Shares in Paddy Power lost more than 20 per cent of their value yesterday after the bookmaker surprised the market with a profit warning.
The company blamed poor horse-racing results for much of the under-performance, noting that its "gross win" over the past three weeks alone had been about €4 million below Paddy Power's own projections.
The firm also pointed to "structural change" in Irish bookmaking and, despite promising to "lead the market", it revised down its future margin guidance for retail operations.
The company is now forecasting full-year operating profits of about €30 million, "assuming reasonable gross win percentages for the remainder of the year".
Turnover at the company continues to "grow strongly", according to the trading update.
Analysts had expected profits to come in closer to €39 million. Paddy Power's shares were instantly hit by the announcement, plunging by more than 25 per cent to €9.50 in early trade. They later recovered some ground but still closed the day €2.95 weaker at €10.40.
Ross Ivers, Paddy Power's finance director, said the firm had spent considerable time over the past month revising its budget and looking at future margins. This had, he noted, coincided with significant changes in the marketplace.
For retail bookmaking, the firm now expects margins of between 11 and 13 per cent, down from between 12 to 14 per cent.
Profitability in bookmaking is highly-sensitive to even a small move in margins.
In the trading update, Paddy Power pointed to more competition in the Irish market, due in large part to the growing incidence of tax-free betting. This involves the bookmaker absorbing the 2 per cent betting tax on all bets.
The firm expects next month's Budget to lead to tax-free betting across the Republic, thus making the market even more competitive.
"This will drive turnover growth through recycling, and the increased betting opportunities that tax-free betting offers as well as transferring business from the grey market," the company said.
Paddy Power also reduced its margin outlook for its telephone betting operations, citing its focus on high-roller customers.
It raised margin guidance slightly for online betting, however, saying the business had benefited from expansion into the "mass market".
The statement pointed out that online turnover is larger than phone turnover, thus resulting in higher aggregate future margin guidance for non-retail betting.
The firm also highlighted last week's resolution of the British Horseracing Board (BHB) case, which it says will further stimulate competition.
Paddy Power expects to draw savings of €2 million from the decision, which will mean Irish bookmakers can access BHB information more cheaply.
David Jennings, an analyst with Davy, revised down his 2006 profit forecasts after the statement was released.
"In effect, they're saying that the Irish retail market isn't as profitable as it once was," he said.
Mr Jennings pointed out, however, that Paddy Power remains a "growth story".
Liam Boggan, head of research with Merrion Stockbrokers, said that while Paddy Power is a "good quality, well-run business", the unpredictability of its earnings will always have the potential to unnerve the market.
