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Interview: Betfair CFO Alex Gersh

AS a gambling man, it’s deliciously prescient that Betfair CFO Alex Gersh owes his accent, liberty and indeed his life to a courageous punt made by his parents during the depths of the Cold War.

In that year, 1979, US president Jimmy Carter and his Soviet counterpart, Leonid Brezhnev, met in Vienna, to sign the SALT II (Strategic Arms Limitation Talks) treaty – a joint bid to slow the rapidly mushrooming manufacture of strategic nuclear weapons by the two world superpowers. Part of that deal was to allow thousands of Russian Jews to emigrate – ostensibly to Israel, but in reality to the US, and more specifically, New York City, home to the most populous Jewish community in the world.

Gersh’s mechanical engineer father applied for consideration, resigned his job – a repressive and compulsory element of the process – and waited for the result. They “got lucky”. Gersh, an only child, vividly recalls that moment when his parents were granted permission to leave, given 30 days to sell everything and take a maximum of $100 per person with them into the unknown.

“My parents took an enormous risk and I’m eternally grateful to them because I wouldn’t be sitting here now,” says Gersh. “I’d be dead in Afghanistan if I was still in Russia. They took a gamble; they took a chance. We got lucky and left.”

Betfair financial highlightsFast forward to 2015 and 51-year-old Gersh sits astride a FTSE 250 company whose share price has risen by 300% in the two years since he joined. And he’s paid somewhat more than the few roubles he probably received in pocket money as a 13-year-old teetering on the edge of a highly uncertain future in the new world back in 1979 – £970,000 to be precise.

Gersh is nothing if not a canny operator. In December 2014, he sold his entire stockholding of 20,000 shares in the online bookmakers at £14.60 – netting him a tidy £292,000 to pad the dual British and US citizen’s bank account. He joined the UK’s biggest online bookmakers in December 2012 having spent seven years at NDS, originally an Israeli technology start-up – now bought out by Cisco and headquartered in Staines – that creates market-leading software for the global pay TV industry.

It was here that he worked with Abe Peled, its Romanian-born chairman and chief executive officer whom Gersh cites as his biggest business influence. “He informed a lot of what I do and learnt. Abe was an unbelievable guy,” he says.

Peled, a former technical officer in the Israeli Army Signal Corps, oversaw the successful sale of NDS to Cisco in 2012 for £3.17bn – some 30 years after it was acquired by News Corporation.

NDS was the subject of a 2012 BBC Panorama documentary that alleged that while it was part of the Murdoch-owned stable of companies, it commissioned a hacker to identify the codes used by ITV digital subscribers – then Sky TV’s biggest rival – to access the channels. The codes were allegedly leaked online so that they could be watched without an ITV digital subscription. The leak ultimately led to the channel’s collapse four years after its launch in 2002. At the time, a News Corporation spokesman accepted NDS’s assurances and denials of any wrongdoing given to the programme.

Transformers

Soon after joining Betfair that same year, Gersh set about helping to transform it into a more profitable beast. CEO Breon Corcoran and Gersh discussed how the “costs of the business were not right”.

“We took 700 people out of the business and saved £30m. But I’m the kind of CFO that will tell you that you can’t become prosperous by cutting and cutting. So we took some of those savings and reinvested them,” he explains.

“Having let go of 700 people, my biggest fear was what would happen to morale. I’ve been involved in restructuring before and I’ve never seen a situation where morale has dramatically improved. People now realised that they mattered, they didn’t have to clear everything 15 times, and they have a direct line to me or to Breon or Mark Brooker or anyone at the senior management level. They get their ideas enacted faster. And what do we ask in return for that? That they need to be accountable – that’s all.

“People say it’s more fun to work here now. And I think professionals ultimately just want to do something they’re proud of and look back on the year and say, ‘I did that’. Of course they want to be rewarded for that as well.”

Overall, the finance side of the company he runs is now “much leaner and more focused”, adds Gersh. And a key element of that drive, especially for a FTSE 250 company, is compliance and investor confidence.

“The confidence of investors and the public in how we operate is very important,” says Gersh. “We hold close to £300m of UK customers’ money so the quality of our security and the information we provide must be very robust. We need to be very transparent, so we tweaked our accounting policy so it was very clear if we’re spending money on operations or capital expenditures. So when we make large capital investments, we say, ‘Look – we just purchased another TV station in the US which shows horse racing (their second); this is how much we spent and this is what it is.’ I also introduced, at certain times of the year, profit guidance to investors and we give them a range.”

On the commercial side of the business, Gersh has instilled a robust culture of “payback”. Last year Betfair shelled out about £140m on advertising and marketing, and the former EY man naturally wants to know “the measurement of payback”, analysing promotions and helping the business change course through more effective allocation of resources.

“When I joined the business, the premise was that any internet business should be able to have operating leverage, which means that, for every pound of revenue, you don’t need to spend an additional pound of cost. You just need to be more effective at allocating the resources that you have,” he explains. The power of that analysis has already improved, says Gersh, and helped the business change course.

“A perfect example is that we advertised on Channel 4 racing last year. When we did, the analysis of that not insignificant spend showed that the payback – or what we were getting for it – was not the right thing to do. We no longer do that. We took that resource and are now going to be advertising on BT, which has the Champions League games next year, which is far more important for us. Finance played a very clear role in that decision.”

Such a muscular approach has also been applied to the eradication of cross-charging,which is anathema to Gersh.

“I’m a huge opponent of cross-charging so I abolished all of that here. To me, cross-charging is taking it from one pocket and putting it into another. My amateur psychology tells me that fundamentally people will do what’s easier rather than what’s important. It’s far easier for you and me to argue over how much my services cost to you rather than to say, ‘I’m going to get some revenue, some customers’,” he says.

“My experience is that re-chargers create a whole industry around them – everybody just goes, ‘I need to push these costs onto someone else’. But I don’t care if you need to look good. It’s what the business looks like that matters. So we’ve taken all that out and now everybody lives or dies together. So if one part of the business over-performed one year and another over-performed the next year – that’s fine, because the management team is much more cohesive in the way it operates. There are no silos left because no one has to protect their little bit.“

Taxing times

Betfair’s internet betting exchange model is now licensed in a growing series of geographies. It recently expanded into Italy – Europe’s second-biggest gambling market, and one of the most competitive. Other European territories where it holds gambling licences are Malta, Spain, Bulgaria, Denmark and Gibraltar.

Its move to operate under a Gibraltar licence in 2011 enabled the company make savings of up to £20m a year as a result of the switch. Until that point it had been paying 15% tax on gross profit from betting, but that plummeted to just 1%. At the time, the then-Betfair CEO David Yu said it was also looking to not fall foul of the “double taxation” trap which it faced under UK tax regulations.

The company also operates in Australia and the US. Meanwhile, Gersh has much to say on the subject of tax.

“Because we have different entities, we have transfer pricing and every so often HMRC looks at that. We have discussions and so far we’ve had no major issues. We’re what I would call a good operator. And while we certainly try to operate in the most effective way possible, we’re not here to try to avoid our obligations. In fact, on the point of consumption tax, I would love the rest of the world to have the kind of regulated regime that this country has because at least you have certainty from the investment perspective,” he says.

This gives a certainty of outcome – imperative for any self-respecting FD to make an informed and intelligent plan.

“While the larger established players like us will be able to pay the tax and continue to operate, the only issue we have – and we have made this point several times to the UK government – is that if they want a regime where only the properly licensed operators operate, they will have to enforce it against illegal operators. Because, fundamentally, the illegal operator has an advantage – I’m paying 15% point of consumption tax. He doesn’t,” he explains.

Gersh suggests unlicensed operators should be banned from advertising online, on TV and in print, as well as doing “something with credit cards so banks won’t take their processing – they don’t need to IP block; that’s not going to happen”. Should such steps be taken, the legitimate players “will only prosper, quite frankly”, enthuses Gersh.

“My hope is that every country decides they want the money, they want the taxes, and they’re willing to regulate and get behind the good citizens. It’ll be a much better world,” he adds.

Such taxes will cost Betfair £19m this year – “and that’s only since December” – and will “probably cost us close to £50m next year”. But he’s adamant that “business can prosper if it’s a level playing field”.

“If you look at our revenue – a disproportionate amount comes from the UK. Why? Because we invest here. We have just participated in the Sky and BT auctions for advertising. Why am I not afraid to spend significant amounts of money – and last year we spent about £140m on marketing? Because in this country I know I can compete on a level playing field with other operators,” says Gersh.

“Our profitability has sky-rocketed over the past couple of years since we came in and restructured the business and our share price is up 300%. So you need a regime like the UK that has a certainty of outcome. Taxes are part of life – you pay them.”

 

Game, set and match-fix

While sports betting is illegal in the US (its size in 2014 was conservatively estimated at about $400bn by NBA commissioner Adam Silver), having a flutter on horse racing is entirely legitimate. Betfair currently earns almost $100m of revenue from horse racing in the US.

“In the US, we have a very good horse racing business, close to 35-40% market share of online horse racing,” says Gersh. Betfair operates in all 22 states where it is legal.

The firm’s second strand is its casino business, regulated on a state-by-state basis. New Jersey only made online gambling legal about 18 months to two years ago, explains Gersh, and “you have to do it in conjunction with a brick-and-mortar casino, so we do it with the Golden Nugget”.

Perhaps it’s North America’s seemingly uncomfortable relationship with gambling – or the scores of Hollywood films that mine the darker aspects of the pursuit – that provokes an unprompted comment about the way the industry is viewed.

“There’s an incredible misconception that online gambling has something to do with organised crime,” says Gersh. “The reality couldn’t be further from the truth. If you think about the betting shop here – if you walk into one with a suitcase of money and you put it on the table, they don’t know who you are, where you are from, where the money comes from: nothing.

“With us, you give me your credit card, your address or your five addresses if you didn’t live there long enough – I’m going to find out who you are. If you start betting big amounts all of a sudden, I’m going to see every bet you make – so I’ll stop you; I’ll check you. We co-operate with authorities.

“We can also play a huge role with the sporting bodies in maintaining integrity in the sport. And we do, because we can figure out when a match is fixed – we can see the pattern of betting and if the pattern of betting is looking a little strange to us, we will suspend the market and we will notify a particular sporting body. Now, it doesn’t happen in the major sports but this is something you have to watch in the betting of the second or the third league. So if we see a massive swing in betting one way or the other, we will investigate it and we will stop it. You can do none of that in the shop.” Which is a fair point.

And it did just that in 2007, when it took the dramatic step of voiding £3.4m of bets waged on Russian tennis star Nikolay Davydenko’s second-round clash against Argentine Martin Vassallo Argüello at the Polish Open after an unusual pattern in odds during the game.

But somewhat bizarrely, Google still won’t take Betfair’s advertising in New Jersey “because in the rest of the country (gambling) is not always legal”. But the former CFO of BT Cellnet is happy with the status quo. For now at least.

“What’s important is for the regulator to be comfortable with the way we operate, so I would much rather they take it slow and easy. I’m not expecting to make a lot of money in New Jersey for a number of years – in countries like the US where it’s new, the regulator, the suppliers and the banks are nervous. Everybody is nervous – it’s really just about working with them,” he says.

“I would much rather take it slow than jump in and have something terrible happen – say, some underage person bets somewhere and it’s all over the newspapers and they shut down the whole industry. So I welcome a very considered approach. The New Jersey regulator has been very good to us because we are a good corporate citizen. We have a great relationship with regulators in the UK and in Italy.”

Two centres of product development in Romania and Portugal, populated by scores of young programmers, also ensure a constant flow of new offerings with which to entice the punter across a growing number of geographies.

Gersh explains that “the jury’s still out” on the success of Betfair’s relatively recent foray into Italy, a “very tough market” with a “massive number of operators”, while advanced plans are already afoot to enter the Spanish market and to launch a horse racing exchange in New Jersey.

In November 2012, Betfair pulled out of the German business after a “prohibitive” 5% tax hike on sports betting made its operation unworkable, primarily because of the way its business model works, whereby gamblers stake money against each other rather than against the bookie.

Earlier this year, Betfair’s US horse racing TV network, TVG, bought HRTV, further strengthening its position in that market and, for the first time, bringing together the US’ leading racetracks under a single TV network. Gersh expects the deal to be a key move for the company over the next seven or eight years.

He adds that “from a sports betting perspective, China and USA are potentially huge opportunities, but they’re both illegal and we don’t operate in either”, adding that he would be “amazed” if sports betting gambling was legalised in the US, even within the next decade.

Culture club

One of the biggest challenges that Gersh has faced as CFO is cultural. Both he and Corcoran have tried to change the corporate culture from being “very process-oriented to very action-oriented”. To Gersh, that means “fewer committees, less PowerPoint, more actions”.

“The other very important thing is the idea of meritocracy,” enthuses Gersh. “Before we joined, there was very little recognition of the people who make a real difference.”
That has now changed thanks to a significantly expanded stock option plan – which now boasts far more people in it than it did in the past.

“I think the restructuring that we had to go through – letting go of 700 people and continuing to drive the business forward – was a big challenge. But that’s over. The right people are in the right jobs now. We took a lot of middle management out – all they do is pass the message from the top to the bottom – and you don’t need that, quite frankly,” he explains.

Since then, the business has grown “quite dramatically”,  and Gersh says it is “getting more competitive and, from the finance perspective, asking how you continue to allocate resources, while continuing to increase your EBITDA and profitability to effect growth, is really the challenge”.

Gersh also completely redesigned the budget process in a bid to make people truly accountable for their actions. To HD or not to HD? That was the oft-repeated question. He cites the example from when he first joined the business: a decision – on whether to make its US horse racing TV station output HD or not – would ping pong from one committee to another.

“Ultimately, nobody wanted to make any decision so at the end of the day it would just die somewhere,” he recounts – so Gersh and Corcoran tasked the relevant teams with making a concise business case on what the return would be. Gersh told them that they “didn’t need 15 committees or 20 spreadsheets” – just a management commitment to regularly monitor the situation, which quickly ensured that a different, more positive and accountable behaviour emerged.

“When we first came here, the US business was, at best, breaking even, and now the horse racing business is generating EBTIDA of 20%, because these guys have stopped spending their time negotiating internally. The HD upgrade came up every year for three years and we said, ‘Okay, if this is what you are going to do and what you’re going to achieve, we will give it to you’. They were shocked and energised and they did it,” he explains.

Gersh is justly proud of the changes he’s helped implement at Betfair – first among equals being making the business even more transparent and “communicating with investors in a different way”.

“With investors, we talk about certain goals over the year. And when it comes to the quarterly or six-monthly results, I don’t mind saying, ‘Actually, on this one, we didn’t do anything and nothing happened – sorry.’ I’d rather do that than make up something that looks like nonsense. You always have to go back and say if you did what you said you would.”

And it was the discipline of the numbers that helped drive that wider meritocratic change. Other changes include slashing the time it takes to pull a budget together – from six months to six weeks.

“It was an industry,” says an exasperated Gersh. “My philosophy is that if you can’t finish it in a month, you’re doing something wrong. You focus on ten key things, you put clear metrics on what you’re driving, you push it down the business, and off you go. It takes about a month to six weeks to do that. We get it approved by the board and it’s done.

“I used to have finance guys who would do nothing but a budget all year long. I’d much rather that they analysed our promotions to our customers and see if they’re paying back, than do another 15 iterations of the budget. Why? Who needs this? This is one of the reasons why I don’t work for very large companies – unfortunately, they have this disease for internal negotiation. My big thing here is that your focus is on the customer, not on each other. We don’t need to negotiate with each other; it doesn’t help.”

Analysis paralysis

Gersh is an evangelist for avoiding what he dubs “analysis paralysis”.

“If people give me a very complicated Excel spreadsheet, I can guarantee you that there is at least five mistakes in there. It’s just as important to analyse the people who are going to execute your plan as the plan itself, because it’s just a piece of paper,” he says.

“In many finance functions, lots of time is spent on analysing things up front and no time is spent on going back and saying, ‘Okay, so we said this, but this is what actually happened.’ It’s far more important to say, ‘Well, I expected this – but I didn’t get this; I got that.’ Inevitably, you’re going to get something different. I spend a lot of time getting the finance guys to analyse the results of the actions against the plans in a much faster way.”

Now that Gersh has got all his fiscal ducks in a row, the former Queens, New York resident sees the industry’s biggest growth opportunities as lying in the continued migration from shops and online. And for a digital consumer proposition, his hope is that markets will continue to liberalise and Betfair can profitably expand its market-winning model. And what of the future?

“Unfortunately, we’re not curing cancer, so I don’t have any massively lofty goals but I think we play a role in allowing consumers to enjoy and entertain themselves and we’ll continue to do that,” says Gersh.

And on his down time, the devoted father of two boys – when not watching his sons play sports – likes nothing better than quality family time and a good read. Currently, he’s devouring books on North Korea. And with Gersh’s company set to hit a turnover of some £450m this year, it would take a brave speculator – or more likely, a deeply stupid one – to take a punt on Betfair having anything less than a future bathed in optimism. ?

Alex GershIN BLACK & WHITE

2012 – Present Chief financial officer, Betfair
2005 – 2012 Chief financial officer, NDS Group
2003 – 2004 Chief financial officer, Flag Telecom
1998 – 2001 Chief financial officer, BT Cellnet
1986 – 1990 Certified public accountant, Ernst & Young

 

 

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