In some of the less surprising financial stories to have surfaced this year, some expected declines for the full year 2015 were released by Ladbrokes and William Hill last week.
With regards to the online side of their businesses, highlights of the reports were a headline digital operating loss of £23.8m for Ladbrokes, which released preliminary results, and a 29% dip in online operating profit for Hills, to £126.5m.
Last year was the first full year in which the UK point-of-consumption tax (POCT), which has placed a 15% tax on profits from remote (online) gaming duty, was in place, after being implemented in December 2014.
To provide some clarity on what this entails, Hills said the POCT is levied on UK revenues from its online arm at 15% of net revenue for gaming and 15% of gross win for sports. As expected, the POCT featured extensively as a reason behind i-gaming results.
How does this translate to overall results?
Let’s take a look at where exactly Ladbrokes and Hills mention the POCT impacting their business and how these totals might look without the reduction.
Two things to note is that the results for digital were not broken down on a market-by-market basis by either operator and that we are using Ladbrokes’ headline results as opposed to statutory results where applicable.
For Ladbrokes, which published its figures last Tuesday, the POCT affected the outcome in these areas:
• An operating loss of £20.7m in comparison with an operating profit of £17.3m for 2014 was reported, which the operator said was driven by the POCT as well as lower sportsbook gross win margin and an increased investment in marketing.
• Headline operating profit was £83.9m, down 40%, which Ladbrokes CEO Jim Mullen said carried “the significant burden of c.£50m increased tax and regulation”. This could also be referring to an increase in machine gaming duty (MGD) from 20% to 25% on the UK land-based side of operations that was implemented last March.
• Digital net revenue grew 13% to £242.8m, while a digital operating loss of £23.8m was reported in comparison with a profit of £14m. Ladbrokes partially explained the digital figures as being a result of the POCT. Digital net revenue accounted for 20% of group net revenue of £1.2bn.
Once again, it was hard to miss the impact of the POCT when Hills released its financials on Friday. Here were some of the key POCT points:
• There were a total of 108 retail shop closures in 2014, as well as online delivering savings, to partially mitigate the effect of the tax.
• Hills said the POCT was the driver of its online operating profit decline of 29% to £126.5m and that William Hill Online incurred an additional £66.4m in taxing as a result of the POCT.
• That £66.4m figure was a significant chunk of a 147% increase in online cost of sales to £126.1m.
• Group operating profit went up 2% to £291.4m, excluding an increased c.£87m of additional UK gambling duties (this could include the rise in MGD). When including the duties, the operating profit was down 22%.
• Pre-exceptional profit before interest and tax descended 22% to £283.3m, also partially as a result of the c.£87m higher duties.
Without the POCT
If we were to look at the online net revenue area where Hills said it has been taxed, then here is the comparison:
Online net revenue was £550.7m, an increase of 4%. Were it not for the POCT, online net revenue would have been approximately £648m and would have showcased an improvement of 23%.
Applying this same method to Ladbrokes shows that online net revenue would be c.£286m and would be up 33%, as opposed to the actual figure of £242.8m, up 13%.
When adding together the impact on online net revenue alone, that is a combined £140.5m snapped up by the UK government.
What about 2016?
It should be noted that the full year 2015 results published by all UK operators will be the last with disjointed comparisons. The FY15 results are in comparison with 2014, where they operated for 11 months without the POCT, but for future reference, results for 2015 and 2016 will both reflect a period of operation where the regime has been in place. Put simply, this should be the last time a non-POCT period plays off against a functioning POCT period.
With online net revenue accounting for 20% and 35% (£550.7m of £1.59bn) of group net revenue for Ladbrokes and Hills respectively, it will clearly have an impact on operations when that revenue is of such importance and it appears fair to state that consolidation is and could continue to be a pertinent issue in the UK gambling market as a result of these figures.