SLOT MANAGEMENT 101

888 Holdings’

declining performance - a product of marketplace volatility, or something more concerning

By Ryan Murray

The rhetoric of 888 Chief Executive Itai Pazner in the immediate aftermath of his company’s Q3 trading announcement suggested all his well with the Gibraltar-based gambling giant. Clearly, the person at the helm of any business will be eager to present their asset in the best possible light; however, Pazner’s conviction regarding expected commercial improvements, enhanced operating procedures, and further international expansion, created a compelling narrative which sells a believable tale of future prosperity.

However, when one looks beyond the words of 888’s maverick CEO, a more concerning picture arguably presents itself.

Indeed, when addressing the raw numbers, it’s not difficult to identify the emergence of some concerning patterns. Moreover, these declining results cannot be exclusively attributed to one vertical or particular enterprise – performance across all business functions have been considerably weaker in 2022 than the levels delivered in the like-for-like period last year. True, when reviewing both Q3 in isolation, and progressive figures for the first nine months of the year, we can see some considerable disparages between equivalent returns in 2021 and 2022.

For the three months to the end of September 2022, revenues fell a significant 7% to £449m, representing a decrease of circa £35m. Within this total, we see each arm of 888 Holdings struggling to re-produce its 2021 outputs, with its recently acquired William Hill business suffering doubledigit annual dips in both its UK and International online exploits, whilst its core operations, concentrated on the digital casino sector, experienced a 5% drop-off. Progressive revenues, which were re-calibrated in order to account for July’s acquisition of William Hill (predicting what the renowned high street bookie would have earned had it been integrated prior to the beginning of the calendar year), made for slightly better reading with regards to year-on-year comparisons. However, a decent proportion of these numbers were undoubtedly skewed by the impact of the coronavirus pandemic, with William Hill stores still subjected to temporary closures, social distancing, and compulsory mask-wearing at various stages throughout the first half of 2021. Therefore, it’s perhaps most productive to deploy the ailing operators’ quarter three numbers when attempting to gain a proper gauge on the severity of the commercial challenges it currently faces. Between July and September this year, William Hill’s UK online activities generated £125m in gross gaming revenue, a staggering 14% dip on Q3 2021. Furthermore, International digital GGR came in at just £52m,with the stuttering sportsbook falling 12% behind last year’s equivalent returns. The only silver lining came within its retail offering, with revenues remaining flat at £124m. As alluded to earlier, services operating under 888 branding could only muster £148m, five percentage points down on the previous year.

Clearly, these underwhelming numbers have served to substantially undermine the firm’s share price listing. When 888 released their half-year trading statement on Friday 12th August, stock values tumbled 2.2% to 156.5p per share, a figure that continued to diminish in the following weeks. As of early December, shareholders find themselves in possession of shares positioned at around 105p – a remarkable deterioration from a twelve-month high of 327.8p. The reason for this sharp reversal in fortunes is not only tethered to revenue headwinds, but also due to fading profitability performance, partially driven by an eye-watering debt burden. Although the global gambling operator has been recently somewhat successful in controlling proliferating interest rates applied to its cash loans, locking down approximately 35% of agreements in accordance to current borrowing premiums, its debt outlay is still huge. 888 is saddled with around £1.81bn worth of debt, with interest charges by the close of 2022 expected to amount to roughly £150m, a noticeable revision to the anticipated cost given by the company in August. Given current market trajectories, its assumed that charges will rise to £170m for full-year 2023.

The groups bottom-line performance was also hurt by a regulator-issued fine of £9.4m, with the Gambling Commission reprimanding 888 in March for ‘social responsibility and money laundering failings’ This clearly did little to support its brand reputation or credibility. Shockingly, one registered customer received clearance to deposit up to £1,300 per month into their betting account – the individual in question had a monthly salary of £1,400.

All of these elements, in addition to expenses associated with the sizeable summer acquisition of all of William Hill’s non-U.S assets, and indeed its dispensation of its internal Bingo platform, ‘888 Bingo’, resulted in 888 presiding over a pre-tax H1 profit of just £14.4m; over £25m less than a coronavirus-stricken opening six months of 2021.

However, is this financial decay across all key performance indicators merely a representation of unprecedented market conditions, or is this a direct consequence of actions taken by 888 and its subsidiary establishments?

The obvious answer here is probably to say a bit of both.

Pazner emphasized ‘stringent safer gambling policies’ as one of the reasons behind the company’s deteriorating commercial performance in recent months – it’s easy to see why. The Gambling Commission has considerably stepped up its player protection efforts of late, demanding operators undertake a raft of procedures, as it attempts to reduce problem gambling levels across the country.

Furthermore, tightening controls are likely to play an increasing role in the UK marketplace, as the government, after a series of protracted delays, could be soon set to release a White Paper on Gambling Reform, which will lay out the parameters for a revamped gaming sector, one which will facilitate greater regulator powers, tougher compliance requirements, and more transparency on operator financial conduct.

The rising interest costs attached to loan activity is clearly an outcome of external market forces. A disastrous UK mini-budget in Autumn, coupled with growing instability in European economic circles caused by Putin’s occupation of Ukraine, has understandably preempted a significant financial backlash. As a result, 888 are now unfortunately paying a much heavier price for their acquisition of William Hill than originally anticipated. Furthermore, the troubled operator has also been subjected to radical changes in the Dutch market, having to withdraw its services for a prolonged period in order to address a series of licensing requirements as the Netherland’s seeks to professionalize its native gaming industry.

Indeed, if you strip out the company’s UK and Netherlands performance, revenues for H1 2022 were actually ahead of the returns amassed between January and June last year.

Nevertheless, the circumstances that 888 have had to adapt to are clearly no different to those faced by their competitors; many of whom, who have similarly invested in new markets over the course of the last six months, are in a far better bill of financialhealth – it is with respect to this dynamic that we should make judgements on the true catalysts for 888’s current demise. In October, Entain reported that their net gaming revenues had increased 2% in Q3 2022 versus the previous year, whilst Flutter, the parent organization of the likes of Paddy Power, Betfair, and Sisal, witnessed an 11% uplift in the third quarter of the year, although admittedly did receive an almighty boost from its U.S operations, a market which has so far alluded Pazner’s firm. These organizations are heavily involved in the European gambling theatre, and therefore have routinely encountered the same difficulties which have upended 888’s progress in the few quarters – why do they enjoy a greater level of financial security? We should not allow 888’s disappointing 2022 results to become distorted, as we review their ongoing performance through a lens permeated with intense external pressures – clearly, every operator is trying to acclimiatize itself with the exact same trading environment. One should therefore be duly concerned with the company’s recent plight. In his commentary following the publication of Q3 results, Pazner stressed that the company’s efforts to ‘increase player protections and drive higher standards of player safety’ and a continuing focus on ‘integration, delivering (our) synergy plans, and driving higher profitability across the business’ will ‘put the group in an even stronger position in the future’. Given the dramatic swing in revenues Pazner and Co. have had to endure this calendar year, 888’s shareholder population will be hoping the assertions of the group’s figurehead prove to be correct.

Spain Pledges to Step up Regulatory Pressure

Spain’s Ministry of Consumer Affairs, alongside the country’s native gaming regulator, the DGOJ, are planning escalate the severity of punishments given to local operators for contraventions of gambling laws. During a busy first six months of 2022, the Ministry, who were awarded responsibility to govern Spain’s gambling sector after the new ‘Gambling Regulation Law’ was implemented in 2021, dished out a staggering €84.3m in fines – over €25m more than the collective value of financial penalties imposed throughout the entirety of the previous year. ‘very Serious’ and ‘serious’ violations, with a total of 53 operators reprimanded under the former description. Within this pool of gambling firms, 21 received the maximum punishment – a two-year licencing suspension, and an order to make their products inaccessible to the Spanish public.

Those who were found to have presided over ‘serious infractions of the Gambling Law’ were allocated fines in the region of €4-5m, whilst a raft of operators was subjected to a charge of €1m each. even more aggressive in its monitoring of regulatory integrity in the coming months, as the DGOJ continues to post a ‘list of infringements’ (detailing the nature of operator contraventions) to its website in order to maintain a level of transparency across the sector. The Ministry will be supported in its campaign by a series of amendments to the current ‘Gambling Regulation Law’, which will enforce operators to incorporate stronger social responsibility measures and afford the authority better visibility on the financial conduct of industry players.

CONTINUING TRENDS IN GAMING IN 2023

By Lynn Pearce

Ialways get excited to look back at the year and then look forward to the growth in the gaming industry, which is one of the fast-growing trends in the world, driven by the massive push towards Web3 and the metaverse.

However, to put this into perspective, I start off by looking at the industries that will always be in demand globally, at least for the foreseeable future. Food is always top of mind (for me anyway) and obviously big pharma, who have experienced ridiculously impressive growth and profitability over the past few years. Another growing trend around the world is Healthcare, particularly with regards to technological advancesand developments in transformative technologies such as artificial intelligence (AI), the internet of things (IoT), virtual and augmented reality (VR/AR), cloud computing, blockchain, and super-fast network protocols like 5G.

In no order of importance, other than being what I think will be the top trends continuing through 2023, I will list these separately below.

The Power of ARTIFICIAL INTELLIGENCE (AI) – and Humans

AI has grown exponentially over the past few years and will continue its momentum unabated into 2023, with data scientists and researchers finding even more innovative ways of using AI. The area of AI that fascinates me the most is the power of AI – and human responses to either adopting it or finding ways of fighting the intelligence.

I read a fascinating article by Topy Shapshat in The Daily Maverick recently on the fight between Chinese protestors and how they cleverly found a way around AI, which is massively and widely used by the Chines government to control every movement of their citizens daily.

China has been rocked by Covid lockdown protests in the past few weeks after a fire in Urumqi killed 10 people in a locked-down building that many people believe prevented victims from escaping and firefighters from getting in.This wave of protest has been likened to the student uprisings in 1989 that culminated in the infamous Tiananmen Square crackdown.

To counter these artificial intelligence (AI) forms of monitoring, angry protesters are holding up blank pieces of paper. To the AI systems trained to pick up words or phrases that are banned, these appear as just blank white pages. But to us, as humans, well, we can read between the lines, resulting in this simple act of defiance – it suddenly becomes a powerful symbol.

Chinese citizens also disguise protest videos with effects, filters or playing Western songs that have similar protest themes. This kind of smart skirting of the strict censorship rules shows that the human brain — and its ability to think laterally and understand humour — can still thwart the literal logic of AI and its algorithms.Score 1 for humans and 0 for AI.

Relating AI trends back to the gaming industry, all you have to do is think of the simple bot, which is widely used in the gaming industry. Humans do not even realise they are playing against bots when gaming, and this has changed the gaming experience as AI technological advances become even smarter!

CLOUD GAMING

In addition, with Cloud gaming and with the speed of 5G on mobile, the gaming market has significant future growth potential. Nowadays, players do not need to download and install casino games, which was a huge blocker to developing countries, like Latin America and in particular, the esports gaming market in Brazil. In India and Africa, the massive rollout of 5G and the low cost of cloud gaming has opened up the market for gaming companies, who are able to install their games on their servers and make them easily accessible on

web browsers to players in these regions.

Couple that with augmented andvirtual reality (VR), which allows players to view games in real time on their devices, these technologies offer them a fantastic virtual gaming experience with awesome 3D graphics with dreamlikerealworld effects. This technology was estimated at $11.56 billion in 2019 and is projected to increase yearly at a CAGR of 30.2% over the next few years.

ESPORTS

Esports (electronic sports) has been around for many years, but I have seen rapid adoption on a global scale within igaming since the lockdowns in 2020, projected to be well over $2 billion by the end of 2022 and increasing to $3.6 billion by 2025 by various research studies that I have read. Newzoo reported that esports would be expected to increase at an annual pace of 10.4%, with more than 351 million casual viewers and over 295 million spectator enthusiasts, bringing the total viewership to 646 million and counting, probably because this trend is as popular for women as it was for the guys previously. One of the reasons of its huge popularity globally are the esports tournaments for professional teams and players – and the awesome high-tech elements, video, special effects and fast actionpacked graphics, which makes for a truly immersive experience for all, whether online or in stadiums around the world.

BLOCKCHAIN

Other than reported issues of fraudulent activities, there are many advantages of using blockchain in the gaming industry. Blockchain eliminates the need for intermediaries when making deposits and withdrawals for the players, which saves time and money, and provides transparency and immutability, which are essential for ensuring fair play.

Some of the top blockchain games include Axie Infinity, Decentraland and Alien Worlds.Decentralized blockchains open the door to verifiable digital ownership, enabling players to truly own the items they play with and with the ever-growing trend of NFTs, I believe this will continue into 2023 with a number of gaming companies adopting NFT payments for gaming, entry into events and in-app purchasing.

These are just a few of the trends will continue to grow and expand with added innovations and technologies throughout 2023, assisting in driving the gaming industry to even greater immersive and enjoyable experiences for the players and profitability for the gaming industry overall.