Cryptologic (CRYP)

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See all Bulls Reasons Bulls: Reasons To Buy More upside potential 100% agree More upside potential Historically strong business with 5-year avg of $16M in annual FCF, 3-year avg of 26% ROIC (despite last year’s 1% ROIC), and 20%+ operating and net income margins before UIGEA. Rock solid balance sheet: zero debt and $75M unrestricted cash ($81M total) Over 90% of... read more View or Edit Reason 1 votes 100% agree Even with the US taking away online gambling, Cryptologic stayed strong 100% agree Even with the US taking away online gambling, Cryptologic stayed strong Even with the US taking away online gambling, Cryptologic stayed strong. The management is always prepared; they were ready for the US to pull out last fall. Moreover, investments in various small companies throughout Asia could open those markets up. Many Asian countries... read more View or Edit Reason 1 votes 100% agree "Even with the US taking away online gambling, Cryptologic stayed strong" 0% agree "Even with the US taking away online gambling, Cryptologic stayed strong" Even with the US taking away online gambling, Cryptologic stayed strong. The management is always prepared; they were ready for the US to pull out last fall. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell Major Risks 100% agree Major Risks The company’s online poker segment is struggling at the moment. Last year, the company lost the contract of Betfair, who took their software support in-house. This reduced the liquidity (which is vital to online poker) of the poker room by 33%. Management has projected... read more View or Edit Reason 1 votes 100% agree Company's position as middleware puts it in competition with its customers 100% agree Company's position as middleware puts it in competition with its customers Cyptologic’s position in the industry, as the middleware between the consumer and the branded casino site, sometimes puts the company in the position of competing against its own clients. For example, a client, Sportech PLC via the Littlewoods gaming sites, is a client... read more View or Edit Reason 1 votes 100% agree Cryptologic and others are subject to considerable political risk. 100% agree Cryptologic and others are subject to considerable political risk. The UIGEA act passed in the United States, which effectively shut down the world’s largest online poker/gambling market. In the UK, house profits will be subject to a 15% tax, much higher than in other jurisdictions. Cryptologic regularly mention possible regulatory roadblocks in countries such as France and Italy. View or Edit Reason 1 votes 100% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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A positive outlook for the rest of 2008 and 2009 has been forecast for Cryptologic based on the signing of seven new clients, new poker room licenses, system enhancements, potential acquisitions, and collaboration with other Internet poker networks. However, net loss for Q2 2008 was $1.5 million (compared with a net loss of $2.6 million a year earlier) despite the revenue increase of 3% to $16.8 million. This loss is attributed to a 16% rise in operating expenses and general and administrative expenses being doubled.^[1]

Based on the company's 2007 annual report, 93.6% of the revenue is recurring royalty revenue. It continues to have a strong balance sheet, ending the quarter with $81.0 million in net cash (or $5.81 per diluted share), no debt and continues to advance in the Asian market; it acquired a substantial minority interest in South Korea's Mobilebus Inc. in 2008. The company has achieved its set goals in the past and has the largest share of the European poker market Casino revenues which has created the largest.

CryptoLogic works with International brand name gaming and media customers such as William Hill^[2], Playboy Gaming, Littlewoods^[3], InterCasino^[4]and Holland Casino^[5]. The company has 10 licensees which include DTD Poker, Betsafe.com, Oceania Caribe Licensing NV (PlayboyGaming), Parbet.com, Holland Casino and Khel Galli^[6]. In February 2008, CryptoLogic hired Brian Hadfield as its new President and CEO.

The company expects a lower level of revenue in the second quarter since the Euro 2008 football championships has caused a decrease in the number of individuals gambling online. However, the company has signed five new customers in Q2, 2008^[7][8] Also, Betsafe, a leading supplier of online gaming with over 70000 customers in 100 countries, recently announced^[9] an enhancement in its payment system that provides more opportunities for cross-selling from the sportsbook to the poker product, which translates into potentially higher revenue for CryptoLogic.

[edit] Business Overview

Online gambling and e-gaming is a growing market. The global online gaming industry including the United States grew from $5.7 billion in 2003 to $10.7 billion in revenue in 2005 (source: Global Betting and Gaming Consultants, February 2007 (“GBGC”)). CryptoLogic reports that by 2010 e-gaming is expected to grow to US $24B, which is still just 7% of the total global gaming market^[10]. This provides a vast opportunity not only for CryptoLogic but also for its competitors: GameTech International^[11], Bingo.com Inc.^[12], Boss Media AB^[13], Aristocrat Leisure Limited^[14], International Game Technology^[15].

[edit] Financial Performance and Highlights

Two important factors in CryptoLogic's winning strategy, thus far, have been developing new games and investment in global markets. In Q2/2006, CryptoLogic's casino revenue grew 19% sequentially and 50% year over year, and represented $17.9 million of the $30.4 million revenue. This growth was in part due to the launch of the new Casino Game Pack 9.0 in June, 2006^[17]. Other games such as the Millionaire's Club, one of their most popular slot games, has drawn in great revenue for the company as well. Recently, the Millionaire's Club awarded more than $1.3 million to a player at LittlewoodsCasino.com^[18]. The opportunity to win a large sum of money will be beneficial to CryptoLogic as gamblers take more shots at the jackpot. Moreover, in 2006, CryptoLogic experienced growth in Internet casino and Internet poker markets, signed up new clients in the UK as well as Sancinavia, and started its venture into the Asian market. In Q1 2008, CryptoLogic has reported the following:

[edit] Revenue

• CryptoLogic’s customer revenue (i.e., excluding unique items) was up 21% to $18.3 million (Q1 2007:$15.1 million), led by 33% growth in the Internet casino business.
• Total revenue was largely unchanged from 2007: $19.3 million in Q1 2008 (Q1 2007: $19.6 million).
  • Internet Casino Revenue:
    • In Q2 2008, Internet casino revenue increased 5.7% to $10.8 million (compared to Q2 2007: $10.2 million). Internet casino revenue accounted for 64.3% of total revenue for Q2 2008 (compared to Q2 2007: 62.9%).
  • Internet Poker Revenue:
    • In Q2 2008, Internet poker revenue declined 27.1% to $3.6 million (compared to Q2 2007: $5 million). Internet poker accounted for 21.6% of total revenue in this quarter (compared to Q2 2007: 30.7%).
  • Other Revenue:
    • In Q2 2008, other revenue (including fees for software customization, services, marketing) increased by 127% to $2.4 million (compared to Q2 2007: $1 million). In this quarter, other revenues accounted for 14.1% of total revenue (compared to Q2 2007: 6.4%).

[edit] Expenses

• Operating expenses were $14.4 million (Q1 2007: $13.6 million), up $0.8 million from a year ago; after normalizing for unique items, operating expenses were $12.6 million, a 7.9% decrease from Q1 2007.

[edit] Net Earnings

• Net earnings were $0.6 million, or $0.06 per fully diluted share (Q1 2007: $1.5 million). The reduction is due largely to the one-time expenses noted above, and to a $4.5 million one-time benefit recorded in Q1 2007.

[edit] Balance sheet

• Net cash was $81.0 million on March 31, 2008, up $3.5 million since December 31, 2007.

Key recent contributing factors:

• extending and expanding relationships with World Poker Tour (WPT)^[20],
• purchasing a popular gaming portal: casino.co.uk,
• arranging licensing agreements with 888.com, 0Poker.com and Maharajah Club,
• investing $2.5 million in Mahjong Time (with more than 600 million players)^[21],
• acquiring a substantial minority interest in South Korea's Mobilebus Inc., one of Asia's fastest-growing mobile and PC game developers and publishers.^[22]

According to the annual report, it extended its relationship with World Poker Tour (WPT). WPT has agreed to add Spanish and German language Internet poker rooms and extend its exclusive use of CryptoLogic software until at least mid-2011. In Q1 2008, ending on March 31, the company posted revenue of $19.3 million and net earnings of $609,000, or $0.06 per fully diluted share.^[23] This showed growth in revenue by 21% compared to the same period a year ago due to strong casino growth from new offerings featuring Marvel Super Heroes Spider-Man and the Fantastic Four and an increased number of licensees. However, this is a a decrease of 5.1% as compared with Q4/2007.

[edit] Significant Sales and New Releases

CryptoLogic has recently launched seven exclusive new casino games including the Internet's first slot version of the world-famous Street Fighter II arcade game and titles featuring the famed Marvel Super Hero Sub-Mariner and 4 Deck Multi Hand Video Blackjack^[24]. The company has created games that provide players with either a fresh take on a familiar concept or experience with a game that they know (e.g. bingo, poker).

[edit] Risks and Challenges

Cryptologic faces challenges created by changes to, or interpretation of, government regulation around the world that may apply to online gaming as some jurisdictions have introduced regulations restricting or prohibiting Internet gaming. While the United Kingdom and other European countries are adopting a regulated online gaming approach, others, including Italy, Germany and France are taking action aimed at banning foreign online gaming operators to protect their monopolies. Cryptologic reports^[25] that "such actions by these European Union (“EU”) member states are in conflict with a decision of the European Court of Justice that challenges the monopolies and have prompted the European Commission (“EC”) to look at creating new legislation that could harmonize online gaming within the EU, which is in line with the EC’s goal to encourage a free and open cross-border market. There is no indication that any such directives will be introduced in the near term. In the meantime, however, the EC has initiated infringement proceedings against some EU member states in relation to alleged breaches of Articles 43 and 49 of the EC Treaty (which articles enshrine the principles of freedom of establishment and movement of services)."

[edit] Growth Strategy and Accumulation of Debt

As of April of 2008, CryptoLogic continues to have a strong balance sheet and continue to be debt-free^[26].

Since 2002, CryptoLogic has shifted its business to Europe. In May 2008, CryptoLogic signed licensee agreements with 888.com, 0Poker.com and Maharajah Club. It further advanced into the Asian market by making an investment in Mahjong Time^[27], which is an innovative provider of online Mahjong software and turnkey solutions with a following of more than 600 million players. Furthermore, CryptoLogic acquired a substantial minority interest in South Korea's Mobilebus Inc., one of Asia's fastest-growing mobile and PC game developers and publishers^[28]. By the summer of 2006, CryptoLogic expects 70% of their licensee's revenue to come from International sources. Currently no revenue comes from the US; mainly from the UK, Continental Europe and Scandinavia.

In 2006, it released 25 new downloadable casino games, 24 non downloadable versions of their casino games, 5 new Marvel Super Hero games, the Frightmare slot series and Blackjack TM (a combination of Blackjack and Poker)^[29]. In its Q1 2008 report, CryptoLogic vows to "[target] a return to its 2006 revenue and earnings levels by the end of 2009."^[30] It plans to grow its core businesses by

• releasing more innovative casino games and using tournaments and other innovations to attract loyalty and liquidity to its licensees’ shared poker room,
• targeting new licensees, and
• diversifying further into Asia and into mobile gaming.

Currently CryptoLogic is providing services to the US$12 billion global e-gaming market, which represents just 5% of the total gaming market, worldwide^[31]. Through introducing new online games, maintaining and expanding their client pool, and diversify their investments in vast markets as the Asian markets, achieving exclusive agreements with large players in the online gambling market such as WPT, the company has been able to reach its set goals.

[edit] Competition and Market Share

In March 2008, Boss Media was acquired by GEMed, a company jointly owned by GTECH (87,5 percent) and Medströms (12,5 percent^[32]. Consequently, Boss Media no longer is listed on the Stock Exchange as of April 18, 2008. However, this company is the most similar-in-nature competitor of Cryptologic, is a developer of software and systems for digitally-distributed gaming entertainment. Initially an Online Internet casino and gaming portal, they have now averted their attention to gaming operations: a game system, a payment system, a management system, and services for surveillance, maintenance, technical support and customer support.

GameTech International^[33] designs, develops and markets electronic Bingo systems (both portable and fixed based), manufactures and sells video lottery terminals^[34].

Bingo.com^[35] develops and operates a Web portal to provide Internet based games including Bingo. The company offers an online community, chat rooms, contests, sweepstakes, and tournaments. Other than players depositing funds on their website, the company generates revenue from selling advertising on its portal.

Aristocrat Leisure Limited is the largest gaming manufacturer in Australia^[36] and focuses on spinning reel slot machines, gaming systems managing slot machines, card game simulations, electronic table games and jackpot systems.

International Game Technology focuses on slot machines and their related online games^[37].

In such a competitive market with immense potential for profit gain, CryptoLogic's utilizes diversification of online games, user friendliness due to continuous customer service, accessibility in multiple languages, and outreach to other markets (in Europe (e.g. UK, Ireleand^[38]), Asia (e.g. China, South Korea) and South Asia (e.g. India^[39])) to stand out.

On September 29, 2006, the United States Congress approved the Unlawful Internet Gambling Enforcement Act (UIGEA), which was made law on October 13, 2006, prohibiting financial transaction processing in the US online gaming market. At the time the UIGEA was passed, approximately 30% of CryptoLogic’s licensees’ revenue was derived from US- based players, while the entire US market was estimated to represent approximately 50% of the global online gaming market (GBGC). Since 2002, Cryptologic has gradually shifted its focus to targeting international markets, most notably the UK and continental Europe.^[40] Accordingly, the company has no revenue from the US and thus further US regulation can not affect its revenue dramatically. However, the UK government is expected to finalize its new online gaming licensing and regulatory framework^[41]. Other European countries are also moving towards regulating Internet gaming with which CryptoLogic has complied with thus far.

[edit] Awards

Gambling Online Magazine's Top Casino Software Award for world-class software (2008, 2007, 2006)^[42]

[edit] References

1. ↑ "Cryptologic posts surprise Q2 loss" August 8, 2008
2. ↑ William Hill
3. ↑ Littlewoods
4. ↑ InterCasino
5. ↑ Holland Casino
6. ↑ CryptoLogic Signs First Major Asian Customer-in India
7. ↑ Cryptologic news release Q2, 2008
8. ↑ Cryptologic expects its Q2 revenues to be lower than Q1 but up on last year
9. ↑ Cryptologic Integrates Poker Site Into Betsafe eWallet
10. ↑ CryptoLogic Overview
11. ↑ GameTech International
12. ↑ Bingo.com
13. ↑ Boss Media
14. ↑ Aristocrat Leisure Limited
15. ↑ International Game Technology
16. ↑ 20-F (2007) Cryptologic Ltd., Item 3: Selected Financial Data
17. ↑ [Cryp equity research]
18. ↑ CryptoLogic's Millionaire's Club Adds New Millionaire
19. ↑ (Q2 2008) Cryptologic Ltd., Report of foreign issuer rules 13a-16 and 15d-16 of the Securities Exchange Act
20. ↑ [1]
21. ↑ [2]
22. ↑ "Cryptologic buys into Mobilebus" April 9, 2008
23. ↑ CryptoLogic's Q1 Interim Report 2008
24. ↑ "Don't cry for me Cryptologic", Nigel K
25. ↑ Form 20-F December 2007
26. ↑ 6-K SEC Filing, filed by CRYPTOLOGIC LTD on 6/4/2008
27. ↑ Mahjong Time
28. ↑ CryptoLogic to take substantial minority stake in South Korea's Mobilebus
29. ↑ CryptoLogic News 2006
30. ↑ Q1/2008 Interim Report
31. ↑ CryptoLogic Investor Information
32. ↑ BossMedia Company Overview
33. ↑ GameTech Inc.
34. ↑ GameTech's Form 10-K for the fiscal year ending October 31, 2007
35. ↑ Bingo.com
36. ↑ Aristocrat Wikipedia Entry
37. ↑ International Game Technology Wikipedia Entry
38. ↑ CryptoLogic Announces Exclusive Deal With New Irish Online Gaming Site
39. ↑ CryptoLogic Signs First Major Asian Customer-in India
40. ↑ [www.cryptologic.com/investor/documents/CIRCULAR-FINAL-25APR07.pdf Notice of special meeting of holders of common shares of Cryptologic Inc. and management information circular]
41. ↑ Current Version of UK's online gaming licensing and regulatory framework
42. ↑ Top Casino Software Award