Five things we learned from 888’s full-year 2021 results presentation

After posting a record full-year revenue of $980.1m and adjusted EBITDA of $165m, 888 is looking ahead to 2022 with vigour. The integration of William Hill is due to complete imminently, which will almost triple the size of the group, and impressive growth across almost all geographical regions were standout points from the results deck. Following the results announcement, CEO Itai Pazner and CFO Yariv Dafna took to the floor on an investor call to address a breadth of topics, including the recent £9.4m fine handed out by the UKGC over AML and social responsibility failings. 888 senior management also touched on the success of its in-house games studio, Section8, and expectations for how the US will shape up, with forewarnings of continued losses over the next 24 months. There remains optimism over new market penetrations in Europe and Canada, while the regulatory headwinds in the UK are a cause for concern. But, a bottom line of pre-tax profit rocketing 205% in 2021 from $26.7m to $81.3m, with the company also increasing its available cash by 18% to $174.5m, will appease investors. Sorry is the hardest word Kicking off the investor call, Pazner addressed the elephant in the room and apologised for the historic failings that saw 888 fined £9.4m by the UK Gambling Commission (UKGC) last week. The UKGC slapped the operator with the fine over AML and social responsibility failings and highlighted several individual shocking cases. One saw 888 fail to interact with a customer who lost £37,000 in a six-week period, while the operator also allowed an NHS worker earning £1,400 per month to set a monthly deposit limit of £1,300. Pazner said: “I think it’s not a happy moment for us in the history of the 888 because we do see ourselves as a responsible operator that takes customers’ safety, adhering to regulations, and meeting the highest standards extremely seriously. “We completely recognise that there were some clear issues in our policies and our procedures at the time that didn’t work properly, and we deeply regret those,” he added. Pazner went on to say that he would do “whatever it takes” to ensure this did not happen again. He said: “I am personally committed to continue investing in this ongoing effort, and doing whatever it takes, to bring us back to the highest standards of the industry, which is a natural place for us and a place that we can be proud of again.” Studio supreme 888 also praised the success of its in-house games studio, Section8, and confirmed that it would continue to invest into the vertical following impressive growth. Pazner described Section8 as a “bit of a hidden gem” for the operator and noted that the content derived from the studio doesn’t get preferential treatment on the operator’s casino sites. However, 888 noted Section8 games are regularly in the top 20 most popular slots for its customers. Pazner confirmed that success of Section8’s output meant 888 would ramp up its investment for the studio, with the number of games being pumped out to jump nearly double per year. He said: “[Section8] has been over the years a very strong asset for us. We expect the output of the studio to be in line with the investment that we’re putting. “We will see 25 to 30 games a year through Section 8. And obviously if this continues to show the great results we can plan to invest in this further. This is a strategic and important asset for us as a group,” he added. Storm before the calm After posting a 6% uptick in US revenue from $20.8m to $22m, 888 confirmed that its marketing strategy and efforts to carve out market share in the states would continue to result in losses from its B2C vertical. The London-listed firm is live with its Sports Illustrated-branded sports betting offering, SI Sportsbook, in Colorado and 888casino in New Jersey (since 2013) and anticipates launching in a further three to four states during 2022. Dafna was coy on details during the investor call but confirmed losses would increase throughout 2022 before reducing in 2023 ahead of potential profit. Dafna said: “The losses in B2C were pretty much as expected, around $18m in 2021. You can expect that this level of losses will increase in 2022, but I would say it will be single-digit million increase in the losses in the US. “We expect to see growth coming in the US this year considering the additional states that we will be launching. In terms of the losses, I think [the] assumption about 2022 becoming the peak for the losses probably makes sense. “However, I would not assume a significant reduction in the losses in 2023, but after that it’s reasonable to assume that we will start to see decline in the level of losses that we’re generating in the US,” he added. Tremendous trio After continued growth in 888’s mature markets, the operator pinpointed three markets that it anticipates to drive growth when licences are acquired for each jurisdiction. The FTSE 250 firm highlighted Germany, the Netherlands and Ontario as potential jewels in the crown, with the operator citing analyst estimations that they represent total addressable market of around $10bn. The Netherlands regulated its online gaming market on 1 October which saw swathes of international operators leave the market, but with the controversial cooling-off period due to end on 1 April, 888 is eyeing a return in the summer. Ontario is set to launch on 4 April, and 888 has been awarded a licence there after operating for years in the unregulated market. Pazner said: “I think there are three very significant opportunities for us and for the industry, which are Germany, Netherlands and Ontario, which represents more or less half of the value of the Canadian markets. “In these markets, we already have experience, we have brand presence, we have teams working on them, we have marketing material, we have everything that it takes to make those significant part of our portfolio of growth countries. “We really see this as medium- to long-term growth potential for the group that we’re starting to focus as these markets open up for us,” he added. Are U(o)K(ay)? Finally, 888 highlighted the negative downturn in H2 revenue compared to H1, specifically with respect to the UK market. 888 said, overall, H2 B2C revenue slid 4% year-on-year compared to H1’s growth of 41%. In the UK, H2 B2C revenue was down 20% compared to H1, with the operator pointing towards the dual impact of a return to retail and regulatory headwinds in the market. Dafna said the reduction in Covid-19’s impact meant customers were able to return to retail settings, pulling against 888’s online-only offering, while changes made to the platform in regards to responsible gambling also had an impact. Dafna said: “The UK was lower in the second half versus the first half, but this is related also to what’s happened to the market. We were indicating about a 20% decline in the second half versus the first half. “If you look at the data from the UKGC, we were actually on this number. So, all the market went down 20%. We consider that to be the going back to normality in terms of the split between retail and online. “In our case, it’s also all the regulatory change that we did. We announced about a year ago an impact of $70m to $100m. We mentioned at that time about $30m related to Germany. “Substantially, all the remaining was related to the UK. We did a lot of changes on our platform of responsible gaming. We started this already in Q4 2020, but we completed everything in the mid-year. So, in a way, the second half represents the new set of rules on our compliance platform,” he added.