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888 has cautioned investors about its “mixed performance” in Q3 2023, with revenue expected to dip by 10% year-over-year to £400m. 

The company’s shares tumbled 14% during the early hours of trading.

Several factors were identified as the main drivers behind the year-over-year revenue decrease. 

These factors include an ongoing significant impact from compliance changes in dotcom markets, resulting in a slower recovery in customer activity and revenue. 

Additionally, customer-friendly sports results have affected win margins in both UK and international markets in September. 

The continued effects of safer gambling changes within the UK are also contributing to the revenue decline. 

Lastly, a short-term impact stems from a shift in 888’s marketing approach to prioritise higher returns in line with the group’s market focus strategy and new brand-led marketing approach.

Earlier this week, 888’s UK online and retail rival Entain posted a similar earnings warning.

Retail remained robust

Despite these challenges, the retail sector continued to perform strongly, with revenue remaining broadly stable compared to the previous year. 

The company maintained its expectation of mid-single digit revenue growth for the full year, citing robust customer engagement and the positive impact of the ongoing rollout of additional proprietary self-service betting terminals (SSBTs) and expansion of content on the retail gaming platform.

888 also reported a cash balance of approximately £162m, with undrawn committed facilities of £150m, providing a total liquidity buffer in excess of £300m.

Current trading and outlook

The Q4 outlook, however, shows promise, with sequential revenue improvement expected. 

Despite projecting a mid-single-digit year-over-year decline in Q4, 888 is targeting a robust return to growth in 2024.

The company said it has made significant and ongoing improvements to the sustainability and quality of the mix of the business, and while this is weighing on short-term performance, it continues to drive strong double-digit active customer growth.

888 executive chair Lord Mendelsohn commented: “We are making significant strides to improve the quality and long-term sustainability of our revenues, but performance in Q3 has been below our expectations, and this means we now expect to end the year with EBITDA below our prior expectation.”

However, he added: “The hard work the team has undertaken so far this year has set very strong foundations for the future of the business and our synergy delivery is well on track. 

“We are strongly focused on investing to deliver good levels of expected revenue growth in 2024 as we progress towards our clear target of more than £2bn of revenue in 2025 and I look forward to the coming years with confidence.”

Full-year guidance

888 noted that synergy delivery remains on track, and significant cost savings have been achieved, helping to offset the year-to-date revenue performance shortfall compared to initial expectations. 

Additional synergy opportunities have been identified, but any extra savings will be reinvested in growth initiatives. 

The group highlighted its significant growth potential supported by its new operating model and brand-led marketing strategy.

888’s primary focus remains on driving sustainable growth in 2024 and beyond, leading to an expected adjusted EBITDA margin of approximately 18% to 19% for the full-year 2023.

888 had initially provided guidance for an adjusted EBITDA margin of 20% for the year.

Mendelsohn also expressed his confidence in the company’s newly appointed CEO Per Widerström and CFO Sean Wilkins, who are expected to lead the company through its next phases of growth, with Widerström set to assume his role in mid-October.

For H1 2023, 888 reported a loss after tax of £33m, a notable shift from the comparable period in 2022, when it generated a £12m profit after tax.

Group revenue surged by 165.5% year-on-year to £881.6m in H1, primarily driven by the acquisition of William Hill, which completed in July last year.

However, on a pro-forma basis (assuming 888 owned William Hill throughout the comparative period), group revenue declined by 6.5%.

Nevertheless, Peel Hunt analyst Ivor Jones anticipates improved prospects on the horizon, prompting the firm to raise its target price from 150p to 175p.

At the 175p target price, 888 would have a FY24E Price-to-Earnings (PE) ratio of 8.8x and a Free Cash Flow (FCF) yield of 11%.

Jones commented: “It has been a challenging year for 888, but we believe better times are ahead and reiterate our Buy recommendation.”

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