Kambi expects to reduce the headcount of its trading department by 2027 as it pivots to an algorithm-led approach in order to hit an ambitious long-term operating profit target.
Kambi this morning revealed a €150m (£130.9m/$161.9m) earnings before interest and tax (EBIT) target for 2027 and, in a capital markets day, executives outlined how the business intends to reach that figure.
The business also revealed that it expected revenue in 2027 to be between two and three times the size of its 2022 revenue. As the relative growth in EBIT would be larger than the relative growth in revenue, this suggested that Kambi hopes to increase its profit margins as it expands.
Now, the supplier has provided more detail of this, with a pivot towards more algorithmic trading helping to drive the projected increase in efficiency.
Kambi embracing algorithmic trading
Kambi deputy chief executive Erik Lögdberg described this pivot as “third-generation sports betting”. He said that currently, most sportsbooks are in what he called “generation two”, in which “humans drive algorithms”.
However, he said that, as the amount of data available to sportsbooks increases, “down to the XYZ coordinates of every player and every ball”, it will make more sense for algorithms to play a larger role in creating odds.
“We have to change the process, it cannot continue around the human,” Lögdberg said. “We have to build the process around the algorithm itself.
“If we build it around the algorithm we can make it literally millions of times bigger than what we work with now.
“And what we do is we bring in the human right at the end for the questions the algorithm can’t answer.”
Kambi CFO David Kenyon added that this might lead to higher costs in the short term, but lower spending by 2027.
“There will be a 2023 ramp-up in costs, but ultimately we think we will make savings in the long-run as we reduce the resources needed in trading,” he said.
“In algo trading there will be a growth in costs in 2023, but ultimately the costs in that part of the business will be more than offset by the savings we can realise.”
When asked about Kambi’s large staff of traders, Kambi chief executive Kristian Nylén directly addressed whether headcount in this area would decline.
“I think the message was quite clear,” he said. “We believe there are cost efficiencies to be done in the future.
“We do all our pricing with what is relatively quite a large number of people. And we expect that number to be lower in the future.”
Betting on new markets
New markets will be key to Kambi hitting its 2027 revenue target. Kenyon said that the supplier’s assumption of a $50bn target addressable market by 2027 includes the launch of regulated sports betting in Brazil, Texas, California and one of India or Japan.
“We need to be able to launch in one big regulated market in Asia before 2027,” he said. “Either Japan or India, or hopefully both of them.”
The launch of regulated sports betting in Brazil was set back earlier this month when outgoing president Jair Bolsonaro opted not to sign regulations to govern the vertical.
In Brazil, Kambi agreed to partner with local fantasy sports leader Rei de Pitaco.
“Rei de Pitaco was our number one target in the Brazilian market,” Nylén said. “We had really struggled to find who would be the leading local heroes in the Brazilian market, but we think we have the leading partner.
“They are the Brazilian DraftKings or the Brazilian FanDuel. They’re doing fantasy sports but we really expect that they will do big things in sports betting when that market opens.”
While operators based abroad and operating in the unregulated Brazilian market were largely unaffected by the setback for regulated sports betting, local businesses lost an opportunity to enter the market. Nylén made clear that in all of the markets it expects to regulate soon, Kambi planned to wait until local regulations were actually in place before entering.
In India, meanwhile, there has been progress as the country’s Ministry of Electronics and IT in India published amendments to its Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules to address online gambling.
Under the rules, an online game is defined as any game played via the internet where a player “makes a deposit with the expectation of earning winnings”. If necessary, the Indian government may declare certain games to be covered by the rules.
Kambi modularisation strategy
Kambi also provided details of how it plans to execute its new strategy of selling modularised products – such as its bet builder product – rather than only selling an entire sportsbook solution.
This, chief commercial officer Cecilia Wachtmeister said, would allow Kambi to partner with more tier one operators, which might do large amounts of trading in-house, but still look to third parties for specific products.
While Wachtmeister did not reveal specifics of whether any deals were in the works, she said that these top operators had responded positively to the new offering of modularised products.
“We have had active discussions with several of these operators, and it has been received positively,” Wachtmeister said. “We hope to be able to update you soon on that.”
In-house or outsourced?
In recent years, Kambi had faced difficulties because of a wider industry trend towards vertical integration.
“When DraftKings did the SPAC with SBTech, suddenly a lot of things changed overnight and it became fashionable to have a vertically integrated sportsbook,” Nylén said. “So we need to be more humble about it in the future and have a product that fits all kinds of customers in all kind of environments.”
However, the Kambi CEO added that he expected this trend to reverse soon, with outsourcing again increasing.
“Why do we believe that outsourcing will increase? First of all, there are more and more regulated markets and in regulated markets there are tougher conditions to follow,” he said. “For operators that means more pressure on profitability. But for us, we like regulation. It gives us more opportunities.
“Second, the macroeconomic environment. We all know where it is: rising inflation, rising interest rates. Kambi can help with that as they can pay commission on revenues rather than fixed costs in house.”