Here is an update on Cryptologic (CRYP, Financial). 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.
Conclusion
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?
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.
Conclusion
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?
