Starting over

Scott Longley and Jake Pollard report on recent market events surrounding Empire Online, cryptoLogic and Playtech

Empire Online

Following the publication of its results in early April, chief executive of Empire Online, Noam Lanir, suggested the cash pile accrued from its US $250m (£ 143m) settlement with cocktail Party Gaming would be utilized in seeking out more acquisitions.
      Lanir was speaking after the poker and casino operator saw pre-tax profit rising to US $41m from US $26m the year previously on net gaming  revenues that rose to US $ 97m.
     “Following the settlement from PartyGaming. Empire Online is in a very strong position financially,” said Lanir. “The US $250m received is currently on deposit and a is available to finance the acquisition of complementary businesses that can be acquired at a sensible price. ”

      Lanir added a sportsbook was among the possibilities. “The large number of egaming sites and the increasingly higher barriers to profitable scale means consolidation will be seen by many operators as an attractive exit going forward. ”
      Empire acquired the Nobel Poker and Club Dice brands in 2005 and the company said it had achieved 138 new real-money sign-ups per day on the fourth quarter, compared with 118 per day in the third quarter. It said it had 29,585 active players as of the end of the year. The club Dice platforms, meanwhile, had 26,790 active players as of the end of 2005.
      After a number of changes to the structure of the company during 2005, including the settlement with PartyGaming over the latter’s ‘skins ’ separation, analysts suggested the company was essentially a very different one now to a year ago.

“You can’t guarantee consolidation, but the factors taken together make it likely. There are a whole range of listed and unlisted businesses out there”

     “The brand is all-new. ” Said one, adding that with a new platform – Playtech’s iPoker – and new players via last year’s acquisitions Noble and Club Dice, the company was essentially “the same engine but a different car. ”
      Andrew Burns, finance director at the company, said such comment was fair, adding this was why the company had gone to the unusual step of issuing guidance for the full-year to the end of 2006. “We have put forward a figure of US $ 37m EBITDA for 2006 and you normally don’t forecast that far ahead. ”
      Regarding the possibility of Empire being involved in any forthcoming consolidation, burns confirmed the company was looking for possible acquisitions, but he could not put a timetable to any possible moves.
     “You can’t guarantee consolidation. Burns confirmed the company was looking for possible acquisitions, but he could not put a timetable to any possible moves. “You can’t guarantee consolidation, but the factors taken together make it likely. There is a whole range of listed and unlisted businesses out there. ”
      Burns added the company had more than the US $250m to spend. “With any acquisition you would be able to support some level of debt, plus we could issue some equity. ”
      Regarding the threat of US legislation. Burns said the company was no more cautious than it was before. “The situation is no worse than it has been before. We think it is a remote risk, but the threat would be so severe if they went through with it that you can’t ignore it. ”


CryptoLogic has reacted to an analyst note headlined ‘Lousing Competitiveness ’ by suggesting the thesis in question was “off base”. The comments followed on from a mid- April note from Greg Harris and Anthony Chow, analysts at Canaccord Adams that suggested commoditization of the gaming royalty rates, larger operators looking to bring ancillary services in-house, more flexible contract terms with lessened restrictions on exclusivity and contract length, and increased attention by developers on new and innovative products.
      However, specifically Canaccord had reviewed its revenue assumptions following the recent renegotiation of the UKBetting contract earlier this year and ahead of contract negotiations with William Hill, set for later this year.
     “We believe the growth in licensee revenue will not offset the decline in royalty rates. In addition, cryptoLogic will be losing high margin revenue from Betfair when the company migrates to an in-house poker network later this year. ”

On the Buy side

As   a result, canaccord is lowering its revenue assumptions for this year and next and has moved the stock to a Sell from a buy. However, a spokesperson for CyptoLogic questioned Canaccord’s assumptions that there has been any material drop in its pricing. Referring specifically to the deal with UKBetting, they said: “We indicated last quarter there was no material adjustment and the renewal was done within our current pricing range. True, compared with five years ago, there have been margin pressures, but in fact, we have seen our royalty rates stabilize given that we offer one of the most comprehensive casino and poker offerings and have strong poker liquidity. ”

The Canaccord note also made  comment regarding the imminent departure of Betfair from CryptoLogic’s poker platform. Since announcing an intention to take its poker in-house in August 2005. Betfair has advised that network migration will happen at some point between June 2006 and January 2007, at which point it will port players off the CryptoLogic network. Canaccord thinks this switch is imminent and says it anticipates poker revenues from Betfair to go ex-growth once new acquisitions are directed to the new platform and the revenue stream to be fully cut off by the end of the year.
     “We view the loss of this revenue stream as significant because it is high margin revenue,” said the note. But CryptoLogic responded, saying excluding Betfair, its other poker licensees grew 100%. “We have also generated excellent growth in casino, which accounts for 60% of our revenue and which Betfair is not a factor as it is only a poker customer.
     “In 2005, our casino revenue grew 11% year-on-year, and up 20% in Q4 2005 versus 2004. Therefore, we expect that revenue and player growth from continuing licensees in both poker and casino will help offset Betfair’s departure and contribute to continued positive growth into 2007. ”


Not surprisingly, seeing as Canaccord Adams happens to be Playtech’s house broker, the analysts have been kinder with that firm’s maiden first –quarter results this months in which the Cyprus –based egaming software developer highlighted 150% growth in revenues from the same period 12 months ago.
      With the majority of its revenue generated by its casino products, Playtech was keen to emphasise its renewed focus on its poker offering and that its contribution was “particularly encouraging”.
      Greg Harris of Canaccord Adams, issued a Buy note for the software firm and highlighted the company’s re-launched poker network towards the end of 2005, having addressed “infrastructure problems and capacity issue”.
      Since the acquisition of Noble Poker by Empire Online in August 2005, Playtech has increased its focus on poker, ensuring the reliability of its network to handle higher liquidity level; and as a result has benefited from Empire’s marketing expertise and strength .

      When asked why Playtech had not concerned efforts on poker earlier. Harris explained the software firm “saw casino products were getting commoditized with competition levels rising all the time, and decided to establish itself as a competitive casino products supplier. ”
      Harris added once Playtech was satisfied with its casino products it decided to allocate more resources to poker, especially with the addition of Empire Online to its network. “Does that mean Playtech could have floated with an even larger market value had it focused more on poker? Possibly, but in the meantime it would not have become such a big player in the casino world,” Harris said.

Asia major

With the Asia-Pacific market contributing 21% of Q1 revenues, nearly as much as the 24% from the European players. Avigur Zmora, Playtech chief executive, highlighted the success of his company’s “stratagey to create a more balanced geographical business portfolio. Our drive into the exciting and fast-growing Asia-Pacific   market is showing clear results. ”
      The broker also highlighted Playtech’s push into the Asia-Pacific market, which it said represented the “fastest-growing internet gaming market ” and the software firm’s “competitive revenue share agreements made it an attractive provider. Playtech has acquired 29 licensees in the past three years and never lost one to a competitor. ”
      Zmora added UD players had contributed around 50% of total revenues, down from 67% on the same quarter 12 months ago. Much of Playtech’s growth from the Far East is said to originate from Japan, and despite an unclear legal situation there, the high credit card and internet penetration levels are said to present encouraging signs for egaming operators .

*  Magic moment for Gaming VC

Gaming VC is at a pivotal turning point, after its share price closed at 420p on 21 April, the exact placing price at the time of its admission on AIM in December 2004. This relatively small online cassino operator is unique in many aspects of its business. The majority of its revenue is generated from the German and Austrian online roulette markets where the company is dominant.
      Instead of developing and maintaining its own software, the company’s Casino-Club website licenses software from Swedish supplier5 Boss media and in return pays a royalty fee on monthly net revenues, capped at € 2m (US $2.5m).
      At the time of its listing investors viewed this licensing agreement as being key to Casino-Club’s ability to produce growing gross margins. With a growing business, such a capped agreement provides for the potential of higher returns with increasing dividends.

      Going by the recent results, such as outcome remains a possibility. According to recent figures, Gaming VC achieved gross margins of 76% last year, down slightly from operating margins of 80% for the 10 months to October 2004.
      For the year ending 31st December 2005, the company reported net revenues of €40m, compared to €37m for the 10 months prior to the listing. Cost of goods sold was only slightly higher compared to costs disclosed for the 10-month prior period.
      Importantly, at the time of its listing, the company’s 58,000 active customers were generating €3.5m in net revenue per month, suggesting the company is enjoying the  benefits of that capped royalty rate.

      Gaming VC is unique in the gaming space as rather than spend excess cash on acquisitions or funding organic growth, it pays a relatively large dividend. For last year, the company paid a dividend 21p, returning a total of €9.6m to shareholders.
      It has stated it will distribute a 21 p as   a final dividend for the next financial year. This gives the shares a reported dividend yield of 9.7%, which by any standards is a fair amount.

Jodi Littlepage is a directors of corporate finance at CitiCourt & Co. Email The views expressed in this article are those of its author and not necessarily of CitiCourt. All information used in the preparation of the article has been obtained from public sources.