TORONTO, Ontario – (PRESS RELEASE) - CryptoLogic Inc. (TSX: CRY)(NASDAQ: CRYP),a leading software developer to the global Internet gaming industry, reported financial results for the third quarter and nine months ended September 30, 2006, including a 32% increase in quarterly revenue to $27.7 million, and a 47% increase in earnings per diluted share to $0.53. With record year-to-date financial results and $129 million in cash, CryptoLogic will continue to invest aggressively in the growth of its business.
"CryptoLogic's excellent results for the third quarter and the first nine months of 2006 reflect our strategy of innovation and our strong diversified revenue base," said Lewis Rose, CryptoLogic's President and CEO. "We have already recorded higher earnings in the nine months to date in 2006 than we did for all of 2005."
---------------------------------------------------------------------------On October 13, the United States Government passed the Unlawful Internet Gambling Enforcement Act into law, effectively banning online gaming in the US. CryptoLogic had already taken action by ensuring that all of its licensees had stopped accepting bets from US players. While this will significantly reduce the company's revenue and earnings in the short-term, CryptoLogic is poised to be a leader in a new online gaming world that excludes the US market.
Financial Highlights Three months ended Nine months ended
(in millions of US dollars, September 30, September 30,
except per share data) 2006 2005 % Change 2006 2005 % Change
---------------------------------------------------------------------------
Revenue $27.7 $21.0 32% $85.0 $61.2 39%
Charge re: Irish HQ $1.6 - $2.6 -
Earnings $7.2 $5.1 41% $23.1 $14.7 57%
Earnings per diluted share $0.53 $0.36 47% $1.68 $1.04 62%
EBITDA(1) $7.6 $5.9 27% $25.7 $17.3 48%
Casino revenue $16.3 $12.6 29% $49.2 $37.5 31%
Poker revenue $8.3 $7.0 19% $27.2 $19.1 43%
"Since 2001, CryptoLogic has been preparing for this eventuality by shifting its business to continental Europe and the UK. We have achieved record year-to-date revenue and earnings and we now power the world's largest poker network that excludes US players," Rose added. "Our company's diversification, strong balance sheet, thriving European customers and potential new business in emerging markets enable us to face the future with confidence."
Since passage of the US law, CryptoLogic has announced the following developments to strengthen the company:
- Signed an exclusive new poker licensee (Betsafe);
- Unveiled two new exclusive games (Hold&'em Blackjack™ and Cubis);
- Introduced an innovative new Poker Tournament Leader Board; and
- Announced that it is maintaining its quarterly cash dividend of US$0.12.
In addition, since the last quarterly report, CryptoLogic has:
- Enhanced its poker network platform to triple poker room capacity and increase uptime;
- Enhanced its contact centre technology and systems to dramatically improve customer service and operating efficiency;
- Renewed its normal course issuer bid.
Financial Performance Ahead of Estimates
Total Revenue. CryptoLogic grew total revenues to $27.7 million, 32% ahead of Q3 2005 and ahead of the company's estimate of $26.5 to $27.0 million, due to solid organic growth in Internet poker and Internet casino fees.
EBITDA(1). The company grew EBITDA(1) to $7.6 million, 27% higher than Q3 2005. EBITDA(1) margin in the quarter was 27%, slightly below 28% in Q3 2005. The decrease was due to $1.6 million in reorganization costs incurred in Q3 2006 associated with the proposed establishment of CryptoLogic's new executive headquarters in Ireland. Excluding the charge, EBITDA(1) would have been $9.2 million and EBITDA(1) margin would have been 33%.
Earnings and Earnings per Diluted Share. CryptoLogic grew earnings to $7.2 million, 41% higher than Q3 2005, and grew diluted earnings per share to $0.53, 47% ahead of Q3 2005 and above the company's estimate of $0.48 to $0.51. The company attributes the better-than-expected results to greater-than-anticipated revenue in the quarter and lower general and administrative costs in the quarter, due primarily to a recovery of $0.8 million in previously-paid sales taxes. Excluding the charge for the proposed Irish headquarters, Q3 earnings would have been $8.9 million and diluted EPS $0.64 (up 73% and 78%, from Q3 2005).
Balance Sheet and Cash Flow. CryptoLogic's financial strength continued to be reflected in its strong balance sheet and operating cash flow. At September 30, 2006, total cash grew to $129.2 million (comprising cash and cash equivalents, short term investments, and security deposits), or $9.37 per diluted share (December 31, 2005: $99.1 million, or $7.05 per diluted share). The company continues to be debt-free. CryptoLogic's working capital at September 30, 2006 rose to $97.2 million, or $7.05 per diluted share (December 31, 2005: $73.6 million, or $5.23 per diluted share). Cash flow from operating activities was $5.7 million in Q3 2006 (Q3 2005: $14.2 million). Cash flow from operations in Q3 2005 was higher than in Q3 2006 despite lower earnings because of favourable fluctuations in non-cash operating assets occurring in that quarter in the ordinary course of business.
Record Nine-month Results
CryptoLogic reported record results for the nine months ended September 30, 2006, reflecting substantial organic growth in licensees' online gaming activities over the comparable period in 2005:
- Revenue: $85.0 million, or 39% higher;
- EBITDA(1): $25.7 million, or 48% higher;
- EBITDA(1) excluding restructuring costs: $28.3 million, or 63% higher;
- EBITDA(1) margin: 30% vs. 28%;
- Earnings: $23.1 million, or 57% higher;
- Earnings excluding restructuring costs: $25.7 million, or 75% higher;
- Earnings per diluted share: $1.68, or 62% higher;
- Earnings per diluted share, excluding restructuring costs: $1.87, or 80% higher;
- Cash flow from operating activities: $35.4 million, or 51% higher.
Strategic Milestones
Since CryptoLogic's last quarterly results announcement, the company has significantly advanced all of its key business strategies: customer, geographic and product diversification, and product innovation. The company also made progress through major corporate initiatives.
Customer Diversification. CryptoLogic continued to maximize and diversify its growth opportunities across a select portfolio of successful customers with the announcement of an exclusive three-year contract with Betsafe, one of the fastest-growing poker sites in one of the world's fastest-growing poker markets-Scandinavia. Having signed both Betsafe and Playboy, the company has achieved its goal of adding two new licensees in 2006, and continues discussions with other new prospects.
Geographic Diversification. During Q3, the company maintained its diversification across jurisdictions with strong opportunities for growth and profitability. More than 70% of licensees' revenue continued to be generated from markets outside the US. The UK and continental Europe together accounted for over 60% of total revenue in the quarter. Since the passage of prohibition legislation in the US after quarter-end, WagerLogic's licensees no longer take bets from US players. Today, 100% of licensees' revenue comes from markets outside the US.
During Q3, CryptoLogic also established its first Asian presence in Singapore and hired a Managing Director for the region. While the company's short-term focus is on Europe, CryptoLogic sees Asia as the next major online gaming market. There are approximately four billion people in Asia, or 10 times the population of North America, and gaming has been part of Asian culture for thousands of years.
Product Diversification and Innovation. In Q3, CryptoLogic continued its focus on the most promising online gaming product markets: casino and poker. During Q3, Internet casino fees represented 59% of revenue, while Internet poker fees contributed 30%. In Q3 and more recently, CryptoLogic furthered its reputation as the industry's innovation leader with the announcement of exciting new initiatives:
- Two new exclusive games-the first ever slot version of Cubis®, an award-winning, visually stunning, hugely popular three-dimensional puzzle game, and Hold'Em Blackjack™, a brand new internally-developed poker game that combines the simplicity of blackjack with the intensity of Texas Hold'Em poker;
- Poker Tournament Leader Board. An innovative feature that provides poker licensees new opportunities to create exciting events and gives their players new chances to win;
- Distributed poker. The new poker platform triples poker room capacity, increases uptime and lets licensees locate the room and/or introduce new games with little or no disruption;
- Enhancements to CryptoLogic's contact centre technology and systems have dramatically improved customer service and operating efficiency.
Corporate Initiatives. To be close to its customers and the heart of the online gaming world, CryptoLogic has announced its intention to establish its executive headquarters in Dublin, Ireland, subject to shareholder and regulatory approvals. The company is moving forward with the initiative, but certain aspects of it are taking longer than expected. The company no longer expects to hold the shareholder meeting in December and will provide an update in due course.
Additionally, the company has declared a dividend of US$0.12 per share, which is unchanged from the previous two quarters. The dividend represents an increased payout rate of future earnings, which are expected to be affected in the near term as the company's licensees no longer accept bets from US players. CryptoLogic has demonstrated a track record of strong revenue generation, consistent earnings and positive cash flow. The decision to increase the dividend payout rate reflects CryptoLogic's ongoing confidence in its business.
The company also renewed its normal course issuer bid, authorizing share repurchases of up to 10% of the public float in a year.
Strategy Update and Outlook
While licensees' exit from the US market will affect financial results in the short term, the company remains optimistic about the future of online gaming and the company's position as one of the leaders within it. CryptoLogic is in excellent financial position to build on the global strategy that has led to record results in both 2005 and 2006. In particular, the Company will:
1. Continue its game innovation strategy. The company is fully committed to several innovative casino and poker projects, both underway and planned, and is confident they will contribute to building licensees' revenue as similar projects have done before.
2. Aggressively pursue new poker opportunities, like Betsafe, that will enhance the liquidity of licensees' poker network-already the world's largest that excludes US players.
3. Tightly control and optimize expenditures by a thorough review of discretionary costs, operating expenses and capital expenditures. The company is not planning significant changes to its cost structure as the company will use current resources to execute current projects and take advantage of significant revenue-enhancing opportunities in Europe, Asia and other major international markets.
4. Aggressively pursue strategic, accretive acquisition opportunities to accelerate the advancement of the company's strategies. Acquisition opportunities have multiplied since passage of the new US law, and the company will continue to evaluate new and existing prospects.
5. Expand in Asia. CryptoLogic will continue to build its European leadership position and over time will expand its Asian presence to become a leader in this large, emerging market.
For Q4 2006, CryptoLogic estimates that revenue will be $19.0-$20.0 million and earnings will be $1.5-$2.0 million, or $0.11-$0.15 per diluted share, after special pre-tax restructuring costs of $1.4 million ($0.21 to $0.25 per diluted share before such costs). These Q4 estimates reflect the departure of Betfair from the licensees' poker network but do not include the addition of Betsafe, which is expected to launch late in Q4. The company expects to begin earning revenue from Playboy beginning in Q1 2007.
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