CryptoLogic Dismisses Betfair/InterCasino Doom

30 August 2005

CryptoLogic Inc. says published reports on its demise are greatly exaggerated and in some cases entirely inaccurate.

The speculation was sprung by the company's disclosure that one of its biggest poker licensees, Betfair, might be switching software suppliers. As a publicly traded company, CryptoLogic was required to inform shareholders that the loss of Betfair as a licensee was possible, but company officials are stressing that the termination of their agreement is by no means a certainty.

The two companies' software agreement will expire in a few months, and representatives for U.K.-based Betfair, which operates the world's leading betting exchange, said the group is simply exploring its options--one which is developing proprietary poker software.

Adding to the negative news surrounding CryptoLogic were reports that the company dropped its biggest and oldest licensee, InterCasino.

Company officials acknowledged that a few operators were trimmed from its list of licensees in early 2005, but those companies represented less than 1 percent of Crypto's overall revue. The InterCasino news, the company stated, was erroneous.

The Betfair situation and the InterCasino rumor have overshadowed a solid second quarter that put the company on course to post sales of more than $80 million in 2005 (a 30 percent increase over last year's figure). Further, the company has increased sales by 85 percent over the last five years, due in large part to the growth of poker, which accounted for about 30 percent of revenues in Q2 2005 (an increase of 180 percent over the same period last year).

Lewis Rose, CryptoLogic's president and CEO, said the company's achievements are often overlooked and that it is one of only a small number of technology firms that pays out a dividend to its shareholders.

"We are truly a Canadian success story," Rose said. "There are very few companies here that have grown from their entrepreneurial roots to become blue-chip leaders in their sector, listed on not just the Nasdaq--but on the main board of the London Stock Exchange--and I believe that the industry still has significant growth potential."

Rose said Crypto's approach has been to draw "top tier" companies as licensees and it has fulfilled its goals by attracting the likes of top British operators William Hill, Littlewoods and Ritz Club.

Betfair, he said, has until the end of the year to decide whether it will stay with Crypto.

"They have not made a decision to terminate the contract," he said. "They have told us they would like to bring core network technology in house. If that is their strategy it is possible that poker would be part of that strategy. Our focus is on trying to retain them as a customer in the meantime."

Rose wouldn't disclose how much money Betfair generates for Cryptologic, but said that if it was to leave it could have "a material effect" on next year's earnings.

Crypto's share price tumbled by 18 percent after news of Betfair's possible departure, and analysts say that Crypto will more than likely take a hit if Betfair goes on its own

Todd Coupland, an analyst with CIBC World Markets Inc., estimates that the loss Betfair would cut CryptoLogic's growth in 2006 to just 4 percent compared to the 18 percent initially forecast.

David Shore, an analyst with Desjardin Securities Inc., estimates that the loss of Betfair would cost the company 10 percent of profits in 2006.

Rose insisted, however, that even if Crypto loses Betfair as a licensee, the software supplier will be able to keep growing and indicated that they might turn to their $93 million in cash to make acquisitions

CryptoLogic says it will update shareholders on the Betfair situation as soon as a decision is made.

Betfair, meanwhile is preparing for a £700 million to £800 million float on the London Stock Exchange.

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