CryptoLogic betting on growth
By SIMON AVERY, The Globe and Mail
In poker, the blue chips tend to be worth the most. In investing, blue chips are the most trustworthy stocks with stable returns.
CryptoLogic Inc., which provides the software and support services to some of the biggest gambling sites on the Internet, scatters images of blue poker chips throughout its corporate literature and calls itself a blue-chip company. It's an ambiguous description at best, and a bold bluff at worst.
The Toronto-based company is on course to post sales in excess of $80-million (U.S.) this year, for another impressive round of growth in the range of 30 per cent. A well-known blue-chip technology stock like International Business Machines Corp., in contrast, will show annual sales in excess of $90-billion.
Why do executives at CryptoLogic even float such a notion? Perhaps it's a cry for respect in an industry that is rapidly maturing but still saddled with an image problem.
All of CryptoLogic's customers are based on two tiny islands -- Alderney, in the English Channel, and the Netherlands Antilles, in the Caribbean Sea -- deemed safe places to operate as international governments figure out how to regulate on-line gambling.
CryptoLogic and its competitors admit that they could one day face civil or criminal actions depending on what policies the United States and other jurisdictions eventually implement.
Against this murky backdrop, the company and the industry as a whole are showing increasing financial legitimacy. In the past five years, on-line gambling has grown three-fold, into a $12-billion-a-year business. CryptoLogic sales are up about 85 per cent in that same period, and the company can claim bragging rights to being one of the world's few software or Internet companies to pay a dividend (along with Microsoft Corp.)
"We are truly a Canadian success story," says Lewis Rose, the president and chief executive officer. "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."
Less than 5 per cent of the $248-billion of bets expected to be made this year through legitimate channels will occur on-line, and the Internet gambling industry thinks it can attract a lot more.
Poker accounted for about 30 per cent of the CryptoLogic's revenue in the second quarter ended June 30, up 180 per cent from a year earlier. The bulk of sales, however, came from the more than 150 casino games the company has created, although annual growth in this area was only 4 per cent.
There are more than 1,000 gambling sites on-line today. CryptoLogic's strategy is to serve only the very largest, including WilliamHill, Littlewoods, Ritz Club and Intercasino. The success of the strategy speaks to the quality of the company's technology, but it also carries risks.
Last week, CryptoLogic warned that Sporting Exchange Ltd.'s Betfair.com, the world's largest on-line betting exchange, is considering developing its own software. The news sent CryptoLogic's shares tumbling 23 per cent.
"They have not made a decision to terminate the contract," Mr. Rose said on Friday, but a decision will be made by year-end.
David Shore, an analyst with Desjardin Securities Inc., estimates that the loss of Betfair would cost the company 10 per cent of profits in 2006.
Todd Coupland, an analyst with CIBC World Markets Inc., calculates the loss would cut CryptoLogic's growth in 2006 to just 4 per cent, instead of the 18 per cent he had initially forecasted.
Mr. Rose admits it would be a challenge to replace Betfair with another licensee of its size, but he says CryptoLogic will keep growing. It will attract new customers by adding new casino games, and possibly cash in some of its own blue chips, using any or all of its $93-million of cash to make acquisitions.
Editor, Jackpot.co.uk - 2005-08-15 12:15:38