888’s Q3 revenue slumps on UK and Dutch headwinds as debts mount

888 has reported a 7% year-on-year (YoY) decline in Q3 2022 group revenue to £449m as UK player safety measures and the closure of the group’s Dutch business continue to hamper operations. Delivering its first update since the closure of the £2bn acquisition of William Hill International from Caesars, the FTSE 250 firm revealed a total online revenue YoY fall of 10% to £325m. Excluding both the UK and Netherlands markets from this figure, 888’s total online revenue was broadly flat YoY. In the UK, 888 saw online revenue slide 13% YoY to £171m, driven by reductions in average spend per player, which was down 14% YoY following the introduction of safer gambling measures in the final two quarters of 2021. In respect of the Dutch market, 888’s revenue dipped 4% YoY, rising to 6% for its William Hill subsidiary in Q3 2022.

888’s retail business, which it acquired as part of the William Hill deal, saw stable YoY revenue during Q3 at £124m, despite an estimated £4m hit from temporary shop closures surrounding the national mourning period following the death of Queen Elizabeth II. On a YoY comparison basis, 888’s sportsbook staking was impacted by Euro 2020 being held in the prior year reporting period, as well as cancellations affecting the horseracing industry because of the UK heatwave in Q3. A sequential reduction in online revenue, the group said, took place due to traditional seasonality, the absence of football from the sporting calendar as well as the cancellations to horseracing. Despite the lower revenue, 888 said it had made “strong early progress” in creating a more efficient business model during the period, improving its adjusted EBITDA margin in Q3 when compared to H1 2022. A chief focus of this is integration planning following the Hills acquisition, with 888 taking on increased debts to finance the multi-billion-pound deal. 888’s current gross debt stands at £1.8bn, with cash interest costs expecting to amount to around £75m in H1 2022 as the macroeconomic environment worsens. 888 added cash interest costs would then rise to around £170m in full year 2023. Changes include the move to a single unified global technology stack, with the aim of increasing scale in both product and content leadership and enabling growth and market share efficiency. “Despite the changing macroeconomic environment and ongoing pressure on UK revenues from long-term focused enhanced safer gambling measures, the board expects revenues in Q4 2022 to grow over Q3 2022 and be similar to Q4 2021 levels,” 888 said in the Q3 update. “The group has taken actions to accelerate synergies and drive a more efficient operating cost base and expects an improved adjusted EBITDA margin in H2 2022 to meet the current market expectations for full year 2022 adjusted EBITDA,” 888 added. 888 CEO Itai Pazner remained upbeat despite the losses, drawing on the “rapid progress” 888 had made in integrating William Hill. “This has enabled us to progress towards our new target operating model, while delivering a series of ‘quick win’ synergies, that will benefit our adjusted EBITDA margin for the second half of this year,” Pazner said. “We are changing the mix of our business to a lower spending, more recreational player base that gives us confidence in the long-term potential for our UK business. He continued: “As we look forward, we remain focused primarily on successful integration, execution and de-leveraging in order to unlock the huge potential from our enlarged business. “We are building a stronger group that will leverage our leading technologies and portfolio of world-class brands to create a leading global betting and gaming company, with clear plans to grow market share and profitability in some of the most attractive markets in the world,” Pazner concluded. Delivering his assessment of the 888 results, Regulus Partners analyst Paul Leyland drew on the regulatory headwinds and the “continued hangover from tough comps” against last year. Leyland said: “888 has gone long on UK macro, UK policy retail and debt risk at a time when each has soured beyond anyone’s expectations. All 888’s significantly improved operational skills will be needed to combat these headwinds. “However, the recent history of global gambling has demonstrated that it is very difficult to buy or operate a business out of strategic trouble. “We believe the two most important strategic moves from a defensive standpoint are to make UK online a sustainable level playing field in terms of customer interactions and unlock the customer interaction rather than the diminishing legacy cash flow value of retail. “These strategic levers will decide whether 888 can grow the key UK market or see it sink the ship, in our view,” Leyland added. 888 shares slumped 6% in early trading on the back of the results before recovering slightly to around 86p at the time of writing. The stock is down 79% in the past 12 months. Analyst firm Peel Hunt has cut its target price for the company by more that half this morning to 210p.