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Update on Cryptologic (CRYP) -- A Pabrai Pick

December 30, 2007 | About:

Here is an update on Cryptologic (CRYP). Many members of GuruFocus bought the company in 2006/07 after it appeared on the Magic Formula list. Soon after, Pabrai posted the idea on VIC, and bought a large stake in the company. In his Dec 2006 write-up, he projected a 2-3 year price target of $50-$60. As many members of this forum are aware, the price has dropped from a high of $30 in spring 2007 to a current price in the $17 range. According the GuruFocus numbers, Pabrai sold about 200k of his roughly 2 million shares in November 2007 in the $19-20 range. Here are a few notes on the events of the past year.

For a brief backgrounder on CRYP, see this Motley Fool article: http://www.fool.com/investing/small-cap/2007/11/09/cryptologic-pulls-through-a-tough-year.aspx

Low Revenues

In coming up with his original $50-60 price target, Pabrai posted his projections for future earnings growth. Revenue and earnings have been below his expectations.

Pabrai’s Projected Q1 ’07 Revenue and Earnings: $21.1 and $4.3 million

Actual Q1 ’07 Revenue and Earnings: $19.6 and $1.5 million (revenue included a $4 million special item that some viewed as slick accounting).

Pabrai’s Projected Q3 ’07 Revenue and Earnings: $23.3 and $6.3 million.

Actual Q3 ’07 Revenue and Earnings: $17.5 and $2.4 million.

-Revenue growth has come mostly from the casino segment. Poker revenue has stayed flat.

Asian Growth

The company continues to highlight its efforts to gain a solid foothold in the emerging gaming market in Asia. It’s made a few recent acquisitions, including a stake in Mikoishi Studios, which focuses on the Asian mobile phone entertainment market; and 568 Network Inc. ("568 Inc."), a developer and distributor of online casual games to the Chinese market. It’s not clear how long it will be before the Asian market contributes significantly to CRYP earnings.

Prospects for Europe

Many are looking to the launch of Holland Casino for the next jump in CRYP revenues. The contract was signed in Feb ’07 but the launch has been delayed until early ’08. Holland is the only Dutch company permitted to operate casinos in the country, and is just beginning this online venture.

So what to look for in revenues from Holland Casino? Looking at comparables, one member of VIC notes that in Sweden, which boasts a population less than half the size of Holland, the state-run Svenska Spel poker room (launched in 2006; now the fifth largest poker room in the world; captured 30% of Swedish online poker market), will produce $50 million in rake in 2007. Software providers in the online gaming industry typically receive 10-20% of this.

Holland will offer casino and poker—the software will be provided by CRYP.

But wait: Holland Casino is very vulnerable to tax increases that threaten to put it out of business. This fall, the Dutch government put in motion a bill to raise taxes on games of chance from 16% to 40.85%. It’s not clear if this would affect Holland Casino’s online games. It’s also unclear if CRYP’s 10-20% cut would come before or after taxes. But the company warned that its land-based earnings of 80-90 million euros would be severely reduced with such a tax increase. They’ve been lobbying vigorously to prevent the tax hike.

What has the result been? There haven’t been many reports, but a google search turned up this result: http://www.union-network.org/unicasinos.nsf/aaf6f2fa073eba90c1257229003b8be2/84db7a6083cc8054c125739b005253fb?OpenDocument

It says that a compromise has been reached that sets the new tax figure at 29%. “All the parties involved are satisfied with the compromise,” the article says.


If Holland is successful, it would add millions to CRYP’s revenues. It would also put CRYP in a great position to attract business from other countries that are considering a similar model. In Asia, it’s unclear what kind of fruit CRYP’s efforts will produce.

Disclosure: I am long CRYP. I plan on holding for at least another year.

Any thoughts from other GuruFocus members? Does anyone have any insights into the gaming market in Asia? Any thoughts about the future of poker? CRYP revenues have been flat in this segment. Is it a dying trend, or can we expect more growth in the poker industry?

About the author:

I am a private investor with a focus on stocks and real estate. I enjoy reading about the investment philosophies of the value "greats." My strategies are closest to those of Joel Greenblatt and Mohnish Pabrai. I believe strongly that individual investors help themselves and the community by subjecting their thoughts and analysis to peer review.

Rating: 3.3/5 (29 votes)


Paladinvest - 9 years ago    Report SPAM
Do you have a reference to a 2008 start for online Holland Casino?
Henniker82 - 9 years ago    Report SPAM
Cryptologic's CEO Javaid Aziz spoke about the timing of the Holland launch during the Q&A portion of the Q3'07 conference call in November 2007. He expects it to occur in Q1'08. Here are his comments, taken from the transcript:

Aziz: "What happens over here with such an installation is we have to complete all the technology set-up because we’re providing the framework, the structure, the whole environment for Holland Casino. Once that’s done, there was a soft launch in the middle of September, which was very successful. It was a soft launch for their internal set of employees. Also it had to go through a certification process, which certifies the technology, certifies the business rules, the way it operates and the results that it’s producing have integrity and probity.

"And that’s all been done to the satisfaction of our client, in this case, Holland Casino. It is only once that was fulfilled could they get on with the final stages of securing the full regulatory approval such that they could actually launch. And our understanding is that their process is on track. They are confident that they will achieve this. I can’t say much more than that because I don’t want to actually prejudice any proceedings that are going on in Holland.

Our anticipation is that this will happen in the first quarter of next year and our guidance for Q3, which is now closed, and for Q4 is consistent with that."

Audio and a transcript of this call can be found here:


Paladinvest - 9 years ago    Report SPAM
Info on the call is much appreciated. For what it's worth, I have invested in quite a few turn around situations. They always seem to take longer than managers and analysts think. As long as they are on track and management is forthright I stick with them. In this case the time has been quite short. They should hit Pabrai's numbers sometime next year. Investors with patience will likely be rewarded.
Emp - 9 years ago    Report SPAM
It seems that Cryptologic competitor GigaMedia did recover a lot faster and is seeing solid growth in Asia. I feel that Cryptologic's venture in Asia is rather insignificant and will probably suffer from its late arrival.

I was expecting growth in poker revenue and its basically flat. Even the Q4 guidance is rather flat. Management expects long term growth double digit growth in poker and casino. I don't see that materializing anytime soon.

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