Cryptologic (CRYP)

1. 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 that growth in the poker segment will only come by adding new licensees (or possibly acquiring them).
2. While the company no longer generates any US business, they still carry a large amount of assets in USD. Management states that the company is naturally hedged through it’s foreign currency operations while keeping assets in dollars but by my quick calculations, CRYP is somewhat long US$.
3. Cryptologic introduced two new CEOs in quick succession. Apparently, the previous CEO agreed to helm the company upon its move to Ireland, then abruptly left due to homesickness. Brian Hadfield took over late last year and while my impression is favorable over the previous CEO, a company racked by uncertainty due to legislation doesn’t need to create any more by playing executive musical chairs.
4. The company faces an impressive competitor, Playtech PLC (London). While CRYP saw revenues fall 29% and operating margins fall off a cliff from 22% to 2% in 2007, Playtech managed to increase revenues and hold operating income (but not margins) steady during 2007. They also garner 21% of revenues from Asia-Pacific, far ahead of Cryptologic and have solid market share in online poker.
5. Fairly weak position in Asia, which doesn’t appear to be generating any revenues for the company. Cryptologic has recently made a series of investments in small gaming companies in China, Singapore, South Korea and first reports are promising but caution is warranted. The prior CEO was overly bullish on Asia and current management has backed of the previous goal of 10% Asian revenues by mid-2008.
6. Cryptologic returned to positive operating (OCF) and free cash flow (FCF) in Q1 2008. However, the company drastically cut CapEx to $664k (down 80% YoY & covering 60% of amortization) to achieve positive FCF. Any sustained decline in CapEx could leave CRYP in a weakened competitive position.
7. The company disclosed material weaknesses in their internal reporting controls in their 2007 annual report. As a small company, they may struggle with the onerous reporting requirements that come with listing in Canada, England and US.
8. CRYP trades relatively low volumes on the NASDAQ exchange, averaging 74,000 shares daily volume. Low liquidity may affect investor ability to maximize entry & exit prices or use derivatives to hedge risk. It doesn’t take a stretch of imagination to see the company de-list from the NASDAQ eventually as the company is headquartered in Ireland, develops in Canada and does no business in the US

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 who has recently announced the termination of their agreement with CRYP in favor of migrating to 888 Holdings PLC, who also happens to have an agreement with Cryptologic for online casino games.
• The company has also noted possible competition between Holland Casino and other clients.

1. The UIGEA act passed in the United States, which effectively shut down the world’s largest online poker/gambling market.
2. In the UK, house profits will be subject to a 15% tax, much higher than in other jurisdictions.
3. Cryptologic regularly mention possible regulatory roadblocks in countries such as France and Italy.