Entain “spooks” investors with Q2 analysis of macroeconomic environment
Entain CFO Rob Wood “really spooked” investors with his commentary on the operator’s Q2 results, according to one prominent financial analyst.
Last week, Wood explained how the macroeconomic environment was behind a reduction in customer spend per head of approximately 5% since April, with that trend expected to continue for the rest of the year on Entain’s “prudent” estimates.
This pattern was a driving factor behind a 7% annual dip in online net gaming revenue for Q2, which in turn saw the FTSE 100 firm’s share price drop by 10% at one point on 7 July.
Entain CEO Jette Nygaard-Andersen said: “As a business, we are relatively resilient to cyclical macroeconomic effects. However, no business is completely immune.
“We’ve seen some moderation in the rate spent by customers, resulting in lower underlying growth across many of our markets versus our expectations earlier in the year.”
Entain CFO Rob Wood: “There has been an impact in the Baltics, for instance, where inflation is nearing 20%. You’d be mad to think you’re not seeing an impact as a result of those kinds of conditions.”
But it was Wood’s in-depth analysis that sparked concern in the market. Entain is one of the first operators to report its Q2 results this year and it will be interesting to see whether this trend is company-specific or reverberates right across the sector.
“Really the step down began in April when across the globe, the headlines really started to hit consumer confidence levels,” said Wood. “This prompted us to investigate.”
During its investigation, Entain realised some territories were witnessing a more severe decline than others.
“Australia, for instance, is going fantastically well,” said Wood, who was at pains to point out that all macroeconomic environments are cyclical. “It’s sort of being flagged as a risk but we don’t think we’re seeing a macro impact in Australia yet.
“But in other parts of the world, particularly in Europe, it’s clear. There has been an impact in the Baltics, for instance, where inflation is nearing 20%. You’d be mad to think you’re not seeing an impact as a result of those kinds of conditions,” he added.
Retail was the shining light of Entain’s Q2 results. Its portfolio of shops, including Ladbrokes and Coral, came in ahead of expectations, with volumes in Q2 ahead of pre-Covid levels.
Entain’s Q2 retail revenue rose 79% year-on-year, soaring to 243% for H1 on the back of a comparative period where shops were still closed for the most part due to Covid-19.
Despite the growth, Wood warned it was “unlikely” that macro factors would have no impact at all on retail spend and performance.
He did say however that Entain was outcompeting its high street rivals (888 via William Hill and Flutter via Paddy Power) due to a stronger gaming machine and bet station offering.
“We’re really confident that we’re outperforming and hopefully that will continue,” said Wood. “Market share gains are really the best way to offset any potential impact from macro conditions.”
More than macro
As well as the macro declines, more than one analyst has suggested to iGaming NEXT that Entain’s decline in online NGR could also be put down to the cost of implementing affordability measures in the UK.
Main rival Flutter front-loaded a bulk of its affordability improvements last year to the cost of £93m. This included a pre-emptive £10 limit for online slots in the UK, which has also been adopted by 888.
Entain, by contrast, has not adopted any such limit and is awaiting concrete guidance from the UK government’s white paper review of the 2005 Gambling Act.
“That to me would say there is a bit more pain to go,” said one gaming and leisure analyst.
That is not to say that Entain is not making progress in this area. Its proprietary Advanced Responsibility & Care (ARC) platform implements checks on customers at different thresholds, while the company said revenue contribution from higher spending cohorts has halved, although it did not elaborate on what constitutes a higher spending customer.
“Operators have worked through the last 18 months on implementing tighter measures like affordability checks, at least when it comes to the licensed operators,” said Nygaard-Andersen. “This goes across the industry, but operators have different approaches.”
Entain CEO Jette Nygaard-Andersen: “As a business, we are relatively resilient to cyclical macroeconomic effects. However, no business is completely immune.”
After being pushed by analysts for a figure, Wood said UK market online NGR was down 15% for the first half of the year (H1). He conceded the drop-off was due to a combination of the macroeconomic environment and also the cost of employing affordability measures.
“On the question of the impact of affordability, it is hard to unpick the competing drivers,” said Wood. “We’re seeing spend per head fall in the UK. How much of that is affordability measures versus ARC but also versus macro conditions? It is hard to separate with confidence.
“We do see macro impacts in the UK, because if you look at spend per head on the lower spending cohorts, you can see a fall off there as well. It is not just driven by less top-end activity. But it is really hard to unpick the two, so I wouldn’t attempt to do that.”
Flutter and 888 are scheduled to report their interim results in August. Perhaps only once its rivals have released their reports will analysts be able to truly assess whether macroeconomic factors or affordability measures were the main driver behind Entain’s Q2 decline.