Spotlight on online gambling

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With recent results out from PartyGaming, Sportingbet, Ladbrokes William Hill and Rank, we are now able to cast an objective eye upon the health of the online gambling sector; highlighting some of the more interesting details behind the headline numbers, which should provide investors with some food for thought. One notable feature, derived from William Hills and Ladbrokes' results, is the significant increase in competition in the European online poker segment.

William Hill
Interactive gross win increased 6% to £130.5m but operating profit showed only a small increase to £61.5m. Poker and Casino had a challenging second half, affected by strong competition particularly following the withdrawal of many operators from the US market in September 2006, which has impacted poker site liquidity in general and made the competition for European customers more intense. Total active accounts increased to 405,000 as at 26 December 2006 (27 December 2005: 341,000).Costs in the channel increased 10%.

In telephone betting the company ended the year with 160,000 active telephone customers (27 December 2005: 174,000).

Expenses (net of operating income) for the Group were £445.3m, increased by 15% (6% excluding Stanley Retail).

Ladbrokes
In the UK retail estate total gross win increased by 4.7% to £715.8 million (2005: £683.6 million). Gross win in the first half showed growth of 7.1%, whilst the second half grew by 2.3%, reflecting poor results on high volume horseracing events and football matches in October and November. On a like for like basis excluding acquisitions and new licences, total gross win showed an increase of 0.8%.

On the downside, group operating costs of £591.7 million increased by 10.9%, due principally to "a larger Retail estate and utility, energy and content cost pressures."

Ladbrokes said that eGaming had grown operating profit by 13.5% and that its Sportsbook, Casino and Games channels had all shown strong double digit growth during 2006. However, it noted that Poker saw fierce competition during most of 2006, particularly from the state monopoly initiated poker site in Sweden, the company's second largest poker market.

Poker gross win declined by 2.7% to £40.3 million, impacted by increased competition, particularly in Sweden with the launch of the state lottery poker site in April 2006 and by a dip in player activity and levels during the World Cup. Average monthly active player days for the year grew by 12% to 461,000, with unique active players up 20% and yield per unique active player down 26% to £227.

In telephone betting Unique active players were broadly flat at 124,400 (2005: 125,300).

Operating costs in egaming increased by 16% to of £80.2 million compared to the 15% increase in net revenue. Marketing costs increased by £3.1 million (22%). Operating profit increased to £47.0 million (2005: £41.4 million), with net revenue conversion of 35.0% (2005: 35.6%).

Operating costs increased by 10.8% to £417.5 million (2005: £376.9 million). Staff costs rose by £12.3 million, property costs increased by £10.9 million, content costs rose by £5.2 million and other costs grew by £12.2 million. Operating profit decreased by 6.0% to £195.4 million (2005: £207.8 million).

PartyGaming
Poker Yield per active player day was down by 11% year on year to $17.7 (2005: $19.9). The company stated that; "Whilst the continued expansion into a number of new territories had a positive influence on yield (early adopters are usually the first to start playing and tend to have above average spend), this was outweighed by the growth in the number of casual players in maturing markets as well as by the loss of a number of high value players during the fourth quarter of 2006 when continuing poker yield fell to $12.9 versus $19.4 in the previous quarter."

During the year, PartyGaming incurred reorganisation costs of $250.4m. Of this amount, $243.2m related to reorganisation costs relating to the company's decision to quit the US market following the enactment of the UIGEA. The primary components of these reorganisation costs related to the consequent impairment of intangible assets, principally Empire Poker, totalling $115.5m; provisions made in respect of potential payment processor bad debts of $63.9m; the write-off of committed marketing expenditures of $32.3m relating to contracts entered into before the enactment of the UIGEA; impairment of technology licences relating to onerous contracts; and redundancy and other costs totalling $17.0m.

Distribution expenses increased by 34% to $362.8m. As a percentage of revenue, distribution expenses increased from 27.7% to 32.8% reflecting the company's drive to break into new markets.

Rank
Revenue from the UK bingo clubs business Mecca, edged lower to £261.7m and operating profit was down by 18.9% to £63.2m. The company stated that the contraction of operating margin was due in part to an additional £3.3m of rental costs and the estimated £4.5m profit impact of the Scottish ban on smoking in enclosed public areas.

In the 40 weeks between the introduction of the smoking ban and the end of the year, the company's Scottish clubs experienced a 15% decline in like-for-like revenue. Admissions were 6% lower than in 2005 and spend per head was down by 9%.

Sportingbet
A strong European margin percentage was however partially offset by a weaker Australia margin percentage and lower income from Paradise Poker due to reduced year on year liquidity. Australian sports betting turnover was £109.7m (2006: £88.9m), earning a gross profit of £2.6m (2006: £2.8m). Paradise Poker contributed gross profit of £3.3m (2006: £4.5m) during the period.

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