The numbers game: A closer look at 888's current performance

888 was the last of the major operators to report in H1 2019 and after a series of underwhelming results from its peers, expectations were fairly low. The reported numbers showing a 2% rise in group revenue to $277m and adjusted EBITDA down 14% to $42m was nonetheless still fairly underwhelming and the share price fell back on the results release. But the picture that emerged was more complex than simply a business struggling for growth and getting squeezed by rising costs.

Profit attrition from rising tax and operational costs is causing pain in the wider sector, and it is certainly not something 888 is immune to. Gaming taxes rose 19% in the period to $44.9m and the absolute rise is almost exactly equal to the drop in adjusted EBITDA. The firm is beginning to cap out here, with regulated and taxed markets representing 74% of revenue in the period, but it remains a huge pressure on a business that is faced with slowing growth. Although it’s worth noting the top line slowdown isn’t quite the same as some of its peers.

Group revenues were only up 2%, with the core casino business up 14% in constant currency to $175m. And this was achieved with a minimal increase in marketing spend with marketing remaining at 30% of revenues despite a big hike in new acquisitions. The vertical by vertical story varied dramatically, however, with bingo looking in a fairly poor state despite the B2C bingo business growing 10% in the period. B2B revenues were down 44% with some of that B2B revenue moving to the B2C line and revenues from other members of its bingo network hit by changes to the UK market

888 said it would look to Africa and Argentina as potential new growth areas for bingo and remained confident of “global growth opportunities” for its B2B division, but it feels like it may be a weight around its neck for the year ahead. The same could be said of poker, which dropped 24% in the period in the face of increasingly tough competition and an increasingly weak looking product. 888 said investment in the new Poker 8 product should help this rebound, but it looks a tough road back to meaningful growth with partypoker and PokerStars both focused on the same recreational player.

Casino was more of a bright spot and with the vertical representing 67% of B2C revenues this is a far more encouraging trend. Revenues were up a fairly modest looking 9% year-on-year, but they were up sharply in the UK and both active players and first-time depositors were up double digits.  Sports also showed promise with revenues up 28% in constant currency and reaching a significant number at $44.5m for the period with the UK growing 50%. While this is some way off a tier one sportsbook, it places it in a fairly strong position compared to its gaming-focused peers and with the acquisition of BetBright there is a lot more it can do here.

BetBright’s technology compared well to its better funded peers and integrating it into the 888 platform with its marketing and middle-ware capabilities could be an interesting combination. The issue will be how it handles trading. 888 is faced with the option of keeping its trading mostly managed by third parties or beefing up its in-house trading capabilities. It’s likely it will opt for a mix of the two but when so much of its acquisition and retention marketing will depend on some degree of trading flexibility, how it manages a transition from passive operator partner with Kambi to a more active participant in the global sportsbook trading market will be interesting to observe.

The product issue

Product has always been at the heart of what 888 do and expanding sports into something a lot less me-too will be crucial to its ambitions there as management were keen to point out. “Underpinning 888’s progress is a keen focus on new product development which helps to drive superior user experiences and differentiates 888’s proposition from competitors,” it noted in its results release. “The roll-out of Orbit, the Group’s new platform initially focused on the casino market, commenced in May 2018 and…has exceeded initial expectations,” it added.

Orbit isn’t anything radically different in the online casino market, where surfacing and personalisation of content has been a big focus for some years now, but it combines some of the best practices in UX and UI. Its benefit is more than just maximising spend by presenting the right content to the right customers, it also allows 888 to increase both its acquisition and retention marketing efficiency. “The Group is seeing positive trends in customer activity across each market where Orbit has been introduced to the 888casino offering and it is in the process of importing several of Orbit’s exciting features and concepts into 888’s sport, poker and bingo products,” 888 noted.

How much of this is 888 catching up with the wider market in terms of a modern mobile-friendly and personalised online casino experience and how much is it pushing beyond this to create a market leading product experience is up for debate. But it does show the value that product investment can still bring to the online casino sector. Orbit was the focus of a lot of the management discussion in the results, with the improved user-facing platform credited with much of the resurgence in online casino in the period.

888 CEO Itai Pazner

“The Orbit casino platform and successful shift of strategy toward casual customer audience continues to drive growth with active casino players increasing 30%,” it noted, and management referenced the “Orbit effect” in its results presentation. “This very encouraging trend reflects highly effective marketing investment as well as the benefits of Orbit, 888’s latest casino platform, which has delivered strong results in each market where it has been launched,” 888 added in a statement.  But this does come at a cost.

Indirect costs rose in the period with administrative expenses up 24% and R&D up 10% with the nature of the maturing egaming market weighing heavily on the bottom line. Adding in depreciation and amortisation and additional finance and M&A costs, profit before tax fell a massive 63% in the half. And this is the most worrying aspect for 888. How does it manage its cost base and maintain profitability in the longer term? The rise in operating costs is interesting for 888 with the increase in third-party supplier costs cited as one of the drivers of this

888 has long been a company with one of the most comprehensive proprietary technology offerings in the industry, but it has been forced to move towards a more varied and comprehensive offering on its casino platform as player expectations have changed. Equally its move into sport has necessitated third-party support, at least in the early days, and even with the acquisition of BetBright it’s hard to see those costs falling in the near term as 888 looks to create a self-supporting platform for the vertical.

Sports is hugely important to 888’s growth plans with the vertical acting as a key acquisition and retention tool in many of its core markets, and a must have in some others. It’s stated ambition to be a “leading online sportsbook operator across global regulated markets” is probably a little beyond its near-term capabilities, but with the acquisition of the BetBright platform and team it’s better placed to attack the opportunity.

The international issue

The initial focus with sports is squarely on the technology and it promised a “phased and market-by-market roll out of the Group’s proprietary sportsbook solution starting in early 2020” that would give it “complete ownership over its technology and product development across all four of its key online betting verticals for the very first time”. A new front-end was rolled out in time for the new football season across most of its markets, but this shift to a more end-to-end product update allowing more integrated personalisation, promotions and a deeper UX will be important to getting sports to kick on.

888 said first time depositors were up 13%, which compares well against a World Cup year, but also suggests they are doing well on retention and increasing share of wallet from their existing customer base. 888 faces the same issue many of its competitors have come up against that turning early growth in sports betting into sustainable success is not easy in a sector where you face such fierce competition. And there is no shortage of this in most of the markets it is targeting with the UK, Italy and Spain presenting a huge challenge in terms of the mix of local and major international brands active and dominating market share.

But in reality, 888 doesn’t need to be a tier one player in sports, it just needs it to continue to be the engine of cheaper acquisitions into casino for the regulated markets it enters. And for those where competition is more limited due to less attractive operating conditions, such as Romania and Portugal, then that benefit is increased. The same dynamics could be applied to its poker vertical, which is going in the opposite direction to sports in terms of revenues, with revenue down 24% to $23m in H1 2019. Although the operator noted that cross-sell into casino and sport offset some of these losses.

For 888 then it’s less about the individual vertical performances and more about how they impact the wider business as a whole. Sports and casino growth with poker decline is only a concern if the overall number of actives and APRU is declining, and if overall B2C revenues are not rising. And on that point the jury must still be out. Active casino players increased by 30%, poker players declined by 11% and no number was given for sports. First time depositors increased across all brands aside from poker, however, with management saying they rose by 20% across the B2C business.

888’s biggest challenge is how it manages its international business in the short-term with so much challenging regulatory change both in-play and pending. Germany, the Netherlands, Sweden, the UK, Spain and Italy all present potential downside risk in the next 12-24 months. And in all markets, costs are rising. Regulated markets, along with Brexit, were given as the main reason for the rise in admin costs and along with the tax impacts of moving into new markets such as Sweden and Portugal, and ultimately the rising costs in current markets such as Italy and Romania it’s tough to see how 888 can outgrow this in the near term.