888 Holdings' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.12.13 | About: 888 Holdings (EIHDF)

888 Holdings plc (OTCPK:EIHDF) Q2 2013 Earnings Conference Call August 6, 2013 5:30 AM ET

Executives

Brian Mattingley - Chief Executive Officer

Aviad Kobrine - Chief Financial Officer

Itai Frieberger - Chief Operating Officer

Analysts

James Hollins - Investec

Vaughan Lewis - Morgan Stanley

Steve Hoare - Gaming Intelligence

Operator

Good day gentlemen and welcome to 888 Holdings Q2 2013 Conference Call. For your information, today’s call is being recorded. I will now hand over to Mr. Brian Mattingley. Please go ahead, sir.

Brian Mattingley - Chief Executive Officer

Good morning, everybody, and thank you all for joining us on the call today. I am Brian Mattingley, Chief Executive of 888 and I am joined today as ever by Aviad Kobrine, our Chief Financial Officer and Itai Frieberger, our Chief Operating Officer.

I will take it as read that you have seen our announcement this morning and I will briefly take you through a few key points before opening up the call to questions. I am pleased with the progress we have continued to make in our core markets and our core products. We have delivered an outstanding performance in Casino and maintained our growth in Poker resulting in an overall record revenue for each one. Against the backdrop of a strong performance in the prior year, Poker revenues have risen further with continued growth in a number of active players and we are now ranked fourth in the online traffic report according to PokerScout.

Casino has seen an excellent sequential year-on-year growth driven by strong performances in Spain and Italy, as well as highly successful marketing campaigns which has helped to drive a 13% increase in revenue. Bingo continues to be a challenging and competitive market and revenues in this half year decreased by 23% year-on-year. In the U.S., we are delighted to announce that today through our AAPN joint venture with Avenue Capital; we have signed an agreement with Caesars Interactive Entertainment that will allow 888 to offer own branded poker and casino products in New Jersey subject to required regulatory approvals. This agreement is an important development in our U.S. strategy.

Trading in quarter three has begun in line with our expectations with our performance being led again by our core casino and poker products. Towards the end of the first half, we signed an agreement with Kambi Sports Solutions, a leading sports book supplier to deliver a fully-managed sports book solution to 888. Sports is an area we are committed to improving and through this partnership we will be aligning our sports platform with the rest of our offering. We are seeing good early results from this partnership.

In summary, we are pleased with our performance and are confident that our focus on ensuring that we have the right platforms, the right partnerships in place to take full advantage of the exciting opportunities in the U.S. is exactly the right one. We remain confident of continued progress and meeting full-year expectations, and we will update you further at the time of our interim results which we plan to announce on the 28th of August.

With that, I will now hand you back to the operator who will open the call for your questions. Thank you very much.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We take our first question today from James Hollins of Investec. Please go ahead.

James Hollins - Investec

Yes, good morning. A few from me, the first one is on New Jersey. I was just wondering if you'd give us an update from your perspective on the timing of when we're likely to hear from them on who has got licenses, etcetera. And linked to that, what is the likelihood of you getting B2C approval on this new deal? The second one is on Nevada update on timing of launch there. I think you talked about Q3 for launch in Nevada. Please give an update on that one. And then finally, just the Caesars B2C deal put to bed any talk of them not partnering with you on their B2B? Thanks very much.

Brian Mattingley

Okay, James, welcome to you. I’ll try and kickoff and I am sure that Aviad and Itai will come in. In terms of New Jersey, the regulator is very, very confident that he will launch and he will be ready to launch on the 28th of November 2013. We think that’s quite ambitious, but he is absolutely 100% convinced about his timescale that he will launch in. We are absolutely at this moment in time up-to-date with all of our submissions. We've done our personal submissions, our corporate submissions and have had all of our paperwork accepted. And the next stage and there's a whole series of timescales and milestones, and as long as we hit all of those timescales and those milestones, then we will launch together with everybody else. That is what (indiscernible) has stated at the DGE.

In terms of our B2C approval, realistically, that is what we have submitted all our paperwork for. We have a license partner in CIE which will now allow us to join with other operators to go through the process of obtaining approval and a transitionary license. We don't see any problems in that area; we have very constant regular dialogue with the regulator there and feel really quite happy that everything is progressing on time and to queue. In terms of Nevada, we have done everything that has been required of us. We have submitted our software to GLI, the testing laboratory, and that has been passed. We have now submitted our software together with all our documentation or dossier of how the system works et cetera to the Nevada Gaming Board of Control and they have asked us questions. We have submitted answers for those questions and we really now are just in the hands of the Nevada regulator. There is nothing more that we can do, and all I can say is we have again, a very, very good and constructive dialogue with Nevada. In terms of the Caesars B2C deal, only person who can really answer that for you is Caesars. I don't see any reason why signing this deal will change anything. I think Caesars are committed to working with us. Whether they will use anybody else is something that they have yet to share with us. Have you got anything else to add Itai?

Itai Frieberger

I think this new agreement with Caesars reinforces our relationship with them, and I think we should all expect us to launch Caesars or actually WSOP in both Nevada and New Jersey when regulation allows us to do so. We have a very good relationship with them and that relationship remain. And I think that, just today, it's just another example how strong and how tight is this relationship between us. I think regarding your question about the other operators and that's a question again to the DGE, the New Jersey regulator, they haven't disclosed the list of the different operators that submitted the application. I'm sure that we will be a very strong operator in that region once it's regulated.

James Hollins - Investec

Okay, great. Well, thank you.

Operator

Thank you. We now move on to our next question from Vaughan Lewis of Morgan Stanley. Please go ahead.

Vaughan Lewis - Morgan Stanley

Hi, good morning. If we look at last year as a whole, the EBITDA margin was around 18%. So, if we achieve that similar in H1 that would be flat EBITDA in H1 relative to last year. Does that sound sort of sensible? And then secondly, what’s going on in the Bingo market? Why is it been so weak and that weakness seems to be continuing? Are customers doing something else or have you lost a lot of market share? What are the real dynamics here, what do you think is going on? And then thirdly, just following on in the U.S., what should we expect in terms of the cash flow profile? Do you think we should expect a period of extended losses like we've seen in some of the regulating European countries or could it be a quicker ramp up to profitability here? Thanks.

Brian Mattingley

Vaughan, I am going to tackle the bingo issue and ask Aviad if he would just talk you through for some margin and cash flow profile in the U.S. First of all, in the Bingo market. The Bingo market as I am sure you are aware is a saturated market. I mean everybody has a Bingo skin. We signed up ourselves on a B2B basis, we signed up Bingo skins probably at a rate of one if not two a month. So, and everybody else is doing that. The Bingo customer is very, very similar to a bricks-and-mortar Bingo customer in the UK, they are very promiscuous. They seek out bonuses, they seek out deals. So, what you have got is you've got a market which has just become incredibly saturated, and to try and make a profit or try and yield profitable admissions and profitable revenue, you have to be very careful on how you treat your bonusing.

I would not believe that we have lost significant market share, albeit that with the 23% decline, you know you have lost market share, but I think those are due to the new entrants coming into the market. They are just giving bonuses away ad lib, so that's where I think we are at. What we are doing is we have done a complete market review and we've also done a strategic review of how we operate in that market. And we have got a very, very comprehensive action plan, and are now working through the action plan with the view to addressing the decline, and I don’t think you will see anything significant in this year. But I would hope that in 2014 we could start to see us getting back to a flat, and hopefully maybe start to see a little bit of growth coming again, but it’s a very, very difficult market 12-19 to be in at the moment. Aviad, can I pass it over to you please?

Aviad Kobrine

Yes, sure. Vaughan, we are obviously not publishing our profit number now. We're going to have to wait until the 28th to get the exact number. So I'm not going to comment on margin. What I will comment is that, given that our margin was 18% last year, and if you look at the current consensus, clean EBITDA, the market focus for us is to keep the same margins and increase EBITDA. And we said in today’s announcement that we're very comfortable with current consensus. So you can draw your own conclusions, I think you'll get the actual numbers on the 28th of August. In terms of U.S. operations and cash flow; First of all, you alluded that the negative cash flow in regulated markets – well, for us, I can repeat in what we said before that in the regulated markets of Italy and Spain, we are positive on the contribution line. So we're not losing money in any of our markets regulated or unregulated. As for the U.S., I expect next year to have several millions of additional OpEx and potentially that could drag on EBITDA at least at the beginning of the operational period there. I don't expect this to be a very significant number, not going to be extended for a long period of time. This management showed that we don’t operate in a loss-making market, where there is no potential. So, after a ramp up period, we expect to be profitable in each and every market in which we operate.

Vaughan Lewis - Morgan Stanley

And can I just check on that a bit. Given the structure of the JV where you are the minority effectively. You won't be consolidating the revenues and EBITDA, I presume we'll just see an associate net income contribution from AAPN, is that right?

Brian Mattingley

Vaughan, we are not – first of all, we are not a minority equity interest at all. We have exactly parity with that of Avenue. There are two or three very, very small shareholders who were part of the original Avenue introduction deal. So we are literally an equal shareholder in that venture. I guess, I think we will consolidate that but below the EBITDA line.

Aviad Kobrine

Let me clarify, Vaughan. We will actually see two revenue streams, if you like. First of all, AAPN pays a Dragonfish service fee, which is going to be a B2B revenue above the EBITDA line. In addition to that, we will reflect our share joint venture close to 50% as a participation in joint venture below the EBITDA line. That's how we're going to reflect this.

Vaughan Lewis - Morgan Stanley

And could I just follow up on the Bingo one, if that's okay as well. Has there been any change of personnel there that it looks like the performance of staff has deteriorated since the final earn-out was paid. Is that fair?

Brian Mattingley

Yes, there has been a significant change in personnel. Personnel now are operating in a similar vein to that of Casino and Poker, where we have one operation, which shares all of the resources for Bingo. We have a new senior manager, who has entered that, who has got exceptional experience coming out of Poker and also Casino. And we expect this to be the beginning of I'll say the resurgence of Bingo, but beginning of actually looking at the way that Bingo operates, the way that we should attack the market and do it in exactly the same format as we do with our two core successful products, Casino and Poker.

Vaughan Lewis - Morgan Stanley

Great, thanks very much.

Operator

Thank you. (Operator Instructions) We now move on to a question from Steve Hoare of Gaming Intelligence. Please go ahead.

Steve Hoare - Gaming Intelligence

Hi. I just wanted to get some sort of clarity on the way that the licenses are structured with Caesars and AAPN. And you mentioned it was to be an 888 branded venture. Is this 888 in partnership with WSOP or with a particular Caesars casino? How does it work in terms of what you show the customer?

Brian Mattingley

I think that’s one firmly for Itai. Itai, could you just sort of allude just what were going on in that situation?

Itai Frieberger

Yes, sure. To understand how it works, in order to run a brand in America, you need a license. Caesars own actually four different licenses in New Jersey. One of them will be used for WSOP and that would be the platform provider on that brand would be 888. So that’s one deal and if you want the Caesars B2C deal powered by the 888 platform. That new deal that we've announced today is another license for 888 to use and when we say 888 branded that would be 888 in New Jersey. You will would 888 B2C offering available in New Jersey under a Caesars' or under a Harrah's license in New Jersey. And that's actually the second license that we're utilizing through Caesars. Is that clear?

Steve Hoare - Gaming Intelligence

So, you have two deals with Caesars for New Jersey, one under their name, and one under your own?

Itai Frieberger

Correct. One deal is for them to when we offered them the platform...

Steve Hoare - Gaming Intelligence

Yes.

Itai Frieberger

Which is the existing deal that was announced some time ago, and that new deal today is for us to be able to allow 888 games to regulate 888 offerings directly to the consumers.

Steve Hoare - Gaming Intelligence

Okay. Finally on the U.S., have you been made aware of any technical issues or regulatory issues that are holding up things in Nevada because, I mean, the other guys managed to launch the Ultimate Gaming, that’s back three months ago now, isn’t it?

Brian Mattingley

I mean, I think we should say first of all that we have no questions or queries from the Nevada Gaming Board of Control other than that which we have expected. The Ultimate Poker received their license because they were not foreign applicants, they were locals to Nevada. They received their license six months in advance of us. I feel at this moment that we have a very strong dialogue and a very strong relationship with the Nevada Gaming Board of Control and have not received any adverse comments from them. I feel at this moment in time we are just waiting to hear from them and it is their – it's their prerogative to do what they need to do.

Steve Hoare - Gaming Intelligence

Okay, thanks very much.

Operator

Thank you. As there are no further questions in the queue, I would like to hand the call back over to you gentlemen for any additional or closing remarks.

Brian Mattingley - Chief Executive Officer

Okay, right. What I like to say thank you very much all of you for coming to the call today. Again, I can reiterate the fact that we have had a very, very encouraging set of results primarily because of the quality of the team that we have at 888 in innovate and continuing to push ahead with all opportunities that arise. We are very confident that our business is strong and healthy and we are well-positioned to take advantage of opportunities as they arise and particularly those in the U.S. So, unless there is any more comments, I would like to thank you all again for coming to the call and look forward to speaking to you at the time of our half year results. So, thank you very much indeed. Good bye.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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