FP articleGamble on CryptoLogic paying off
Financial Post - Tuesday November 4, 2003
By Kevin Restivo
Stock up 96% this year
The betting world isn't often known for guaranteed money makers. But investors that have put money down on Canadian Internet gambling software provider CryptoLogic Inc. this year haven't been disappointed.
The Toronto-based tech company has seen its shares (CRY/TSX) gain 96% this year. Unlike many of the online gamblers that come away losers from casinos, CryptoLogic investors have watched their shares surge -- and remain stable this year-- amid a wave of positive announcements including a 3¢ quarterly dividend and regular dividends after the company's fourth quarter. The shares closed at $14.74, up 19¢ yesterday.
Investor optimism has also stemmed from the company's better recent quarterly results.
For the quarter ended June 30, CryptoLogic reported net income of $2.6-million, or 21¢ per share compared to $2-million (16¢) in the second quarter last year. Sales increased to $10.8-million, a 22% jump over the company's prior-year period. CryptoLogic reports third-quarter results on Thursday.
CryptoLogic generates sales by selling software licenses to reputable international casinos so that they can offer popular games such as poker and bingo on their Web sites. CryptoLogic also generates sales from transaction fees in some instances.
It's a model that seems to be gaining momentum. Though overall sales are still small, CryptoLogic has been solidifying support with a small group of company observers.
That's because sales in markets other than the U.S. are improving an important development for CryptoLogic. In the quarter ended June 30, CryptoLogic's non-U.S. revenue increased to US$6.5-million, or 60% of the company's overall sales.
The company has identified non-U.S. sales as increasingly important, given that regulations preventing online gambling continue to hinder company sales in the world's largest market.
"The U.S. marketplace is uncertain, so we're not banking on it," says CryptoLogic chief financial officer Jim Ryan. "Our entire sales and marketing strategy is focused on the international arena."
Desjardins Securities analyst David Shore says now that international sales are improving, "CryptoLogic may pursue smaller players with specialized products that can provide greater leverage to growth by catering to an array of consumer tastes and cultural specifications."
To that end, CryptoLogic also said in September that it had received approval for its shares to begin trading on the London Stock Exchange which the company hopes will give it a broader shareholder base and help the Toronto-based firm expand its profile overseas.
In the meantime, questions about the company's growth prospects persist as U.S. legislators continue to make online gambling a legislative whipping boy.
As a result, CryptoLogic has sought growth in Asian countries, such as Japan with its high Internet penetration rate. This is where the U.S. General Administrative Office expects the bulk of online gambling growth will occur. By 2006, the GAO predicts that only 25% of online gambling revenue will be derived from the United States.
Debate around online gambling in the U.S. has centred around federal-versus-state jurisdiction as well as how to govern overseas Internet gambling sites that are accessible by Americans and others.
Though the U.S. remains a tough spot to sell, CryptoLogic remains optimistic the federal government will eventually subsume online gambling into the mainstream.
"We do believe ultimately that the U.S. government will regulate [online gambling] as opposed to trying to shut it down," Mr. Ryan says.
Improved company results and renewed optimism belies a relatively rocky three-year stretch that saw the company's share price begin a steady descent from its record high of $68 in March, 2000 -- not long after company founders Mark and Andrew Rivkin resigned -- to a low of $5.06 on the Toronto Stock Exchange last October.
Matters weren't helped by poorer results and the departure of Jean Noelting, Andrew Rivkin's successor as CEO, who left the company quietly in July of last year. He was eventually replaced by current chief executive Lewis Rose. Mr. Noelting's time on the job coincided with a continuing stock slide and a US$9.5-million investment write off in Sports.com Ltd., a British-based online gaming business that was forced into bankruptcy protection last May.
Despite the challenges, observers still see CryptoLogic as the industry leader over Boss, the world's No. 2 gambling software developer, in a growing market.
The company has also stabilized itself in recent quarters with improved financial results while the company had US$58.3-million in cash as of last quarter.
Now investors have to hope that CryptoLogic can continue to grow internationally while working to convince regulators and legislators that online gambling is worth the roll of the virtual dice.