TIDM888
RNS Number : 5653S
888 Holdings plc
12 March 2019
12 March 2019
888 Holdings Public Limited Company
("888" or the "Group")
Audited annual financial results for the year ended 31 December
2018
Continued strategic progress and resilient financial performance
resulting in record EBITDA
888, one of the world's most popular online gaming entertainment
and solutions providers, announces its audited annual financial
results for the year ended 31 December 2018 ("the period").
Financial Highlights
-- Group revenue(1) decreased by 2% to US$529.9 million (2017:
US$541.8 million)
-- Revenue from regulated and taxed markets continue to represent
the significant majority of Group revenue at 70% (2017: 70%)
-- B2C Casino revenue increased by 8% to US$317.6 million (2017:
US$293.9 million); B2C Casino revenue excluding UK increased
by 17%
-- B2C Sport revenue increased by 6% to US$80.3 million (2017:
US$75.5 million); B2C Sport revenue excluding UK increased
by 18%
-- B2C Poker revenue decreased by 37% to US$49.0 million (2017:
US$77.9 million) reflecting challenging competitive environment
-- B2C Bingo revenue decreased by 17% to US$32.4 million (2017:
US$39.3 million) reflecting heightened regulatory scrutiny
in the UK
-- Resolution of a legacy VAT matter in Germany and subsequent
release of an exceptional provision of US$22.4 million
-- Adjusted EBITDA(2) increased by 6% to US$107.1 million (2017:
US$100.7 million); EBITDA for the period was US$129.1 million
(2017: US$41.2 million)
-- Adjusted EBITDA margin increased by 160bp to 20.2% (2017: 18.6%);
EBITDA margin increased to 24.4% (2017: 7.6%)
-- Adjusted Profit before tax(2) increased by 11% to US$86.7 million
(2017: US$78.3 million); Profit before tax was US$108.7 million
(2017: US$18.8 million)
-- Adjusted basic earnings per share increased to 20.2c (2017:
20.1c); basic earnings per share increased to 26.3c (2017:
3.5c)
-- Final dividend of 6.0c per share (2017: 5.9c per share), plus
an additional one-off 2.0c per share (2017: 5.6c per share)
bring the total dividends for the year to 12.2c per share (2017:
15.5c)
Operational Highlights
-- Continued growth across several regulated markets, primarily
in Continental Europe, underpinned by momentum in Casino and
Sport, resulting in revenue from regulated markets (excluding
the UK) increasing by 14%
-- Improving trends in the UK B2C business towards the end of the
year following the prudent and proactive customer protection
measures taken by 888 over the past 18 months; positive trends
in the UK market have continued in Q1 2019 with UK B2C revenue
up more than 10% year-on-year at constant currency
-- Continued product innovation with the successful gradual launch
in May of Orbit, 888's most exciting Casino product innovation
during recent years, delivering encouraging results
-- 16% year on year increase in active Casino players
-- 888Sport first time depositors increased by 21% and deposits
increased by 10%
-- Further investment in 888's poker proposition including the
launch of 888Poker.it (Italy) at the beginning of 2018 and the
development of the Group's new Poker 8 platform during the year
-- Progress in the developing US market with highlights including:
o The strategic acquisition of the remaining 53% interest in
the All American Poker Network for US$28.5 million
o The launch of 888Sport in New Jersey in September and subsequent
sponsorship of the New York Jets by 888.com
o Enhanced casino content in New Jersey
-- New licences obtained in Sweden and Malta at the end of the
year and in Portugal post the period end
Post period-end highlights
-- Appointment of Itai Pazner, previously Chief Operating Officer,
as 888's new Chief Executive Officer replacing Itai Frieberger
who stood down as CEO after more than 14 years with the business
-- Acquisition of a number of bingo brands, including Costa Bingo,
for GBP18m strengthening 888's position in the UK online bingo
market
-- Strategic acquisition of high-quality and scalable sportsbook
technology alongside associated risk management, product and
trading capabilities from Dedsert Limited and Dedsert (Ireland)
Limited and its affiliates for GBP15 million
-- Positive current trading with average daily revenue up more
than 10% in Q1 so far when compared to Q4 2018 and Group trading
during the financial year to date 5%* higher at constant currency
year-on-year
Itai Pazner, CEO of 888, commented:
"In my first report as CEO I am delighted to update 888's
stakeholders on the significant strategic progress made by the
Group during 2018 and since the start of 2019. Amongst other
initiatives, we have continued our geographic expansion by
obtaining important new licenses; launched our most significant
product innovation in recent years in the form of Orbit, a new
Casino platform; and announced three acquisitions including
delivering on our long-stated ambition to add proprietary sports
betting technology to 888.
Despite headwinds in some areas of the business, the financial
performance in 2018 was resilient and we achieved a record EBITDA
outcome for the year. The Group achieved continued growth across
several regulated markets, primarily in Continental Europe,
underpinned by good momentum in Casino and Sport.
The positive momentum at the end of 2018 has continued into the
first quarter of 2019 with average daily revenue in 2019 to date up
10% compared to Q4 2018 reflecting improvements across major KPIs.
In the UK, we are encouraged by the improving trends we began to
witness in the latter stages of 2018 and the Board is pleased to
report that these have continued during the first quarter of the
current financial year. Average daily revenue at constant currency
in our UK B2C business up by more than 10% year-on-year in Q1 so
far. Overall Group trading during the financial year to date is 5%*
higher at constant currency year on-year.
The Group continues to base its success on its unique
technology-edge, fantastic team and diversification across products
and markets. Underpinned by the strength of 888's technology and
the significant strategic progress made by the Group over recent
months, the Board continues to see a number of significant growth
opportunities for 888 in both new and existing markets. We look
forward to another exciting year of progress in 2019."
* Adjusted for the migration of Cashcade Bingo.
(1) Revenue in this document is before VAT accrual release.
(2) As defined in the financial summary below.
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES
OF ARTICLE 7 OF REGULATION (EU) NO 596 /2014.
The person responsible for making this announcement is Itai
Pazner, Chief Executive Officer of the Group
Financial summary
2018(1) 2017(1)
US$ million US$ million Change
---------------------------------------- ------------- ------------ --------
Revenue- B2C
Casino 317.6 293.9
Poker 49.0 77.9
Sport 80.3 75.5
Bingo 32.4 39.3
Total B2C 479.3 486.6 (2%)
B2B 50.6 55.2 (8%)
Revenue before VAT accrual release 529.9 541.8 (2%)
VAT accrual release(2) 10.7 -
Revenue 540.6 541.8
Adjustment of VAT accrual release (10.7) -
Operating expenses(3) (137.8) (138.8)
Gaming duties (69.9) (75.2)
Research and development expenses (32.8) (35.4)
Selling and marketing expenses (155.0) (162.5)
Administrative expenses(4) (27.3) (29.2)
------------- ------------ --------
Adjusted EBITDA(5) 107.1 100.7 6%
------------- ------------ --------
Depreciation and amortisation (20.3) (19.3)
Finance (0.1) (3.1)
------------- ------------ --------
Adjusted profit before tax(5) 86.7 78.3 11%
------------- ------------ --------
Share benefit charges (8.9) (8.5)
VAT accrual release 10.7 -
Exceptional items(6) 11.1 (50.8)
Gain from re-measurement of
previously held equity interest
in joint ventures 9.3 -
Share of equity accounted associates'
loss (0.2) (0.2)
Profit before tax 108.7 18.8
Adjusted basic earnings per
share 20.2c 20.1c
------------- ------------ --------
Basic earnings per share 26.3c 3.5c
------------- ------------ --------
Reconciliation of profit before tax to EBITDA and Adjusted
EBITDA
2018(1) 2017(1)
US$ million US$ million
----------------------------------------- ------------ ------------
Profit before tax 108.7 18.8
------------ ------------
Finance 0.1 3.1
Depreciation 5.3 5.7
Amortisation 15.0 13.6
------------ ------------
EBITDA 129.1 41.2
------------ ------------
Exceptional items(6) (11.1) 50.8
VAT accrual release(2) (10.7) -
Share benefit charges 8.9 8.5
Gain from re-measurement of previously
held equity interest in joint
ventures (9.3) -
Share of equity accounted associates
loss 0.2 0.2
Adjusted EBITDA(5) 107.1 100.7
(1) Totals may not sum due to rounding.
(2) Revenue includes US$10.7 million (2017: nil) in respect of
accrual release which relates to receipt of tax assessments in
respect of legacy value-added tax in Germany, as detailed in note
19 to the financial statements.
(3) Excluding depreciation of US$5.3 million (2017: US$5.7
million) and amortisation of US$15.0 million (2017: US$13.6
million).
(4) Excluding share benefit charges of US$8.9 million (2017:
US$8.5 million).
(5) Adjusted EBITDA is the main measure the analyst community
uses to evaluate the Company and compare it to its peers. The Group
presents adjusted measures (including adjusted profit before tax)
which differ from statutory measures due to the exclusion of
exceptional items and adjustments. It does so because the Group
considers that it allows for a further understanding of the
underlying financial performance of the Group.
(6) Exceptional income of US$11.1 million related to US$22.4
million release of provision following receipt of tax assessments
in respect of legacy VAT relating to the provision of gaming
services in Germany prior to 2015 (2017: exceptional charges of
US$45.3 million) offset by an accrual of US$10.4 million in respect
of regulatory matters related to customers' activity in prior
periods and US$0.9 million legal and professional costs associated
with aborted M&A efforts, as set out in note 5 to the financial
statements.
Sell-side analyst presentation and live audio webcast
Itai Pazner, Chief Executive Officer and Aviad Kobrine, Chief
Financial Officer will host a presentation for sell-side analysts
today at 10:00 (BST) at the offices of Hudson Sandler, 25
Charterhouse Square, London EC1M 6AE. To express interest in
attending please contact 888@hudsonsandler.com or call +44 (0)207
796 4133.
The presentation will be webcast live and will be available via
the following link:
https://www.investis-live.com/888/5c810398ff46a80a00ff5e76/pnnp
Replay will be available on the 888 website
(http://corporate.888.com/investor-relations) later today.
Enquiries and further information:
http://corporate.888.com/
888 Holdings Plc
Itai Pazner, Chief Executive Officer +350 200 49 800
Aviad Kobrine, Chief Financial Officer +350 200 49 800
Hudson Sandler - 888@hudsonsandler.com
Alex Brennan
Hattie O'Reilly +44(0) 207 796 4133
Bertie Berger
This announcement includes statements that are, or may be deemed
to be, "forward-looking statements". By their nature,
forward-looking statements involve risk and uncertainty since they
relate to future events and circumstances. Forward-looking
statements may and often do differ materially from actual results.
Any forward-looking statements in this announcement reflect 888's
view with respect to future events as at the date of this
announcement. Save as required by law or by the Listing Rules or
the Disclosure Guidance and Transparency Rules of the UK Listing
Authority, 888 undertakes no obligation publicly to release the
results of any revisions to any forward-looking statements in this
announcement that may occur due to any change in its expectations
or to reflect events or circumstances after the date of this
annou
CHAIRMAN'S STATEMENT
Introduction
I am pleased to report on another year of progress for 888.
During 2018, the Group continued to deliver against its strategic
objectives with a firm focus on strengthening its position in
regulated markets; developing new products and technologies; and
continuous improvements in the areas of compliance and safe
gambling. As a result of the Group's continued progress, and
despite regulatory headwinds in certain markets during 2018, I am
delighted to report that 888 achieved record EBITDA in the
year.
Market overview
The global online gambling market remains dynamic and
fast-growing. H2 Gambling Capital, a leading industry data source,
predicts that the global online gambling industry will continue to
grow significantly over the coming years, from a value of $50.8
billion in 2018 to be worth approximately $70.3 billion in 2023*.
The key drivers behind this anticipated growth will continue to be
the increasing penetration and use of mobile devices, improved
internet connectivity for consumers, and positive regulatory
changes that open new markets for online gambling.
Regulation continues to be a key force in shaping the future
direction of our industry and the Group continues to welcome and
support the development of regulatory frameworks globally that
provide better protection for customers and greater clarity for
online gambling operators. In some cases, such as in the UK, Italy,
Denmark and Romania, recent and forthcoming changes to regulation
and taxation could present potential headwinds for profitability
and growth. On the other hand, new regulated markets also provide
significant potential growth opportunities for 888 by providing
environments where the Group can access new customers and leverage
its extensive marketing capabilities. The Group has a proven and
successful track record of launching in new regulated markets and
growing market share and there is perhaps no better example of this
than in Spain. Having launched in Spain in 2012, revenue from the
market has grown significantly over recent years to account for 13%
of the Group's revenue in 2018 and now represents the Group's
second largest individual market. We continue to seek opportunities
to replicate this success in other markets as they regulate online
gambling and, at the very end of the year, we were delighted to
receive a licence from the Gambling Authority in Sweden to provide
online Casino, Sport and Poker services under the new regulated
Swedish regime, which came into effect on 1 January 2019. Post the
period end, the Group received a licence to launch Casino and Poker
in the regulated Portuguese market from January 2019. These marked
the 12(th) and 13(th) jurisdictions where 888 holds a licence,
thereby demonstrating further progress against the Group's strategy
to diversify and expand across regulated markets.
Over recent years the regulator in the UK, the United Kingdom
Gambling Commission ("UKGC"), has become more active in promoting
the improvement of standards of operation across the industry,
thereby enhancing the protection of potentially vulnerable
customers. The Group has been proactive in implementing changes to
its operations to support the long-term sustainability of our UK
business. These include enhancing customer checks and verifications
and strengthening its customer protection protocols and procedures.
Whilst this has impacted 888's revenue from the UK market over the
last 18 months, we are pleased by the recent encouraging trends
witnessed in our UK business.
* Source: H2 Gambling February 2019
The regulatory environment in the US has continued to evolve
and, in May 2018, the US Supreme Court overturned the Professional
and Amateur Sports Protection Act of 1992 ("PASPA") thereby
enabling individual states in the US to regulate online sports
betting. In September, we were delighted to launch 888sport in New
Jersey, marking the first time 888 has offered sports betting in
the US and paving the way for the Group to expand its sports offer
on a state-by-state basis as future regulation allows. Whilst the
repeal of PASPA represents a positive and fundamental shift in the
long-term outlook for the US market, in January 2019, post the
period end, the US Department of Justice released an updated
opinion regarding the interpretation of the Wire Act of 1961. This
has created some uncertainty across the US market which may
continue through a legal challenge to the new opinion. Despite
this, the Board believes that the Group remains well-positioned for
future growth in the developing US market.
Strategic progress
888's strategy is to drive growth across diversified
geographies, product verticals and revenue streams (both B2C and
B2B). To achieve this, the Group continues to balance investment
across areas of the business that will generate long-term value for
the Group's stakeholders.
Underpinning the Group's growth strategy are 888's core
strengths: outstanding proprietary technology; an experienced and
dedicated management team; business analytics expertise; customer
relationship management ("CRM") capabilities; and efficient
marketing. The Board believes that, through continuous investment
and innovation, 888 has developed - and continues to enhance -
truly market-leading proprietary online gaming technology. In an
industry as dynamic and fast-moving as 888's, the Group's ability
to develop its own products and solutions remains critical to 888's
ability to both adapt to regulatory changes and achieve sustainable
growth.
New product development remains a key driver of the Group's
organic growth and, as discussed in more detail in the Business
& Financial Review below, was an area of significant focus
during the year. Towards the end of May, the Group successfully
launched Orbit, a new cutting edge web-based Casino platform, which
has recorded very encouraging results and contributed to the 8%
increase in Casino revenue in 2018. We have also continued to
invest in our growing Sport proposition, which recorded a revenue
increase of 6% in 2018, with an enhanced and more personalised
"front-end" to 888sport in the pipeline. In early 2019, we
commenced the phased roll out of Poker 8, a new and improved
cross-territory Poker platform, which we are confident will provide
new momentum to 888poker following a challenging year where revenue
decreased by 37%. In addition, we are also excited about the
forthcoming launch of 888's shared poker player liquidity network
across selected European markets. In Bingo, where revenue decreased
by 17%, we are continuing to develop our product by introducing new
games and enhancing customer personalisation which we believe will
support 888's future success in what remains a competitive bingo
market.
The Group continues to explore M&A opportunities and
partnerships that will create value for its stakeholders. In
December 2018, we were pleased to announce the acquisition of the
remaining 53% interest in the All American Poker Network ("AAPN"),
a joint venture established in 2013. The acquisition represented an
important strategic step towards 888 achieving its exciting
long-term potential in the US market and we are confident that it
will create additional value for our shareholders.
Following the year end, in February 2019, the Group announced
the acquisition of a portfolio of bingo brands - including the
well-established Costa Bingo brand - which previously operated as
B2B brands on the Group's Dragonfish Platform. With the acquired
brands having been developed on Dragonfish, the Board is confident
their consolidation into 888's established B2C brand portfolio will
deliver synergies and growth opportunities through the application
of the full extent of the Group's capabilities in product
development, marketing, and customer relationship management to
their operations.
In March 2019, the Group was delighted to announce the exciting
and strategically important acquisition of sportsbook technology
alongside associated risk management, product and trading
capabilities from Dedsert Limited and Dedsert (Ireland) Limited and
its affiliates (together "BetBright") for GBP15 million. This
acquisition gives 888 complete ownership over technology and
product development across four key online betting verticals for
the first time and will support the long-term development of the
successful and increasingly established 888Sport brand. We are
confident that this acquisition will increase the Group's exciting
long-term prospects and differentiation in the growing global
sports betting market.
Safer gambling
888's values place the safety of our customers at the centre of
all endeavours. The Group's primary objective is to ensure that all
those who visit our websites can do so with confidence and
security.
Many millions of adult customers around the world choose to
participate in online gambling activities and the clear majority of
those who play our games enjoy a safe and positive experience.
However, as a responsible operator, we constantly strive to ensure
that those for whom our games are not intended, notably the
underage and the vulnerable, will not be drawn into the gaming
environment and that those customers who develop a gambling problem
are quickly identified and helped. We maintain a close dialogue
with relevant stakeholders, which include regulators, industry
bodies and charities, and we are committed to contributing to the
continuous improvement of standards across the industry. As well as
being the right thing to do, by continuing to conduct business
responsibly we are in a stronger position to generate value for all
stakeholders.
Board and people
On behalf of the Board, I would like to take this opportunity to
thank each of my colleagues at 888 for their commitment during the
year. We continue to place an emphasis on nurturing our creative
and responsible culture and ensuring that this is understood and
shared by all colleagues. This has been another dynamic year for
the industry and the progress made by 888 during 2018 is, above all
else, testament to the skill and dedication of our outstanding
team.
Following the year end, the Group announced that Itai Pazner,
previously Chief Operating Officer ("COO"), had been appointed as
888's new Chief Executive Officer ("CEO"). He replaced Itai
Frieberger who, after more than 14 years with the business, in
January stood down from his role as the Group's CEO in January
2019. I am pleased to report that, in order to ensure the smoothest
possible transition, Itai Frieberger will be remaining with 888 as
a Director of the Group for a period of up to 12 months.
Itai Frieberger has made a truly outstanding contribution to 888
over many years and, on behalf of everyone at the Company, I would
like to thank Itai for his exceptional achievements and dedication.
In Itai Pazner we have the ideal successor as CEO. He is a highly
experienced operator with a great track record of success within
888. He has developed a unique understanding of the Group over the
past 17 years with the business and has worked closely with Itai
Frieberger for a number of years, especially throughout the past
year in his role as COO, which has supported an effective and
seamless transition.
Also following the year end, we were delighted to welcome new
colleagues that are joining us from Betbright. The BetBright
sportsbook that we have acquired has been developed by a fantastic
team and our new colleagues will significantly strengthen 888's
sports betting expertise and industry know-how.
Outlook
The Board continues to believe that, underpinned by the Group's
diversification across products and markets as well as its
technology leadership and first-class team, 888 is very well
positioned to continue to generate value for its stakeholders.
Changes and developments to regulation will continue to play a
major role in dictating the future dynamics and size of the global
online gambling industry. Despite recent uncertainty arising from
the US Department of Justice's recently revised opinion to the Wire
Act of 1961, the Board believes that 888 remains well positioned
and we will continue to invest to develop 888's presence in the
evolving US market. Whilst these investments will have an impact on
Group profitability in the coming year, the longer term growth
potential for 888 in the US market, which retains the potential to
become the largest in the world, remains significant.
The positive momentum at the end of 2018 continued into the
first quarter of 2019 with average daily revenue up 10% compared to
Q4 2018 reflecting improvements across all major KPIs. In the UK,
we are encouraged by the improving trends we began to witness in
the latter stages of 2018 and the Board is pleased to report that
these have continued during the first quarter of the current
financial year with average daily revenue at constant currency in
our UK B2C business in Q1 so far up by more than 10% compared to
prior year. Overall Group trading during the financial year to date
is 5%* higher at constant currency year-on-year.
888's focus in 2019 and beyond will, as ever, remain on
delivering a truly satisfying and safe experience for customers,
expanding the business in regulated markets and investing in our
technology, people and platform, thereby supporting sustainable
growth for our shareholders.
Brian Mattingley
Non-Executive Chairman
* Adjusted for the migration of Cashcade Bingo.
CEO'S STRATEGIC REPORT
I am delighted to present my first Strategic Report to 888's
stakeholders since taking over as Chief Executive Officer in
January 2019. I am honoured to be the new CEO of 888, which is a
business with an outstanding team and culture. I am hugely excited
at the prospect of building on the Group's position of strength as
a diversified operator with outstanding proprietary technology and
a number of significant potential future growth opportunities.
The Board believes that 888 is one of the most diversified
operators across product verticals and regulated markets in the
global online gaming industry. I am pleased to report that, in
2018, 888 delivered further strategic progress and maintained its
focus on compliance and customer safety, technology and product
innovation, and achieved growth in various regulated markets.
MAINTAINING A SAFE AND ENJOYABLE ONLINE ENVIRONMENT
888's mission remains, above all else, to provide its customers
with a safe, secure and entertaining environment to enjoy online
gaming and betting. Our primary goal remains consistent: to ensure
that all those who visit our sites can do so with confidence and
that those for whom our games are not intended, notably underage
and vulnerable individuals, will not be drawn into the gaming
environment. Critically, protecting our customers is not only the
right way to do business, but it is the only way in which 888 will
continue to succeed and create value for all its stakeholders.
888'S ESTABLISHED BUSINESS MODEL
The operations of 888 Holdings plc are structured into two lines
of business: the core B2C business, where the Group operates the
888 brands, and a leading B2B offering, conducted through
Dragonfish.
Through its B2C business, which accounted for 90% of the Group's
revenue in 2018 (2017: 90%), 888 operates popular online gaming
brands across four product verticals; Casino, Sport, Poker and
Bingo. Through Dragonfish, the Group offers gaming partners a
comprehensive end-to-end solution encompassing technology,
compliance, operations and advanced marketing tools.
888's core B2C business is based upon attracting customers to
its brands in a cost-effective manner and then retaining those
customers by offering a variety of games and markets across
different product verticals in an enjoyable and safe environment.
To achieve this, 888 continually invests in technology and product
development, marketing and its people. Sophisticated data analytics
underpin and guide the Group's approach to all key areas of
business development.
888's highly-skilled team and its internally generated know-how
remain major drivers of the Company's value. 888 carefully manages
and sustains these resources and details of key actions taken in
2018 are set out in the Corporate Responsibility Report set out in
the 2018 Annual Report. 888 employs an extensive team of highly
trained and experienced business analytics and data-mining
professionals. Teams across 888 including product development,
marketing and customer support leverage this extensive and
constantly evolving data and, by applying robust statistical models
and subject always to our safe and responsible gaming policies,
influence the following factors in the online gaming cycle:
1. Marketing
Central to the Group's approach to growth is an unwavering focus
on return-to-cost driven marketing. The Group continually evolves
and develops new marketing techniques and campaigns, both online
and offline, to increase awareness of its brands and create
customer loyalty. The returns to cost ratios of all marketing
campaigns are rigorously tested against strict criteria before
being extended to their target markets. This helps to ensure that
888's marketing spend remains cost-efficient.
2. Acquisition
Effective marketing helps to attract customers to 888's brands.
Strong levels of customer acquisition, measured by increases in
first time depositors, is the fuel for 888's future growth.
3. Deposits
Customers need to be able to enjoy a seamless journey from the
moment they visit the Group's websites through to making deposits
and then enjoying 888's games. 888's proprietary payment processing
capabilities support a wide variety of languages, methods and
currencies and it is vital that the Group is able to offer
efficient and easy to use payment processing.
4. Customer relationship management ("CRM")
Once 888 has acquired a customer, our goal is to make sure that
they have a great, safe experience with 888. Subject always to our
safe and responsible gaming policies, tools used to achieve this
include personalised communications and the promotion of relevant
offers and bonuses.
5. Activity
Whilst subject always to our safe and responsible gaming
policies, offering a high-quality product helps to increase
customer activity and, consequently, life-time value with 888.
888's ability to successfully create proprietary games, enhance
personalisation, offer great odds, and develop new functionality on
mobile and desktop platforms helps to differentiate 888 from its
competitors.
6. Gaming revenue
Player activity leads to revenue for the Group. This then
enables our marketing teams to invest in campaigns to acquire more
new customers.
888's B2C proposition:
Product Our Offer How we generate revenue
Casino 888casino is one of the longest Online casinos replicate the
standing online casino brands real-life casino experience
in the market. with players playing against
'the house' across online
Through continuous product versions of classic casino
development, 888casino aims table games such as roulette
to provide the most enjoyable and blackjack as well as video
online experience available. slot and video poker games.
888casino combines exclusive In these games, the house
in-house developed games has a statistical advantage
alongside branded video slots or 'edge'.
and 'live' Casino games,
which offer high-quality Casino gaming revenue is represented
video streamed casino games by the difference between
with a range of professional the amounts of bets placed
dealers. by customers less amounts
won adjusted for bonuses granted
to customers.
--------------------------------- --------------------------------------
Sport 888sport is a fast-growing Sportsbook online gaming revenue
sports betting destination. comprises bets placed less
At the heart of the 888sport amounts won adjusted for the
brand is genuine passion fair value of open betting
for sport, with thousands positions.
of live and pre-event betting
markets on offer, from the
obvious to the obscure.
--------------------------------- --------------------------------------
Poker 888poker offers a first-class In online poker, the operator
poker environment that enables acts as the virtual host for
players of all abilities the game and provides a platform
to enjoy the games of their that enables customers to
choice. play various forms of poker
against each other.
888poker offers Texas Hold'em,
Omaha Hi'Lo, 7 Card Stud Poker revenue represents the
and other poker variations commission (or 'rake') charged
in Pot Limit, Fixed Limit from each poker hand in ring
and No Limit and Blast formats. games, and entry fees for
participation in poker tournaments
less the fair value of certain
promotional bonuses.
--------------------------------- --------------------------------------
Bingo 888's leading bingo brands As with traditional bingo
have engaging themes, a variety halls, online bingo rooms
of games and a strong sense offer customers the chance
of community, replicating of winning prizes by purchasing
the experience of traditional tickets and playing their
bingo halls. The Group's bingo format of choice.
bingo brands also benefit
from an extensive range of Bingo online gaming revenue
888-developed and 3(rd) parties is represented by the difference
slot games and scratch cards between the amounts of tickets
that are offered alongside purchased by customers less
traditional bingo formats. amounts won less the fair
value of certain promotional
888's portfolio of brands bonuses.
includes 888 Ladies, Wink
Bingo and Wink Slots.
--------------------------------- --------------------------------------
B2B - Dragonfish, the partner of choice
Under its Dragonfish arm, the Group offers gaming partners a
comprehensive end-to-end solution, encompassing customer support,
technology, operations and advanced marketing tools. Drawing on
more than two decades of 888's track record and reputation in
online gaming, the Dragonfish team is uniquely placed to support
its partners and deliver a first-class online proposition.
Dragonfish is home to one of the world's leading bingo networks,
providing software to some of the biggest names in bingo.
We are steadfastly committed to providing a safe, secure and
compliant environment for each of our partners' customers and
Dragonfish's flexible platform and tools have been developed and
certified to meet the rigorous regulatory requirements of the
different jurisdictions in which its partners operate.
Dragonfish offers its partners a wide range of more than 570
games, including video slots, progressive jackpots, Live Dealer,
video poker, table games and branded titles. Dragonfish powers
leading brands such as MoonBingo and World Series Of Poker
(WSOP).
888's B2B business model is based on an agreed share of the
revenue generated by its gaming partners.
888'S STRATEGY AND PROGRESS
888 has a consistent strategy for sustainable growth that is
built on five key pillars, described below. The delivery of this
strategy is based upon harnessing the Group's organic potential as
well as evaluating attractive M&A opportunities.
This strategy is underpinned by the strength of the Group's
people and technology. 888 owns and develops proprietary online
gaming technology and associated platforms and this provides the
bedrock of the Group's success. Owning and developing proprietary
technology enables 888 to create a differentiated customer
proposition, adapt to regulatory changes effectively and respond
quickly to new opportunities.
888's operations are directed by highly sophisticated business
analytics which are critical to the Group's approach to product
development, marketing and customer relationship management. These
strengths enable 888 to deliver first-class and innovative online
gaming entertainment products and solutions.
During 2018, 888 made further progress against its growth
strategy:
Strategic pillars 2018 performance highlights:
Development of core B2C brands o Casino continued to deliver
888 continue to develop its solid growth with an 8% increase
B2C brands to ensure that it in revenue to US$317.6 million
offer customers the most enjoyable (2017: US$293.9 million) and
online gaming entertainment a 16% increase in active players;
possible. excluding the UK, Casino revenue
increased 17% .
888 has a portfolio of established o Successful gradual launch
and strong brands in Casino, of Orbit from May, 888's most
Sport, Poker and Bingo. exciting Casino product innovation
in recent years, delivering
encouraging results.
o Sport revenue increased 6%
to US$80.3 million (2017: US$75.5
million); excluding the UK,
Sport revenues increased 18%.
o Sport first time depositors
increased by 21% (28% outside
of UK) and deposits increased
by 10% (18% excluding UK).
o In March 2019, post the year
end, the Group was delighted
to announce the exciting and
strategically important acquisition
of the sports betting platform
and team behind BetBright, giving
888 complete ownership over
technology and product development
across four key online betting
verticals for the first time.
o Continued investment in Poker
product with launch of Poker
in Italy at the beginning of
2018, launch of Progressive
Knock Out (PKO) format in 2018,
and development of the new Poker
8 platform during the year (which
began its phased roll out in
early 2019).
o Post the year end, in February
2019, the Group announced the
acquisition of a portfolio of
bingo brands, including the
well-established Costa Bingo
brand, which previously operated
as B2B brands on the Group's
Dragonfish Platform.
--------------------------------------------
Enhancing efficiencies o Marketing ratio decreased
Management remain steadfastly to 29% of revenue (2017: 30%)
focused on maximising operational but new customer recruitment
efficiencies, including by constantly increased therefore cost per
developing and refining marketing acquisition declined reflecting
approaches and driving increased the optimisation and efficiency
volumes. of targeted marketing investment.
o Overall cost ratio reduced
to 80% of revenue (2017: 81%)
reflecting operational efficiencies
and strict cost control.
--------------------------------------------
Expansion in regulated markets o Revenue from regulated and
888's focus is on driving growth taxed markets comprised 70%
in markets where there is a of Group revenue (2017: 70%).
sustainable regulatory framework Excluding the UK, the proportion
for online gaming and where of revenue from regulated and
we are able to benefit from taxed markets increased 5.5%.
marketing opportunities for o The Group's diversification
our brands. 888 has a proven strategy continues with the
track-record in successfully UK now representing 32% of Group
and efficiently launching and revenue, down from 37%.
growing in attractive regulated o Spain revenue increased by
markets. 8% with lower Poker revenue
partially offsetting strong
double-digit growth in both
Casino and Sport.
o Italy revenue increased by
29% driven by enhanced Casino
content including the launch
of 'Orbit' during the second
half of the year; the launch
of Poker at the beginning of
the year; and a robust Sport
performance.
o New licences obtained in Sweden
and Malta at the end of the
year, and a Portuguese license
was applied for during 2018
and obtained in early 2019.
o Continued development in the
US with the launch of 888sport
in New Jersey in September,
marking the first time 888 has
offered sports betting in the
US market, and 149 new Casino
games added to the Group's offering
in New Jersey during 2018.
o Acquisition of the remaining
53% interest in AAPN to support
future expansion in the US market.
--------------------------------------------
B2B through Dragonfish o B2B Revenue declined 8% reflecting
We will continue to invest in the challenges of the UK bingo
and develop our B2B offer to market as well as the termination
establish Dragonfish as the of an agreement with Cashcade,
partner of choice in both regulated a former B2B partner.
and newly regulating markets. o 21 new skins added to the
Dragonfish Bingo network, including
eight added to CasinoFlex.
--------------------------------------------
Continue to protect our customers, o Sustained focus on and investment
employees, community and act in enhancing 888's responsibility
responsibly tools and processes during the
The Group is constantly mindful year to:
of its social responsibilities, o better identify vulnerable
which includes protecting our or potentially vulnerable players;
customers and ensuring they o better identify customers
enjoy a truly satisfying experience. with multiple accounts; and
o check customer source of funds.
888 continues to invest resources o Further investment in training
in caring for our customers, our team to help them identify
protecting the vulnerable, and and interact better with vulnerable
ensuring that we continue to or potentially vulnerable customers.
entertain those who choose to o Due diligence processes are
play with 888. in place with regard to the
Company's anti-bribery policy
888 has policies in place to and anti-modern slavery policy.
prevent bribery and corruption, Particular focus is given to
promote the well-being and diversity bribery risks involved in dealings
of its employees and prevent with foreign government officials
violations of human rights in and brokers, and to human slavery
its supply chain. 888 periodically risks in respect of service
reviews the Group's environmental providers to the Group's offices
impact, however notes that as in less developed countries.
an online business this is limited,
and therefore has not adopted
a formal policy at this stage.
--------------------------------------------
Itai Pazner
Chief Executive Officer
CFO'S REPORT
2018 Business & Financial review*
During 2018, 888 delivered continued progress against its stated
strategy. The Group has continued to focus on driving growth in
regulated markets, enhancing compliance, and developing exciting
product innovations.
Financial summary
2018(1) 2017(1)
US$ million US$ million Change
---------------------------------------- ------------- ------------ --------
Revenue- B2C
Casino 317.6 293.9
Poker 49.0 77.9
Sport 80.3 75.5
Bingo 32.4 39.3
Total B2C 479.3 486.6 (2%)
B2B 50.6 55.2 (8%)
Revenue before VAT accrual release 529.9 541.8 (2%)
VAT accrual release(2) 10.7 -
Revenue 540.6 541.8
Adjustment of VAT accrual release (10.7) -
Operating expenses(3) (137.8) (138.8)
Gaming duties (69.9) (75.2)
Research and development expenses (32.8) (35.4)
Selling and marketing expenses (155.0) (162.5)
Administrative expenses(4) (27.3) (29.2)
------------- ------------ --------
Adjusted EBITDA(5) 107.1 100.7 6%
------------- ------------ --------
Depreciation and amortisation (20.3) (19.3)
Finance (0.1) (3.1)
------------- ------------ --------
Adjusted profit before tax(5) 86.7 78.3 11%
------------- ------------ --------
Share benefit charges (8.9) (8.5)
VAT accrual release 10.7 -
Exceptional items(6) 11.1 (50.8)
Gain from re-measurement of
previously held equity interest
in joint ventures 9.3 -
Share of equity accounted associates'
loss (0.2) (0.2)
Profit before tax 108.7 18.8
Adjusted basic earnings per
share 20.2c 20.1c
------------- ------------ --------
Basic earnings per share 26.3c 3.5c
------------- ------------ --------
* Alternative Performance Measures ("APMs") used in this
Business & Financial Review do not have standardised meanings
and therefore may not be comparable to similar measures presented
by other companies.
Reconciliation of profit before tax to EBITDA and Adjusted
EBITDA
2018(1) 2017(1)
US$ million US$ million
----------------------------------------- ------------ ------------
Profit before tax 108.7 18.8
------------ ------------
Finance 0.1 3.1
Depreciation 5.3 5.7
Amortisation 15.0 13.6
------------ ------------
EBITDA 129.1 41.2
------------ ------------
Exceptional items(6) (11.1) 50.8
VAT accrual release(2) (10.7) -
Share benefit charges 8.9 8.5
Gain from re-measurement of previously
held equity interest in joint
ventures (9.3) -
Share of equity accounted associates
loss 0.2 0.2
Adjusted EBITDA(5) 107.1 100.7
(1) Totals may not sum due to rounding.
(2) Revenue includes US$10.7 million (2017: nil) in respect of
accrual release which relates to receipt of tax assessments in
respect of legacy value-added tax in Germany, as detailed in note
19 to the financial statements.
(3) Excluding depreciation of US$5.3 million (2017: US$5.7
million) and amortisation of US$15.0 million (2017: US$13.6
million).
(4) Excluding share benefit charges of US$8.9 million (2017:
US$8.5 million).
(5) Adjusted EBITDA is the main measure the analyst community
uses to evaluate the Company and compare it to its peers. The Group
presents adjusted measures (including adjusted profit before tax)
which differ from statutory measures due to the exclusion of
exceptional items and adjustments. It does so because the Group
considers that it allows for a further understanding of the
underlying financial performance of the Group.
(6) Exceptional income of US$11.1 million related to US$22.4
million release of provision following receipt of tax assessments
in respect of legacy VAT relating to the provision of gaming
services in Germany prior to 2015 (2017: exceptional charges of
US$45.3 million) offset by an accrual of US$10.4 million in respect
of regulatory matters related to customers' activity in prior
periods and US$0.9 million legal and professional costs associated
with aborted M&A efforts, as set out in note 5 to the financial
statements.
B2C revenue during the year was US$479.3 million (2017: US$486.6
million), representing 90% of total Group revenue(1) (2017: 90%).
The Group delivered continued growth across several regulated
markets, primarily in Continental Europe, underpinned by good
momentum in Casino and Sport. However, this growth was offset by
the closure of several markets (primarily Australia and the Czech
Republic) during the course of 2017 (and which therefore did not
contribute at all to the Group's performance during 2018), and a
16% decrease in revenue from the UK, despite more encouraging
trends in the second half of the year (discussed below). This
outcome from the UK business is primarily driven by the proactive
and prudent customer protection measures 888 has taken amidst the
market's heightened regulatory scrutiny.
(1) Revenue in this document is before VAT accrual release.
B2C - Product segmentation
888 continues to focus on growing its B2C brands across Casino,
Sport, Poker and Bingo across global markets that have regulated
frameworks for online gambling. The Group does this by investing in
analytics driven marketing and product innovation as well as by
applying data-driven CRM that supports player retention and
customer "cross-sell" between 888's products and brands.
888's revenue by product segment is set out in the table
below:
2018 2017 Change
US$ million US$ million Reported
---------------------------- ------------ ------------ ---------
Revenue - B2C
Casino 317.6 293.9 8%
Poker 49.0 77.9 (37%)
Sport 80.3 75.5 6%
Bingo 32.4 39.3 (17%)
---------------------------- ------------ ------------ ---------
Total B2C 479.3 486.6 (2%)
B2B 50.6 55.2 (8%)
---------------------------- ------------ ------------ ---------
Revenue before VAT accrual
release 529.9 541.8 (2%)
---------------------------- ------------ ------------ ---------
VAT accrual release(2) 10.7 -
---------------------------- ------------ ------------ ---------
Revenue 540.6 541.8 (0%)
---------------------------- ------------ ------------ ---------
Casino
Results overview
Casino continued to deliver solid growth with an 8% increase in
revenue to US$317.6 million (2017: US$293.9 million) and a 16%
increase in active players against the prior year. Excluding the
UK, Casino revenue increased by 17%, demonstrating the strengths of
888 innovative marketing, effective CRM and overall customer
proposition, particularly on mobile devices.
Casino was boosted by the launch of Orbit, a new cutting-edge
web-based Casino platform, at the end of May 2018. The new
platform, which represents 888's most exciting Casino product
innovation of recent years, was initially launched across the
Group's .com markets with a roll-out into a number of regulated
markets as the year progressed. The Group has seen positive and
encouraging trends in first time deposits as well as activity and
retention metrics across all markets where the new platform has
been launched.
In the UK, the new tools introduced with the Orbit platform
align with the Group's strategy of appealing to and attracting an
increasingly recreational "mass audience" customer base. The Group
saw particularly positive results in the second half of the year -
having introduced the platform in the UK in May 2018 - with higher
conversion rates, increases in the number of games played by
customers and uplifts in new customers acquired.
Product overview and developments
888casino offers classic table games, such as blackjack and
roulette, as well as exclusive in-house developed proprietary games
and appealing third-party content. The Group's success in Casino
remains underpinned by 888's strong brand and focus on customer
experience.
Orbit is a new web-based Casino platform that uses artificial
intelligence ("AI") and machine learning driven recommendations to
provide a more personalised display and seamless experience for
customers. The result is reduced login times and a smoother
transition between games for players. The new platform also enables
888 to host more games and better utilise its ever-increasing
content suite. 888 added 127 new games (both in-house developed and
third-party content) across mobile and desktop platforms during the
year.
Sport
Results overview
Sport revenue increased 6% to US$80.3 million (2017: US$75.5
million). This outcome reflected the strong growth across regulated
markets excluding the UK, partially offset by the negative impacts
of several big customer wins as well as the proactive customer
protections measures taken by the Group in the UK. Excluding the
UK, Sport revenues increased 18% supported by strong performance
during the FIFA World Cup over the summer, effective marketing
investment, a greater number of events for customers to bet on, and
increased customer personalisation. First time depositors increased
by 21% (28% excluding the UK) and deposits increased by 10% (18%
excluding the UK) reflecting the effectiveness of the Group's
marketing and CRM. Mobile and, in particular, in-play betting
remain a key driver for 888sport with approximately 70% of bet
volumes now being placed during events.
In the UK, the Group is encouraged by positive trends witnessed
during the second half of the year. In the second half, the Group's
refocused UK strategy saw new Sport customers acquired increase by
15%, building a healthier customer base as the Group moved into
2019.
In September, the Group was pleased to launch 888sport in New
Jersey, marking the first time the Group had offered sports betting
in the regulated US market. This marked a major milestone for the
Group and paves the way for the Group to launch in additional US
states as future regulation allows.
In March 2019, post the year end, the Group was delighted to
announce the acquisition of BetBright's sports betting platform for
GBP15 million. The acquisition represented a major milestone for
the Group, strengthening 888's product and technology capabilities
to support the long-term development strategy for 888Sport.
Product overview and developments
In addition to being a meaningful revenue generating product for
888, Sport remains a highly important customer acquisition channel
for the Group and provides additional value by cross-selling
customers into Casino and Poker. 888 continues to invest in its
Sport proposition across product and marketing. During 2018, 888
invested in developing a new 888sport "front-end" to improve
functionality and the customer experience, integrate artificial
intelligence tools and increase customer personalisation. This is
being rolled out across the Group's markets during 2019 and the
Group is confident that this will further differentiate 888's Sport
product from its competitors'.
Following the completion of the acquisition of Betbright's
platform in March 2019, the Group will begin the integration
process of BetBright's technology into 888 as a soon as practically
feasible. The Group aims to begin a phased and market-by-market
roll out of its proprietary sports book solution once integration
is completed. The integration of BetBright's sportsbook into the
Group will give 888 complete ownership over its technology and
product development across all four of its key online betting
verticals for the very first time and the Board believes that this
acquisition will enhance the Group's long-term prospects in the
global Sports betting market by enabling 888 to fully leverage its
marketing and analytics capabilities, scale and unique
expertise.
Poker
The Poker market remained highly challenging during 2018. This
resulted in a revenue decrease of 37% to US$49.0 million (2017:
$77.9 million). The Group's Poker results reflect a number of
factors including: the Group's decision to exit several markets
(primarily Poland and Australia) during the first half of 2017 (and
which therefore did not contribute at all to the Group's
performance during 2018); the continued challenges of the overall
Poker market; the launch of the European interstate network
creating a new poker environment for players in several European
markets (that the Group is yet to participate in); increased
competitor marketing activity in some of our markets and the
unilateral withdrawal of certain payment providers and ISP blocking
in several unregulated markets.
Active poker players decreased by 8%, however there is an
encouraging trend for players to be retained for longer on the
platform and active days per player increased over the previous
year.
Despite the revenue decline, Poker remains a highly important
customer acquisition tool for the Group. The flow of Poker players
also playing Casino and Sport with 888's brands continued to be an
important element of the Group's overall B2C business.
The Group remains committed to the Poker market and confident of
its long-term opportunities for 888. During January 2018, the Group
launched Poker in Italy, bringing all three of 888's core gaming
verticals to the Italian market. In addition, a significant
investment was made during the year into developing the Group's
latest poker platform, Poker 8, which began its phased roll out in
early 2019.
Following the award of the Group's latest licence in Portugal,
the Group intends to launch its European interstate poker network
during 2019. This will initially pool Poker players across the
Portuguese and Spanish markets, increasing player "shared
liquidity" and therefore offering greater availability of the games
and formats that our customers want to play. The Group is confident
that 888's European interstate network will provide increased
competitiveness and new growth opportunities for the Group's Poker
product in regulated European markets over the coming years.
Product overview and developments
888poker focuses on recreational Poker players and providing a
range of games and format to suit its target customers' needs and
preferences. Over recent years, this has included an ever greater
focus on mobile devices.
During the second half of the year, 888 launched another
exciting recreational Poker feature called PKO (Progressive Knock
Out) that quickly became an integral and leading feature of
888poker. Since launch, PKO has been instrumental in building
higher prize-pools and engaging more players. PKO was introduced to
888's poker networks in Spain and Italy and we are confident of
seeing further progress during 2019. By the end of 2018, more than
third of 888poker's players had played PKO.
Poker 8, which was developed during the year and which began its
phased roll out in early 2019 post the period end, is a new and
improved cross-territory Poker platform that offers an even more
engaging, contemporary and enjoyable experience for 888poker
players. The development of Poker 8 follows extensive ongoing
research and feedback from customers. The initial phase of the
roll-out involved upgrades to the 888poker tables for desktop
players, with enhanced graphics, a cleaner design and improved
functionality. Further upgrades to the new Poker platform are
planned, including improved graphics and enhancements to the lobby
and on mobile devices.
Bingo
Results overview
Bingo, which is predominantly focused on the UK market, remained
challenging during 2018. The Group recorded Bingo revenue of
US$32.4 million (2017: US$39.3 million) representing a 17% decrease
year on year. This performance reflects a continued highly
competitive UK Bingo market as well as the proactive steps 888 has
taken to address the tighter regulatory environment in the UK. This
decrease was offset by an increase in active players of 14% during
the year. Average active days per funded player also increased,
reflecting the Group's effective CRM.
In February 2019, the Group announced the acquisition of a
portfolio of bingo brands - including the well-established Costa
Bingo brand - which previously operated as B2B brands on the
Group's Dragonfish Platform. Management believes that consolidating
these brands into 888's established B2C brand portfolio will
deliver synergies and growth opportunities through the application
of the full extent of the Group's capabilities in product
development, marketing, and customer relationship management to
their operations.
Product overview and developments
888 offers online bingo entertainment across a wide array of
branded Bingo sites, each with its own unique themes. The Group's
Bingo brands benefit from 888's continuous development with regular
new content and in-house developed games that help to differentiate
888's brands in the competitive and highly fragmented UK
market.
The Group remains committed to the Bingo vertical and introduced
a number of new features such as user-friendly mobile verification
upon registration during this year. New game variants were also
introduced during the year to support the Bingo performance
including a new, unique "mystery" jackpot feature launched during
the second half of the year that increased bet volumes per player
by 20%. New customer personalisation layers, that will leverage
smart analytics and machine learning models, are planned to further
enhance the customer experience at 888's bingo brands during
2019.
B2B REVIEW
Results overview
Revenue from Dragonfish, 888's B2B division, decreased by 8% to
US$50.6 million (2017: US$55.2 million). This reflects a number of
factors including: the overall fiscal and regulatory challenges
facing the UK bingo market; the reduced marketing spend by some of
our partners; and the termination of the Group's agreement with
Cashcade, a former B2B partner, following Cashcade's decision to
migrate its brands to its own proprietary platform.
Revenue from our B2B business in the US market remained in line
with the Board's expectations. The Group continues to explore
further partnerships and new growth opportunities in the US.
Operational overview and developments
The Group's partners continue to enjoy and benefit from new
product developments, features and functionalities to enhance the
end-user experience. During the year these included 228 new games,
bringing the total portfolio to more than 570 active games as well
as a number of Bingo game variations.
The Group remains confident of the opportunities for its B2B
division, which remain underpinned by focusing on delivering and
maintaining a first-class and full-service gaming proposition for
its partners. Post the year end, the Group initiated some
organisational changes at Dragonfish to bring all aspects of the
B2B offer, except marketing, into one standalone business unit.
These changes are aimed at increasing the customer-focus of the
Group's B2B operations as Dragonfish refines its strategic focus on
offering an increasingly value-added proposition to a smaller
number of larger customers (both in the UK and international
regulated markets). Underpinned by the Group's technology edge and
market know-how, the Board remains confident of the B2B division's
long-term prospects.
Revenue by geographic market
Regulated markets
888 remains focused on growing in sustainable, regulated markets
where the Group can leverage its full marketing expertise to
capture growth opportunities. Revenue from regulated markets
continued to represent the majority of Group revenue with revenue
from regulated and taxed markets(1) representing 70% of revenue
(2017: 70%). Excluding the UK, the proportion of revenue from
regulated and taxed markets increased by 5.5%.
(1) Regulated and taxed markets refer to jurisdictions where the
Group operates under a local licence or where the Group is liable
for gaming duties or VAT (or its equivalent).
The global regulatory landscape continues to develop and the
Group remains focused on exploring new markets on a case-by-case
basis dependent on the strategic and economic viability of each new
regulated market.
The below table shows the Group's revenue by geographical
market:
2018 2017 Growth (decline) % of reported
from previous Revenue (2018)
US$ million US$ million year
---------------------------- ------------ ------------ ----------------- ---------------
EMEA (excluding the UK and
Spain)(1) 228.9 213.6 7% 43%
UK 170.6 203.1 (16%) 32%
Spain 68.0 63.1 8% 13%
Americas 48.1 46.2 4% 9%
Rest of world 14.3 15.8 (10%) 3%
Revenue before VAT accrual
release 529.9 541.8 (2%) 100%
------------ ------------ -----------------
VAT accrual release 10.7 -
---------------------------- ------------ ------------ ----------------- ---------------
Total revenue 540.6 541.8
---------------------------- ------------ ------------ ----------------- ---------------
(1) During the period the Group identified that the Europe Other
Geographical segment (as was previously presented) should in fact
be referred to as Europe, the Middle East and Africa (EMEA).
Non-European revenue included in the segment during 2018 amount to
US$45.7 million (2017: US$35.3 million).
EMEA (excluding the UK and Spain)
Regulated markets in Continental Europe continued to experience
healthy growth with a revenue increase of 12% year on year. This
outcome reflects strong progress driven by Sport and Casino across
European markets. The increase was moderated due to the negative
performance of Poker in Spain which was affected by the heightened
competition resulting from a new shared liquidity regime with
France, which 888 did not participate in.
In Italy, revenue increased by 29% and first time depositors
more than doubled, compared to 2017. This was supported by the
successful launch of Poker in Italy in January 2018; the launch of
Orbit during the second half of 2018 which supported a 44% increase
in new Casino players; and optimised and highly effective digital
marketing investment in light of the industry-wide gambling
advertising ban announced by the new Government.
Revenue from the Romanian market increased by 14% during 2018
driven by Sport and reflecting enhanced brand awareness. During
2019, the Group intends to extend the successful Orbit casino
platform to the Romanian market.
At the very end of the year, the Group was delighted to be
awarded its 11(th) licence in Malta, as well as its 12(th) licence
in Sweden which enables the Group to offer Sport, Casino and Poker
in this significant newly regulated market. Post the year end, the
Group received its 13(th) licence for Portugal, where the Group
launched 888casino in January 2019. The Portuguese licence provides
further growth opportunities for the Group with the forthcoming
launch of 888's poker network that will, in time, share player
liquidity across the regulated Spanish and Portuguese markets.
Revenue from Middle East and Africa markets included in the EMEA
segment increased by 29% to US$45.7 million (2017: US$35.3
million). Revenue from Germany, which represented 8% of total, was
impacted by the uncertain regulatory environment and challenges
referred to in the Risk Management Strategy section below,
increased in 2018 by 18%.
UK
As detailed in the product review above, revenue trends in the
UK improved during the second half of 2018. Despite this, UK
revenue decreased by 16% year on year to US$170.6 million (2017:
US$203.1 million). This reflected revisions to the Group's
operating practices across product verticals to align with the
stricter regulatory environment across the UK market (detailed
below); a small number of significant customer wins in Sport;
reduced marketing investment by Cashcade, one of the Dragonfish
Bingo partners that terminated its activity as of mid-November; as
well as the Group's decision to redeploy marketing investment into
other areas of the business where 888 is generating the highest
returns.
During the second half of 2018, the Group witnessed certain
positive indicators in its UK B2C business as first time depositors
continued to increase (by 7% year on year, and 12% half-year on
half-year), supported by the launch of the Orbit Casino platform
during the first half of 2018, and strong Sport performance during
the FIFA World Cup over the summer.
The actions and changes made to the operating processes
undertaken by 888 in the UK market over recent years have been
aimed at providing the safest possible gambling environment for
players and ensuring the Group is aligned with the market's
stricter regulatory environment. Changes made include the
tightening of anti-money laundering processes, increased customer
due diligence and further customer protection tools and protocols.
Taking these actions is not only the right thing to do but also
positions the Group for long-term development in what remains the
world's largest regulated online gaming market.
As a result of the dynamics in the UK as well as the strong
progress delivered across continental European markets, revenue
from the UK represented a lower proportion of total revenue at 32%
(2017: 37%).
Spain
In Spain, the Group's second largest single market, the Group
delivered a revenue increase of 8% year on year to US$68.0 million
(2017: US$63.1 million). As a result, Spain represented 13% (2017:
12%) of total revenue. The Group's growth reflected continued
effective marketing investment and momentum in Casino, as well as
Sport, which benefited from a strong FIFA World Cup. As described
above, Poker was negatively impacted by the introduction of a
shared Poker liquidity networks between Spain and France (that the
Group has not participated in) accompanied by significant
promotions and the large number of guaranteed tournaments offered
by our competitors. However, we remain confident of the
opportunities presented by shared Poker player liquidity across
European markets including Spain and Portugal due to be launched in
2019.
The Group launched the Orbit Casino platform in Spain in
December 2018, and saw a positive customer response, similar to the
one seen in the UK, Italy and more recently also Denmark where
first time depositors increased by 34% during the second half of
2018 following the launch of Orbit in October. The Group intends to
support its product developments with increased investment in Spain
during the current year.
US
Having operated in the regulated US market since 2013, 888
enjoys a unique position in that evolving market. The Group is
focused on investing in delivering medium to long-term growth
opportunities for the business in the US market. As a result, 2018
was a very busy year for the Group in the US market.
In May, the Group's long-term growth prospects in the US market
were boosted by the US Supreme Court's decision to repeal PASPA,
thereby clearing the path for US states to regulate sports betting.
In September 2018, the Group launched 888sport in New Jersey,
marking the first time the Group has offered sports betting in the
United States. This launch was followed by another first, not just
for 888 but for the entire industry, as 888.com became the first
ever online casino to partner with a National Football League (NFL)
team when the Group signed a sponsorship agreement with the New
York Jets.
In May the Group was pleased to announce an extension of its
contract with the Delaware Lottery to continue powering the state
lottery platform for a further two years.
In June, the Group announced an extended partnership with
Evolution Gaming, a leading provider of Live Casino solutions in
New Jersey, as 888 continues to invest in and improve its offering
in the state. During the second half of the year, 888casino
launched a comprehensive Live Casino suite of products to New
Jersey customers on desktop (via the 888casino website) and on
mobile (through the 888casino apps available for Android and iOS).
The Group intends to launch the new Orbit Casino platform in New
Jersey during 2019.
In December, the Group was pleased to announce the acquisition
of the remaining 53% interest in AAPN, a joint venture established
with Avenue Capital in 2013. The acquisition represented an
important strategic milestone that will facilitate the Group's
future growth strategy in the US by giving 888 additional
operational, technological and commercial flexibility to deliver on
multiple potential growth opportunities. The AAPN joint venture had
been a successful endeavour for the Group by affording 888 the
flexibility and financial capability to build a position in the
regulated US market over the last five years whilst also investing
in other global regulated markets.
In January 2019, post the period end, the US Department Of
Justice released an updated opinion regarding the interpretation of
the Wire Act of 1961. This has created uncertainty across the US
market which may continue through a legal challenge to the new
opinion. Despite this and underpinned by the strategic progress
made in the US market during 2018, the Board believes that the
Group remains well-positioned for future growth in the developing
US market.
Expenses overview
The Group continues to improve its operating efficiencies with
lower levels of expenses compared to the prior year driven by a
continued, company-wide focus on cost optimisation and
efficiencies.
888's continued progress in Casino and Sport, where the Group
incurs some commissions (explained below) and a sustained focus on
enhanced compliance and customer protection resulted in an increase
in the ratio of operating expenses to revenue.
Operating expenses
The Group's expanding Casino and Sport offering resulted in
higher commissions and associated expenses in respect of the Live
Casino and Sport third-party platforms.
Operating expenses* decreased by 1% to US$137.8 million (2017:
US$138.8 million). The proportion of operating expenses (which
mainly comprise staff related costs, commissions and royalties
payable to third parties, chargebacks, payment service providers'
("PSP") commissions and costs related to operational risk
management services) to revenues increased to 26.0% (2017: 25.6%).
This reflected stricter regulatory requirements to tighten the
scope of customer related screening. Reported operating expenses
amounted to US$158.1 million (2017: US$158.1 million).
Employee-related costs decreased by 8% compared to the prior
year. The decrease is mainly a result of a cost reduction and
headcount optimisation plan that was executed during the second
half of 2017.
* As defined in the table set out above
Gaming taxes and duties
Gaming duties levied in regulated and taxed markets decreased to
US$69.9 million (2017: US$75.2 million). This is a result of the
lower activity in the UK and a reduced gaming tax rate (from 25% to
20% of gross gaming revenue) in Spain which commenced during the
second half of 2018, offset by increased gaming duties in Italy as
a result of the Group's strong revenue growth and the lunch of
Poker in Italy during January 2018.
Research and development expenses
Research and development expenses decreased 7% to US$32.8
million (2017: US$35.4 million). However, when adding back
capitalised development expenses, overall research and development
spend would have decreased only 2% to US$44.7 million (2017:
US$45.5 million). This reflects continued investment across
regulated markets and the development of new products and games as
well as the implementation of new technologies and tools to further
enhance customer protection. The research and development expenses
to revenue ratio reduced to 6.2% (2017: 6.5%).
Selling and marketing expenses
One of 888's main objectives is cost-efficient, effective and
innovative marketing spend. Overall marketing expenses decreased to
US$155.0 million (2017: US$162.5 million) as a result of lower
marketing investment as well as lower cost per player acquisition
in the UK reflecting the market environment. In addition, the lower
level of marketing spend was driven by management's decision to
invest in more efficient online marketing activities and focus on
high-growth regulated European markets. The ratio of selling and
marketing expenses to revenue reduced to 29.3% (2017: 30.0%).
Administrative expenses
Administrative expenses* amounted to US$27.3 million (2017:
US$29.2 million) and represented a lower proportion of revenue
compared to the previous year at 5.1% (2017: 5.4%). This was a
direct result of management's continued efforts to maximise
operational efficiencies and strict cost control. Reported
administrative expenses amounted to US$36.1 million (2017: US$37.7
million).
* As defined in the table set out above.
Adjusted EBITDA
Adjusted EBITDA increased by 6% to US$107.1 million (2017:
US$100.7 million) representing a 4% increase at constant currency.
The positive result was achieved despite the impacts of the UK
market's heightened regulatory scrutiny and higher UK Point of
Consumption ('POC') duty as a result of the new gross gaming
revenue tax base that has been effective since the second half of
2017. Adjusted EBITDA margin increased to 20.2% (2017: 18.6%).
EBITDA for the period amounted to US$129.1 million (2017: US$41.2
million) as detailed in the financial summary table.
Exceptional items
Exceptional income was US$11.1 million (2017: Exceptional
expense of US$50.8 million). The Group received tax assessments
from the tax authorities in Germany in respect of a legacy VAT
matter relating to the provision of gaming services in Germany
prior to 2015. This resulted in a payment of US$24.6 million and a
release of US$22.4 million of the US$45.3 million provision which
was recorded in 2017, as described in further detail in note 5 to
the 2018 financial statements. In addition, during the period the
Group recorded a provision of US$10.4 million in respect of
regulatory matters related to customers' activity in prior periods
and US$0.9 million legal and professional costs related to aborted
M&A efforts.
Share benefit charges
Share benefit charges relate to long-term incentive equity
awards granted to eligible employees.
Equity settled share benefit charges of US$8.9 million (2017:
US$8.5 million) mainly comprise new awards granted during the year
and the full year effect of awards granted in previous years.
Further details are given in the Directors' Remuneration Report set
out in the 2018 Annual Report and in note 22 to the financial
statements.
Gain from re-measurement of previously held equity interest in
joint ventures
On 10 December 2018, the Group acquired an additional 53%
interest in the voting shares of AAPN, increasing its ownership
interest to 100% for cash consideration of US$28.5 million. The
Group re-measured its previously held 47% equity interest in AAPN
at its acquisition-date fair value and recognised US$9.3 million
gain in the consolidated income statement.
Finance income and expenses
Finance income of US$0.6 million (2017: US$0.6 million) less
finance expenses of US$0.7 million (2017: US$3.7 million) resulted
in a net expense of US$0.1 million (2017: US$3.1 million). The
decreased expense compared to the previous year is mainly
attributable by the weakness of EUR and GBP against USD in 2018
compared to 2017.
888 continually monitors foreign currency risk and takes steps,
where practical, to ensure that net exposure is kept to an
acceptable level.
Profit before tax
Profit before tax increased to US$108.7 million (2017: US$18.8
million profit) as a result of the exceptional income (compared to
exceptional charges in 2017), VAT accrual release and gain from
re-measurement of previously held equity interest in joint ventures
outlined above. Adjusted profit before tax increased by 11% to
US$86.7 million (2017: US$78.3 million).
Taxation
Taxation for the period was US$13.9 million (2017: US$6.2
million). The increase is primarily a result of the higher profit
before tax during the period, the effect of foreign currency
earnings following the strengthening of the USD against the ILS and
withholding tax on dividend distribution by a subsidiary to the
parent company.
Adjusted Profit after tax and Profit after tax
Adjusted profit after tax(1) increased by 1% to US$72.8 million
(2017: US$72.1 million).
Profit after tax was US$94.8 million (2017: US$12.6 million) as
a result of the exceptional charges and gain from re-measurement of
previously held equity interest in joint ventures outlined
above.
(1) As defined in note 9 of the financial statements
Earnings per share
Basic earnings per share increased to 26.3c (2017: 3.5c) as a
result of the exceptional charges and gain from re-measurement of
previously held equity interest in joint ventures outlined above.
Adjusted basic earnings per share at 20.2c (2017: 20.1c). Further
information on the reconciliation of Adjusted basic earnings per
share is given in note 9 to 2018 financial statements.
Dividend
The Board of Directors is recommending a final dividend of 6.0c
per share in accordance with 888's dividend policy, plus an
additional one-off 2.0c per share, bringing the total for the year
to 12.2c per share (2017: 15.5c per share) reflecting the
performance of the Group, recent acquisitions as well as regulatory
developments and the importance of retaining adequate cash to fund
potential investment activities.
Cash flow
Net cash generated from operating activities was US$42.1 million
(2017: US$95.5 million). The decrease is primarily explained by an
exceptional payment on account of historical VAT in Germany, higher
gaming duties in respect of H2 2017 driven by increase in trading
activity and a reduction in customer deposits as a result of a
decrease in Poker activity.
Dividend payments during the year amounted to US$56.6 million
(2017: US$70.5 million).
Balance sheet
888's balance sheet remains strong, with no debt as of the date
of the financial statement and ample liquid resources. 888's cash
position as at 31 December 2018 was US$133.0 million (2017:
US$179.6 million). The balance owed to customers at US$57.1 million
(2017: US$71.7 million). Net cash at 31 December 2018 was US$75.9
million (2017: US$107.9 million) after dividend payments of US$56.6
million during the year (2017: US$70.5 million).
In February 2019, 888 signed a revolving credit facility ("RCF")
with Barclays Bank plc pursuant to which 888 may borrow an amount
of up to US$50 million in order to finance its M&A activities
in the short term.
Aviad Kobrine
Chief Financial Officer
RISK MANAGEMENT STRATEGY
The Board acknowledges that there is no return without risk.
However, key risks must be identified, evaluated and where possible
quantified in order for the Board to rationally determine how to
harness risk to generate optimal return.
The Board acts in accordance with a Risk Management Policy,
which aims to explicitly identify and evaluate key risks underlying
the Group's core business strategy and standardise the approach to
risk prioritisation and management across 888's operations. This in
turn means that effective controls can be put in place to ensure
888 is able to manage its operations effectively now and into the
future. 888's risk register is updated periodically and regular
discussions are held at Board and management level of the role of
risk in 888's business.
888's culture emphasises the need for employees to take
responsibility for managing the risks in their own areas and to
transparently and timely report "bad news" and "near miss"
incidents, with a willingness to constantly learn and improve. The
Board has also adopted a Reporting and Escalation Procedure to
ensure timely reporting of internal reportable events including
bugs, technical failures, information security malfunctions and
marketing and other operational incidents which may affect
customers.
The Board considers that 888 complies with the requirements of
the Financial Reporting Council's Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting dated
September 2014, and specifically confirms that:
- it is responsible for 888's risk management systems and for reviewing their effectiveness;
- there is an on-going process for identifying, evaluating and
managing the principal risks faced by 888;
- the systems have been in place during 2018 and up to the date
of approval of the annual report and accounts; and
- they are regularly reviewed by the Board (please refer to the
2018 Annual Report for further details of the review conducted in
2018).
Risk appetite
Addressing risk is a high priority for the Board and effective
risk management is an integral part of the way we conduct our
business on a daily basis. The Board factors into the risk
assessment impact, likelihood and appetite considerations. Risk is
managed across the Group in the context of overall risk appetite
and during 2018 the Board considered risk appetite to ensure
adequate resources are allocated to identified risks. The Board
reviewed and approved the following risk appetite statement:
Category Tolerance Risk Parameters
of Risk
Strategic Medium During development and implementation
of new propositions and assessing
new opportunities including potential
transactions, we are prepared to
accept medium risks that support
our pursuit of growth.
-------------- -----------------------------------------
Operational Low to medium When operating within our business,
we have a low to medium tolerance
for risk. We will take a cautious
approach to risk within our operations,
but consider that certain risks
will be taken in order to achieve
our strategic objectives and maintain
our competitive position.
-------------- -----------------------------------------
Financial Low We consider that robust financial
controls are necessary to manage
our business effectively. All of
our operating processes are based
around policies and procedures
that minimise the risk of a loss
of financial control.
-------------- -----------------------------------------
Compliance Extremely low We have an extremely low to zero
tolerance when complying with laws
and regulations that relate to
bribery, corruption and anti-money
laundering. We have controls in
place that are designed to mitigate
these risks, and detailed and tested
procedures in place for dealing
with these types of scenarios when
they arise. We are particularly
sensitive to compliance risks in
our key regulated markets including
the UK.
-------------- -----------------------------------------
888 faces the following significant risks:
Regulatory risk è increased during 2018
The risk: The regulatory framework of online gaming is dynamic
and complex. Change in the regulatory regime in a specific
jurisdiction can have a material adverse effect on business volume
and financial performance in that jurisdiction. In addition, a
number of jurisdictions have regulated online gaming, and in
several of those jurisdictions 888 either holds a licence or
applied to obtain one. However, in some cases, lack of clarity in
the regulations, or conflicting legislative and regulatory
developments, mean that 888 may risk failing to obtain an
appropriate licence, having existing licences adversely affected,
or being subject to other regulatory sanctions, including internet
service provider blocking, payments blocking, black-listing and
fines. Furthermore, legal and other action may be taken by
incumbent gaming providers in jurisdictions which are seeking to
regulate online gaming, in an attempt to frustrate the grant of
online gaming licences to 888. Finally, changes to either the
regulatory framework or enforcement policy relating to online
gaming in certain markets may effectively force the Group out of
certain markets where it currently operates or compel it to change
its business practices or technology in a way that would materially
impact results.
Relevance to strategy: Compliance with regulatory requirements
and the maintenance of regulatory relationships in multiple
jurisdictions is key to maintaining 888's online gaming licences
which are critical to the operation and growth of its online gaming
business. In addition, 888 may be exposed to claims in
jurisdictions which do not regulate online gaming, seeking to block
access to 888's offering to players located in such jurisdiction. A
robust understanding of the legal and regulatory position in key
locations worldwide is crucial to mitigating this risk.
How the risk is managed: 888 manages its regulatory risk by
routinely consulting with legal advisers in various jurisdictions
where its services are marketed or which generate significant
revenue for the Group. Furthermore, 888 obtains frequent and
routine updates regarding changes in the law that may be applicable
to its operations, working with local counsel to assess the impact
of any changes on its operations. 888 constantly adapts and
moderates its services to comply with legal and regulatory
requirements. 888 has also implemented organizational changes in
order to strengthen regulatory compliance oversight, as well as to
improve co-operation between the different departments and
streamline processes of settling any conflicts between them,
ensuring that 888's regulatory requirements and duty to uphold the
licensing objectives always take priority over commercial
interests. Finally, 888 blocks players from certain "blocked
jurisdictions" using multiple technological methods as
appropriate.
What happened in 2018: The UKGC took an increasingly strict
approach towards compliance, tightening requirements, adopting more
stringent policies and regulations, and increasing the level of
oversight over licensees. The primary areas of focus for the UKGC
were responsible gambling and prevention of underage gambling,
consumer protection, and anti-money laundering. During 2018, the
UKGC issued fines to a number of licensed operators, for various
violations and shortcomings pertaining to regulatory compliance,
signalling a tougher stance on compliance and enforcement. The
Group continued to work closely with the UKGC on compliance
matters, and also to update its policies and procedures and to
strengthen internal reporting lines to ensure compliance within the
business, investing significant resources in regulatory compliance
measures. In Germany, the Company is subject to prohibition orders
issued by various German states, some of which have been upheld by
German courts and others which are in the process of judicial
review. While the Company continues to challenge the validity of
these orders (where possible) and is seeking relief on this matter
from the German Constitutional Court, it has been consulting
closely with its German advisers as to the appropriate operational
measures to be taken by the group in light of the orders issued.
The Group continues to be conscious of the potential for increased
enforcement in Germany and of the impact that the current German
legal landscape may have on the willingness of payment processors
to process payments from German players. In light of these
developments, the Group continues to assess its operations in
Germany, with a view to averting legal, reputational and
operational risks. In the Netherlands, where a law was approved in
February 2019 to liberalize the market, the local regulator has
been taking a more aggressive approach towards enforcement of
existing laws against operators whose operations are conducted in
violation of the "prioritization criteria" for enforcement issued
by the authorities and updated from time to time. Several operators
received significant fines due to the conduct of operations in a
manner violating these criteria. Operators fined may also be barred
from participating in the liberalized market or have their
eligibility for licensing delayed. The Group has been studying
these developments closely. In January 2019 the US Department of
Justice issued a legal opinion on the scope of the federal Wire
Act, overturning a previous opinion from 2011, and finding that the
Act applies to all forms of gambling (not only sports betting, as
was concluded in the previous opinion.) This reversal, and a
subsequent change of enforcement policy by the federal authorities,
could have far-reaching impacts on the US gambling industry,
particularly with respect to online operations. The Department of
Justice has announced it will not be pursuing enforcement action
under the new interpretation for a 90-day period starting on
January 15, 2019. In tandem, various state regulators have
announced their position on the ramifications of the new opinion or
are in the process of studying its implications. The Group is
taking advice on this matter from its legal advisors in the US, to
ensure that its operations are consistent with updated regulatory
requirements and cannot be seen as violating federal law. The
issuance of the updated memo could have far-reaching consequences
in connection with the ability or willingness of various crucial
service providers (e.g. banks and payment processors) to work with
the gambling industry, and the Group anticipates that the full
impact of the new opinion on its operations and on the industry
will become more apparent in the near future.
Brexit-related risks è increased during 2018-19
The risk: The status of Gibraltar as a result of "Brexit"
remains unclear. If 888 were to remain registered, licenced and
operating in Gibraltar in these circumstances, its ability to rely
on EU freedom of services / establishment principles in supplying
its services within the EU will be limited; furthermore, it may
become ineligible to continue to hold regulatory licenses in
certain EU jurisdictions. Brexit may also adversely impact economic
and market conditions in the United Kingdom, and give rise to a
slowdown of UK business for the Company.
Relevance to strategy: The ability to rely on EU principles
underpins 888's regulatory strategy regarding major EU markets.
How the risk is managed: 888 is not able to control political
changes of this nature, however it has obtained a gaming licence in
Malta and established a server farm in Ireland so that it can
continue to serve European markets with no disruption to its
business. 888 also diversifies its geographical customer base so as
to mitigate dependency on the UK market.
What happened in 2018-19: The UK formally notified the EU in
March 2017 of its intention to withdraw from the EU, which
commenced a negotiation period which is expected to conclude in
March 2019 (unless all parties to the negotiations agree otherwise)
with the United Kingdom ceasing to be a member of the EU at the end
of March 2019. On 15 January 2019, the British House of Commons
rejected Prime Minister Theresa May's Brexit deal with the EU.
Presently, the manner of Britain's exit from the EU on March 29,
2019, remains unclear.
Information Technology and Cyber risks è increased during
2018
The risk: IT systems may be impacted by unauthorised access,
cyber-attacks, DDoS (Distributed Denial of Service) attacks, theft
or misuse of data by internal or external parties, or disrupted by
increases in usage, human error, natural hazards or disasters or
other events. Cyber-attack and data theft incidents may expose 888
to "ransom" demands and costs of repairing physical and
reputational damage. Failure of IT systems, infrastructure or
telecommunications / third party infrastructure may cause
significant cost and disruption to the business and harm revenues.
Lengthy down-time of the site (including in transitioning to
activated disaster recovery servers) could also cause 888 to breach
regulatory obligations.
Relevance to strategy: As an online B2C and B2B business, the
integrity of 888's IT infrastructure is crucial to the supply of
its offerings and compliance with its regulatory obligations and to
the maintenance of customer loyalty.
How the risk is managed: Cutting-edge technologies and
procedures are implemented throughout 888's technology operations
and designed to protect its networks from malicious attacks and
other such risks. These measures include traffic filtering,
anti-DDoS devices and obtaining anti-virus protection from leading
vendors. Physical and logical network segmentation is also used to
isolate and protect 888's networks and restrict malicious
activities. The IT environment is audited by independent auditors,
such as PCI DSS security audit and eCOGRA audit. These audits form
part of 888's approach to ensuring proper IT procedures and a high
level of security. In order to ensure systems are protected
properly and effectively, external security scans and assessments
are carried out on a regular basis. 888 has a disaster recovery
site to ensure full recovery in the event of disaster. All critical
data is replicated to the disaster recovery site and stored
off-site on a daily basis. In the event of loss of functionality of
888's critical services, the business can be fully recovered
through the resources available at the disaster recovery site. In
order to minimise dependence on telecommunication service
providers, 888 invests in network infrastructure redundancies
whilst regularly reviewing its service providers. 888 has two
Internet service providers in Gibraltar in order to minimise
reliance on one provider. As a part of its monitoring system, 888
deploys set user experience tests which measure performance from
different locations around the world. Network-related performance
issues are addressed by rerouting traffic using different routes or
providers. 888 operates a 24/7 Network Operations Centre ("NOC").
The NOC's role is to conduct real time monitoring of production
activities using state-of-the-art systems. These systems are
designed to identify and provide alerts regarding problems related
to systems, key business indicators and issues surrounding customer
usability experience. The IT environment tracks changes, incidents
and service level agreement key performance indicators in order to
ensure that client experience is consistent and well managed. As
part of these procedures, capacity planning takes place and
infrastructure is built accordingly. System-wide availability and
business-level availability is measured and logged in the IT
information systems.
What happened in 2018: Security - Awareness training was carried
out for Group personnel at all locations by the Chief Information
Security Officer. New security practices and technologies were
implemented with a focus on DDoS mitigation and GDPR readiness.
Infrastructure - A new main data centre was built in Dublin using
advanced IT architecture and technologies. The new data centre
introduces a very high standard of redundancy and performance, and
is expected to launch in March 2019. Operations - 888 focused on
operations analytics as the next evolution of monitoring,
implementing an "elastic" framework for near real-time log and KPI
analysis.
Taxation risk è increased during 2018
The risk: Heightened attention continues to be given to matters
of cross-border taxation in line with the G20/OECD Base Erosion and
Profit Shifting recommendations. On 21 March 2018, the European
Union proposed new rules to implement "virtual permanent
establishment" criteria as well as interim measures to tax the
digital economy, including a targeted turnover-based equalisation
tax and potentially an EU-wide advertising tax, which has led to
introduction of "web taxes" in jurisdictions such as Italy and
France. In the UK, new rules have been implemented from 1 April
2019 imposing UK tax on the receipt of royalties by offshore
companies deriving from business activity in the UK, whilst past
proposals regarding imposition in the UK of "use and enjoyment" VAT
rules with respect to UK-facing advertising have not materially
progressed. In Gibraltar, legislation has been introduced to
recover unpaid taxes following a European Commission ruling
regarding illegal state aid given between 2011-2013. Due to
pressure from the European Union, offshore jurisdictions including
the British Virgin Islands have introduced new "substance"
requirements with regard to IP companies and other entities. The
likelihood of scrutiny of tax practices by tax authorities in
relevant jurisdictions and the aggressiveness of tax authorities
remains high, with 888 receiving VAT assessments in Germany during
2018 relating to tax years 2010-2017, regarding which it had
previously recorded a provision and contingent liability in its
financial statements. A finding of taxable presence of the Group in
one or more jurisdictions (including pursuant to revised
interpretations of the permanent establishment concept as mentioned
above), a transfer pricing adjustment with respect to attribution
of profit to such jurisdiction(s), or imposition of another form of
tax as mentioned above, may have a substantial impact on the amount
of tax and VAT paid by 888 or require significant payments by 888
in respect of historical tax liabilities. 888's effective tax
burden also increases due to the imposition or increase of gaming
duty in markets in which the group has customers, including the
recently announced increase in the rate of UK remote gaming duty to
21% of GGR as from 1 April 2019, the additional Romanian gaming tax
at 2% of deposits from 2019, and the increase in Italian gaming
duty to 25% of GGR (24% for sports betting) from 2019. The
Company's Israeli subsidiary entered into an Assessment Agreement
with the Israeli Tax Authority in 2016, in which the subsidiary's
transfer pricing remuneration was agreed with regard to tax years
ending in 2015. The Company believes that the remuneration
attributed for tax purposes to its Israeli subsidiary complies with
the arm's length standard, and therefore continues to rely on the
transfer pricing agreement with regard to tax years following 2015,
however the agreement has not been renewed. As such, and in light
of the developments in taxation rules internationally, including in
the field of transfer pricing pursuant to which new methodologies
are gaining prominence, in the context of the tax audit detailed
below, the Israeli Tax Authority may seek to increase the level of
remuneration attributed to the Israeli subsidiary for tax purposes
commencing from the 2016 tax year, which could have material
financial consequences to the Company.
Relevance to strategy: In addition to the financial consequences
of a challenge to 888's tax structure, tax compliance - and being
seen to be paying the "right amount" of tax - has become a serious
reputational issue as well as being a regulatory compliance issue.
As such, it is crucial that 888 has a solid basis for its tax
positions taken in relevant jurisdictions.
How the risk is managed: 888 aims to ensure that each legal
entity within its Group is a tax resident of the jurisdiction in
which it is incorporated and has no taxable presence in any other
jurisdiction. In addition, 888 consults with tax advisers not only
in jurisdictions in which its Group companies are incorporated and
in which it has personnel, but also in major markets in which it
has customers, in order to comply with its legal obligations whilst
taking such action as is necessary to prevent the improper
imposition of unlawful or double taxation.
What happened in 2018: 888 continues to engage with tax
authorities and obtain legal advice in order to regularise its tax
position and mitigate exposures. As regards the inquiry in Germany
regarding VAT, 888 received assessments for tax years 2010-2017 and
accordingly partially released the provision recorded in its
financial statements in addition to the contingent liability. In
Israel, the local subsidiary is undergoing a tax audit and has also
appealed a withholding tax assessment relating to tax years
2013-2016.
Data Protection risk è remained stable during 2018
The risk: 888 processes a large quantity of personal customer
data, including sensitive data such as name, address, age, bank
details and gaming / betting history. Such data could be wrongfully
accessed or used by employees, customers, suppliers or third
parties, or lost, disclosed or improperly processed in breach of
data protection regulations. In particular, the European General
Data Protection Regulation ("GDPR") entered into force in May 2018,
having a significant effect on the Company's privacy and data
protection practices, as it introduced various changes to how
personal information should be collected, maintained, processed and
secured. Non-compliance with the GDPR may result in fines of up to
EUR20 million or 4% of the Company's annual global turnover, and
the Company will be particularly exposed to enforcement action in
light of the amount of customer data it holds and processes. In
addition, various countries in the EU have introduced domestic data
protection laws incorporating the GDPR requirements. The Company
could also be subject to private litigation and loss of customer
goodwill and confidence.
Relevance to strategy: The holding and processing of personal
and sensitive data in a lawful and robust manner is central to
888's analytics-based business strategy. As an online B2C and B2B
business, the integrity of 888's data protection framework is
crucial to the supply of its offerings, compliance with its
regulatory obligations and maintenance of the impressive customer
loyalty with which 888 is entrusted.
How the risk is managed: 888 has undergone a robust and
risk-oriented GDPR-preparation project, pursuant to a designated
GDPR Gap Analysis that was prepared for that purpose in
coordination with its legal advisers.
What happened in 2018: 888 mapped the personal data life-cycle
within the organisation, including how personal data of its
customers and EU employees is collected, stored, secured and shared
with third parties. In addition, 888 appointed a designated
internal Data Protection Officer and put in place policies and
procedures on relevant matters including exercising user rights and
data retention, data sharing with third parties, security policies,
as well as reviewing necessary product and IT implementation. Such
policies and procedures are reviewed and updated on an ongoing
basis to align with the most up to date regulatory guidelines. 888
has also put in place adequate contractual measures with respect to
sharing data with third parties, reviewing its privacy notices and
other customer notifications and reviewing the current data
security framework on an ongoing basis.
Reputational riskè remained stable during 2018
The risk: The reputation of 888 is affected by the profile of
both other online gaming and betting operators, as well as the
gaming and betting industry as a whole. Various regulators, most
notably the UKGC, have adopted stricter compliance and enforcement
policies, conducting more in-depth reviews of operational practices
and sanctioning operators found to be non-compliant. There appears
to be growing sentiment in various jurisdictions that existing
regulations do not sufficiently protect minors and vulnerable
players or do enough to prevent the use of illictly obtained funds
for gambling purposes. This could result in reputational damage to
the Group, as well as in the adoption of stricter regulations and
enhanced enforcement measures.
Relevance to strategy: Underage and problem gaming, as well as
the use of illicit funds for gambling, are risks associated with
any gaming business, and ensuring compliance with regulatory
requirements for the protection of vulnerable people and the
prevention of money laundering is critical to maintaining 888's
online gaming licences.
How the risk is managed: Staff are trained to provide a safe
gaming experience to customers and to recognise and take
appropriate actions if they identify compulsive or underage
activity. 888 also complies with eCOGRA guidelines to protect
customers. Web links to professional help agencies are provided on
888's real money gaming sites, and 888 has a dedicated website
which provides information regarding responsible gaming. Players
can also limit their play pattern or request to be self-excluded.
888 furthermore - directly or via industry bodies - seeks to ensure
that legislators and regulators are provided with accurate and
useful information regarding protections against problem and
underage gaming.
What happened in 2018: During 2018, the UKGC continued its
regulatory enforcement processes and actions which resulted in
several public regulatory settlements with online operators, as
published by the Commission. Such publications raise further
concerns about the sector's compliance with regulatory requirements
pertaining primarily to Anti-Money Laundering and Social
Responsibility. 888 continued to devote significant resources to
putting in place prevention measures coupled with strict internal
procedures to protect customers, and monitor and update procedures
to ensure that minors are unable to access their gaming sites. 888
also completed an upgrade of the Observer responsible gambling
tool, to increase the protection to players and ensure earlier and
more efficient detection and prevention of instances of problem
gambling, and updated its anti-money laundering policies to better
detect players suspected of using illicit funds for gambling. 888
has continued its review of all its websites and those of its B2B
partners in light of the UK Advertising Standards Authority and
Committees of Advertising Practice's review of gaming industry
practices, with a view to ensuring that content that may be
particularly appealing to children, whether specific games or
general creative elements on the site, have been removed or made
accessible only after a robust age verification process has been
completed. 888 has also integrated with the National Online
Self-Exclusion Scheme (also known as "GAMSTOP") to enable its
customers to self-exclude themselves on national level from all UK
online gambling operators.
Partnership risk è decreased during 2018
The risk: B2B partnerships expose 888 to business risks as well
as compliance and reputational risks, with increased pressure on
888 as the licence holder, particularly from the UK Gambling
Commission, to monitor activities of its B2B partners.
Relevance to strategy: B2B remains a material part of 888's
business, particularly for Bingo in the UK; in addition, its US B2B
contracts have strategic importance for the longer term.
How the risk is managed: 888 has reduced its dependency on B2B
relationships, following the acquisition of Costa Bingo and other
formerly B2B bingo brands. Remaining B2B contracts are maintained
commercially in terms of the functionality and technology of the
B2B platform offered, competitive pricing, maintaining an ongoing
relationship with B2B partners, and ensuring that 888 has a good
understanding of the needs of its B2B partners and their
owners.
What happened in 2018-19: In early 2019, 888 acquired Costa
Bingo and other formerly B2B bingo brands from its former B2B
partner Jet Management.
Acquisition risks è increased during 2018-19
The risk: 888 has made a number of acquisitions in the online
gaming and betting space. Acquisitions of gaming companies carry
business risks, such as overpaying for what are mainly intangible
assets, as well as legal and regulatory risks, including the
receipt of necessary regulatory approvals to the transaction and
exposure to legacy non-compliance of the seller. Furthermore,
integration of acquired entities gives rise to a financial burden
and the requirement of management attention and operational
resources.
Relevance to strategy: Ongoing consolidation of the online
gaming market costs has increased the importance of 888 being ready
to acquire smaller operators, particularly in business areas such
as Sport where 888's activity has historically been smaller.
How the risk is managed: 888's legal, financial and tax advisers
ensure that a comprehensive due diligence is carried out on
potential acquisition targets. Generally, 888 prefers to acquire
assets rather than shares of companies, in order to mitigate
exposure to any past non-compliance issues on the part of the
seller. 888 seeks to take into account the resources required to
integrate acquired entities in its annual budgeting and
planning.
What happened in 2018-19: In early 2019, 888 acquired Costa
Bingo and other formerly B2B Bingo brands from its former partner
Jet Management, as well as acquiring the BetBright Sport
business.
Credit risk è increased during 2018-19
The risk: 888 has taken an RCF from Barclays Bank plc in order
to finance its activities. The credit facility contains covenants
by the Group regarding the maintenance of certain financial ratios,
as well as various regulatory compliance matters.
Relevance to strategy: Ongoing consolidation of the online
gaming market has increased the importance of 888 being ready to
acquire smaller operators, requiring readily available cash
resources.
How the risk is managed: 888 monitors its ongoing compliance
with the relevant financial ratios. 888, in-house and via its legal
counsel, also monitor changes to the regulatory landscape which may
have an impact on its obligations under the credit facility.
What happened in 2018-19: In early 2019, 888 executed the
revolving credit facility with Barclays.
Regulation and general regulatory developments
Like its predecessor, 2018 brought many changes to the online
gaming industry, nowhere more so than in the United States where
the overturn of PASPA by the US Supreme Court ushered in legal
sports betting. The 888 group continued to seize the increasing
trend towards tailored regulation of online gaming to increase its
presence in locally regulated markets and grow its licensing
portfolio. In the face of regulatory reforms and increased scrutiny
from regulatory authorities, the group continues to adapt to
shifting regulatory environments, while striving constantly to
maintain the highest compliance standards and to support the move
towards clearer regulation in the online gaming industry.
We look forward to working with our partners in the industry and
with regulators toward shaping a regulatory landscape that is
business-friendly whilst safeguarding the objectives of the
industry's regulation.
The following paragraphs summarise the main relevant regulatory
developments of 2018 and our expectations regarding changes that
may impact 888 in 2019.
Europe
2018 saw several European jurisdictions adopting new regulatory
regimes for online gaming or significantly amending existing
regimes. Though a growing number of European jurisdictions now have
robust regimes in place allowing for the licensing of commercial
operators to offer various forms of online gaming, there remain
pockets within Europe where the regulatory regimes are ambiguous,
non-compliant with EU law, or simply ignore the technological
advancements in the industry. We perceive these as obstacles to the
growth of the industry and also as an impediment to channeling
commerce towards secure and compliant operators, leaving players
less protected and with less access to quality services. We hope,
therefore, that 2019 will see a further elimination of this
situation in those jurisdictions where it persists.
With attention in the EU dedicated to Brexit, there were no
noticeable developments at the pan-European level dedicated to
gambling, and regulation continued to develop on the national
level. Similarly, 2018 saw no landmark rulings by the European
Court of Justice on matters pertaining to gambling.
The entry into force in 2018 of the GDPR had a significant
effect on the privacy and data protection practices of companies
dealing with information relating to EU residents, and 888 brought
its practices and policies in line with the requirements imposed by
this Regulation.
Brexit, presently scheduled to occur in March 2019, could see
Gibraltar cease to be a part of the EU. As a Gibraltar-based group,
with many of its licensed subsidiaries registered in Gibraltar, the
Group commenced a restructuring of its European-facing business
during 2018, to be completed in Q1 2019. This would see part of the
group's operations migrated to other EU Member States, most notably
Malta, where the group is now a licensed operator. Other parts of
the group's business will remain in Gibraltar. The final form of
this restructuring may be dependent on the particulars of the UK's
departure from the EU, however the Group has put measures in place
to ensure that its operations continue undisturbed under any
variation of Brexit.
A number of regulatory developments in European jurisdictions
during 2018 have had an effect on 888's operations and will
continue to do so in 2019:
-- In the UK, 888's main market, the Group continued adapting to
meet the developing and increasingly more stringent regulatory
requirements, a process which continues to require significant
efforts and the implementation of changes in many areas of the
business. We continue to work to adapt our operations and working
modalities to ensure ongoing adherence to the various (and
evolving) requirements applicable to our UK operations.
o The UKGC placed significant attention during 2018 on the
protection of consumers, specifically problem gamblers and underage
gamblers, and on raising standards in the gambling market. These
focal points will be monitored, as before, by both the UKGC and the
CMA. 888 implemented sweeping changes to our problem gambling
detection systems, updating triggers and introducing additional
interaction points, in an effort to better identify potential
problem gamblers and prevent the use of our services by those for
whom they are not appropriate.
o During 2018, the UKGC issued fines to various operators for
failings pertaining to consumer protection, money laundering and
the use of proceeds of crime for gambling. We have scrutinized the
UKGC's findings and determinations in these cases and, where
necessary, have implemented changes in the Group's business
modalities to ensure they are in line with our understanding of the
UKGC's expectations and demands.
o The Group continued to engage with the UKGC with respect to
cases submitted to its attention by the UKGC and is committed to
continuing its open and productive dialogue with the UKGC on all
matters pertaining to our operations.
o Late in the year, UK licensed bookmakers agreed to self-impose
an advertising watershed. This came amid calls, including within
Parliament, for the imposition of stricter restrictions on the
advertising of gambling services.
o The UKGC has reportedly been working with banks on a plan that
would give players the possibility of restricting or blocking
gambling-related transactions directly from their bank accounts. A
leading high-street bank has already made such an option available
to account holders. This development, as well as the introduction
during 2018 of GamSTOP (a national self-exclusion program) could
have a significant impact on UK-licensed operators.
-- In January 2019, the Group obtained a license in Portugal in
order to bring its offering to players in this jurisdiction.
-- On 1 January 2019 a new law regulating the online gaming
market came into force in Sweden. 888 obtained a Swedish license
under this new law and now offers its services in Sweden under a
local license and in accordance with the new regulatory framework
in place in this jurisdiction.
-- In Switzerland, voters in a referendum upheld a new law
regulating the online gaming and betting market. This law, which
came into force on 1 January 2019 (with a 6 month transitional
period for enforcement), provides for the licensing of land-based
casinos to offer online casino gambling. The group continues to
investigate potential business opportunities in this newly
regulated market and will evaluate its strategy with respect to the
Swiss market, in light of the new law, accordingly.
-- In the Netherlands, progress towards liberalization of the
market continued, and legislation introducing a new regulatory
framework for online gaming was passed by Parliament in February
2019. In the interim, the Dutch regulator continued to update its
enforcement policy, based on the "prioritization criteria" for
enforcement, and issued several fines, including to large
international operators, whose operations were perceived to be in
violation of these criteria.
-- Germany's regulatory landscape remains riddled with
uncertainty, although the market yielded a few regulatory and legal
developments in 2018. The future of the German Inter-State Gambling
Treaty continues to be a cause for friction between the German
states. Several German states (including, most recently, Hesse)
have suggested they would break with the other German states if
progress was not made towards liberalization of the online gaming
market in line with neighbouring jurisdictions. In March 2018, the
German Federal Administrative Court upheld the current Treaty's
compliance with EU law when it comes to its prohibition of remote
casinos, scratch cards and poker games, and restricting sports
betting (contrary to previous rulings by both German and EU
courts). This ruling, which only formally applies with respect to a
particular prohibition order issued in a single German state,
raised concerns over a possible shift in the approach to
enforcement in other German jurisdictions. An attempt by the state
of Lower Saxony to prevent payment processors from processing
payments for German players has been linked to this ruling, as have
efforts in the state of Baden Wuerttemberg to give effect to the
prohibition orders upheld by the Federal Court. The Company filed a
petition to the German Federal Constitutional Court seeking to
overturn the Administrative Court ruling, and a ruling on the
admissibility of this petition is pending. In parallel, the Company
has sought to engage in constructive dialogue with various German
authorities with respect to its operations in this jurisdiction.
The Group also obtained an interim license from the state of
Schleswig Holstein, whose previous licensing regime lapsed at the
end of 2018. The group remains hopeful that, as one of Europe's
largest jurisdictions, Germany will make moves in 2019 to clarify
its regulatory landscape and to adopt a regime that is beneficial
for consumers, operators and the state.
-- In Italy, where 888 renewed its licensed status after the
expiry of the first set of concessions issued under the current
law, lawmakers imposed an extensive ban on advertising related to
gambling, which included a gradual implementation timeline and
limited grandfathering of existing advertising relationships. The
group has implemented measures to comply with the new regulations,
which are anticipated to have an impact on the growth of this
market. Other jurisdictions in Europe where the group operates,
including Spain, have similarly been considering restrictions on
the advertising of gambling services.
The United States
2018 saw major shifts in the regulatory landscape in the US. In
May 2018, the US Supreme Court issued its landmark ruling
overturning in its entirety the Professional and Amateur Sports
Protection Act (PASPA). As a result, states were once again
empowered to regulate sports betting within their respective
territories. Some states whose laws already allowed for the
regulation of sports betting subject to the removal of any federal
law impediment, proceeded shortly after the ruling to launch
regulated sports betting activities. Others, including West
Virginia and the District of Columbia adopted legislation
introducing sports betting to the state (in some cases this was
restricted to land-based betting only, and in others it included
online betting as well.) In Michigan, a bill to regulate online
gambling was vetoed by the State Governor in the last days of 2018,
returning the issue to the state legislature. New Jersey, where 888
has been operating for several years, launched regulated online
sports betting shortly after the Supreme Court ruling, and the
Group commenced offering these services in the state with its local
partners.
The repeal of PASPA and the emergence of regulated sports
betting on the state level have prompted debate in Washington DC
around new federal legislation either banning sports betting or
imposing a federal layer of regulation on the industry. A bill on
this matter was tabled in the US Senate in the final days of 2018,
but with the commencement of a new session of Congress it is
unclear whether and in what form the federal legislature will
address this industry.
In 2018, Pennsylvania launched online gambling under a 2017 law,
including casino and sports betting.
With new legislatures and new administrations taking power in
various states following the mid-term elections, proposed
legislation to reform the gambling landscape in some key states is
anticipated to be tabled during 2019. Attention is focused on New
York where the public debate on the regulation of online gambling
continued in 2018.
We believe the developments in the US have the potential to
transform the US into a major gambling (primarily - betting)
market, and 888 intends to follow these developments as they evolve
with a view to capitalizing on our strong position in this
market.
Further afield
In 2018, Australia adopted a much awaited amendment to the 2001
Interactive Gambling Act, providing the authorities with
significant enforcement tools against operators offering unlicensed
gambling services. The Group's operations are fully compliant with
the amended Act.
Two heavily populated districts of Argentina (the State and City
of Buenos Aires) adopted legislation late in 2018 introducing
commercial gambling services. Details about the licensing structure
and scope are expected in the coming months. In parallel, the
Argentinean communications regulator has increased efforts to block
access to offshore online gambling services, a move which may be
linked to the anticipated emergence of a locally regulated
market.
Brazil, whose antiquated gambling laws did not specifically
regulate online gambling, adopted framework legislation late in
2018 which would bring commercial online gambling to this
significant jurisdiction. The law gives the local authorities two
years to develop implementing regulations, a process which has
already commenced. Given the size of this market, an accommodating
regime in Brazil could represent a significant opportunity for the
group, though this is not likely to materialize in 2019.
888 continues to follow these developments to assess their
impact on our business and to identify potential opportunities for
growth.
Directors' statement of responsibilities
We confirm, to the best of our knowledge:
(a) the financial statements, prepared in accordance with
International Financial Reporting Standards as adopted by the EU,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of 888 and the undertakings included in
the consolidation taken as a whole; and
(b) the strategic report includes a fair review of the
development and performance of the business and the position of 888
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face.
On behalf of the Board:
Itai Pazner
Chief Executive Officer
12 March 2019
Consolidated Income Statement
For the year ended 31 December 2018
2018 2017
Note US $ million US $ million
------------------------------------------------ ---- ------------ ------------
Revenue before VAT accrual release 3 529.9 541.8
VAT accrual release 19 10.7 -
Revenue 540.6 541.8
------------------------------------------------ ---- ------------ ------------
Operating expenses 4 (158.1) (158.1)
Gaming duties (69.9) (75.2)
Research and development expenses (32.8) (35.4)
Selling and marketing expenses (155.0) (162.5)
Administrative expenses (36.2) (37.7)
Exceptional items 5 11.1 (50.8)
Operating profit before exceptional items,
VAT accrual release and share benefit charge 86.8 81.4
Exceptional items 5 11.1 (50.8)
VAT accrual release 10.7 -
Share benefit charge 22 (8.9) (8.5)
------------------------------------------------ ---- ------------ ------------
Operating profit 4 99.7 22.1
Finance income 7 0.6 0.6
Finance expenses 7 (0.7) (3.7)
Gain from remeasurement of previously held
equity interest in joint ventures 11 9.3 -
Share of post-tax loss of equity accounted
joint ventures and associates 14 (0.2) (0.2)
------------------------------------------------ ---- ------------ ------------
Profit before tax 108.7 18.8
Taxation 8 (13.9) (6.2)
------------ ------------
Profit after tax for the year attributable
to equity holders of the parent 94.8 12.6
------------------------------------------------ ---- ------------ ------------
Earnings per share 9
Basic 26.3c 3.5c
Diluted 25.8c 3.4c
--------------------- ----- ----
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2018
2018 2017
Note US $ million US $ million
------------ ------------
Profit for the year 94.8 12.6
Items that may be reclassified subsequently
to profit or loss
------------------------------------------------------- ---- ------------ ------------
Exchange differences on translation of foreign
operations (0.4) 0.8
------------------------------------------------------- ---- ------------ ------------
Items that will not be reclassified to profit
or loss
------------------------------------------------------- ---- ------------ ------------
Remeasurement of severance pay liability 6 1.1 (1.4)
------------------------------------------------------- ---- ------------ ------------
Total other comprehensive expense for the
year 0.7 (0.6)
------------------------------------------------------- ---- ------------ ------------
Total comprehensive income for the year attributable
to equity holders of the parent 95.5 12.0
------------------------------------------------------- ---- ------------ ------------
The notes below form part of these consolidated financial
statements.
Consolidated Balance Sheet
At 31 December 2018
2018 2017
Note US $ million US $ million
----------------------------------------------- ---- ------------
Assets
Non-current assets
Goodwill and other intangible assets 12 200.3 159.8
Property, plant and equipment 13 11.0 9.0
Investments 14 1.1 1.3
Non-current receivables 17 0.8 0.8
Deferred tax assets 15 1.4 1.5
----------------------------------------------- ---- ------------ ------------
214.6 172.4
Current assets
Cash and cash equivalents 16 133.0 179.6
Trade and other receivables 17 33.0 43.1
Income tax receivable - 1.1
----------------------------------------------- ---- ------------ ------------
166.0 223.8
Total assets 380.6 396.2
----------------------------------------------- ---- ------------ ------------
Equity and liabilities
Equity attributable to equity holders of the
parent
Share capital 18 3.3 3.3
Share premium 18 3.6 3.5
Foreign currency translation reserve (2.0) (1.6)
Treasury shares 22 (1.2) (0.7)
Retained earnings 156.6 108.7
----------------------------------------------- ---- ------------ ------------
Total equity attributable to equity holders
of the parent 160.3 113.2
Liabilities
Current liabilities
Trade and other payables 19 136.0 156.9
Provisions 19 11.3 47.0
Income tax payable 11.4 4.1
Deferred tax liability 8 2.3 -
Severance pay liability 6 2.2 3.3
Customer deposits 20 57.1 71.7
220.3 283.0
Total equity and liabilities 380.6 396.2
-------------------------------- ----- -----
The notes below form part of these consolidated financial
statements.
Consolidated Statement of Changes in Equity
For the year ended 31 December 2018
Foreign
currency
Share Treasury Retained translation
capital Share premium shares earnings reserve Total
US $ million US $ million US $ million US $ million US $ million US $ million
--------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Balance at 1 January 2017 3.2 3.3 - 159.5 (2.4) 163.6
--------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Profit after tax for the year
attributable to equity holders
of the parent - - - 12.6 - 12.6
Other comprehensive expense for
the year - - - (1.4) 0.8 (0.6)
--------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Total comprehensive income - - - 11.2 0.8 12.0
Dividend paid (note 10) - - - (70.5) - (70.5)
Equity settled share benefit
charges (note 22) - - - 8.5 - 8.5
Acquisition of treasury shares - - (0.7) - - (0.7)
Issue of shares to cover
employee
share schemes (note 18) 0.1 0.2 - - - 0.3
Balance at 31 December 2017 3.3 3.5 (0.7) 108.7 (1.6) 113.2
--------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Profit after tax for the year
attributable to equity holders
of the parent - - - 94.8 - 94.8
Other comprehensive (expense)
income for the year - - - 1.1 (0.4) 0.7
--------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
Total comprehensive income - - - 95.9 (0.4) 95.5
Dividend paid (note 10) - - - (56.6) - (56.6)
Equity settled share benefit
charges (note 22) - - - 8.9 - 8.9
Acquisition of treasury shares - - (0.8) - - (0.8)
Exercise of deferred share
bonus
plan - - 0.3 (0.3) - -
Issue of shares to cover
employee
share schemes (note 18) - 0.1 - - - 0.1
Balance at 31 December 2018 3.3 3.6 (1.2) 156.6 (2.0) 160.3
--------------------------------- ------------ ------------- ------------ ------------ ------------ ------------
The following describes the nature and purpose of each reserve
within equity.
Share capital - represents the nominal value of shares allotted,
called-up and fully paid.
Share premium - represents the amount subscribed for share
capital in excess of nominal value.
Treasury shares - represent reacquired own equity instruments.
Treasury shares are recognised at cost and deducted from
equity.
Retained earnings - represents the cumulative net gains and
losses recognised in the consolidated statement of comprehensive
income and other transactions with equity holders.
Foreign currency translation reserve - represents exchange
differences arising from the translation of all Group entities that
have functional currency different from US$.
The notes below form part of these consolidated financial
statements.
Consolidated Statement of Cash Flows
For the year ended 31 December 2018
2018 2017
Note US $ million US $ million
Cash flows from operating activities
Profit before income tax 108.7 18.8
Adjustments for:
Depreciation 13 5.3 5.7
Amortisation 12 15.0 13.6
Interest income 7 (0.6) (0.6)
Gain from remeasurement of previously held equity
interest in joint ventures 11 (9.3) -
Share of post- tax loss of equity accounted
associates 14 0.2 0.2
Exceptional items (11.1) 50.8
VAT accrual release (10.7) -
Share benefit charges 22 8.9 8.5
------------------------------------------------------- ---- ------------ ------------
Profit before income tax after adjustments 106.4 97.0
Decrease (increase) in trade receivables 8.4 (7.2)
Increase in other receivables (1.3) (1.1)
Decrease in customer deposits (12.1) (2.9)
(Decrease) Increase in trade and other payables (29.1) 17.7
Decrease in provisions (24.6) (3.8)
------------------------------------------------------- ---- ------------ ------------
Cash generated from operating activities 47.7 99.7
Income tax paid (5.6) (4.2)
------------------------------------------------------- ---- ------------ ------------
Net cash generated from operating activities 42.1 95.5
Cash flows from investing activities
Acquisition of property, plant and equipment 13 (7.3) (5.6)
Interest received 7 0.6 0.6
Acquisition of intangible assets 12 (2.7) (3.6)
Acquisition of subsidiaries, net of cash acquired 11 (9.2) -
Internally generated intangible assets 12 (12.0) (11.2)
------------------------------------------------------- ---- ------------ ------------
Net cash used in investing activities (30.6) (19.8)
Cash flows from financing activities
Issue of shares to cover employee share schemes 18 0.1 0.3
Acquisition of treasury shares 22 (0.8) (0.7)
Dividends paid 10 (56.6) (70.5)
------------------------------------------------------- ---- ------------ ------------
Net cash used in financing activities (57.3) (70.9)
Net (decrease) increase in cash and cash equivalents (45.8) 4.8
Net foreign exchange difference (0.8) 2.2
Cash and cash equivalents at the beginning of
the year 16 179.6 172.6
------------------------------------------------------- ---- ------------ ------------
Cash and cash equivalents at the end of the
year(1) 16 133.0 179.6
------------------------------------------------------- ---- ------------ ------------
(1) Cash and cash equivalents includes restricted short-term
deposits of US$1.5 million (2017: US$1.2 million) (see note
16).
Net cash generated from operating activities is presented after
deduction of US$24.6 million paid during 2018 in respect of
exceptional items (2017: US$6.2 million).
The notes below form part of these consolidated financial
statements.
Notes to the Consolidated Financial Statements
1 General information
The financial information does not constitute the Group's
statutory accounts for the year ended 31 December 2018 or the year
ended 31 December 2017, but is derived from those accounts.
Statutory accounts for the year ended 31 December 2017 have been
delivered to the Registrar of Companies in Gibraltar together with
a report under section 10 of the Gibraltar Companies (Accounts) Act
1999. Statutory accounts for the year ended 31 December 2018 will
be filed with Companies House Gibraltar following the Company's
Annual General Meeting. The auditors have reported on both the 2018
and 2017 accounts and their reports were unqualified, did not draw
attention to any matters by way of emphasis and did not contain
statements under section 10(2) of the Gibraltar Companies
(Accounts) Act 1999 or section 182(1) (a) of the Gibraltar
Companies Act.
Company description and activities
888 Holdings Public Limited Company (the "Company") and its
subsidiaries (together the "Group") was founded in 1997 in the
British Virgin Islands and since 17 December 2003 has been
domiciled in Gibraltar (Company number 90099). On 4 October 2005,
the Company listed on the London Stock Exchange.
The Group is the owner of innovative proprietary software
solutions providing a range of virtual online gaming services over
the internet, including Casino and games, Poker, Sport, Bingo,
social games, and brand licensing revenue on third party platforms.
These services are provided to end users ("B2C") and to business
partners through its business to business unit, Dragonfish ("B2B").
In addition, the Group provides payment services, customer support
and online advertising.
Definitions
In these financial statements:
The Company 888 Holdings Public Limited Company.
The Group 888 Holdings Public Limited Company and its subsidiaries.
Subsidiaries Companies over which the Company has control (as defined
in IFRS 10 - Consolidated Financial Statements) and
whose accounts are consolidated with those of the Company.
Related parties As defined in IAS 24 - Related Party Disclosures.
Joint ventures As defined in IFRS 11 - Joint Arrangements and IAS 28
and associates - Investments in Associates and Joint Ventures.
2 Significant accounting policies
The significant accounting policies applied in the preparation
of the consolidated financial statements are as follows:
2.1 Basis of preparation
The consolidated financial statements of the Group have been
prepared in accordance with International Financial Reporting
Standards ("IFRSs"), including International Accounting Standards
("IAS") and Interpretations adopted by the International Accounting
Standards Board ("IASB"), endorsed for use by companies listed on
an EU regulated market. The consolidated financial statements have
been prepared on a historical cost basis, except for equity
investments which have been measured at fair value.
The consolidated financial statements are presented in US
Dollars because that is the currency in which the Group primarily
operates. All values are rounded to the closest million except when
otherwise indicated.
The consolidated financial statements comply with the Gibraltar
Companies Act 2014.
The significant accounting policies applied in the consolidated
financial statements in the prior year have been applied
consistently in these consolidated financial statements, with the
exception of the amendments to accounting standards effective for
the annual periods beginning on 1 January 2018. These are described
in more detail on the below.
2 Significant accounting policies (continued)
2.2 New standards, interpretations and amendments adopted by the
Group
The following interpretation and amendments to International
Financial Reporting Standards, issued by the IASB and adopted by
the EU, were effective from 1 January 2018 and have been adopted by
the Group during the year with no significant impact on the parent
company or on the consolidated results or financial position:
-- Amendments to IFRS 2 - Classification and Measurement of Share-based Payment Transactions.
-- IFRIC Interpretation 22 - Foreign Currency Transactions and Advance Consideration.
-- Annual Improvements to IFRS Standards 2014-2016 Cycle:
Clarification in IAS 28 that measuring investees at fair value
through profit or loss is an investment-by-investment choice.
The Group had applied, for the first time, IFRS 9 - Financial
Instruments and IFRS 15 - Revenue from Contracts with Customers,
that require restatement of previous financial statements.
-- IFRS 9 - IFRS 9 Financial Instruments replaces IAS 39
Financial Instruments: Recognition and Measurement for annual
periods beginning on or after 1 January 2018, bringing together all
three aspects of the accounting for financial instruments:
classification and measurement; impairment; and hedge
accounting.
The Group has applied IFRS 9 retrospectively with no material
impact on the financial statements of the Group.
(a) Classification and measurement
The Group's income earned from Casino, Bingo and Sports falls
within the scope of IFRS 9, which did not result in material impact
on accounting or presentation of this income. There were no changes
in classification and measurement of other financial assets and
liabilities.
(b) Impairment
The adoption of IFRS 9 has fundamentally changed the Group's
accounting for impairment losses for financial assets by replacing
IAS 39's incurred loss approach with a forward looking expected
credit loss (ECL). IFRS 9 application did not result in material
changes to Group's financial statements.
Trade receivables
Trade receivables are initially recognised at fair value and
subsequently measured at amortised cost and principally comprise
amounts due from credit card companies and from ePayment companies.
The Group has applied the standard's simplified approach and has
calculated the ECLs based on lifetime of expected credit losses.
This did not result in material changes to Group's financial
statements. Bad debts are written off when there is objective
evidence that the full amount may not be collected.
Equity instruments designated at fair value through OCI
Under IFRS 9 equity investments are measured at fair value
through other comprehensive income (FVOCI) without subsequent
recycling to income statement. Equity instruments at FVOCI are not
subject to an impairment assessment under IFRS 9. Under IAS 39,
these were classified as available for sale financial assets. The
impact is not material.
Financial liabilities
The accounting for Group's financial liabilities remains largely
the same as it was under IAS 39.
-- IFRS 15 - supersedes IAS 11 Construction Contracts, IAS 18
Revenue and related Interpretations and it applies to all revenue
arising from contracts with customers, unless those contracts are
in the scope of other standards. The new standard establishes a
five-step model to account for revenue arising from contracts with
customers. Under IFRS 15, revenue is recognised at an amount that
reflects the consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a
customer.
2 Significant accounting policies (continued)
The standard requires entities to exercise judgement, taking
into consideration all of the relevant facts and circumstances when
applying each step of the model to contracts with their customers.
The standard also specifies the accounting for the incremental
costs of obtaining a contract and the costs directly related to
fulfilling a contract.
The Group adopted IFRS 15 using the full retrospective method of
adoption with no material impact on the financial statements of the
Group:
(a) Casino, Bingo and Sports
The Group's income earned from Casino, Bingo and Sports does not
fall within the scope of IFRS 15. Income from these online
activities is disclosed as revenue although these are accounted for
and meet the definition of a gain under IFRS 9.
(b) Poker and B2B revenue
Poker revenue represents commission charged from each poker hand
in ring games and entry fees for participation in Poker tournaments
less the fair value of certain promotional bonuses and the value of
loyalty points accrued. In Poker tournaments certain promotional
costs are accounted for, and entry fee revenue is recognised when
the tournament has concluded. IFRS 15 adoption did not have impact
on Group's Poker revenue.
Revenue from B2B is mainly comprised of services provided to
business partners and brand licensing on third party platforms.
IFRS 15 adoption did not have an impact on Group's B2B revenue
recognition policy including assessment whether the Group is acting
as principal or agent in the relevant contracts.
The Group applies judgement in determining whether it is acting
as a principal or an agent where it provides services to business
partners through its business to business unit. In making these
judgements the Group considers, by examining each contract with its
business partners, identifying the specified services and determine
which party controls such services before they are transferred to
the customer. If control assessment is not clear, the Group
considers the principal indicators such as which party has the
primary responsibility for providing the services and is exposed to
the majority of the risks and rewards associated with providing the
services, as well as if it has latitude in establishing prices,
either directly or indirectly.
(c) Presentation and disclosure requirements
The Group disclosed disaggregated revenue recognised from
contracts with customers and revenue from other online activities
in note 3 Segment Information.
2.3 New standards that have not been adopted by the Group as
they were not effective for the year:
The new standard applies to annual reporting periods beginning
on or after 1 January 2019. The Group has not early adopted IFRS
16.
IFRS 16 Leases - IFRS 16 was issued in January 2016 and it
replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement
contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27
Evaluating the Substance of Transactions Involving the Legal Form
of a Lease. IFRS 16 Leases requires lessees to recognise
right-of-use assets and lease liabilities for most leases. A
contract is (or contains) a lease if it conveys the right to
control the use of an identified asset for a period of time in
exchange for consideration.
Right-of-use assets are initially measured at cost and
depreciated by the earlier of the end of the useful life of the
right-of-use asset or the end of the lease term. The cost of
right-of-use assets comprises of initial measurement of the lease
liability, any lease payments made before or at the commencement
date and initial direct costs. The lease liability is initially
measured at the present value of the lease payments that are not
paid at the commencement date and subsequently measured at
amortised cost with the interest expense recognised within finance
income (expense) in the consolidated statement of income.
In accordance with the transition provisions in IFRS 16, the
Group is entitled to choose to apply the modified retrospective
approach. Under this approach, a lessee does not restate
comparative information and recognise the cumulative effect of
initially applying IFRS 16 as an adjustment to the opening balance
of retained earnings at the date of initial application.
Notes to Consolidated financial statements (continued)
2 Significant accounting policies (continued)
During 2018, the Group has performed a detailed impact
assessment of IFRS 16. In summary the impact of IFRS 16 adoption is
expected to be as follows:
Impact on the statement of financial position as at 31 December
2018:
US $ million
------------------------------ ------------
Assets
Property, plant and equipment
(right-of-use assets) 27.2
Liabilities
Current Lease liabilities (5.1)
Non-current lease liabilities (22.1)
Net impact on equity -
--------------------------------- ------------
Expected impact on the statement of profit or loss for 2019:
US $ million
------------------------ ------------
Depreciation expense (5.2)
Operating lease expense 5.9
Operating profit 0.7
Finance costs (0.9)
Profit for the year (0.2)
--------------------------- ------------
Following the adoption of IFRS 16, the Group's operating profit
will improve, while its interest expense will increase. This is due
to the change in the accounting for expenses of leases that were
classified as operating leases under IAS 17.
The following relevant interpretations and amendments to
existing standards issued by the IASB, have not been adopted by the
Group as they were either not effective for the year or not yet
endorsed for use in the EU. The Group is currently assessing the
impact of these interpretations and amendments will have on the
presentation of, and recognition in, parent company or consolidated
results or financial position in future periods:
-- Amendments to IAS 28 - Long-term Interests in Associates and
Joint Ventures (effective for accounting periods beginning on or
after 1 January 2019).
-- Annual Improvements to IFRS Standards 2015-2017 Cycle (issued
on 12 December 2017) (effective for accounting periods beginning on
or after 1 January 2019).
-- IFRIC Interpretation 23 - Uncertainty over Income Tax
Treatments (effective for accounting periods beginning on or after
1 January 2019).
-- Amendments to IAS 19: Plan Amendment, Curtailment or
Settlement (effective for accounting periods beginning on or after
1 January 2019).
-- Amendments to IFRS 9: Prepayment Features with Negative
Compensation (effective for accounting periods beginning on or
after 1 January 2019).
2 Significant accounting policies (continued)
Critical accounting estimates and judgments
The preparation of consolidated financial statements under IFRS
as adopted by the EU requires the Group to make estimates and
judgements that affect the application of policies and reported
amounts. Estimates and judgements are continually evaluated and are
based on historical experience and other factors including
expectations of future events that are believed to be reasonable
under the circumstances. Actual results may differ from these
estimates.
Included in this note are accounting policies which cover areas
that the Directors consider require estimates and assumptions which
have a significant risk of causing a material adjustment to the
carrying amount of assets and liabilities in the future. These
policies together with references to the related notes to the
financial statements, which include further commentary on the
nature of the estimates and judgements made, can be found
below:
Critical judgements
Revenue
The Group applies judgement in determining whether it is acting
as a principal or an agent where it provides services to business
partners through its business to business unit. In making these
judgements the Group considers, by examining each contract with its
business partners, which party has the primary responsibility for
providing the services and is exposed to the majority of the risks
and rewards associated with providing the services, as well as if
it has latitude in establishing prices, either directly or
indirectly. This is described in further detail in the revenue
accounting policy set out below.
Internally generated intangible assets
Costs relating to internally generated intangible assets, are
capitalised if the criteria for recognition as assets are met. The
initial capitalisation of costs is based on management's judgment
that technological and economic feasibility criteria are met. In
making this judgement, management considers the progress made in
each development project and its latest forecasts for each project.
Other expenditure is charged to the consolidated income statement
in the year in which the expenditure is incurred. Following initial
recognition, intangible assets are carried at cost less any
accumulated amortisation and any accumulated impairment losses. For
further information see note 12.
Key accounting estimates
The Group's response to Brexit is shown on risk management
strategy report. Given the level of uncertainty which still remains
in relation to the nature of Brexit and how it might apply to
online gambling companies its effect on the carrying values of
assets and liabilities cannot be quantified. Brexit has been
considered when assessing other key accounting estimates.
Taxation
Due to the international nature of the Group and the complexity
of tax legislation in the jurisdictions in which it operates, the
Group applies judgement in estimating the likely outcome of tax
matters and the resultant provision for income taxes. The Group
believes that its accruals for tax liabilities are appropriate. For
further information see note 8.
Impairment of goodwill and other intangible assets
Determining whether goodwill is impaired requires an estimation
of the value in use of the cash-generating units to which the
goodwill has been allocated. The value in use calculation requires
the entity to estimate the future cash flows expected to arise from
the cash-generating unit and a suitable discount rate in order to
calculate present value. For further information see note 12.
Provisions, contingent liabilities and regulatory matters
The Group makes a number of estimates in respect of the
accounting for and disclosure of expenses and contingent
liabilities for regulatory matters, including gaming duties. These
are described in further detail in note 27.
Notes to Consolidated financial statements (continued)
2 Significant accounting policies (continued)
Basis of consolidation
The consolidated financial statements include the accounts of
the Company and its subsidiaries. The subsidiaries are companies
controlled by 888 Holdings Public Limited Company. Control exists
where the Company has power over an entity; exposure, or rights, to
variable returns from its involvement with an entity; and the
ability to use its power over an entity to affect the amount of its
returns. Subsidiaries are consolidated from the date the Parent
gained control until such time as control ceases.
The financial statements of subsidiaries are included in the
consolidated financial statements using the purchase method of
accounting. On the date of the acquisition, the assets and
liabilities of a subsidiary are measured at their fair values and
any excess of the fair value of the consideration over the fair
values of the identifiable net assets acquired is recognised as
goodwill.
Intercompany transactions and balances are eliminated on
consolidation.
The financial statements of subsidiaries are prepared for the
same reporting period as the Parent Company and using consistent
accounting policies.
Revenue
Revenue is recognised provided that it is probable that economic
benefits will flow to the Group and the revenue can be reliably
measured. Revenue is recognised in the accounting periods in which
the transactions occurred after deduction of certain promotional
bonuses granted to customers and VAT, and after adding the fees and
charges applied to customer accounts, and is measured at the fair
value of the consideration received or receivable.
Revenue consists of income from online activities and income
generated from foreign exchange commissions on customer deposit and
withdrawals and account fees, which is allocated to each reporting
segment.
Revenue from online activities comprises:
Casino and Bingo (IFRS 9)
Casino and Bingo online gaming revenue is represented by the
difference between the amounts of bets placed by customers less
amounts won, adjusted for the fair value of certain promotional
bonuses granted to customers and the value of loyalty points
accrued.
Social games revenue represents the Group's share from the sale
of virtual goods to customers playing the Group's games.
Sport (IFRS 9)
Sport online gaming revenue comprises bets placed less payouts
to customers, adjusted for the fair value of open betting
positions.
Poker (IFRS 15)
Poker online gaming revenue represents the commission charged
from each poker hand in ring games and entry fees for participation
in Poker tournaments less the fair value of certain promotional
bonuses and the value of loyalty points accrued. In Poker
tournaments certain promotional costs are accounted for, and entry
fee revenue is recognised when the tournament has concluded.
2 Significant accounting policies (continued)
B2B (IFRS 15)
Revenue from B2B is mainly comprised of services provided to
business partners and brand licensing on third party platforms.
-- For services provided to business partners through its B2B
unit, the Group considers whether for each customer it is acting as
a principal or as an agent by considering which party has the
primary responsibility for providing the services and is exposed to
the majority of the risks and rewards associated with providing the
services, as well as if it has latitude in establishing prices,
either directly or indirectly:
-- Where the Group is considered to be the principal, income is
recognised as the gross revenue generated from use of the Group's
platform in online gaming activities with the partners' share of
the revenue charged to marketing expenses.
-- In other cases income is recognised as the Group share of the
net revenue generated from use of the Group's platform.
-- B2B also includes fees from the provision of certain gaming related services to partners.
-- Customer advances received are treated as deferred income
within current liabilities and released as they are earned.
-- Revenue derived from brand licensing on third party platforms
represents the Group's net revenue share from that activity.
Operating expenses
Operating expenses consists primarily of staff costs, payment
service providers' commissions, chargebacks, commission and
royalties payable to third parties, all of which are recognised on
an accruals basis, and depreciation and amortisation.
Administrative expenses
Administrative expenses consist primarily of staff costs and
corporate professional expenses, both of which are recognised on an
accruals basis.
Exceptional items and adjusted performance measures
The Group classifies and presents certain items of income and
expense as exceptional items. The Group presents adjusted
performance measures which differ from statutory measures due to
exclusion of exceptional items and certain non-cash items as the
Group considers that it allows a further understanding of the
underlying financial performance of the Group. These measures are
described as "adjusted" and are used by management to measure and
monitor the Group's underlying financial performance. Non-cash
items that are excluded from adjusted performance measures of
underlying financial performance include share benefit charge and
share of post-tax loss of equity accounted joint ventures and
associates. The Group also seeks to present a measure of underlying
performance which is not impacted by exceptional items. The Group
considers any non-recurring items of income and expense for
classification as exceptional by virtue of their nature and size.
The items classified as exceptional (and are excluded from the
adjusted measures) are described in further detail in note 5.
Notes to Consolidated financial statements (continued)
2 Significant accounting policies (continued)
Foreign currency
Monetary assets and liabilities denominated in currencies other
than the functional currency of the relevant company are translated
into that functional currency using year-end spot foreign exchange
rates. Non-monetary assets and liabilities are translated using
exchange rates prevailing at the dates of the transactions.
Exchange rate differences on foreign currency transactions are
included in financial income or financial expenses in the
consolidated income statement, as appropriate.
The results and financial position of all Group entities that
have a functional currency different from US$ are translated into
the presentation currency at foreign exchange rates as set out
below. Exchange differences arising, if any, are recorded in the
consolidated statement of comprehensive income as a component of
other comprehensive income.
(i) assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance sheet;
and
(ii) income and expenses for each income statement are
translated at an average exchange rate (unless this average is not
a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and
expenses are translated at the dates of the transactions).
Taxation
The tax expense represents tax payable for the year based on
currently applicable tax rates.
Deferred tax assets and liabilities are recognised where the
carrying amount of an asset or liability in the balance sheet
differs from its tax base. They are accounted for using the balance
sheet liability method. Recognition of deferred tax assets is
restricted to those instances where it is probable that taxable
profits will be available against which the difference can be
utilised. Such assets and liabilities are not recognised if the
temporary differences arise from goodwill or from the initial
recognition (other than in a business combination) of other assets
and liabilities in a transaction that affects neither the taxable
profit nor the accounting profit. The amount of the asset or
liability is determined using tax rates that have been enacted or
substantively enacted by the balance sheet date and are expected to
apply when the deferred tax liabilities/assets are
settled/recovered.
Intangible assets
Acquired intangible assets
Intangible assets acquired separately consist mainly of software
licences and domain names and are capitalised at cost. Those
acquired as part of a business combination are recognised
separately from goodwill if the fair value can be measured
reliably. These intangible assets are amortised over the useful
life of the assets, which for software licences is between one and
five years and for domain names is five years.
Internally generated intangible assets
Expenditure incurred on development activities of gaming
platform is capitalised only when the expenditure will lead to new
or substantially improved products or processes, the products or
processes are technically and commercially feasible and the Group
has sufficient resources to complete development. All other
development expenditure is expensed. Subsequent expenditure on
intangible assets is capitalised only where it clearly increases
the economic benefits to be derived from the asset to which it
relates. The Group estimates the useful life of these assets as
between three and five years, except for certain licence costs
which are amortised over either the life of the licence, or up to
20 years, whichever is the shorter period.
2 Significant accounting policies (continued)
Goodwill
Goodwill represents the excess of the fair value of the
consideration in a business combination over the Group's interest
in the fair value of the identifiable assets, liabilities and
contingent liabilities acquired. Consideration comprises the fair
value of any assets transferred, liabilities assumed and equity
instruments issued.
Goodwill is capitalised as an intangible asset with any
impairment in carrying value being charged to the consolidated
income statement and not subsequently reversed. Where the fair
values of identifiable assets, liabilities and contingent
liabilities exceed the fair value of consideration paid, the excess
is credited in full to the consolidated income statement on the
acquisition. Changes in the fair value of the contingent
consideration are charged or credited to the consolidated income
statement. In addition, the direct costs of acquisition are charged
immediately to the consolidated income statement.
Property, plant and equipment
Property, plant and equipment is stated at historical cost less
accumulated depreciation. Assets are assessed at each balance sheet
date for indicators of impairment.
Depreciation is calculated using the straight-line method, at
annual rates estimated to write off the cost of the assets less
their estimated residual values over their expected useful lives.
The annual depreciation rates are as follows:
IT equipment 33%
Office furniture and equipment 7-15%
Motor vehicles 15%
Over the shorter of the term of the
Leasehold improvements lease or useful lives
Impairment of non-financial assets
Impairment tests on goodwill are undertaken annually and where
applicable an impairment loss is recognised immediately in the
consolidated income statement. Other non-financial assets are
subject to impairment tests whenever events or changes in
circumstances indicate that their carrying amount may not be
recoverable. Where the carrying value of an asset exceeds its
recoverable amount (being the higher of value in use and fair value
less costs to sell), the asset is written down accordingly through
the consolidated income statement.
Where it is not possible to estimate the recoverable amount of
an individual asset, the impairment test is carried out on the
asset's cash generating unit (i.e. the smallest group of assets to
which the asset belongs for which there are separately identifiable
and largely independent cash inflows).
Investment in equity accounted joint ventures and associates
Joint ventures are those entities over whose relevant activities
the Group has joint control, established by contractual agreement
and requiring unanimous consent for strategic financial and
operating decisions.
Associates are those businesses in which the Group has a
long-term interest and is able to exercise significant influence
over the financial and operational policies but does not have
control or joint control over those policies.
Joint ventures and associates are accounted for using the equity
method and are recognised initially at cost. The Group's share of
post-acquisition profits and losses is recognised in the
consolidated income statement, except that losses in excess of the
Group's investment in the joint ventures and associates are not
recognised unless there is an obligation to make good those
losses.
Profits and losses arising on transactions between the Group and
its joint ventures or associates are recognised only to the extent
of unrelated investors' interests in the joint ventures and
associates. The investor's share in the profits and losses of the
investment resulting from these transactions is eliminated against
the carrying value of the investment.
Notes to Consolidated financial statements (continued)
2 Significant accounting policies (continued)
Any premium paid above the fair value of the Group's share of
the identifiable assets, liabilities and contingent liabilities
acquired is capitalised and included in the carrying amount of the
investment. Where there is objective evidence that the investment
has been impaired the carrying amount of the investment is tested
for impairment in the same way as other non-financial assets, and
any charge or reversal of previous impairments is taken to the
consolidated income statement.
Where amounts paid for an investment in joint venture and
associates are in excess of the Group's share of the fair value of
net assets acquired, the excess is recognised as negative goodwill
and released to the consolidated income statement immediately.
The Group's share of additional equity contributions from other
joint venture partners is taken to the consolidated statement of
comprehensive income.
Business combination achieved in stages
Business combination achieved in stages refers to transactions
which the Group obtains control in entities which it held an equity
interest immediately before the acquisition date. The Group
remeasure its previously held equity interest in the acquiree at
its acquisition-date fair value and recognise the resulting gain or
loss, if any, in the income statement.
Trade receivables
Trade receivables are initially recognised at fair value and
subsequently measured at amortised cost and principally comprise
amounts due from credit card companies and from e-payment
companies. The Group has applied the standard's simplified approach
and has calculated the ECLs based on lifetime of expected credit
losses. Bad debts are written off when there is objective evidence
that the full amount may not be collected.
Fair value measurement
The Group measures certain financial instruments, including
derivatives and equity investments, at fair value at each balance
sheet date. The fair value related disclosures are included in
notes 25 and 26. Fair value is the price that would be received or
paid in an orderly transaction between market participants at a
particular date, either in the principal market for the asset or
liability or, in the absence of a principal market, in the most
advantageous market for that asset or liability accessible to the
Group.
The Group uses valuation techniques that are appropriate in the
circumstances and for which sufficient data are available to
measure fair value, maximising the use of relevant observable
inputs and minimising the use of unobservable inputs.
The fair value measurement hierarchy is based on the inputs to
valuation techniques used to measure fair value. The inputs are
categorised into three levels, with the highest level (level 1)
given to inputs for which there are unadjusted quoted prices in
active markets for identical assets or liabilities and the lowest
level (level 3) given to unobservable inputs. Level 2 inputs are
directly or indirectly observable inputs other than quoted
prices.
Derivative financial instruments
From time to time the Group enters into contracts for derivative
financial instruments such as forward currency contracts to hedge
operational risks associated with foreign exchange rates. Such
derivative financial instruments are measured at fair value and are
carried in the consolidated balance sheet as assets when the fair
value is positive and as liabilities when the fair value is
negative. Any gains or losses arising from changes in the fair
values of derivatives are recorded immediately in the consolidated
income statement.
Cash and cash equivalents
Cash comprises cash in hand and balances with banks. Cash
equivalents are short-term, highly liquid investments that are
readily convertible to known amounts of cash. They include
short-term deposits originally purchased with maturities of three
months or less.
Equity
Equity issued by the Company is recorded as the proceeds
received from the issue of shares, net of direct issue costs.
2 Significant accounting policies (continued)
Treasury shares
Own equity instruments that are reacquired (treasury shares) are
recognised at cost and deducted from equity.
No gain or loss is recognised in profit or loss on the purchase,
sale, issue or cancellation of the Group's own
equity instruments. Any difference between the carrying amount
and the consideration, if reissued, is
recognised in the share premium account.
Trade and other payables
Trade and other payables are initially recognised at fair value
and subsequently measured at amortised cost.
Liabilities to customers
Liabilities to customers comprise the amounts that are credited
to customers' bankroll (the Group's electronic "wallet"), including
provision for bonuses granted by the Group, less fees and charges
applied to customer accounts, along with full progressive provision
for jackpots. These amounts are repayable in accordance with the
applicable terms and conditions.
Leases
Leases are classified as finance leases wherever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the Group. All other leases are classified as
operating leases and rentals payable are charged to the
consolidated income statement on a straight-line basis over the
term of the lease.
Provisions
Provisions are recognised when the Group has a present or
constructive obligation as a result of a past event from which it
is probable that it will result in an outflow of economic benefits
that can be reasonably estimated.
Dividends
Dividends are recognised when they become legally payable. In
the case of interim dividends to equity shareholders, this is when
declared by the Board of Directors and paid. In the case of final
dividends, this is when approved by the shareholders at the Annual
General Meeting.
Equity-settled Share benefit charges
Where the Company grants its employees or contractors shares or
options, the cost of those awards, recognised in the consolidated
income statement over the vesting period with a corresponding
increase in equity, is measured with reference to the fair value at
the date of grant. Market performance conditions are taken into
account in determining the fair value at the date of grant.
Non-market performance conditions, including service conditions,
are taken into account by adjusting the number of instruments
expected to vest at each balance sheet date so that, ultimately,
the cumulative amount recognised over the vesting period is based
on the number of instruments that eventually vest.
Severance pay schemes
The Group operates two severance pay schemes:
Defined benefit severance pay scheme
The Group operates a defined benefit severance pay scheme
pursuant to the Severance Pay Law in Israel. Under this scheme
group employees are entitled to severance pay upon redundancy or
retirement. The liability for termination of employment is measured
using the projected unit credit method.
Severance pay scheme surpluses and deficits are measured as:
-- the fair value of plan assets at the reporting date; less
-- plan liabilities calculated using the projected unit credit
method, discounted to its present value using yields available for
the appropriate government bonds that have maturity dates
appropriate to the terms of the liabilities.
Remeasurements of the net severance pay scheme assets and
liabilities, including actuarial gains and losses on the scheme
liabilities due to changes in assumptions or experience within the
scheme and any differences between the interest income and the
actual return on assets, are recognised in the consolidated
statement of comprehensive income in the period in which they
arise.
Defined contribution severance pay scheme
In 2017 the Group introduced defined contribution plan pursuant
to section 14 to the Severance Pay Law. Under this scheme the Group
pays fixed monthly contributions. Payments to defined contribution
plans are charged as an expense as they fall due.
3 Segment information
Segmental results are reported in a manner consistent with the
internal reporting provided to the chief operating decision maker.
The chief operating decision maker has been identified as the
management team comprising mainly the Chief Executive Officer and
Chief Financial Officer. The operating segments identified are:
* B2C (Business to Customer): including Casino and games, Poker, Sport, Bingo; and
* B2B (Business to Business): offering Total Gaming Services
under the Dragonfish trading brand. Dragonfish offers to its
business partners use of technology, software, operations,
E-payments and advanced marketing services, through the provision
of offline/online marketing, management of affiliates, search
engine optimisation (SEO), customer relationship management (CRM)
and business analytics.
There has been no aggregation of these two operating segments
for reporting purposes. The management team continues to assess the
performance of operating segments based on revenue and segment
profit, being revenue net of chargebacks, payment service
providers' commissions, gaming duties, royalties payable to third
parties, selling and marketing expenses.
B2C B2B Consolidated
---------- -----------------
Casino Poker Sport Bingo Total
B2C
--------- -------- ------- ------- ------- ---------- -----------------
2018 US $ million
Segment revenue before
VAT accrual 317.6 49.0 80.3 32.4 479.3 50.6(1) 529.9
VAT accrual release - - - - 10.7 - 10.7
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
Segment revenue 490.0 50.6 540.6
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
Segment result(2) 218.7 25.4 244.1
Unallocated corporate
expenses(3) (155.5)
Exceptional items 11.1
Operating profit 99.7
Finance income 0.6
Finance expenses (0.7)
Gain from remeasurement
of previously held equity
interest in joint ventures 9.3
Share of post-tax loss
of equity accounted joint
ventures and associates (0.2)
Taxation (13.9)
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
Profit after tax for
the year 94.8
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
Adjusted profit after
tax for the year(4) 72.8
Assets
Unallocated corporate
assets 380.6
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
Total assets 380.6
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
Liabilities
Segment liabilities 55.5 1.6 57.1
Unallocated corporate
liabilities 163.2
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
Total liabilities 220.3
---------------------------- --------- -------- ------- ------- ------- ---------- -----------------
--
(1) Revenue recognised in accordance with IFRS 15 - Revenue from
contracts with customers.
(2) Revenue net of chargebacks, payment service providers'
commissions, gaming duties, royalties payable to third parties and
selling and marketing expenses.
(3) Including staff costs, corporate professional expenses,
other administrative expenses, depreciation, amortisation and share
benefit charges.
(4) As defined in note 9.
3 Segment information (continued)
B2C B2B Consolidated
---- ------------
Casino Poker Sport Bingo Total
B2C
------ ----- ----- ----- ----- ---- ------------
2017 US $ million US $ million
-------------------------- ------------------
Segment revenue 293.9 77.9 75.5 39.3 486.6 55.2 541.8
------------------------------- ------ ----- ----- ----- ----- ---- ------------
Segment result(1) 213.7 22.3 236.0
Unallocated corporate
expenses(2) (163.1)
Exceptional items (50.8)
Operating profit 22.1
Finance income 0.6
Finance expenses (3.7)
Share of post-tax loss
of equity accounted
joint ventures and associates (0.2)
Taxation (6.2)
------------------------------- ------ ----- ----- ----- ----- ---- ------------
Profit after tax for
the year 12.6
------------------------------- ------ ----- ----- ----- ----- ---- ------------
Adjusted profit after
tax for the year(3) 72.1
------------------------------- ------ ----- ----- ----- ----- ---- ------------
Assets
Unallocated corporate
assets
------------------------------- ------ ----- ----- ----- ----- ---- ------------
Total assets 396.2
------------------------------- ------ ----- ----- ----- ----- ---- ------------
396.2
Liabilities
Segment liabilities 67.1 4.6 71.7
Unallocated corporate
liabilities 211.3
------------------------------- ------ ----- ----- ----- ----- ---- ------------
Total liabilities 283.0
------------------------------- ------ ----- ----- ----- ----- ---- ------------
(1) Revenue net of chargebacks, payment service providers'
commissions, gaming duties, royalties payable to third parties and
selling and marketing expenses.
(2) Including staff costs, corporate professional expenses,
other administrative expenses, depreciation, amortisation and share
benefit charges.
(3) As defined in note 9.
Other than where amounts are allocated specifically to the B2C
and B2B segments above, the expenses, assets and liabilities relate
jointly to all segments. These amounts are not discretely analysed
between the two operating segments as any allocation would be
arbitrary.
3 Segment information (continued)
Geographical information
The Group's performance can also be reviewed by considering the
geographical markets and geographical locations within which the
Group operates. This information is outlined below:
Revenue by geographical market (based on location of
customer)
2018 2017
US $ million US $ million
EMEA (excluding the UK and Spain)(1) 228.9 213.6
UK 170.6 203.1
Spain 68.0 63.1
Americas 48.1 46.2
Rest of world 14.3 15.8
------------------------------------- ------------ ------------
Revenue before VAT accrual release 529.9 541.8
------------------------------------- ------------ ------------
VAT accrual release 10.7 -
------------------------------------- ------------ ------------
Total revenue 540.6 541.8
------------------------------------- ------------ ------------
(1) During the period the Group identified that the Europe Other
Geographical segment used in 2017 financial statements should in
fact be referred to as Europe, the Middle East and Africa (EMEA).
Non-European revenue included in the segment during 2018 amount to
US$45.7 million (2017: US$35.3 million).
Non-current assets by geographical location
Carrying amount of non-current
assets by location
2018 2017
US $ million US $ million
----------------------------------------------------- --------------- ---------------
Gibraltar 135.6 138.8
Rest of world 77.6 32.1
------------------------------------------------------ --------------- ---------------
Total non-current assets by geographical location(1) 213.2 170.9
------------------------------------------------------ --------------- ---------------
(1) Excludes deferred tax assets of US$1.4 million (2017: US$1.5 million)
4 Operating profit
2018 2017
Note US $ million US $ million
Operating profit is stated after charging:
Staff costs (including Executive Directors) 6 95.7 104.2
Gaming duties 69.9 75.2
Selling and marketing expenses 155.0 162.5
Exceptional items 5 (11.1) 50.8
Fees payable to EY Limited, Ernst & Young
LLP and its affiliates:
Statutory audit of the consolidated financial
statements 0.7 0.4
Other assurance services - 0.1
Depreciation (within operating expenses) 13 5.3 5.7
Amortisation (within operating expenses) 12 15.0 13.6
Chargebacks 2.8 2.7
Payment of service providers' commissions 23.2 23.4
--------------------------------------------------- ---- -------------------- ------------
5 Exceptional items
The Group classifies certain items of income and expense as
exceptional, as the Group considers that it allows for a further
understanding of the underlying financial performance of the Group.
The Group considers any non-recurring items of income and expense
for classification as exceptional by virtue of their nature and
size.
2018 2017
US $ million US $ million
Historical VAT (22.4) 45.3
Provision - regulatory matters 10.4 -
Exceptional legal and professional costs 0.9 -
UKGC - payments in lieu of a fine - 5.5
Total exceptional items(1) (11.1) 50.8
------------------------------------------ ------------ ------------
(1) Tax effect of the exceptional items is US$0.3 million credit
(2017: US$1.3 million tax charge)
Historical VAT
During 2017, the Group recorded a provision for exceptional
items of US$45.3 million in respect of historical value added tax
relating to the provision of gaming services in Germany prior to
2015. During 2018, following receipt of tax assessments from the
Tax Authorities in Germany, the Group paid US$24.6 million on
account of this provision and released US$22.4 million of the
provision as described in note 19 below.
Provision - regulatory matters
During the year, the Group recorded a provision of US$10.4
million (2017: nil) in respect of regulatory matters related to
legacy customers' activity in prior periods. This amount represents
management's best estimate of probable cash outflows related to
these matters, which are closely monitored by the Group. See also
note 19.
Exceptional legal and professional costs
During the year, the Group incurred legal and professional costs
of US$0.9 million (2017: nil) associated with M&A activity.
UKGC - payments in lieu of a fine
During 2017 the UK Gambling Commission (UKGC) conducted a review
of the manner in which the Group has carried on its licensed
activities in the United Kingdom.
The Group worked cooperatively with the UKGC throughout its
review and took actions to address the concerns raised therein and
entered into a voluntary regulatory settlement involving a payment
in lieu of fine of US$5.5 million. In respect of this settlement,
the Group recorded exceptional items in 2017 consolidated income
statement of US$5.5 million. The payment was made on 26 October
2017.
6 Employee benefits
Staff costs, including Executive Directors' remuneration,
comprises the following elements:
2018 2017
US $ million US $ million
-------------------------------------------------- ------------ ------------
Wages and salaries 94.6 98.5
Social security 4.9 5.5
Employee benefits and severance pay scheme
costs 8.0 9.1
--------------------------------------------------- ------------ --------------
107.5 113.1
Staff costs capitalised in respect of internally
generated intangible assets (11.8) (8.9)
--------------------------------------------------- ------------ --------------
95.7 104.2
-------------------------------------------------- ------------ --------------
In the consolidated income statement total staff costs,
excluding share benefit charges of US$8.9 million (2017: US$8.5
million), are included within the following expenditure
categories:
2018 2017
US $ million US $ million
----------------------------------- ------------ ------------
Operating expenses 51.9 56.3
Research and development expenses 25.6 29.1
Administrative expenses 18.2 18.8
------------------------------------ ------------ --------------
95.7 104.2
----------------------------------- ------------ --------------
The average number of employees by category was as follows:
2018 2017
Number Number
-------------------------- ------ ------
Operations 805 838
Research and development 388 383
Administration 127 129
--------------------------- ------ --------
1,320 1,350
-------------------------- ------ --------
At 31 December 2018 the Group employed 1,364 (2017: 1,310)
staff.
At 31 December 2018 the Group used the services of 210 chat
moderators (2017: 229) and 82 contractors (2017: 61).
Severance pay scheme - Israel
The Group has defined contribution plan pursuant to section 14
to the Severance Pay Law under which the Group pays fixed
contributions and will have no legal or constructive obligation to
pay further contributions if the fund does not hold sufficient
amounts to pay all employee benefits relating to employee service
at the date of their departure. The Group recognised an expense in
respect of contribution to the defined contribution plan during the
year of US$0.8 million (2017: US$0.3 million).
The Group's employees in Israel, which are not subject to
section 14 to the Severance Pay Law, are eligible to receive
certain benefits from the Group in specific circumstances on
leaving the Group. As such the Group operates a defined benefit
severance pay plan which requires contributions to be made to
separately administered funds. The funds are held by an independent
third party company.
The current service cost and the present value of the defined
benefit obligation are measured using the projected unit credit
method. Under this schedule, the Company contributes on a monthly
basis at the rate of 8.3% per cent of the aggregate of members'
salaries.
The disclosures set out below are based on calculations carried
out as at 31 December 2018 by a qualified independent actuary.
6 Employee benefits (continued)
The following table summarises the employee benefits figures as
included in the consolidated financial statements:
2018 2017
US $ million US $ million
-------------------------------------------------- ------------ ------------
Included in the balance sheet:
Severance pay scheme liability (within trade
and other payables) 2.2 3.3
Included in the income statement:
Current service costs (within operating expenses) 1.6 2.0
Current service costs (within research and
development) 1.5 1.8
Current service costs (within administrative
expenses) 0.7 0.8
Included in the statement of comprehensive
income:
Remeasurement of severance pay scheme liability (1.1) 1.4
--------------------------------------------------- ------------ ------------
Movement in severance pay scheme liability:
2018 2017
Severance pay scheme assets US $ million US $ million
---------------------------------------------- ------------ ------------
At beginning of year 22.5 18.8
Interest income 0.8 0.9
Contributions by the Group 3.6 4.3
Benefits paid (3.2) (3.8)
Return on assets less interest income already
recorded (0.2) 0.2
Exchange differences (1.6) 2.1
----------------------------------------------- ------------ ------------
At end of year 21.9 22.5
----------------------------------------------- ------------ ------------
2018 2017
Severance pay plan liabilities US $ million US $ million
--------------------------------------------------- ------------ ------------
At beginning of year 25.8 20.4
Interest expense 0.9 0.9
Current service costs 3.8 4.6
Benefits paid (3.2) (3.9)
Actuarial gain on past experience (0.2) 0.3
Actuarial loss on changes in financial assumptions (1.2) 1.2
Exchange differences (1.8) 2.3
---------------------------------------------------- ------------ ------------
At end of year 24.1 25.8
---------------------------------------------------- ------------ ------------
As at 31 December 2018 the net accounting deficit of the defined
benefit severance pay plan was US$2.2 million (2017: US$3.3
million). The Scheme is backed by substantial assets amounting to
US$21.9 million at 31 December 2018 (2017: US$22.5 million). The
net accounting deficit of defined benefit severance plan is a
result of two elements:
-- Potential liability to pay further contributions to employees
who will be made redundant, if the fund does not hold sufficient
assets to pay all benefits relating to employee service at the date
of their departure.
-- Volatility of Israeli government bond rates may have
substantial impact in absolute terms on the net liability. A
decrease in the discount rate by 0.25% per annum (i.e. 4.46% to
4.21%) would increase the plan liabilities by US$0.5 million (2017:
US$0.6 million).
The impact of the severance deficit on the level of
distributable reserves is monitored on an on-going basis.
Monitoring enables planning for any potential adverse volatility
and helps the Group to assess the likely impact on distributable
reserves.
Employees can determine individually into which type of
investment their share of the plan assets are invested and,
therefore the Group is unable to accurately disclose the
proportions of the plan assets invested in each class of asset.
The expected contribution for 2019 is US$3.8 million.
The main actuarial assumptions used in determining the fair
value of the Group's severance pay plan are shown below:
2018 2017
% %
---------------------------------------------- ---- ----
Discount rate (nominal) 4.46 3.87
Estimated increase in employee benefits costs 5.14 5.14
Voluntary termination rate 75 75
Inflation rates based on Israeli bonds 1.52 1.55
----------------------------------------------- ---- ----
Sensitivity of balance sheet at 31 December 2018
The results of the calculations are sensitive to the assumptions
used. The balance sheet position revealed by IAS 19 calculations
must be expected to be volatile, principally because the market
value of assets (with significant exposure to equities) is being
compared with a liability assessment derived from corporate bond
yields.
The table below shows the sensitivity of the IAS 19 balance
sheet position to small changes in some of the assumptions. Where
one assumption has been changed all the other assumptions are kept
as disclosed above.
Resulted (surplus)/deficit Change from
disclosed
US $ million US $ million
Discount rate less 0.25% (2.7) (0.5)
Estimated increase in employee benefits costs
plus 1% (3.9) (1.7)
Voluntary termination rate decrease 5% (2.3) (0.1)
Inflation rates up 0.25% (1.9) 0.3
----------------------------------------------- -------------------------- --------------
7 Finance income and finance expenses
Finance income:
2018 2017
US $ million US $ million
---------------- ------------ ------------
Interest income 0.6 0.6
Finance income 0.6 0.6
----------------- ------------ ------------
Finance expenses:
2018 2017
US $ million US $ million
------------------------ ------------ ------------
Foreign exchange losses 0.7 3.7
------------------------- ------------ ------------
Finance expenses 0.7 3.7
------------------------- ------------ ------------
8 Taxation
Corporate taxes
2018 2017
US $ million US $ million
-------------------------------------------------- ------------ ------------
Current taxation
Gibraltar taxation 2.2 0.2
Other jurisdictions taxation 11.9 8.1
Adjustments in respect of prior years (0.2) 0.1
--------------------------------------------------- ------------ ------------
13.9 8.4
Deferred taxation
Origination and reversal of temporary differences - (2.2)
--------------------------------------------------- ------------ ------------
Taxation expense 13.9 6.2
--------------------------------------------------- ------------ ------------
The taxation expense for the year differs from the standard
Gibraltar rate of tax. The differences are explained below:
2018 2017
US $ million US $ million
------------------------------------------------------ ------------ ------------
Profit before taxation 108.7 18.8
Standard tax rate in Gibraltar (2018: 10%,
2017: 10%) 10.9 1.9
Higher effective tax rate on other jurisdictions 4.1 0.8
Tax on dividend distribution from other jurisdictions 5.5 5.0
Deferred tax on intragroup transfer - (1.9)
Expenses not allowed for taxation 1.8 1.3
Capital allowances in excess of depreciation (0.8) (0.5)
Non taxable revaluation of equity interest (0.9) -
Non-taxable income (6.5) (0.5)
Adjustments to prior years' tax charges (0.2) 0.1
------------------------------------------------------- ------------ ------------
Total tax charge for the year 13.9 6.2
------------------------------------------------------- ------------ ------------
Current tax is calculated with reference to the profit of the
Company and its subsidiaries in their respective countries of
operation. Set out below are details in respect of the significant
jurisdictions where the Group operates and the factors that
influenced the current and deferred taxation in those
jurisdictions:
Gibraltar
Gibraltar companies are subject to a corporate tax rate of 10%.
Gibraltar corporate tax expenses for the year are significantly
higher compared to 2017, as a result of higher profit before tax,
partially derived from the release of provision for historical VAT
recorded in 2017, as described in note 5.
Israel
The domestic corporate tax rate in Israel in 2018 is 23% (2017:
24%). The Company's Israeli subsidiary concluded an assessment
agreement with respect to all tax years up to and including 2013
and entered into certain transfer pricing agreements with the
Israeli Income Tax Commissioner as regards 2014-2015.
UK
The Group's subsidiary in the UK is subject to a corporate tax
rate of 19% (2017: 19.25%). In addition to the previously enacted
reduction in the UK corporation tax rate to 19% from April 2017,
the UK government announced and substantively enacted a further
reduction to 17% from April 2020.
Romania
The Group's subsidiary in Romania is subject to a corporate tax
rate of 16% (2017: 16%).
US
The Group's subsidiaries in US are subject to federal corporate
tax rate of 21% (2017: 34%), and state (New Jersey) tax rate of 9%
(2017: 9%).
Sensitivity analysis
The key operating companies in the group are incorporated,
managed and controlled and tax resident in Gibraltar. The Group's
subsidiaries are located in different jurisdictions and these
subsidiaries are taxed locally on their respective profits which
are determined with reference to transfer pricing agreements.
Effective tax rate increased by 1% would result in an increase in
the tax charge (and associated provision) of US$1.1 million (2017:
US$0.2 million).
9 Earnings per share
Basic earnings per share
Basic earnings per share (EPS) has been calculated by dividing
the profit attributable to ordinary shareholders by the weighted
average number of shares in issue and outstanding during the year
during the year.
Diluted earnings per share
The weighted average number of shares for diluted earnings per
share takes into account all potentially dilutive equity
instruments granted, which are not included in the number of shares
for basic earnings per share. Certain equity instruments have been
excluded from the calculation of diluted EPS as their conditions of
being issued were not deemed to satisfy the performance conditions
at the end of the period or it will not be advantageous for holders
to exercise them into shares, in the case of options. The number of
equity instruments included in the diluted EPS calculation consist
of 5,759,968 Ordinary Shares (2017: 8,840,298) and 18,481
market-value options (2017: 49,353).
The number of equity instruments excluded from the diluted EPS
calculation is 2,078,991 (2017: 1,431,143).
2018 2017
--------------------------------------------- ----------- -----------
Profit for the period attributable to equity
holders of the parent (US$ million) 94.8 12.6
Weighted average number of Ordinary Shares
in issue 361,122,725 359,260,003
Effect of dilutive Ordinary Shares and Share
options 5,778,449 8,889,651
Weighted average number of dilutive Ordinary
Shares 366,901,174 368,149,654
---------------------------------------------- ----------- -----------
Basic earnings per share 26.3c 3.5c
Diluted earnings per share 25.8c 3.4c
---------------------------------------------- ----------- -----------
Adjusted earnings per share
The Directors believe that EPS excluding VAT accrual release,
exceptional items, share benefit charges, gain from remeasurement
of previously held equity interest in joint ventures and share of
post- tax loss of equity accounted joint ventures and associates
("Adjusted EPS") allows for a further understanding of the
underlying performance of the business and assists in providing a
clearer view of the performance of the Group.
Reconciliation of profit to profit excluding exceptional items,
share benefit charges, gain from remeasurement of previously held
equity interest in joint ventures and share of post-tax loss of
equity accounted joint ventures and associates ("Adjusted
profit"):
2018 2017
US $ million US $ million
--------------------------------------------- ------------ ------------
Profit for the period attributable to equity
holders of the parent 94.8 12.6
VAT accrual release (10.7) -
Exceptional items (see note 5) (11.1) 50.8
Share benefit charges (see note 22) 8.9 8.5
Gain from remeasurement of previously held
equity interest in joint ventures (9.3) -
Share of post-tax loss of equity accounted
associates (see note 14) 0.2 0.2
Adjusted profit 72.8 72.1
---------------------------------------------- ------------ ------------
Weighted average number of Ordinary Shares
in issue 361,122,725 359,260,003
Weighted average number of dilutive Ordinary
Shares 366,901,174 368,149,654
---------------------------------------------- ------------ ------------
Adjusted basic earnings per share 20.2c 20.1c
Adjusted diluted earnings per share 19.8c 19.6c
---------------------------------------------- ------------ ------------
10 Dividends
2018 2017
US $ million US $ million
--------------- ------------ ------------
Dividends paid 56.6 70.5
---------------- ------------ ------------
An interim dividend of 4.2c per share was paid on 31 October
2018 (US$15.2 million). The Board of Directors will recommend to
the shareholders a final dividend in respect of the year ended 31
December 2018 comprising 6.0c per share, and an additional one-off
dividend of 2.0c per share, both of which will be recognised in the
2019 financial statements once approved.
In 2017 an interim dividend of 4.0c per share was paid on 11
October 2017 (US$14.4 million) and a final dividend of 5.9c per
share plus an additional one-off 5.6c per share were paid on 11 May
2018 (US$41.4 million).
11 Business combinations
Acquisition of additional interest in AAPN Holdings LLC
On 10 December 2018, the Group acquired an additional 53%
interest in the voting shares of AAPN Holdings LLC (AAPN),
increasing its ownership interest to 100% for a cash consideration
of US$28.5 million. US$10.0 million was paid on the day of
acquisition and additional US$18.5 million to be paid during the
first quarter of 2019 included in other payables as at 31 December
2018, see note 19.
The acquisition represented an important strategic milestone
that will facilitate the Group's future growth strategy in the US
by giving 888 additional operational, technological and commercial
flexibility to deliver on multiple potential growth
opportunities.
The Group remeasured its previously held 47% equity interest in
AAPN at its acquisition-date fair value and recognised US$9.3
million gain in the consolidated income statement. The goodwill
recognised of US$30.9 million represents the potential revenues
from the US market as the states regulate online gambling. No
goodwill is expected to be deductible for tax purposes. The fair
value of the identifiable assets and liabilities of AAPN as at the
date of acquisition were:
Fair Value recognised
on acquisition
US $ million
------------------------------------- ---------------------
Assets
Other intangible assets 9.9
Cash and cash equivalents 0.8
Trade and other receivables 0.3
Total assets 11.0
----------------------------------------- ---------------------
Liabilities
Trade and other payables 1.8
Deferred tax liability 2.3
Total Liabilities 4.1
----------------------------------------- ---------------------
Total identifiable net assets
at fair value 6.9
----------------------------------------- ---------------------
Goodwill arising on acquisition 30.9
----------------------------------------- ---------------------
Purchase consideration transferred 28.5
----------------------------------------- ---------------------
Gain from remeasurement of
previously held equity interest
in joint ventures 9.3
----------------------------------------- ---------------------
Fair value of purchase consideration 37.8
----------------------------------------- ---------------------
Cash flow on
acquisition
US $ million
----------------------------- -------------
Net cash acquired with the
subsidiary 0.8
--------------------------------- -------------
Cash paid (10.0)
--------------------------------- -------------
Net cash flow on acquisition (9.2)
--------------------------------- -------------
12 Goodwill and other intangible assets
Internally
Acquired generated
intangible intangible
Goodwill assets assets Total
US $ million US $ million US $ million US $ million
------------------------------ ------------ ------------ ------------ ------------
Cost or valuation
At 1 January 2017 146.1 18.8 69.4 234.3
Additions - 3.6 11.2 14.8
Disposals - (0.8) - (0.8)
At 31 December 2017 146.1 21.6 80.6 248.3
------------------------------- ------------ ------------ ------------ ------------
Additions - 2.7 12.0 14.7
Acquisition of a subsidiary
(AAPN buyout) 30.9 9.9 - 40.8
At 31 December 2018 177.0 34.2 92.6 303.8
------------------------------- ------------ ------------ ------------ ------------
Amortisation and impairments:
At 1 January 2017 20.7 14.4 40.6 75.7
Amortisation charge for the
year - 2.6 11.0 13.6
Disposals - (0.8) - (0.8)
At 31 December 2017 20.7 16.2 51.6 88.5
------------------------------- ------------ ------------ ------------ ------------
Amortisation charge for the
year - 3.2 11.8 15.0
At 31 December 2018 20.7 19.4 63.4 103.5
------------------------------- ------------ ------------ ------------ ------------
Carrying amounts
At 31 December 2018 156.3 14.8 29.2 200.3
------------------------------- ------------ ------------ ------------ ------------
At 31 December 2017 125.4 5.4 29.0 159.8
------------------------------- ------------ ------------ ------------ ------------
At 1 January 2017 125.4 4.4 28.8 158.6
------------------------------- ------------ ------------ ------------ ------------
Following a review of fully written down assets, assets no
longer in use with a total cost and accumulated depreciation of nil
were written off in 2018 (2017: US$0.8 million).
Acquisition during the year
Fair Value of acquired intangible assets recognised on
acquisition of AAPN includes licence to operate, trade names and
customer relationships. The estimated remaining useful life of the
acquired intangible assets is 5 years, 5 years and up to 12 years,
respectively.
Internally generated intangible assets
This category of assets includes capitalised development costs
in accordance with IAS 38. The material projects as included within
the carrying amount above include compliance with local regulatory
requirements in certain jurisdictions US$5.6 million (2017: US$6.6
million) and a major upgrade to the gaming systems platform US$23.5
million (2017: $22.4 million). No impairment tests were considered
to be required at 31 December 2018 and the carrying value of
internally generated intangible assets is considered to be
appropriate. At 31 December 2018 there were projects with carrying
value US$4.3 million (2017: US$3.1 million) which were not
completed and therefore not being amortised. All of these projects
are expected to complete and commence amortisation in 2019.
12 Goodwill and other intangible assets (continued)
Analysis of goodwill by cash generating units:
B2C B2B Consolodated
------------------ ----- --------------
Bingo AAPN Other Bingo Total goodwill
----- ---- ----- ----- --------------
US $ million
------------------------------ -----------------------------------------
Carrying value at 31 December
2018 95.4 30.9 0.3 29.7 156.3
Carrying value at 31 December
2017 95.4 - 0.3 29.7 125.4
------------------------------ ----- ---- ----- ----- --------------
Impairment
In accordance with IAS 36 and the Group's stated accounting
policy an impairment test is carried out annually on the carrying
amounts of goodwill and a review for indicators of impairment is
carried out for other non-current assets. Where an impairment test
was carried out, the carrying value is compared to the recoverable
amount of the asset or the cash generating unit. In each case, the
recoverable amount was the value in use of the assets, which was
determined by discounting the future cash flows of the relevant
asset or cash generating unit to their present value.
Goodwill - Bingo B2C and B2B business
Goodwill and intangible assets associated with the Bingo online
business unit arose following the acquisition of the Bingo online
business of Globalcom Limited during 2007 and the acquisition of
the Wink Bingo business in 2009. The income streams generated from
the Bingo online business, comprising the B2C Bingo cash generating
unit and the B2B cash generating unit. In previous years these have
been considered together as the risks and rewards associated with
those income streams are deemed to be sufficiently similar. In 2018
Bingo B2C and Bingo B2B revenue streams were separated following
the decline in Bingo revenue mainly due to the regulatory
challenges facing the UK Bingo market and the termination of
contract with one of the B2B partners which resulted in a decreased
available headroom.
Key assumptions and inputs used
Cash flow projections have been prepared for a five year period,
following which a long- term growth rate has been assumed.
Underlying growth rates, as shown in the table below which applies
for each of B2B and B2C, have been applied to revenue and are based
on past experience, including the results in 2018 and 2017 and
projections of future changes in the UK online bingo gaming market.
B2B contracts that will not be renewed were projected accordingly.
Key assumptions in preparing these cash flow projections include
moderate growth in revenue, a stable level of costs per customer
acquisition, stable exchange rate for GBP/US$ and the expectation
that the Group will continue to operate and be subject to gaming
duties in its core jurisdictions.
The pre-tax discount rate that is considered by the Directors to
be appropriate is the Group's specific Weighted Average Cost of
Capital, adjusted for tax, which is considered to be appropriate
for the online Bingo cash generating units.
GBP/US$
Long-term Operating exchange
Pre-tax Underlying Underlying growth expenses Operating rate used
discount growth growth rate increase expenses in the model
rate rate(2) rate years year years increase for future
applied(1) year 1 2-5 6+ 1-5 year 6+ periods
------------ ----------- ------------ ---------- ---------- ---------- --------------
At 31 December
2018 9% 2% 3% 2% 2% 2% 1.30
At 31 December
2017 9% 3% 1% 2% 1% 2% 1.35
(1) The pre-tax discount rate is recalculated by taking into
account prevailing risk free rates, equity risk premium and company
beta and having regard to external data commenting upon the
Weighted Average Cost of Capital applied to the Group.
(2) The underlying growth rate in 2018 was calculated excluding
the effect of certain B2B contracts which were terminated during
2018 and excluding the full effect of newly acquired Bingo brands.
For further information see note 28. .
The calculation of value in use for Bingo B2C and Bingo B2B
units is most sensitive to the following assumptions:
(i) Revenue growth rates - growth rates are based on past
experience and projections of future changes in the online gaming
market. The continued highly competitive UK Bingo market as well as
the proactive steps 888 has taken to address the tighter regulatory
environment in the UK adversely impacted 2018 revenue growth. A
reduction of 1.3% and 1.9% in the long-term growth rates for each
of B2B and B2C would result in in zero headroom for Bingo B2B and
Bingo B2C, respectively.
(ii) Cash flow forecast - cash flow projections may be affected
by changes in the UK gaming market including possible economic
slowdown as a result of Brexit. A reduction of 10% and 17% in the
cash flow projections for each of B2B and B2C would result in zero
headroom for Bingo B2B and Bingo B2C, respectively.
(iii) Exchange rate - Management recognises that a change in
GBP/US$ currency rate can have a significant impact on available
headroom. A reduction by 2% and 11%in the GBP/US$ currency rates
for each of B2B and B2C would result in zero headroom for Bingo B2B
and Bingo B2C, respectively.
Goodwill - AAPN
The Group recognised goodwill of US$30.9 million following the
acquisition of additional 53% interest in the voting shares of AAPN
during December 2018, increasing the Group's ownership interest to
100%. The recognised goodwill reflects the potentially significant
opportunities in the US to create additional value for the
Group.
Key assumptions and inputs used
The recoverable amount of the AAPN CGU has been determined from
value in use calculations based on cash flow projections from
formally approved budgets. Beyond the forecast period, management
has applied an annual growth rate of 2%. The forecast cashflows are
particularly uncertain as the rate of market growth in the US is
dependent on both the timing of markets opening, as well as their
forecast growth rates and 888's share of those markets. Management
has applied a discount rate to the cashflows which reflect the
additional risks specific to the US online gambling market.
Management analysis shows the value in use is highly sensitive and
reasonably possible changes in the US market size and 888's market
share could result in an impairment of the goodwill.
Acquired intangible assets
Software licences
No impairment tests were considered to be required at 31
December 2018 and the carrying value of licences is considered to
be appropriate.
Other intangible assets
No impairment tests were considered to be required at 31
December 2018 and the carrying value of other intangible assets is
considered to be appropriate.
13 Property, plant and equipment
Office furniture,
equipment and Leasehold
IT equipment motor vehicles improvements Total
US $ million US $ million US $ million US $ million
------------------------- ------------ ----------------- ------------- ------------
Cost
At 1 January 2017 49.9 4.4 15.1 69.4
Additions 4.1 1.2 0.3 5.6
Disposals (9.9) (0.1) (0.2) (10.2)
-------------------------- ------------ ----------------- ------------- ------------
At 31 December 2017 44.1 5.5 15.2 64.8
Additions 6.4 0.6 0.3 7.3
Disposals (3.5) - - (3.5)
-------------------------- ------------ ----------------- ------------- ------------
At 31 December 2018 47.0 6.1 15.5 68.6
-------------------------- ------------ ----------------- ------------- ------------
Accumulated depreciation
At 1 January 2017 43.6 3.3 13.4 60.3
Charge for the year 4.9 0.4 0.4 5.7
Disposals (9.9) (0.1) (0.2) (10.2)
-------------------------- ------------ ----------------- ------------- ------------
At 31 December 2017 38.6 3.6 13.6 55.8
Charge for the year 4.4 0.5 0.4 5.3
Disposals (3.5) - - (3.5)
-------------------------- ------------ ----------------- ------------- ------------
At 31 December 2018 39.5 4.1 14.0 57.6
-------------------------- ------------ ----------------- ------------- ------------
Carrying amounts
At 31 December 2018 7.5 2.0 1.5 11.0
-------------------------- ------------ ----------------- ------------- ------------
At 31 December 2017 5.5 1.9 1.6 9.0
-------------------------- ------------ ----------------- ------------- ------------
At 1 January 2017 6.3 1.1 1.7 9.1
-------------------------- ------------ ----------------- ------------- ------------
Following a review of fully written down assets, assets no
longer in use with a total cost and accumulated depreciation of
US$3.5 million were written off in 2018 (2017: US$10.2
million).
14 Investments
Investments in associate
The following entities meet the definition of an associate and
have been equity accounted in the consolidated financial
statements:
Effective Effective
interest interest
Country of 31 December 31 December
Name Relationship incorporation 2018 2017
------------------- ---------------- ---------------- ------------- -------------
Come2Play Limited Associate Israel 20% 20%
------------------- ---------------- ---------------- ------------- -------------
On 15 April 2015 the Group acquired 20% of the Ordinary Shares
of Come2Play Limited for a cash payment of US$1.5 million. As at 31
December 2018 the Group had investment in associate of US$0.9
million (2017: US$1.1million). Further disclosures have not been
provided as the investment is not material to the Group.
A reconciliation of the movements in the Group's interest in
equity accounted associates is shown below:
US $ million
------------------------------------------- ------------
At 1 January 2017 1.3
Share of post-tax loss of equity accounted
joint ventures and associates (0.2)
------------------------------------------- ------------
At 31 December 2017 1.1
Share of post-tax loss of equity accounted
joint ventures and associates (0.2)
------------------------------------------- ------------
At 31 December 2018 0.9
------------------------------------------- ------------
Investments in US joint ventures
In 2013 the Group entered into a joint venture agreement ("JVA")
with Avenue OLG Entertainment LLC ("Avenue") and other minority
shareholders to form AAPN Holdings LLC ("AAPN"), under which the
Group had a 47% interest in AAPN. AAPN has a 100% owned subsidiary,
AAPN New Jersey LLC ("AAPN NJ"), which has a B2C gaming offering in
New Jersey.
AAPN has been equity accounted for, reflecting the Group's
effective 47% interest in their consolidated results and
assets.
On 10 December 2018 ("AAPN buyout day"), the Group acquired an
additional 53% interest in the voting shares of AAPN Holdings LLC
(AAPN), increasing its ownership interest to 100% for cash
consideration of US$28.5 million. US$10.0 million was paid to the
non-controlling shareholders on the day of acquisition and
additional US$18.5 million to be paid during the first quarter of
2019, included in the other payables as at 31 December 2018.
AAPN assets and liabilities as of 31 December 2018 are included
in the consolidated balance sheet, for further information see note
11.
AAPN results were under the joint venture framework until AAPN
buyout day. Starting 11 December 2018 AAPN results are included in
the consolidated income statement, the impact on 2018 consolidated
income statement is not material.
Group's share of net assets of the joint ventures as of 31
December 2017 are as follows:
Net assets of US joint ventures 2017
US $ million
Non-current assets 2.5
Current assets 7.5
Current liabilities (1.1)
Net assets of joint ventures 8.9
------------------------------------------------- -------------
Assets attributed to class B holders (8.9)
------------------------------------------------- -------------
Net assets of joint ventures attributed to the
Group -
------------------------------------------------ -------------
Group effective interest in joint ventures 47%
------------------------------------------------- -------------
Group share of net assets of joint ventures -
------------------------------------------------- -------------
Group's share of post-tax losses of the joint ventures as are as
follows:
1 Jan 2018
Income statement of US joint ventures - 10 Dec
2018 2017
US $ million US $ million
--------------------------------------------------- ------------- -------------
Revenue 2.7 2.6
Expenses (10.8) (6.1)
--------------------------------------------------- ------------- -------------
Post tax loss of joint ventures (8.1) (3.5)
--------------------------------------------------- ------------- -------------
Expenses attributed to class B holders (2.0) (2.0)
--------------------------------------------------- ------------- -------------
Total post tax loss of joint ventures attributed
to the Group (10.1) (5.5)
--------------------------------------------------- ------------- -------------
Group effective interest in joint ventures 47% 47%
--------------------------------------------------- ------------- -------------
Group share of post tax loss of joint ventures(1) (4.7) (2.6)
--------------------------------------------------- ------------- -------------
(1) The Group's investment in the US joint ventures had reduced
to nil due to the US joint ventures' cumulative losses exceeding
the Group's investment. In 2018 the US joint ventures incurred
further losses and, as a result, the Group's investment remained at
nil. As the Group's investment remained at nil, the Group did not
recognise the losses of US$4.7 million in its consolidated income
statement in 2018 (2017: US$2.6 million). The total amount of
unrecognised loss as of AAPN buyout day is US$13.2 million (2017:
US$8.5 million).
AGN LLC ("AGN"), the entity which contracted with a Las Vegas
casino licensee in connection with the operation of a B2C gaming
offering in Nevada, is 100% owned by the Group. However, the Group
considers that due to the manner in which AGN was operated under
the contractual arrangements in the JVA, it was regarded as a joint
venture. During 2016 AGN surrendered its Nevada licence and ceased
operation and winded down as of 31 December 2017.
Other investments
The Group holds equity instruments designated at fair value
through OCI of US$0.2 million at 31 December 2018 (31 December
2017: US$0.2 million).
15 Deferred taxes
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. The Group's deferred tax assets and liabilities
resulting from temporary differences, some of which are expected to
be settled on a net basis, are as follows:
2018 2017
US $ million US $ million
------------------------------------------------- ------------ ------------
Deferred tax relates to the following:
Accrued severance pay 0.2 0.2
Vacation pay accrual 0.5 0.6
Property, plant and equipment 1.0 1.1
Intangible assets (2.6) (0.4)
-------------------------------------------------- ------------ ------------
(0.9) 1.5
------------------------------------------------- ------------ ------------
Reflected in the statement of financial position
as follows:
Deferred tax assets 1.4 1.5
Deferred tax liabilities (2.3) -
-------------------------------------------------- ------------ ------------
The Group has no tax losses at 31 December 2018 (2017: nil) that
are available indefinitely for offset against future taxable
profits of the companies in which the losses arose.
Deferred tax liabilities of US$2.3 million have been recognised
in respect of the fair value of acquired intangible assets
recognised on acquisition of AAPN.
16 Cash and cash equivalents
2018 2017
US $ million US $ million
------------------------------- ------------ ------------
Cash and short-term deposits 74.4 106.7
Customer funds 57.1 71.7
Restricted short-term deposits 1.5 1.2
-------------------------------- ------------ ------------
133.0 179.6
------------------------------- ------------ ------------
Customer funds represent bank deposits matched by liabilities to
customers and progressive prize pools of an equal value (see note
20). Restricted short-term deposits represent amounts held by banks
primarily to support guarantees in respect of regulated markets
licence requirements.
17 Trade and other receivables
2018 2017
US $ million US $ million
------------------------------------ ------------ ------------
Trade receivables 19.0 27.8
Other receivables 10.3 11.4
Prepayments 3.7 3.9
------------------------------------- ------------ ------------
Current trade and other receivables 33.0 43.1
Non-current prepayments 0.8 0.8
------------------------------------- ------------ ------------
33.8 43.9
------------------------------------ ------------ ------------
The carrying value of trade receivables and other receivables
approximates to their fair value as the credit risk has been
addressed as part of impairment provisioning and, due to the
short-term nature of the receivables they are not subject to
ongoing fluctuations in market rates. Note 25 provides credit risk
disclosures on trade and other receivables.
18 Share capital
Share capital comprises the following:
Authorised
31 December 31 December 31 December 31 December
2018 2017 2018 2017
Number Number US $ million US $ million
---------------------------- ------------- ------------- ------------ ------------
Ordinary Shares of GBP0.005
each 1,026,387,500 1,026,387,500 8.1 8.1
----------------------------- ------------- ------------- ------------ ------------
Allotted, called up and fully paid
31 December 31 December 31 December 31 December
2018 2017 2018 2017
Number Number US $ million US $ million
---------------------------- ----------- ----------- ------------ ------------
Ordinary Shares of GBP0.005
each at beginning of year 359,679,561 358,585,958 3.3 3.2
Issue of Ordinary Shares of
GBP0.005 each 4,604,978 1,093,603 - 0.1
----------------------------- ----------- ----------- ------------ ------------
Ordinary Shares of GBP0.005
each at end of year 364,284,539 359,679,561 3.3 3.3
----------------------------- ----------- ----------- ------------ ------------
The narrative below includes details on issue of Ordinary Shares
of GBP0.005 each as part of the Group's employee share option plan
(see note 22) during 2018 and 2017:
During 2018, the Company issued 4,604,978 shares (2017:
1,093,603) out of which 60,182 shares (2017: 155,603) were issued
in respect of employees' exercising market value options giving
rise to an increase in share premium of US$0.1 million (2017:
US$0.2 million).
Shares issued are converted into US$ at the exchange rate
prevailing on the date of issue. The issued and fully paid share
capital of the Group amounts to US$3.3 million (2017: US$3.3
million) and is split into 364,284,539 (2017: 359,679,561) Ordinary
Shares. The share capital in UK sterling (GBP) is GBP1.8 million
(2017: GBP1.8 million).
19 Trade, other payables and provisions
2018 2017
US $ million US $ million
--------------------------------------- ------------ ------------
Trade payables 30.8 38.4
Accrued expenses(1) 63.6 87.3
Liability in respect of AAPN buyout(2) 18.5 -
Other payables 23.1 31.2
---------------------------------------- ------------ ------------
Total trade and other payables 136.0 156.9
Provisions(3) 11.3 47.0
147.3 203.9
--------------------------------------- ------------ ------------
(1) Following the receipt of tax assessments from the German tax
authorities position in respect of 2015-2017 period the Group
released US$10.7 million of accrual liability in respect of VAT due
relating to this period.
(2) The Group acquired additional 53% interest in the voting
shares of AAPN for cash consideration of US$28.5 million. US$10.0
million was paid on the day of acquisition and additional US$18.5
million to be paid during the first quarter of 2019.
(3) Includes mainly provisions in respect of regulatory matters
related to legacy customers' activity in prior periods (2017:
US$47.0 million in respect of historical value added tax relating
to the provision of gaming services in Germany prior to 2015).
The carrying value of trade and other payables approximates to
their fair value given the short maturity date of these
balances.
Provisions
During the year, the Group recorded a provision of US$10.4
million in respect of regulatory matters related to legacy
customers' activity in prior periods. This amount represents
management's best estimate of probable cash outflows related to
these matters, which are closely monitored by the Group.
During 2017, the Group recorded a provision for exceptional
items of US$45.3 million in respect of historical value added tax
relating to the provision of gaming services in Germany prior to
2015. During 2018, following receipt of tax assessments from the
Tax Authorities in Germany, the Group paid US$24.6 million on
account of this provision and released US$22.4 million of the
provision, as described in note 5.
Movement in the provision during the year is as follows:
Total
US $ million
----------------------------------------------- ------------
At 1 January 2018 47.0
Arising during the year 10.4
Paid during the year (24.6)
Released to income statement during the period (22.4)
Exchange rate 0.9
----------------------------------------------- ------------
At 31 December 2018 11.3
----------------------------------------------- ------------
Current 11.3
Non-current -
----------------------------------------------- ------------
20 Liabilities to customers and progressive prize pools
2018 2017
US $ million US $ million
------------------------- ------------ ------------
Liabilities to customers 49.5 65.1
Progressive prize pools 7.6 6.6
-------------------------- ------------ ------------
57.1 71.7
------------------------- ------------ ------------
21 Investments in significant subsidiaries
The consolidated financial statements include the following
principal subsidiaries of 888 Holdings plc:
Percentage Percentage
of equity of equity
Country of interest interest
Name incorporation 2018 2017 Nature of business
% %
----------------------- --------------- ---------- ---------- -----------------------------------
VHL Financing Limited Gibraltar 100 100 Holding company
VHL Financing (Malta)
Limited Malta 100 100 Holding company
Cassava Enterprises Holder of gaming licences in
(Gibraltar) Limited Gibraltar 100 100 Gibraltar
Holder of gaming licences in
Virtual Digital Gibraltar for European markets
Services Limited Gibraltar 100 100 which are not locally regulated
Brigend Limited Gibraltar 100 100 Bingo business operator
B2B business operator (except
Fordart Limited Gibraltar 100 100 Bingo)
888 UK Limited Gibraltar 100 100 Holder of UK remote gaming licence
Virtual Marketing
Services Italia Holder of Italian online gaming
Limited Gibraltar 100 100 licence
888 Spain Public Holder of Spanish online gaming
Limited Company S Gibraltar 100 100 licence
Holder of Interactive Gaming
Service Provider and Manufacturer
888 US Limited Gibraltar 100 100 licence in the state of Nevada
Holder of Transactional Waiver
pending application for full
licensing in the state of New
888 Atlantic Limited Gibraltar 100 100 Jersey
Holder of Gaming Vendor License
888 Liberty Limited Gibraltar 100 100 in the state of Delaware
Holder of Romanian online gaming
888 Romania Limited S Gibraltar 100 100 licence
Holder of Irish online betting
888 (Ireland) Limited Gibraltar 100 100 licence
Holder of Danish online gaming
888 Denmark Limited Gibraltar 100 100 licence
Holder of Portuguese online gaming
888 Portugal Limited Malta 100 100 licence
Holder of Swedish online gaming
888 Sweden Limited Malta 100 100 licence
Virtual Emerging
Entertainment Limited Gibraltar 100 100 Trademark licensor
Gisland Limited Gibraltar 100 100 Payment transmission
Virtual IP Assets
Limited BVI 100 100 Holder of group IP assets
Virtual Marketing
Services (Gibraltar)
Limited Gibraltar 100 100 Marketing acquisition
Virtual Marketing
Services (UK) Limited UK 100 100 Advertising services
888 US Services New Jersey, Provider of US-based services
Inc. USA 100 100 for US operations
Dixie Operations
Limited Antigua 100 100 Customer call center operator
Research, development and marketing
Random Logic Limited Israel 100 100 support
Random Logic Ventures
Limited Israel 100 100 Investment holding company
Sparkware Technologies
SRL Romania 100 100 Software development
Virtual Internet Data hosting and development
Services Limited Gibraltar 100 100 services
Virtual Internet
Services (Ireland)
Limited Ireland 100 100 Data hosting services
Virtual Share Services Administration of employee equity
Limited Gibraltar 100 100 schemes
Delaware,
888 US Inc. USA 100 100 Holder of AAPN
888 US Holdings Delaware,
Inc. USA 100 100 Holder of AAPN
AAPN Holdings, Delaware, Holding company (Joint venture
LLC USA 100 47 in 2017)
Holder of Casino Service Industry
AAPN New Jersey New Jersey, Enterprise licence in New Jersey
LLC USA 100 47 (Joint venture in 2017)
22 Share benefit charges
Equity-settled share benefit charges
As at 31 December 2018 the Group has equity-settled employee
shares and share options granted under two equity-settled employee
share incentive plans - the 888 All-Employee Share Plan ("AEP"),
which expired according to its terms in August 2015, and the 888
Long-Term Incentive Plan 2015 ("LTIP") which was adopted at the
Extraordinary General Meeting on 29 September 2015. The 888
Long-Term Incentive Plan 2015 is open to employees (including
Executive Directors) and full-time consultants of the Group, at the
discretion of the Remuneration Committee. Awards under this scheme
will vest in instalments over a fixed period of at least three
years subject to the relevant individuals remaining in service.
Certain of these awards are subject to additional performance
conditions imposed by the Remuneration Committee at the dates of
grant, further details of which are given in the Directors'
Remuneration Report set out in the 2018 Annual Report.
In addition, on 8 May 2017, the Board adopted a Deferred Share
Bonus Plan ("DSBP") in order to allow the Company to comply with
the requirement contained in its Remuneration Policy pursuant to
which any annual bonus payment made to an Executive Director in
excess of 100% of such Executive Director's annual salary is
deferred into equity awards of the Company in the form of nil cost
options or share awards.
Details of equity settled shares and share options granted as
part of the AEP, the LTIP and the DSBP are set out below. Shares
are granted to employees for nil consideration.
Share options granted
2018 2017
Weighted average Weighted average
exercise price Number exercise price Number
------------------------------- ----------------- -------- ---------------- ---------
Outstanding at the beginning
of the year GBP1.26 97,968 GBP1.27 259,981
Market value options lapsed
during the year GBP1.08 (4,694) GBP1.15 (6,410)
Market value options exercised
during the year GBP1.38 (60,182) GBP1.28 (155,603)
Outstanding at the end of
the year(1,2,3) GBP1.08 33,092 GBP1.26 97,968
-------------------------------- ---------------- -------- ---------------- ---------
(1) Of the total number of options outstanding at 31 December
2018, 33,092 had vested and were exercisable (2017: 97,968).
(2) The range of exercise prices for options outstanding at 31
December 2018 is GBP1.02-GBP1.11 (2017: GBP1.02-GBP1.50).
(3) The weighted average remaining contractual life at the
year-end was 0.79 years (2017: 1.22 years)
Ordinary Shares granted (without performance conditions)
2018 2017
Number Number
----------------------------------------- ----------- ----------
Outstanding at the beginning of the year 4,083,372 4,240,266
Shares granted during the year 910,159 35,652
Lapsed future vesting shares (141,397) (169,213)
Shares issued during the year (1,273,858) (23,333)
------------------------------------------ ----------- ----------
Outstanding at the end of the year 3,578,276 4,083,372
Averaged remaining life until vesting 0.59 years 1.09 years
------------------------------------------ ----------- ----------
22 Share benefit charges (Cont.)
Deferred Share Bonus Plan
2018 2017
Number Number
----------------------------------------- ---------- ----------
Outstanding at the beginning of the year 211,691 -
Shares granted during the year 197,074 211,691
Lapsed future vesting shares - -
Shares exercised during the year (70,564) -
Outstanding at the end of the year 338,201 211,691
Averaged remaining life until vesting 1.02 years 1.22 years
------------------------------------------ ---------- ----------
The aforementioned grants under the DSBP were approved by the
Board as part of the annual bonus award to the Executive Directors
for 2016-2018, pursuant to which an amount equal to 100% of salary
was granted in cash, with the additional 50% of salary deferred
into shares of the Company. These grants were made on 21 March 2018
to the CEO (117,965 Shares) and CFO (79,109 Shares) and 28 June
2017 to the CEO (130,914 Shares) and CFO (80,777 Shares), with the
shares vesting in equal tranches over three years. Ordinary Shares
granted for future vesting are valued at the share price at grant
date, which the Group considers approximates to the fair value. On
28 March 2018, the Group purchased 197,074 shares and on 29-30 June
2017 the Group purchased 211,691 shares on the open market at an
average price of 277.9c per share and 255.31c per share,
respectively, all of which were recognised as treasury shares as of
31 December 2018.
Ordinary Shares granted (subject to performance conditions)
2018 2017
Number Number
----------------------------------------- ----------- ----------
Outstanding at the beginning of the year 5,991,889 5,573,612
Shares granted during the year 1,372,015 1,332,944
Lapsed future vesting shares - -
Shares issued during the year (3,221,775) (914,667)
------------------------------------------ ----------- ----------
Outstanding at the end of the year 4,142,129 5,991,889
Averaged remaining life until vesting 1.25 years 1.17 years
------------------------------------------ ----------- ----------
Of these grants, 50% of each are dependent on an EPS growth
target, and 50% on total shareholder return (TSR) compared to a
peer group of companies. Further details of performance conditions
that have to be satisfied on these awards are set out in the
Directors' remuneration report set out in the 2018 Annual Report.
The EPS growth target is taken into account when determining the
number of shares expected to vest at each reporting date, and the
TSR target is taken into account when calculating the fair value of
the share grant.
Valuation information - shares granted under TSR condition:
Shares granted during the year: 2018 2017
----------------------------------------- ----------- -----------
Share pricing model used Monte Carlo Monte Carlo
Determined fair value GBP1.72 GBP1.72
Number of shares granted 686,008 666,472
Average risk-free interest rate 0.98% 0.16%
Average standard deviation 26% 31%
Average standard deviation of peer group 29% 29%
------------------------------------------ ----------- -----------
22 Share benefit charges (Cont.)
Valuation information - shares granted
2018 2017
Without performance With performance Without performance With performance
conditions conditions conditions conditions
Weighted average share price
at grant date GBP2.76 GBP2.70 GBP2.73 GBP2.73
Weighted average share price
at issue of shares GBP2.29 GBP2.30 GBP2.65 GBP2.71
---------------------------- ------------------- ---------------- ------------------- ----------------
Ordinary Shares granted for future vesting with EPS growth
performance conditions are valued at the share price at grant date,
which the Group considers approximates to the fair value. The
restrictions on the shares during the vesting period, primarily
relating to non-receipt of dividends, are considered to have an
immaterial effect on the share option charge.
In accordance with IFRS 2 a charge to the consolidated income
statement in respect of any shares or options granted under the
above schemes is recognised and spread over the vesting period of
the shares or options based on the fair value of the shares or
options at the grant date, adjusted for changes in vesting
conditions at each balance sheet date. These charges have no cash
impact.
Share benefit charges
2018 2017
US $ million US $ million
----------------------------------- ------------ ------------
Equity-settled
Equity-settled charge for the year 8.9 8.5
------------------------------------ ------------ ------------
Total share benefit charges 8.9 8.5
------------------------------------ ------------ ------------
23 Related party transactions
The aggregate amounts payable to key management personnel,
considered to be the Directors of the Company, as well as their
share benefit charges, are set out below:
2018 2017
US $ million US $ million
--------------------------------------- ------------ ------------
Short-term benefits 3.2 4.6
Post-employment benefits 0.2 0.2
Share benefit charges - equity-settled 4.2 4.7
7.6 9.5
--------------------------------------- ------------ ------------
Further details on Directors' remuneration are given in the
Directors' Remuneration Report set out in the 2018 Annual
Report.
US joint ventures
During 2018 the Group charged the US joint ventures for
reimbursement of costs of US$3.9 million (2017: US$2.1
million).
24 Commitments
Lease commitments
Future minimum lease commitments under operating leases on
properties occupied by the Group at the year-end are as
follows:
2018 2017
US $ million US $ million
--------------------------- ------------ ------------
Within one year 5.4 4.9
Between two and five years 14.9 17.7
More than 5 years 8.9 11.8
---------------------------- ------------ ------------
29.2 34.4
--------------------------- ------------ ------------
The expense relating to operating leases recorded in the
consolidated income statement in the year was US$5.1 million (2017:
US$5.1 million). The disclosure in respect of transition to IFRS 16
is provided in note 2.
25 Financial risk management
The Group is exposed through its operations to risks that arise
from use of its financial instruments. Policies and procedures for
managing these risks are set by the Board following recommendations
from the Chief Financial Officer. The Board reviews the
effectiveness of these procedures and, if required, approves
specific policies and procedures in order to mitigate these
risks.
The main financial instruments used by the Group, on which
financial risk arises, are as follows:
-- Cash and cash equivalents;
-- Trade and other receivables;
-- Trade and other payables;
-- Customer deposits;
-- Equity instruments designated at fair value through OCI.
Detailed analysis of these financial instruments is as
follows:
2018 2017
Financial assets US $ million US $ million
----------------------------------------- ------------ ------------
Trade and other receivables(1) (note 17) 29.3 39.2
Cash and cash equivalents (note 16) 133.0 179.6
Equity investment (note 14) 0.2 0.2
------------------------------------------ ------------ ------------
162.5 219.0
----------------------------------------- ------------ ------------
(1) Excludes prepayments and non-current other receivables.
In accordance with IFRS 9, all financial assets are classified
as loans and receivables. Equity investments are measured at fair
value through other comprehensive income (FVOCI) without subsequent
recycling to income statement.
25 Financial risk management (continued)
2018 2017
Financial liabilities US $ million US $ million
-------------------------------------- ------------ ------------
Trade and other payables(1) (note 19) 100.7 93.8
Customer deposits (note 20) 57.1 71.7
--------------------------------------- ------------ ------------
157.8 165.5
-------------------------------------- ------------ ------------
(1) Excludes taxes payable.
In accordance with IFRS 9, all financial liabilities are held at
amortised cost.
Capital
The capital employed by the Group is composed of equity
attributable to shareholders. The primary objective of the Group is
maximising shareholders' value, which, from the capital
perspective, is achieved by maintaining the capital structure most
suited to the Group's size, strategy, and underlying business risk.
There are no demands or restrictions on the Group's capital.
The main financial risk areas are as follows:
Credit risk
Trade receivables
The Group's credit risk is primarily attributable to trade
receivables, most of which are due from the Group's payment service
providers (PSP). These are third party companies that facilitate
deposits and withdrawals of funds to and from customers' virtual
wallets with the Group. These are mainly intermediaries that
transact on behalf of credit card companies.
The risk is that a PSP would fail to discharge its obligation
with regard to the balance owed to the Group. The Group reduces
this credit risk by:
-- Monitoring balances with PSPs on a regular basis.
-- Arranging for the shortest possible cash settlement intervals.
-- Replacing rolling reserve requirements, where they exist,
with a Letter of Credit by a reputable financial institution.
-- Ensuring a new PSP is only contracted following various due
diligence and "Know Your Customer" procedures.
-- Ensuring policies are in place to reduce dependency on any
specific PSP and as a limit any concentration of risk.
The Group considers that based on the factors above and on
extensive past experience, the PSP receivables are of good credit
quality and there is a low level of potential bad debt as at year
end amounting to US$0.1 million arising from a PSP failing to
discharge its obligation (2017: US$0.5 million). This has been
charged to the consolidated income statement.
25 Financial risk management (continued)
An additional credit risk the Group faces relates to customers
disputing charges made to their credit cards ("chargebacks") or any
other funding method they have used in respect of the services
provided by the Group. Customers may fail to fulfil their
obligation to pay, which will result in funds not being collected.
These chargebacks and uncollected deposits, when occurring, will be
deducted at source by the PSPs from any amount due to the Group. As
such the Group provides for these eventualities by way of an
impairment provision based on analysis of past transactions. This
provision is set off against trade receivables and at 31 December
2018 was US$1.1 million (2017: US$1.4 million).
The Group's in-house Fraud and Risk Management department
carefully monitors deposits and withdrawals by following prevention
and verification procedures using internally-developed bespoke
systems integrated with commercially-available third party
measures.
Cash and cash equivalents
The Group controls its cash position from its Gibraltar
headquarters. Subsidiaries in its other main locations maintain
minimal cash balances as required for their operations. Cash
settlement proceeds from PSPs, as described above, are paid into
bank accounts controlled by the Treasury function in Gibraltar.
The Group holds the majority of its funds with highly reputable
financial institutions and will not hold funds with financial
institutions with a low credit rating save for limited balances for
specific operational needs. The Group maintains its cash reserves
in highly liquid deposits and regularly monitors interest rates in
order to maximise yield.
Customer funds
Customer funds are matched by customer liabilities and
progressive prize pools of an equal value.
Restricted short-term deposits
Restricted short-term deposits are short-term deposits held by
banks primarily to support guarantees in respect of regulated
markets licence requirements.
The Group's maximum exposure to credit risk is the amount of
financial assets presented above, totalling US$162.5 million (2017:
US$219.0 million).
25 Financial risk management (continued)
Liquidity risk
Liquidity risk exists where the Group might encounter
difficulties in meeting its financial obligations as they become
due. The Group monitors its liquidity in order to ensure that
sufficient liquid resources are available to allow it to meet its
obligations.
The following table details the contractual maturity analysis of
the Group's financial liabilities:
2018
Between 3
months and More than
On demand In 3 months 1 year 1 year Total
US $ million US $ million US $ million US $ million US $ million
---------------------------- ------------ ------------ ------------ ------------ ------------
Trade and other payables(1) 11.6 83.1 6.0 - 100.7
Customer deposits 57.1 - - - 57.1
----------------------------- ------------ ------------ ------------ ------------ ------------
68.7 83.1 6.0 - 157.8
---------------------------- ------------ ------------ ------------ ------------ ------------
(1) Excludes taxes payable.
2017
Between 3
months and More than
On demand In 3 months 1 year 1 year Total
US $ million US $ million US $ million US $ million US $ million
---------------------------- ------------ ------------ ------------ ------------ ------------
Trade and other payables(1) 11.2 68.7 13.9 - 93.8
Customer deposits 71.7 - - - 71.7
----------------------------- ------------ ------------ ------------ ------------ ------------
82.9 68.7 13.9 - 165.5
---------------------------- ------------ ------------ ------------ ------------ ------------
(1) Excludes taxes payable.
25 Financial risk management (continued)
Market risk
Currency risk
The Group's financial risk arising from exchange rate
fluctuations is mainly attributed to:
-- Mismatches between customer deposits, which are predominantly
denominated in US$, and the net receipts from customers, which are
settled in the currency of the customer's choice and of which
Pounds Sterling (GBP) and Euros (EUR) are the most significant.
-- Mismatches between reported revenue, which is mainly
generated in US$ (the Group's reporting currency and the functional
currency of the majority of its subsidiaries), and a significant
portion of deposits settled in local currencies.
-- Expenses, the majority of which are denominated in foreign
currencies including Pounds Sterling (GBP), Euros (EUR) and New
Israeli Shekels (ILS).
The Group continually monitors the foreign currency risk and
takes steps, where practical, to ensure that the net exposure is
kept to an acceptable level. This includes the potential use of
foreign exchange forward contracts designed to fix the economic
impact of known liabilities when considered appropriate.
At 31 December 2018 the Group does not have any open foreign
exchange forward contracts.
The tables below detail the monetary assets and liabilities by
currency:
2018
GBP EUR ILS USD Other Total
US $ million US $ million US $ million US $ million US $ million US $ million
------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents 37.8 38.6 13.2 39.7 3.7 133.0
Trade and other receivables 6.2 14.9 0.5 2.3 5.4 29.3
Equity instruments designated
at fair value through
OCI - - - 0.2 - 0.2
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Monetary assets 44.0 53.5 13.7 42.2 9.1 162.5
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Trade and other payables (16.2) (16.1) (19.9) (46.9) (1.6) (100.7)
Customer deposits (8.7) (17.6) - (29.0) (1.8) (57.1)
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Monetary liabilities (24.9) (33.7) (19.9) (75.9) (3.4) (157.8)
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net financial position 19.1 19.8 (6.2) (33.7) 5.7 4.7
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
25 Financial risk management (continued)
2017
GBP EUR ILS USD Other Total
US $ million US $ million US $ million US $ million US $ million US $ million
------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents 29.5 59.5 25.8 56.7 8.1 179.6
Trade and other receivables 13.9 17.3 0.4 2.2 5.4 39.2
Equity instruments designated
at fair value through
OCI - - - 0.2 - 0.2
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Monetary assets 43.4 76.8 26.2 59.1 13.5 219.0
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Trade and other payables (28.4) (11.3) (30.5) (21.4) (2.2) (93.8)
Customer deposits (12.5) (14.1) - (41.0) (4.1) (71.7)
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Monetary liabilities (40.9) (25.4) (30.5) (62.4) (6.3) (165.5)
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net financial position 2.5 51.4 (4.3) (3.3) 7.2 53.5
------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Sensitivity analysis
The table below details the effect on profit before tax of a 10%
strengthening (and weakening) in the US$ exchange rate at the
balance sheet date for balance sheet items denominated in Pounds
Sterling, Euros and New Israeli Shekels:
Year ended 31 December 2018
GBP EUR ILS
US $ million US $ million US $ million
------------------ ------------ ------------ ------------
10% strengthening (1.9) (2.0) 0.6
10% weakening 1.9 2.0 (0.6)
------------------- ------------ ------------ ------------
Year ended 31 December 2017
GBP EUR ILS
US $ million US $ million US $ million
------------------ ------------ ------------ ------------
10% strengthening (0.3) (5.1) 0.4
10% weakening 0.3 5.1 (0.4)
------------------- ------------ ------------ ------------
Interest rate risk
At present the Group has no borrowing. Once the Group utilise
the revolving credit facility ("RCF") (see note 28) it will be
exposed to floating rate risk however given the magnitude of the
max drawable amount under the RCF interest rate fluctuations are
not expected to be significant.
The Group's exposure to interest rate risk is limited to the
interest bearing deposits in which the Group invests surplus
funds.
The Group's policy is to invest surplus funds in low risk money
market funds and in interest bearing bank accounts. The Group
arranges for excess funds to be placed in these interest bearing
accounts with its principal bankers in order to maximise
availability of funds for investments.
Downside interest rate risk is minimal as the Group has no
floating rates borrowings. Given current low interest rates a 0.5%
downward movement in bank interest rates would not have a
significant impact on finance income for the year. However, a 0.5%
increase in interest rates would, based on the year end deposits,
increase annual profits by US$0.3 million (2017: US$0.35
million).
26 Fair value measurements
At 31 December 2018 and 2017, the Group's equity investment is
measured at fair value (level 2). For the remaining financial
assets and liabilities, the Group considers that the book value
approximates to fair value.
There were no changes in valuation techniques or transfers
between categories in the period.
27 Provisions, contingent liabilities and regulatory issues
(a) The Group operates in numerous jurisdictions. Accordingly,
the Group files tax returns, provides for and pays all taxes and
duties it believes are due based on local tax laws, transfer
pricing agreements and tax advice obtained. The Group is also
periodically subject to audits and assessments by local taxing
authorities. Other than as provided in the Group financial
statements, the Board is unable to quantify reliably any exposure
for additional taxes, if any, that may arise from the final
settlement of such assessments and considers it unlikely that any
further liability will arise.
(b) In 2017, in response to an inquiry from the tax authorities
in Germany relating to a legacy VAT matter, the Group disclosed a
contingent liability of US$18.5 million, relating to issues on
which the Group considered that it has strong arguments but
regarding which it remained possible that there would be a cash
outflow. During 2018 following further discussions with tax
authorities in Germany culminating in the issuance of tax
assessments, the Board, supported by their updated legal advice,
considered that the risk of cash outflow in respect of these
services is remote, and therefore the contingent liability no
longer exists. The Board has reserved its position and all legal
rights, based on the legal advice received. The foregoing is in
addition to a provision of US$45.3 million (39.6 million Euro)
recorded in the 2017 consolidated income statement, on account of
which the Group paid US$24.6 million and released US$22.4 million
during the year.
(c) As part of the Board's ongoing regulatory compliance and
operational risk assessment process, it continues to monitor legal
and regulatory developments, and their potential impact on the
business, and continues to take appropriate advice in respect of
these developments.
Given the nature of the legal and regulatory landscape of the
industry, from time to time the Group has received notices,
communications and legal actions from a small number of regulatory
authorities and other parties in respect of its activities. The
Group has taken legal advice as to the manner in which it should
respond and the likelihood of success of such actions. Based on
this advice and the nature of the actions, for the majority of
these matters the Board is unable to quantify reliably the outflow
of funds that may result, if any. For matters where an outflow of
funds is probable and can be measured reliably, amounts have been
recognised in the financial statements within Provisions. Except
for the regulatory matters described in notes 5 and 19, these
amounts are not material at 31 December 2018.
28 Events after the reporting period
Acquisitions after the reporting period
On 19 February 2019, the Group announced the signing of an
agreement for the acquisition of certain assets of Jet Management
Group Limited and Jet Media Limited (together, "Jet") for
consideration of GBP18.0 million. Jet is part of the group of
companies headed by JPJ Group plc, which owns the Jackpotjoy
brands. The consideration of GBP18.0 million will be satisfied all
in cash, with GBP12.0 million being paid to Jet upon closing of the
acquisition and the remainder of GBP6.0 million to be paid in
September 2019.
Jet has been a partner of Dragonfish, the Group's B2B Bingo
division, since 2009 with brands including Costa Bingo, City Bingo
and Sing Bingo. The acquisition will give the Group full control of
these successful brands from a marketing perspective to support and
further strengthen the Group's position in the UK online bingo
market.
On 4 March 2019, the Group announced the acquisition of
BetBright's sports betting platform for GBP15.0 million. The
acquisition strengthens 888's product and technology capabilities
and will support the long-term development strategy for
888Sport.
The Directors are still in the process of performing a fair
valuation of the acquisitions.
Revolving credit facility
During 2019, 888 has finalised a revolving credit facility with
Barclays Bank plc of up to US$50.0 million in order to finance its
M&A activities in the short term.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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