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888 numbers prove the race is on

The gambling sector finds itself in a race against time, as companies fight to produce the strongest numbers ahead of the Point of Consumption tax later this year.
April 16, 2014

A bullish set of numbers from online gambling company 888 Holdings (888) is the latest example proving the online gambling sector is locked in an unforgiving 'arms race', with companies attempting to win as much investor confidence and new customers as possible before the Point of Consumption (PoC) tax is introduced this December.

888 only released its full-year results at the end of March, reporting a 30 per cent increase in reported pre-tax profits and a 7 per cent jump in revenues year-on-year. Additionally, it handed back $50m (£30m) to shareholders, declaring an additional special dividend worth 7¢ share for 2013. And now, first-quarter figures are equally good, with an 11 per cent year-on-year rise in quarterly revenues and a 7 per cent improvement on the final quarter of 2013. Particular progress was made in consumer bingo, with revenues up 9 per cent on the final quarter of last year. This will be welcome news after the bingo business saw revenues plummet 16 per cent in 2013.

But the bullish news update must be understood in a wider context. The gambling sector is facing one of the worst years for regulatory upheaval: if PoC is introduced on time, all online gambling companies will be subject to another 15 per cent tax on revenues generated from customers in the UK. It will no longer matter where the company is registered. Traditionally, online gambling companies avoided onshore duties by registering abroad - most commonly in Gibraltar - which rendered other taxes such as Machine Game Duty (MGD) and fixed-odds terminal betting duty irrelevant. But this will no longer be enough to safeguard against PoC.

There is no word yet from most of the online gambling companies on how they plan to offset the cost of the new duty in the long term, and concern is building over the effect on prices and the consumer. Instead, the companies have laid out figures which they believe will represent the annual impact going forward. In 888's case, profits are expected to take a $20m beating in a full year.

More concerning is the reaction from investors to the incoming taxes. While the March Budget did nothing to alleviate pressure on the sector (fixed-odds terminal betting duty rose from 20 to 25 per cent), widespread panic sent some gambling stocks plummeting. While the long-term measures are unclear and cause shareholder skittishness, a $20m hit to profits at 888 is barely material. The company has a market capitalisation of more than £500m and ended 2013 with over $100m in the bank.

But understanding the numbers in relative terms hasn't stopped shares such as those in 32Red (TTR) taking a 16 per cent nose-dive since early March. Forced to address the share price movement, group chief executive Ed Ware insisted guidance for 2014 was still positive and reassured the market of the group's plans to fight PoC in the courts, should it be brought in at the current rate and on time. Mr Ware also emphasised that the changes to fixed-odds terminal betting announced as part of the Budget would not be affecting his business.

For now, the gambling companies will focus on growing market share. They believe this is crucial to offset any profit challenges later in the year and will help outstrip future punitive measures. To achieve this, gambling companies are fighting a fierce war to garner as much media coverage as possible before the tax is introduced at the end of the year. Interactive gaming outfit NetPlay TV (NPT) secured a three-year deal with ITV and sponsored reality show Big Brother and its celebrity version last year. Marketing costs were vast, but it appears to be paying off: NetPlay TV reported a 25 per cent increase in new players by the end of 2013. Similarly, 32Red announced this week that it will be the new sponsor for Rangers International Football Club (RFC) for the 2014-15 season, and betting exchange group Betfair (BET) has signed deals for more television coverage over the next 15 months, including during the World Cup and Champions League broadcasts.