. Because of the way we've built our product, any change in the regulatory environment will be seamless for our customers. They'll be in the same app, same account of wallet, same core experience. And in our key states, it's just a question of which markets are available to them. Do they have team markets or if there are no sports prediction markets, only player markets. We look forward to the clarity the sooner, the better. 2026 has been a year of transformation for us. Last NFL season, prediction markets reset what could be offered to sports fans across the U.S. We put our heads down the off season and spent the first part of the year rebuilding our product, as you've seen. Given the product transition we had to make, we deliberately slowed investment, taking marketing spend down over 30% year-to-date. We wanted to make sure we are back to having what we believe is the best product for our customers before spending more aggressively on marketing. The signals from month 1 of NFL season are very strong, and we're confident that, again, we have the best product for our core customers. Customers are engaging more hand per customer is up 165% year-over-year in Q3. Average deposits per customer up 109% in that same period. Net revenue in our slowest quarter of the year, Q3 was $105 million, up 118% year-on-year. Handle grew even faster and monthly actives grew 13%. I do just want to caveat the year-over-year revenue growth in Q3 benefited in part by the sporting calendar as we had some World Cup in Q3 and by us lapping an unusually bad margin period at the end of last Q3. Also worth pointing out, our business does have variance and volatility tied to sports results. Our results are impacted by the outcomes of games and player performance. So when there are unusually high scoring games or favorites consistently win, we'll see it in our results. But over time, we have a lot of confidence in our trading ability and our structural edge. Given the product transition we just made and the KPIs we're seeing, we're feeling great about accelerating customer growth as we head into the most exciting sports calendar of the year with NBA season starting in just a few weeks and NFL a month into its season. To close, Underdog is the fastest-growing sports gaming company through our first 6 years with over 5.5 million deposit customers. We're the only sports operator -- sports-first operator live with an active SCM, DCM and DCO. We offer nearly 100% of the sports experience in almost every state in one seamless app. Our revenue is well diversified, and we're well set up to succeed under any likely regulatory outcome. And we now head into our biggest quarter of the year with the best product we've ever had. And with that, I'll hand it over to Clifford.

Thanks, Jeremy. Let me remind you of the financial highlights. We're comfortable the acquisition will deliver strong returns for IG in line with our M&A framework. The TAM is large and growing. You've seen how Underdog has delivered very strong revenue growth. We believe that Underdog can succeed in different regulatory scenarios. We're excited about the prospects for the business. Finally, the transaction is structured to incentivize the team to deliver. Underdog more than doubles IG's U.S. revenue and increases U.S. monthly active customers more than tenfold. On a combined basis, the U.S. contributes 41% of revenue, up from 19% now. Underdog also diversifies IG's revenues by product, which we expect to reduce short-term variability as underdog's revenue streams are largely uncorrelated with IGs. Following the transaction, Prediction Markets and DFS would represent 27% of combined group revenues. So IG relies less on any one single product. In summary, the transaction brings strong strategic and financial benefits. It accelerates IG's growth, diversifies our products and meets our return targets. Next, a reminder on structure. The $1.1 billion upfront reflects the enterprise value for 100% of underdog at closing or 2.4x net revenue for the 12 months to June 2026. IG will settle the equity value in 2 parts. 60% through the issue of 24.1 million new IG shares a number fixed on the 30th of July 2026. To be clear, the number of shares we're issuing does not change with the IG share price. The remaining 40% will be paid in cash fund initially through a bridge facility. On top of that, an earn-out tied to 2026 revenue achieved of up to $200 million. Separately, there's a management incentive plan which sits outside the purchase price. It rewards eligible employees when underdog delivers 2028 and 2029 EBITDA targets, and underdogs own earnings will fund it. The earnout and the management incentive plan pay out only as underdog delivers. We'll now have plenty of time to answer your questions. Just a reminder that IG has another capital markets event on October 22, focused on IG's existing businesses. So the 3 of us are available now to answer all your questions regarding Underdog. With that, I'll ask the operator to open us up to questions.

Thank you. We will now start the Q&A. [Operator Instructions] Our first question comes from Ian White from Autonomous Research. Please go ahead.

Hello.

Yes, you're online, please go ahead.

Slight confusion because my name is not in, but thank you very much for the opportunity to ask a question. It's Hadarom UBS. Could I ask a couple, please. Firstly, thank you very much for laying out. Let me understand regardless of whether this is a UDX or crypto or Kashi Ultimate venue for trading, the user doesn't see any difference in the app. If I can confirm that's true. Then I guess the second question is, when we look at the data you publish, we can see that the UDX portion has grown from, say, around 50% of your volumes 2 weeks ago to now over 75%. I just wondered what your vision is, Germany, for the -- where the percentage should land. And when you say structurally higher margins from owning the whole stack, could you give us any more color on that, please?

Yes, of course. Thank you for the question, Heidi. So your first question was, does the does the customer see any difference. They do know what venue their trade is executed on. But the core UX, the core flow is the same no matter of the venue. And that's a really important part of the orchestration layer and the product we've built is it's totally seamless for the customer to express their opinion is something we're really proud of. I think your second question was the comment on UDX growth, and we have seen UDX scale scaling up nicely since we we have launched it. So we're really excited about that. But no specific guidance on the right mix. The mix is ultimately around what provides the best experience for the customers and ultimately, the best economics. So we're going to let the data continue to drive us in real time on that.

And is there any comment on the structurally higher margins you get from only the whole stack?

Yes. I mean it's -- if you think about a broker trade versus a trade that executes across every lever, there's ability for economics at every lever. So because we have every single lever there. There's the ability to capture more economics. We're not giving specific guidance or details on the margin at Neev.

And Haley, if I may add to that, because the technology is in-house, and the licenses are in-house. We have greater flexibility and critically also the ability to change things more quickly than we might in a slightly different world -- and we believe that the economics, the net customer economics will benefit from some of the ancillary products we offer around this, which is the point Jeremy was making by diversification. So to your first question, customer behavior will determine the end mix of prediction versus DFS. But we will -- we are almost agnostic to that over time. And as we broaden the product range around the core stack, we believe we will evidence better retention and better economics per customer.

Our next question is from Ian White from Autonomous Research.

I hope you can hear me okay. It is actually in white this time. Three questions, please, if I can. So Jeremy, please. Simply, what most excites you about the combination with IG Group, what does IG bring that improves underdog in your opinion, please? Secondly, can you talk a bit about your experience running a commercial sports book, which I think on the dog gig for a little while, how much cross-selling did you sort of see at that time during the period you ran that offering. Obviously, you would have had a broader suite of products, at least for some customers, did they start doing more with you and move away from other sportsbook providers. That's question two. And lastly, can you help me understand what makes you confident you can sort of sustainably internalize volumes onto your own exchange when there are established sort of liquid markets for some of the products that you might want to offer. Can you just help me understand that, please? I'm thinking around basically best execution on the last point, interesting thoughts there.

Yes, for sure. Thank you, Ian. Glad we finally got you -- so let me start with your first question, just what makes me most excited about IG. And I think it's a few -- there's kind of some gating factors when we decided when we decided this -- we wanted to team up and then there's a few key pieces. So the gating factors, obviously, are the belief in the team, Brion and Clifford, the business led by Michael Healy, Andy Big Sara, on the compliance and legal side has been a great partner already for us. So just seeing the caliber of the people the culture of the team there is building gave us a lot of belief in IG in the business, which, obviously, if we're going to be part of the business, we want to really believe in it. So that's a big part of it. But that's kind of the gating factor. Really, A big part of what drives, I think, the reason this makes a lot of sense is. We believe in this coming convergence, actually, it was Brian who kind of first shared the vision with me a while ago of the convergence of the different ways a customer can express opinions, not just in sports, but we've got kind of sports as our DNA on 1 side. And obviously, the IG's business is another DNA kind of in the financial markets almost on the other side. And it's very clear there's this coming convergence. That I think we, as a combined company, are really well positioned for, and it's going to be a really big opportunity we talk more about over the next couple of years. So that was a big driver. The question you asked about when we operated and a licensed sports book in America. So I think it's worth sharing a bit of what our strategy was when we operated mostly under the state regulatory framework. Our strategy largely was use our product, use the pick on product to acquire customers, of course, across the country, we really focused on the states without sports betting. About 40% of the country doesn't have legal online sports betting. That's big states like California, Texas, Georgia. In those states, we were the best legal way for a customer to express their opinions on sports. And as a result, we had tremendous growth in those states. There was always the belief that over time, states that didn't have legal sports betting would legalized sports betting. And our strategy always was to then offer that in a seamless experience, all in the same app where the customer effectively not much changes for them, except they now have more markets. They now have teams and some of the restrictions that they had to do or they had to kind of stay within the fantasy regulatory framework, those restrictions are all gone, right? So now they can do anything they want. So that was the strategy. When we launched Sportsbook in the 1 state we did in North Carolina, we obviously saw a ton of cross-sell because we didn't have to move a customer from 1 app to another from 1 account or 1 wallet to another. We didn't have to move them at all. We just -- we're able to put more markets there and take away restrictions. So customers kept on doing largely the same things with more options and a lot of them cross sold into what was then OSB because in that case, we turned off fantasy and it all became OSB. We had -- if you think about our customer history, there -- what they do in fantasy, it always has to be multiple players. So it's very similar to what a sports betting is considered a parlay. We had, in sports betting, I believe, the highest partly mix across the category because that's what our customers were used to doing in our app, and that's really what our interface was built for. We've seen a very similar thing. If you kind of think about the same strategy, we've now got to deploy that with prediction markets. So in our app, in California, customers went from before last September, it was only players now to having players and teams. All the restrictions that were there in Fantasy Sports remove from them and how they can express whatever opinions they want. And we're seeing that show up obviously in our data. I think your third question was around how are we confident in our ability to have volume on the exchange and execute trades on the exchange. And look, it's about the customers and what the customers want to do. What is offered across prediction markets, the currently, the markets themselves are largely commodities, a big part of the market, our single certainly are. And then you can think about combos as more bespoke -- but really, again, it's about the customer owning the relationship with the customer and what that customer wants to do, which is express an opinion on sports, right? It's not for them about what venue do they execute on. What regulatory framework is that under, it's about, hey, are the Patriots. I'm a Patriots, I'm going to use them in references all the time. Are the Patriots going to win today an how are their players going to do?

And just to build on that, Ian, as you know, some of us have experienced from the Betfair Exchange days while it's important, liquidity is very important. Liquidity doesn't predetermine, doesn't necessarily predetermine success. So we think there will be multiple exchanges. And to the specific question about best execution, without -- just going back to what Jeremy said, we obviously have considerable experience of operating in regulated financial markets where things like best execution are core to the product offer. So I think as this market evolves over the coming months and years, we will bring some capabilities to the table to bolster the incredible customer centricity and product velocity that underdog brings.

Can I follow-up just briefly on the final point? Is it -- just is it about what customers want to do? Or is it about sort of sort of what is required by regulation basically? Can customers say, look, I want to execute on underdog, do they just sort of hand you a position and say, I want the best price for that. And you have to kind of work out the answer to that, whether it's internal or third party? And then just on the point that you made, Breon, am I sort of hearing correctly that you're really talking about here about offering proprietary liquidity, your own market making basically to boost on own venue. Is that where this is likely to go.

Yes. So the customer to be clear, the customer does know it's there in the text, what venue their trade is ultimately going to execute on. But a customer is not coming into underdog saying I want to execute on UDX. I want this to be fantasy. I want this to be on a different platform. They're coming in and saying, "I want this combination I want or I want this single the patriots to win that I want. And of course, they're going to want the best price at the amount they want for that. And so that's what our orchestration layer does seamlessly behind the scene, so they don't have to think about it. Again, it's about the opinion the customer wants to express we handle everything gracefully below the scenes, and it's a huge part of the value stack for us and the value we built in the product. And on the liquidity part, I mean, as we bring on more and more market makers, obviously, there's growing liquidity and we've got a lot of customers that as well provide the liquidity into the platform.

It can be dangerous to be seduced by all the similarities. But I think there's a probable end state here where customers express use Derma's words, customers express opinions and they get filled through a selection of exchanges where there are varying mix of market makers depending on what customers are expressing to opinion on. And that resonates a bit with putting the Sportsbook on top of the exchange of Betfair, where we were able to offer different product to differentiate ourselves from sports books and to differentiate ourselves from exchanges because we had product flexibility and promotional flexibility that people, who just operate in on reg stack or 1 tech stack don't have. In terms of the opportunity for IG, well, these are enormous markets. we can transform the prospects for IG shareholders by just being an active growing profitable part of them. And I do think this is not going to be a winner take all. I think there will be multiple winners in the coming years.

Our next question is from Jordan Bender from Citizens.

Everyone, thanks for the question here. Maybe I want to start on the customer acquisition. You guys sort of talked on it, Jeremy. But with the products that you're now adding to the platform, we think the crash product Packricks, are you seeing customers that you're acquiring from those specific categories maybe less sports-minded customers coming on to the platform? Or is it still the main funnel here coming from what was legacy DFS going into PM and then into those smaller product offerings? And then on the second one, I think you guys just kind of touched on a little bit, if we can elaborate a little bit more around the promos or the financial incentives, you own the whole stack in theory, that can allow you to freely give more money or customer incentives towards your customers and retain more of the economics in the long run. Jeremy, can you just kind of talk about the strategy there and maybe the advantage that gives you versus your peers?

Yes, absolutely. Thank you for the question. Thank you for tuning in Jordan. So first question was on what we're seeing in the early data for customer acquisition for kind of our new games products. And Look, we've only had a month with the games for the most part. So not ready to share a lot of data yet, but you asked about cross-sell specifically. And we are seeing really nice signs of cross-sell both ways, but we've got a lot to develop, a lot to learn on that. Your second question, I think, was just about the optionality and the opportunity kind of we have by owning the full stack, and it's obviously a really key part of what our strategy has been and what sets us up for success. -- is the full stack and the seamless integration of payment methods, promo mechanics, again, the ability for the customer to simply want to express an opinion and have that executed best for them. And then obviously, in owning each of the vertical pieces of it. We've got so much flexibility to be able to provide the best customer experience. And as I obviously talked about in the presentation, our North Star always is how can we offer the best experience possible to the most customers -- and we think as long as we follow that North Star, it will continue to drive us obviously to the economic rewards as a result.

Just to build on that, Jordan, we expect customers to come in through all of these different top-of-funnel devices. We see customers come in through the RIPS pack, which you'll probably know is a very fast-growing adjacent category in the United States. We also see customers migrate and change their behaviors who started in a daily fantasy background. We also see customers coming from states where daily Fantasy previously wasn't a thing. And I think the trick to maximize value creation in the coming years will be to really understand the unit economics for customers coming in through different parts of the funnel who then will cross-sell to varying degrees to other parts of the business. And you referenced promos in particular, doing that properly cognizant of regulatory constraints as and when they evolve, I think will be part of the way we'll capture value for shareholders, and maximize the experience for customers in the coming years.

Our next question is from Ben Bathurst from RBC Capital Markets.

Great. So I was wondering if you could just talk a bit more about your vision for the business in the sort of more adverse scenario production market. So scenario be Am I right in saying that you envisage opening back up into DFS products in those states where you recently surrendered licenses? And also, the Supereme Court does ultimately rule against sports price market. might you consider moving into regulated gambling to sort of broaden your target market? And just if not, why not?

So I'll take the second one, Jermey will take the first one. It's too early to say what will happen at the Supreme Court. And since we announced the deal on, I think, the ninth of July 30, there's been an awful lot of news, legal and political. We were expecting a lot of noise, there's been plenty. Probably one of the things that has changed since July 30, is the split court decision looks like that will be an accelerant to getting to a Supreme Court judgment. So probably end state certainty is coming sooner rather than -- sooner than probably we had -- we might have anticipated. I think that's a good thing. But Jermey, I think, is now going to talk to the flexibility of the product and the team I think it's too early to judge it. I think irrespective of the Supreme Court outcome, we will have a customer base. He's referenced 5 million deposit and customers already of young typically 20 to 40, typically male people that are interested in sports that we know are also trading on other asset classes. But guessing what will happen at the Supreme Court and what we will do thereafter. Other than hoping to remind people that we have considerable optionality. I think it's just too early to say what the end state will be. But do you want to take the first question about DFS.

Yes, for sure, Ben. I'll take your question kind of as what do you do if the Supreme Court does defer authority back to the states. And your question and kind of answered it, yes, we'll shift more of our flow or predominantly all of our sports flow back to the fantasy sports, the DFS regulatory framework. You asked about the states that we recently surrendered licenses in. So let me just explain that. We surrendered licenses in 7 states recently. We did that because in conversation with those regulators, those regulators are not fans of prediction markets. And if we want to offer prediction markets, it would have they would have preferred or kind of we would have preferred given the relationship that we're not also offering fantasy in those states. 6 of those 7 states, we did not offer the core pickup game that I've taken you through in this presentation. We only offered our draft gate. And while we love the draft product and the community that comes with it, it is a very, very low immaterial piece of our revenue mix. So in surrendering 6 of those states, it was essentially no revenue surrendered if we have to go back to fantasy if prediction markets go away. And then there's 1 other state where we have a lot of confidence that if prediction markets go away and we want to reenter that state, there is a fast path to doing so. So that's on the fantasy side. As Breon kind of articulated, we've built a new capability recently, obviously, with our exchange, and there is a lot that can be offered on that exchange via prediction markets and other asset classes if and when or even without sports prediction market is going away in either outcome, and that is something over time, we obviously will develop. We're also, as shared in the presentation, now able to spend a lot more of our time and energy on new games and experiences as we really feel good about our core product offering. So that will continue, and we'll continue to develop more resident games there that give us more ways to acquire customers, retain customers, engage customers, monetize those customers and obviously help diversify our revenue. And then you asked when we go into regulated OSB, and that's absolutely a question that we'll answer and evaluate, and we certainly have the capabilities to do so if that's what's best for our business. So again, we feel really well set up for any outcome. And was certainly kind of like the uncertainty or the limbo to get answered sooner than later because we feel really good about either path for ourselves.