NEW GROWTH STRATEGY FOR CRYPTOLOGIC

14 November 2008

Quarter three results released

 

The Dublin-based online gambling software provider Cryptologic has released its third quarter results and details of a new growth strategy.

The company posted revenue of $14.0 million and a net loss of $5.9 million, including a foreign exchange loss of $4.2 million, but projected a favourable outlook for 2009 following significant new customer wins and yesterday's announcement of a new strategic poker partnership with Boss Media - GTECH Corporation that will help reduce operating expenses and increase profitability, expected to slash annual operating costs by between $12 and $15 million.

This move is part of CryptoLogic's strategy to achieve revenue growth and profitability by focusing exclusively on its very popular branded games and its Internet casino business. The shift will enable the company to build on its fast-growing list of major casino customers and its leadership in the branded gaming space, management claims.

"In a challenging year for our company and our industry, we recognize that we must do better - and that is why CryptoLogic is aggressively implementing its strategy to achieve profitability and growth in 2009," said Brian Hadfield, CryptoLogic's President and CEO.

"CryptoLogic's proven casino offering is attracting new customers more swiftly than ever before, and our branded games have earned the confidence of some of the world's biggest gaming operators. And we have already begun reducing our operating costs - a trend that will continue as we implement our new poker partnership."

The company booked a significant foreign exchange loss in the quarter due to the rapid and unexpected appreciation of the U.S. dollar against the U.K. sterling and the euro; CryptoLogic has since moved substantially all of its cash and marketable securities into U.S. dollars to minimize the impact of further currency market volatility.

Operational highlights in the third quarter include:

* CryptoLogic has found attractive and lucrative opportunities licensing some of its leading games to large global Internet gaming operators such as 888.com and the company's newest customer, PartyGaming.

* Based on the success of the initial launch of CryptoLogic's games in early October, 888.com has ordered 10 more, bringing the total number of games to 13.
Internet casino: licensing & launches

* In August, CryptoLogic announced a three-year contract with the Gaming Media Group Limited, owner of The Poker Channel, Europe's largest dedicated gaming television network. CryptoLogic will develop an Internet casino using its award-winning casino software. The site will be available to players around the world - in five languages - later this year.

* CryptoLogic also announced a three-year casino licensing contract with Sky Betting & Gaming, part of BSkyB Group plc (BSkyB), the U.K.'s leading entertainment brand. A selection of CryptoLogic's top non-downloadable casino games will be available on SkyVegas.com by early 2009.

* Subsequent to end of Q3, CryptoLogic launched a new site for Betjacks, one of the company's new European clients. The site went live on November 4, 2008.

* CryptoLogic announced an exclusive multi-year licensing contract with GigaMedia Limited, a major provider of online entertainment software and services. CryptoLogic will be the only external provider to offer casino software across the Everest Gaming platform - GigaMedia's gaming technology offering.

* CryptoLogic launched a new game pack featuring Sub-Mariner, another famed Marvel Super Hero, and 4 Deck Multi Hand Video Blackjack, a patent-pending product developed exclusively by CryptoLogic.

* Subsequent to the end of Q3 on September 30, the company launched Bonus Pack 15, a new seven-game lineup featuring branded games based on Merian C. Cooper's King Kong and the popular Casinomeister portal, new European Blackjack and upgraded European Roulette software, and other innovations.

*On November 7, CryptoLogic announced an agreement with NextGen Gaming, the world's leading independent developer of slot games, under which the two companies will collaborate on both the development and the distribution of branded games.

The company has been active in seeking new markets:

* In August, CryptoLogic's investment in Mahjong Time showed its significant potential when the company signed a licensing agreement to gain access to 50 percent of the Internet cafes in China.

* In early October, CryptoLogic announced an exclusive licensing agreement with Kurastica, an operator doing business in Russia and the Commonwealth of Independent States (CIS). The multi-year deal means Kurastica will begin offering CryptoLogic's award-winning Internet casino software through various channels in early 2009.

CryptoLogic's revenue for Q3 2008 declined by 16.4 percent to $14.0 million compared with the previous quarter, and 19.7 percent down when compared with the same period last year.

The company's Internet casino revenue was slightly over $10.1 million, compared with $10.8 million in the second quarter. Poker revenue was $3.2 million, down from $3.6 million in Q2. The company attributes these decreases to a combination of reduced Internet gaming in the summer months and reduced marketing activity by one of its major licensees.

Revenue for the nine months ended September 30, 2008 was $50.2 million, a decrease of 5.9 percent when compared with the same period of 2007. However, after adjusting for certain non-recurring benefits recorded in the first nine months of both 2008 and 2007, revenue was essentially flat when compared to the same period of last year.

Operating expenses for the quarter ended September 30, 2008 were $16.5 million, or 117.5 percent of revenue (Q3 2007: $11.8 million or 67.3 percent of revenue).

For the nine months ended September 30, 2008, operating expenses were $44.1 million or 87.9 percent of revenue (September 30, 2007: $36.7 million or 68.9 percent of revenue).

Operating expenses increased primarily due to a $4.2 million loss on foreign exchange recorded during the quarter as the U.S. dollar appreciated by approximately 10 percent against both the U.K. pound and the euro during a period where the company had significant net asset positions in these currencies. CryptoLogic has since moved substantially all of its cash and marketable securities into U.S. dollars, the company's reporting currency, to minimise the reported impact of further currency market volatility.

Net cash (comprised of cash, cash equivalents and short-term investments) was $48.7 million (June 30, 2008: $64.4 million).

Management commented that on October 20, 2008, CryptoLogic adopted a new strategy that features a major change to its business model:

* Casino licensing: Internet casino is by far CryptoLogic's most profitable business, and the company expects significant revenue growth from this segment in 2009, thanks to the 10 new customers signed in 2008, and others to come. CryptoLogic will continue to sell customised casino solutions to both established and emerging gaming brands.

* New channels for CryptoLogic games: With the highest-rated casino games on the market, CryptoLogic has found attractive opportunities selling its leading games to other top brands, such as 888.com and PartyGaming. These and other large global gaming sites offer significant revenue potential for 2009 and beyond.

* Branded content: The company has been a pioneer in taking top entertainment brands - from legendary superheroes to world-famous video and casual games -- and converting them into highly popular and profitable casino products. CryptoLogic will focus and build on this expertise.

*Poker partnership: CryptoLogic is outsourcing its poker network (to Boss Media) to increase liquidity and profitability for customers, while reducing the company's own expenses substantially.

* New markets: The company will continue to develop its business and manage its recent investments and new relationships in China, Korea, Russia and Singapore to achieve long-term growth.

CEO Brian Hadfield says that 2008 is proving to be a challenging year, due to the combination of a business slowdown and necessary transitions in the company's management and business model.

However, he remains cautiously optimistic for 2009, due to the company's new business strategy, lower anticipated costs, recent and pending implementations of sites for new customers, and positive responses to the company's newest branded casino games.

In the fourth quarter, CryptoLogic is launching sites for Betjacks, GigaMedia and the Poker Channel, and early 2009, the company will launch sites for BSkyB and Kurastica, and implement six of its most successful games on PartyGaming's popular casino site.

The company has also released another suite of promising new branded games, including King Kong, which has received positive initial reviews from customers and players alike, and continues to have an active pipeline of potential customers and branded gaming partners.