Revenue rise offsets 888's $20m Mytopia write-down
US$25m combined cost of CEO exit, management restructure and botched social gaming venture fails to dent 888's numbers as it records second highest first half revenues.
The US$25m combined cost of the departure of former CEO Gigi Levy, a management restructure and a botched venture into social gaming failed to dent 888’s numbers as it recorded its second highest first half revenue figure.
Levy, who left in April this year but who remains on the board as a non-executive director, received a $3.909m golden handshake with group management team restructuring and “related costs” rising to $4.949m with the inclusion of the former CEO’s payoff. Meanwhile, Mytopia, a social games business acquired under Levy’s leadership in June last year for $18m, has effectively been written off with 888 taking a “non-cash impairment charge” of $20.2m, after the company found that it could only recover $957,000 based on a fair value estimate.
Brian Mattingley, deputy chairman and at the helm since Levy’s departure, told eGaming Review that games design business Mytopia had given 888 “a foothold in a new segment” but that it had “unfortunately” failed to achieve predicted revenue targets and that the board had taken the “prudent” decision to write off the business’s value on the balance sheet as an “accounting operation”.
Barak Rabinowitz, former founder of online cash trivia and bingo business Amuso.com that went into voluntary liquidation in September last year, joined Mytopia as its new chief executive in February this year.
“It is difficult for us to make an assessment as to the future revenues of this company. It’s an accounting adjustment. Under accounting rules you are forced to revalue your assets every year and if you can’t substantiate a value you are required to impair them and the board have taken the decision that we will impair them completely,” he said.
“We can’t justify to our auditors that it’s worth $20m so we impair it, you take the hit to P&L account, its below EBITDA line, it has no impact and effect on operating profit, it is purely and simply an accounting entry and we’re being exceptionally prudent making that provision. We’ll continue to invest but it’s a long-term play for us.”
Mattingley acknowledged the first half of this year had presented “some challenges” for the company and its board, namely Levy’s mutually agreed exit, enforced cost cutting measures as well as the business temporarily suspending its dividends due to a higher than expected earn out payment related to its acquisition of Wink Bingo.
However, he added the business was “fitter and healthier than it has been for some time” with $61m in cash, improving margin figures and in a position in which to capitalise on regulating markets. First half revenue was up 18% to US$154m for the six months ended 30 June 2011 “ its second highest revenue achievement for a first half in the company’s history even before its US exit “ compared to $130m for the first half of last year with casino up 16%, poker up 22%, bingo up 17%, and Dragonfish, its B2B arm, up 16%. EBITDA increased by 59% to US$20m compared to $13m for the first half of 2010, only $8.6m off the company’s full year results for last year.
“The first half has been very successful, that’s been down to improvement in our offer, renewed focus on our core strengths and this has led to two very impressive quarters of growth. First time depositors in poker and casino is up 43%, active players up 77% and customer deposits up by 20%.”
The company saw margins rise to 13% from 9.7% last year, with Mattingley attributing this to volume growth and “not at the expense of cutting marketing spend which is always an easy way of improving your margin”.
888 spent around £3m more on marketing than last year seeing its first half total rise to $50m from $47m, with the deputy chairman suggesting “higher revenue gives us a very respectable marketing ratio” and that it would continue to invest heavily in marketing in the coming years as more countries regulate. “I don’t see any reason at all why the marketing spend will slow down,” he added.
“In the second half of this year we’re planning to make some investments in new regulated markets so marketing spend will be higher, but we’re not looking at seeing such an aggressive EBITDA coming through. Cash at the end of H1 was $61m which gives an indication that we have the right resource now.”
The third quarter has started strongly, he said, with the company predicting the traditionally weak trading month of August to be its single highest ever revenue month. “This is coming through all areas,” Mattingley said, “uplift in casino and poker improving, whereas bingo in the first half was flat, we’re seeing improvements from the campaigns we’ve launched.”
“The whole of the business is now focused on our core products either delivered through B2C or B2B so we’re resisting any new movements for new and emerging products and concentrating all our efforts in getting best in class products, good CRM, best customer service and ensuring the return on investment we get from marketing campaigns are way above what we have received in the past,” he explained.
Despite not announcing any new large B2B contract wins since agreeing a deal with Caesars Mattingley said there was a “strong pipeline” for Dragonfish to exploit, adding that the business was in the process of reviewing its current agreements with a view to either renegotiating or terminating current deals depending on their profitability.
“We’re not exiting B2B but we’re saying our quality clients going forward will be more substantial, and more committed. We have six to seven sizeable contracts and other small skins. When we do an appraisal now on whether take on a new B2B customer it’s all about getting their commitment to market alongside us and their commitment to drive their business into profit. We’re not out of it, but looking more selectively at what we take on board.”
He concluded by saying that the search for Levy’s replacement was still underway and that the company was “still in the process of putting out a brief to headhunters”, but that the “main thrust” of the board’s focus was “just growing the business”.
“As it is today the team works well, we all pull together, it’s a new era. We are concentrating all our attentions on getting this company in a really fit and healthy state ready to tackle new and regulated markets.”