Doubts creep in as William Hill pursues strategy

The confirmation of William Hill’s financial involvement in NYX Gaming’s acquisition of OpenBet will not prevent the rumblings of discontent among the company’s analyst followers. Scott Longley looks at the questions being asked of chief executive James Henderson’s strategic vision.

James Henderson did a decent job of defending his stewardship of William Hill in an interview with The Times newspaper that appeared in the same week as the company shocked the City with a surprise profit warning.

He insisted that since he had succeeded previous boss Ralph Topping to the hot chair he had done what he thought was “right for the business” and that now it was time to “focus on the positives”.

But many in the City are doing precisely the opposite. The latest analyst to voice his concerns was Vaughan Lewis at Morgan Stanley who issued a sell note that will have hit a nerve among the higher echelons at Wood Green, William Hill’s London base.

Lewis not only cut his target price on the shares by 30% but he also hinted that further downgrades were possible. “With the online division faltering at a time of heightened regulatory risk in retail, we think the risk-reward profile has deteriorated sharply,” he said.

The facts of the profit warning are certainly concerning. A combination of a hit to online earnings from the extrapolation of increased self-exclusion numbers from higher-revenue customers and lower sports margins caused partly by a poor Cheltenham Festival saw William Hill lower its earnings forecast for 2016 by around £40m to between between £260m to £280m.

But this might not be the end of the story. In its analysis, Morgan Stanley points out that the new forecasts don’t take account of the potential hit from the next stage of the UK Gambling Commission’s rules on problem gambling, the ‘reality checks’ which will allow players to track their own play via an on-screen timer or pop-up.

These will be introduced at the end of this month. Moreover, the fear is that the company is using the issues around self-exclusion to mask deeper problems within the online business.

The upheavals at the top of the business continue; online managing director Andy Lee left in January, swiftly followed by the company’s long-standing director of innovation Jamie Hart who walked in March and now the head of sports Kevin Beard has also jumped ship to head up the sports-betting operation at Sun Bets.

In response, Henderson somewhat threw interim online boss Crispin Nieboer to the lions when he asked him to present a strategic plan to analysts on the profit warning conference call.

Leaving aside the slightly puzzling question of why the interim boss is being handed the reins of a strategic review – or indeed the related issue of why Nieboer has either not been offered or not accepted the post full time – the bones of the turnaround plan appeared to answer a different set of questions to the immediate ones posed by the profit warning.

On the call, Nieboer suggested the marketing strategy had been weighted too much towards desktop and higher volume at the expense of mobile and higher lifetime value customers. But as Lewis at Morgan Stanley pointed out, the new stated strategy of moving from “volume to value” has echoes of the failed one from pre-GVC bwin party. In that case, in the first two years of the implementation revenues dropped by 13% and EBITDA fell 23%.

Lewis specifically called William Hill out on the move, suggesting it is a strategy that never works in online gambling or any other online business. He says that a volume growth strategy generates a virtuous circle with the rising customer base providing growth in deposits and the cash to fund investment in product and content that can help grow ARPU while also funding further marketing recruitment campaigns.

“Reversing this trend and focusing on cost-cutting is a risky strategy, with potential for this virtuous circle to become a negative cycle, with ongoing cost-cutting to protect profits leading to shrinking investments in product and marketing that damage the long-term health of the business.”

Stack fallacy in online gambling
Henderson was insistent in his Times interview that the decisions he was taking with regard to online – and in particular the company’s ongoing technology effort Project Trafalgar – were the “right thing to do” (a form of wording that was repeated by Nieboer on the conference call).

But here again there is a wariness of what these aims have morphed into. From being an effort to transform the front end, it appears that Trafalgar is now aimed at taking large elements of the back end in house as well. Such is certainly the case now it has been confirmed that William Hill is to provide £80m of the £270m NYX has stumped up to buy sportsbook platform supplier OpenBet.

The company said this week that the new 10-year agreement with NYX/OpenBet would enhance the moves by William hill to develop a “new back-end platform for William Hill to complement and support our Trafalgar platform”.

As Morgan Stanley point out, online capex has increased sharply, up to between £36m-£38m in the past two years from under £20m previously, reflecting the spending on proprietary tech. But the jury is still out on whether this spend is necessary or desirable. Indeed, it might be argued that William Hill are now the prime example of a form of stack fallacy.

In technology, the stack fallacy is the belief that it is easy to build the layer above you. The online gambling variant is that operators believe in the growing necessity to control ever more elements of the technology, whether that is front or back end.

It has an obvious appeal. The more control a company has, the more it likely feels it can offer a differentiated offering and the less it has to embark on profit shares with suppliers. But Lewis at Morgan Stanley makes the point that in his eyes the “optimal” way forward is to utilise third-party expertise and he does have a point.

After all, William Hill’s current market leader status was built upon the decision to scrap its old proprietary sportsbook technology and move to OpenBet for sports and Playtech for gaming.

(Indeed, as one source put it, the big winner from William Hill’s online travails is Playtech which will no doubt be preparing the sales deck that shows what happens to companies that move away from total reliance on its systems and services).

Three is the magic number
Trafalgar, NYX/OpenBet and the quest for greater control of its technology is a story that will play out in the coming months and years. What matters for the William Hill shareholders is that in the short term they need to see the online business recover some of its poise.

According to another source, investors have to an extent not quite fully understood the speed with which the company has been overtaken by events.

Yet with the football European Championships fast approaching, the Australian business still in recovery positon and with more self-exclusion pain likely, whatever plans that will be put in place now will have precious little time to succeed before the next results reckoning in August at the interims.

That is assuming, of course, that we don’t hear from the company sooner than that. Old City lore has it that profit warnings rarely happen in the singular. The true test for Henderson is whether he can avoid having to arrange another unscheduled talk with the analysts in the coming months and keep his public pronouncements for the newspapers.

Related article: Hills has tech edge with WHLabs, but proof will be in results