Crypto Hoping Globalization, Centralization Will Counter Poor Performance

11 November 2002

Canadian I-gaming software supplier CryptoLogic Inc. released its third quarter results last week, just days after introducing new multiplayer poker and bingo solutions. The company acknowledged business is suffering and attributed the poor performance to "industry-wide challenges."

Nevertheless, Interim CEO Lewis Rose is confident earnings and profit margins will return to previous years' levels before too long.

"It is our view that as we continue to upgrade our offerings and our clients come on board with the expanded software, we will be less and less reliant on North America."
- Lewis Rose

"It is our view that as we continue to upgrade our offerings and our clients come on board with the expanded software, we will be less and less reliant on North America," he said.

Rose said the company's new proprietary ECash system, which enables users to maneuver seamlessly from bingo, casino and sports betting online using the same account, will compensate for operators' continued challenge of finding alternative payment solutions.

He said many of the company's casino licensees also offer sports betting, and offering customers centralized accounts will keep them on one site for all of their gambling activities.

Crypto joins a host of software suppliers that have created centralized multiplayer poker solutions. Rose is confident that having licensees like Littlewoods Leisure, Hard Rock and William Hill will create enough liquidity to make the system successful in the short term.

But the company's plans go beyond the short term, and Rose feels a major key to success is establishing relationships with heavyweights along the lines of the aforementioned operators.

"It is our view that from a long-term approach, those are the companies that will really shape the industry," he said.

But ultimately, overcoming the payment processing crisis will be the biggest challenge for CryptoLogic, as it is for virtually all of the company's competitors.

CryptoLogic's net income for the third quarter was $1.3 million, or $0.11 per diluted share, exceeding management's expectation of $1.2 million, or $0.08 per diluted share. Revenue for the quarter dropped from $10.7 million in 2001 to $8 million this year. Positive operating cash flow totaled $2.2 million during the quarter. This compares with operating cash flow of $2.1 million in the third quarter of 2001. The company remains debt free and has one of the industry's strongest balance sheets, with total cash resources of $41.5 million as of Sept. 30, 2002.

Revenue in the nine months ended September 30, 2002 totaled $25.6 million, down from $32.4 million in the first nine months of 2001. In the first nine months of 2002, net income before non-recurring items was $5.5 million, or $0.45 per share ($0.43 per diluted share), compared to net income of $14.4 million, or $1.05 per share ($0.95 per diluted share), in the corresponding period of 2001. Including the one-time $10.5 million special charge taken in the second quarter, net loss for the first nine months of 2002 was $4.3 million, or $0.35 per share ($0.35 per diluted share). In line with management's commitment to align its interests with shareholders, senior management and directors purchased 30,000 common shares during the quarter.

The company also repurchased 70,000 shares through its normal course issuer bid during this period.

Rose said CryptoLogic is committed to offering players at its licensees' casinos a broad range of payment options. This is especially important, he said, in light of the decision by some U.S.-based banks to limit the use of their credit cards for Internet gaming transactions as well as PayPal's decision to cease processing these transactions starting Nov. 24, 2002.

In the quarter, CryptoLogic implemented telephone- and e-wallet-based payment applications. Further solutions will follow by the end of the year.