888 Holdings plc
30 April 2007
888 Holdings Public Limited Company
('888' or the 'Company')
Preliminary Results for the twelve months ended 31 December 2006
888, one of the world's most popular online gaming entertainment companies,
announced its preliminary results for the twelve months ended 31 December 2006.
Financial Highlights
• Profit before tax* up 34% to US$90.5m (2005: US$67.4m)
• Net Gaming Revenues ('NGR') up 7% to US$289.9m (2005: US$271m)
• Net Gaming Revenues from continuing operations** up 28% to US$157m
(2005: US$123m)
• Operating expenses % of NGR stable at 27%
• Cash at year end US$114.4m (2005: US$62.2m) - Group has no debt
• Net cash generated from operating activities of US$85m (2005: US$88m)
• Basic EPS*** up 29%% to 24.8c (2005: 19.3c)
• Profit before tax* margin up to 31% (2005: 25%)
Operating Highlights
• Further diversification of product offering via landmark acquisition of
the Bingo business from Globalcom Limited in Q1 2007
• Ground-breaking partnership with Rileys, the UK's largest chain of
snooker, pool and poker clubs
• Customer experience enhanced by introduction of:
- Multi-hand poker
- New casino games including Mobile Casino
- Blackjack in Poker
- Backgammon
• Sports betting licence in Italy, applied for, and successfully granted
• Customer acquisition underpinned by further investment in 888 brand; a
vital contributor to the company's resilience after the passing of the
Unlawful Internet Gambling Enforcement Act (UIGEA) in October 2006
* Excluding share benefit charges of US$8.8m (2005: US$17.2m) and reorganisation
costs of US$4.0m (2005: US$nil)
** Continuing operations relates to all non-US facing operations
***Excluding share benefit charges of US$8.8m (2005: US$17.2m)
Commenting, Gigi Levy, CEO of 888 said:
'2006 was a significant year for 888, not least because of the signing of the
UIGEA bill in October which meant we had to cease all activity in the US market
- 55% of our business. Against this background, I am delighted to report record
financial results for 2006. Our continued success is based on the principle of
providing our customers a compelling, localised, innovative unique customer
experience.
I am also pleased to report that our financial and operational recovery since
October 2006 continues with NGR growth of 16% in Q1 2007 compared to Q4 2006.
Given this start to 2007, the release of new products, our Bingo acquisition and
our clear business strategy we are confident of delivering future growth in
2007.'
< ends >
An audio replay of the presentation to analysts will be available from the
investor relations section of 888's website (http://www.888holdingsplc.com) from
late afternoon today.
Contacts and enquiries
888
Gigi Levy Chief Executive Officer +350 49800
Aviad Kobrine Chief Financial Officer +350 49800
Bell Pottinger Corporate & Financial
Ann-marie Wilkinson/Nick Lambert/Chris Hamilton +44 (0) 20 7861 3232
Chairman's Statement
On behalf of the Board of 888 Holdings I am pleased to present the financial
results for the year ended 31December 2006.
The year proved to be a watershed for the online gaming industry following the
passing of the Unlawful Internet Gambling Enforcement Act (UIGEA) in the United
States on 29 September 2006 as a consequence of which we ceased all activity
with US based customers. We were particularly disappointed by this development
as we believe in a global regulated online industry. 888 has been at the
forefront of self-regulation since its inception. This is with a view to both
protecting our customers and ensuring they have a safe environment in which they
can enjoy their chosen entertainment experience.
The enactment of this law radically altered the landscape of the online gaming
industry and had a significant impact on 888's business performance. However,
the broad international reach of the Group's business, especially in Europe,
meant that the impact of our withdrawal from the US market left us with a viable
cash flow positive business on which we have built significantly.
Management rose to the significant operational challenge this placed on the
business and proved that this Group has a robust and flexible business model.
The results are testament to all our staff who continue to operate with both
professionalism and commitment.
Financial results
Despite our withdrawal from the US in October 2006, we have achieved record
turnover of US$289.9 million, an increase of 7% above 2005, driven by 28%
turnover growth from operations outside the US and profit before tax* of US$90.5
million, an increase of 34% compared to previous year.
Dividends
In line with our policy, and despite the negative effect of the UIGEA, given the
strong financial performance, the Board has recommended a final dividend of
8.88c per share.
Board changes
There have been a number of changes during the year under review.
In June Gigi Levy joined the Group as COO and Shay Ben-Yitzak, a founding
shareholder, stepped down from his executive role to take up a non-executive
directorship. On behalf of the Board I would like to thank Shay for his valuable
contribution and wish him every success in the future. Gigi brought with him a
strong technology and customer service background, having worked in the
international communications, broadband cable and satellite industry, and this
experience has proved invaluable to the business as it focuses on the customer
offering.
Having led the business for six years and taken it through its successful
flotation on the London Stock Exchange, John Anderson stepped down as CEO on 31
December 2006 and was succeeded by Gigi Levy. On behalf of the Board I would
like to thank John for his valuable contribution and wish him every success in
the future. The Group continues to benefit from John's vast experience in his
role as a Non-executive Director.
I would like to thank my Board colleagues for their continued support and on
your behalf to express my thanks to all the 888 team. They are a fantastic group
of people whose dedication and commitment has been outstanding.
Outlook
The Group has worked hard to continue expanding its non-US business, a strategy
we have pursued as core to our objectives and we are especially pleased with the
results and our performance since ceasing the US business. Our ability to
succeed in the new environment is the outcome of a strategy that encompasses
vision, new products and enhanced customer experience. We have continued to
build our brand and business in new geographic areas, expand our innovative
product offering and extend our multi-channel customer acquisition and retention
through our market-leading customer service.
Quarter 1 2007 started well, driven by the rollout of innovative products such
as localised Video Slots, Blackjack in Poker and Crazy Blackjack, to name a few.
We are confident that these initiatives together with the release of our all new
home-grown Backgammon, coupled with the Bingo acquisition, will deliver further
growth.
Your Board believes we are well positioned to develop and grow our business in
this exciting and expanding space for the foreseeable future.
Richard Kilsby
Chairman
Chief Executive Officer's Review
When I joined 888 as COO in June 2006 I joined one of the world's foremost
internet companies, a leader in the online gaming entertainment market, with one
of the strongest brands in the industry and my focus was to ensure the
continuance and acceleration of the company's spectacular growth.
888, is known for its unique marketing capabilities, its strong global brand,
the high quality service and support it provides its customers and the
state-of-the-art technology it develops and uses. My challenges for 2006 were
mostly related to the refinement of the company's strategy, the need to continue
to innovate and introduce additional games and the desire to continue to expand
geographically, a long declared strategy of the Group. Everything was set for
another record year.
The UIGEA bill was signed into law on October 13 and we ceased all activity in
the US market. This was not an easy change to make, losing the majority of our
26 million registered customers at the time and 55% of our revenue could have
potentially delivered a lethal blow to the business. However I am pleased to say
that we already had the infrastructure and plans in place to ensure our
survival.
The impact was immediate, with revenue falling by 55%, new customer acquisition
numbers by almost 40% and active customer numbers by 35%. The company's cost
structure was inappropriate for such reduced revenue levels, and we had to act
swiftly, taking appropriate action including the regrettable but necessary
headcount reduction and a refocus of our marketing activity on new markets. We
made a bold and conscious decision not to reduce headcount by similar
percentages to the revenues we lost. It was - and still is - our belief that
growth will only come from an innovative offering and cutting-edge marketing.
Thus the number of Research & Development and marketing professionals was hardly
changed, ensuring we can continue performing on our declared product and
marketing strategy. Current trading suggests that this was the right strategy,
which enabled us to remain a profitable and fast growing business.
Our 2006 results, despite the UIGEA setback, prove again the attractiveness of
our business model and the resilience of our Group. Altogether, our revenues
grew by 7% year on year, and based on our improved operational performance and
larger scale, our PBT* grew 34% making 2006 the group's most successful
financial year ever. More importantly, our revenue from non-US markets grew by
28%, in line with our strategy to continue reducing exposure to the US market.
* Excluding share benefit charges of US$8.8 million (2005: US$17.2 million) and
reorganisation costs of US$4.0 million (2005: US$nil).
Delivering on our strategy
Our success in 2006 was based on the same strategic principles that made us
successful during our 10 years of operation, namely acquiring and retaining
customers by delivering a compelling, localised, innovative, unique customer
experience while being mindful of the complex regulatory environment that we
operate in and the necessary social responsibilities that come with our
industry.
To achieve the desired customer experience, we continued our investment in our
Enhanced and Innovative Offering - 2006 saw the largest investment we have ever
made in Research and Development to date, more than US$19 million. This resulted
in a whole new Casino version - our best-ever online entertainment arena, the
introduction of our multi-hand Poker and a significant investment in gaming
infrastructure which will be the basis for rapid games introduction in 2007.
This infrastructure enabled us to introduce an average of one new game a month
in our Casino offering in the last quarter of 2006 as well as Blackjack in Poker
and most recently the all new home-grown Backgammon.
2006 was a record year in terms of marketing activity, in which we kept our
focus on delivering State of the art Integrated Marketing. We did more than
before in every aspect of our marketing activities in 2006; more online
marketing campaigns in more countries; more affiliates working with us; more
offline campaigns; more promotions and retention activities with our customers;
the first 888 Magazine ('Eight' which has become a huge success); and more
sponsored sports events. In 2006 we continued developing our 888.com brand,
which became the most recognized online gaming brand in the UK. It is this
unique marketing capability which enabled us to turn the business around so
quickly when we had to abruptly cease US activities and which will continue to
drive our customer acquisition and retention.
A common thread in our activities, we ensured we are Thinking Global while
Acting Local. The winning customer experience always has a local flavour to it,
and we kept pushing to deliver the most localised experience available. With
campaigns in more than 15 languages, Casino software in 11 languages, Poker in 7
languages and customer service available in 11 languages, we continued
delivering one of the most localised gaming experiences in the industry.
One of our core capabilities, we kept providing our customers Market-Leading
customer service. Taking care of our customers has been one of the cornerstones
of our success, and through 2006 we kept delivering a phenomenal Service Level
Agreement answering the vast majority of customers' calls and chat requests in
less than 18 seconds and responding to e-mails in less than 20 minutes. This is
visibly the best customer service in the industry and we constantly receive
positive feedback on our service levels from our customers.
As part of our investment in improving our Customer Intimacy, we met more of our
customers in 2006, asked a larger sample of them to answer our satisfaction and
research surveys and invested even more in our data mining and analytical
capabilities. In 2006 we also completed our new Data Warehouse, which is
providing a far better insight into our customers' behaviours and needs. This
resulted in more personalised promotions to customers in 2006, which assisted in
maintaining and increasing customers' lifetime value.
With all the challenges we had to overcome in 2006, it became even more critical
then ever to act as a Focused, Efficient and Effective Organisation. We have
managed to reduce a considerable part of our cost base throughout the year and
completed a quick cost reduction plan following UIGEA without which we would not
have been able to secure our margins in 2007. To complete our recovery, it was
our proactive Employer of Choice philosophy which enabled us to retain our
professional, dedicated and motivated employees in the midst of the storm our
industry went through.
Responsible gaming
Responsible gaming has always been at the heart of our activity. As a founding
member of eCogra, the self-regulating industry body, we have continuously aimed
to set an example when it comes to acting responsibly. 2006 was no different. We
continued to restrict hundreds of customers whom we suspected had a gaming
problem and direct them to seek help and support; we enabled customers to impose
limits on their activities and when appropriate proposed they do so; we offer
self-exclusion tools to all customers and continue to utilise all available
methods and work with industry experts to detect underage gamblers and prevent
them from playing. In 2006 we continued to train our staff to recognize signs of
problem gamers and act accordingly; we have further developed our automatic
protocols looking for gaming problems in customers' behaviours. We have also
recruited an experienced executive (who previously worked at Gamcare) as
Director of Responsible Gaming. She acts at the most senior levels in the
Company and focuses all of her time on this most important issue.
The regulatory landscape
While the regulatory landscape has always been a key focus for us, this has
intensified following UIGEA and other anti-online gaming legislation in various
jurisdictions. Managing regulatory compliance is a vital task for an online
gaming company, and we continue investing significant effort, both internally
and through our network of advisors worldwide, to better understand regulatory
developments and ensure appropriate actions are taken. It has always been our
belief that there will be a growing regulatory clarity in the coming years,
mostly in the form of a regulatory framework in the various markets, and we
continue to see this as the most sensible evolution for this highly popular form
of online entertainment. Clearly, regulatory developments can have both positive
and negative impacts on our business, and when faced with the right
opportunities to reduce regulatory risk we would do so. In line with this
strategy we applied in 2006 for, and were successfully granted, a Sports Betting
licence in Italy. We will keep monitoring regulatory changes throughout 2007 and
take appropriate steps to reduce risk.
Our employees
I cannot overstate the importance of our employees to our success, especially in
light of UIGEA and the changes we had to implement immediately.Had it not been
for our professional, motivated and committed employees all around the world, we
could not have refocused as quickly and effectively as we did. We will continue
investing in our employees, developing their skills and ensuring we provide them
a professional and challenging working environment keeping 888 one of the best
companies to work for world wide. Our success is based on excellent people and
we will continue bringing on board and promoting key talent wherever we find it.
Our strategy for 2007 and beyond
While our core strategy remains unchanged, our management team has significantly
refined our strategy to meet the new challenges in the newly formed, post-UIGEA
market. The new emphasis in our strategy set out below aims to further enhance
our customers' experience, ensuring that we provide our customers the widest
variety of relevant games, better and more rewarding opportunities to play and
win wherever and whenever they wish.
Unified offering - from different games to a single multi-dimensional gaming
environment
In order to provide our customers with a wider selection and a complete
entertainment experience, we have decided to move all of our offering into a
single software client, using a single wallet which will make all games
available to all customers. This is a unique approach in the market, and in
coming months our customers will enjoy the ability to play Poker, Casino and
Backgammon all from the same software client and wallet. The process has already
started with the successful introduction of Blackjack into our Poker offering,
which was an instant success. Early in Quarter 2 2007 our customers will be able
to access Video Slots, Video Poker and Roulette (comprising a total of 19 new
games) and our new Backgammon game in the same software client and later during
the year they will be able to access directly all of our additional Casino
games. This is a unique offering which is more exciting than what is currently
available in the market as it makes it a lot easier for customers to enjoy their
deposited funds in a large variety of games without the need to download
different software clients for each game. Coupled with our newly acquired Bingo
offering and our anticipated Sports Betting proposition we aim to have the best
offering in the market by the end of 2007.
Entertainment focus - from just gaming to additional forms of entertainment
Whilst online gaming remains the core of our offering, to ensure our customers
enjoy their membership of 888 even more, we will be adding Video and Audio
entertainment to our proposition throughout the year. Following extensive
studies of our customers' interest areas and given our ability to personalise
our offering, we are confident we can deliver relevant content which will
further delight our customers.
Community tools - from individuals playing at the same table to a community of
people looking to have fun
We believe that our customers are looking for the best entertainment available
online. Growth of social networks in recent years, demonstrates clearly that
communication and networking is key in creating a sense of belonging and
loyalty. We have always had chat available for customers playing Poker as well
as forums, but we are now taking this further so our customers can interact
better with each other, use messaging technologies, know when their friends are
online and even be able to 'set appointments' to play with these friends. These
features which will be available throughout 2007 will ensure that our customers
not only enjoy the games but also enjoy being part of the 888 community.
Mobile and TV - from a single platform to multi platform access
As the worlds of the PC, mobile phone and television are converging, our
customers want to be able to access their favourite games not only from their
computer but also from their mobile phone and television. In 2006 we launched
our mobile Casino, which currently features our most popular games on most
handsets and enables users to play the same games using the same account and
wallet as online. In 2007 we will seek to expand our mobile reach and extend our
offering to additional platforms such as television.
More localisation - from localising games to adding local games
While our offering is already localised today, we aim to do even more, and will
introduce in 2007 not only further localised versions of our games but also
local games which are relevant for target markets. Asian games, South American
games and others will be added to our offering to accommodate local gaming
preferences in each market. To accelerate the pace of adding new games, we have
opened our platform for integration, and will be choosing key partners worldwide
to provide games which will operate in our proprietary gaming environment. So
while we will be able to integrate new third party games rapidly into our front
line we will continue to have a single integrated financial, transactional and
back office system.
Strategic partnerships - from just an operator to service provider to virtual
operators
Following significant technological investment, the Group has embarked on a new
venture, partnering with key brands to deliver specific propositions to target
segments. These partnerships will enable the Group to reach new customers
rapidly, leveraging the partners' assets and sharing the revenue from these
customers. We have already announced our first such partnership, an innovative
cooperation with Rileys, the UK's leading chain of 168 Snooker, Pool and Poker
clubs. In this partnership, we use our online Poker capabilities to power
www.rileyspoker.com. This Poker site is promoted by Rileys in their clubs to
their 525,000 customers and externally in new club customer recruitment giving
us immediate reach to these new potential customers. We are currently in the
final stages of negotiating additional similar partnerships, which will further
broaden our potential audience and accelerate our customer recruitment.
New Customers Club - from a 2-tier VIP club to a state of the art Customers Club
2007 will see the launch of The Max, our newly formed loyalty club which will
give customers an unparalleled membership experience. With a simple, 4-tier
membership level, innovative prizes, quicker points accumulation and lots of
surprises, The Max, which will be launched mid year, will aim to be the best
membership club in online gaming and the major one to offer points collection
from all types of online games into a single account.
As can be seen, we plan to have an exciting year, in which we will continue to
deliver on our successful strategy.
Our first acquisition
We recently announced the first acquisition in the history of the Group, in
which we acquired the Bingo business and assets from Globalcom Limited*. Bingo
is a fast growing segment of online gaming, and we are certain this acquisition
will assist us in delivering quick growth. We are constantly looking for
additional opportunities to enhance our strong organic growth with selective
acquisitions.
Current trading and outlook
We had a good start to 2007 with record turnover in March 2007 for non-US
operations with 16% NGR growth in Quarter 1 2007 compared to Quarter 4 2006.
During the period 1 March to 21 April 2007 average daily turnover as well as
Poker rake plus tournament fees were both 20% higher than during the last week
of October 2006, while average daily Poker and Casino active customers were 28%
and 11% higher respectively, than the last week of October 2006.
Given this start to 2007, the release of new products, our Bingo acquisition and
our clear business strategy, we are confident of delivering future growth in
2007.
Gigi Levy
Chief Executive
Enhanced Business Review
Introduction
888 Holdings plc is one of the world's most popular online gaming entertainment
companies. 888 owns and operates various websites including www.888.com,
www.Casino-on-Net.com and www.PacificPoker.com which are amongst the most well
known online brands. We are the home of online gaming entertainment.
In 2005, 888.com was the proud recipient of Best Online Casino and Best Online
Operator of the Year at the e-gaming Awards. 888.com was also voted 'Best Online
Casino 2005' in the Inside Edge magazine and in 2006 888.com received 'Best
Online Casino 2006' award at the UK Gambling Awards and the '2006 Casino
Operator of the Year' award at the e-gaming Awards.
2006 was a year of change for the Group. Externally the passing of the UIGEA in
the United States in October 2006 has had a major impact on the financial
performance and share price of the Group. 888 was the first public company to
announce its withdrawal from US-facing operations on 2 October 2006 as a result
of UIGEA and the new regulatory reality necessitated determined swift action. As
a result, the Group underwent an internal restructuring process following a
detailed review of its cost base in order to adapt its operations to the new
environment. In addition 888 underwent a significant change in operating
structure and management focus which will allow it to better align its resources
towards the challenge of growing in a more diverse and rapidly changing market.
In accordance with accounting standards and to provide a clear understanding of
the Group's continuing operations, the financial results for 2006 and the
comparative 2005 period have been segmented into Continuing and Discontinued
operations. Discontinued operations represent activities undertaken by the Group
that were US customer facing, while Continuing operations are those activities
offered to non-US customers. All costs which could not be specifically allocated
were attributed to the continuing operations, see also note 2 of the financial
statements.
While the financial statements show the consolidated performance all references
to financial performance or Key Performance Indicators ('KPIs') throughout this
document refer to the Continuing operations unless expressly stated otherwise.
Results - Group
Financial summary**
Year ended 31 December 2006 Year ended 31 December 2005
Continuing Discontinued Total Continuing Discontinued Total
US$m US$m US$ US$m US$m US$m
Net Gaming Revenue
Casino 88.8 72.0 160.8 85.2 76.0 161.2
Poker 68.2 60.9 129.1 37.8 72.0 109.8
Total Net Gaming Revenue 157.0 132.9 289.9 123.0 148.0 271.0
Operating expenses 49.4 28.1 77.5 43.3 29.7 73.0
Research and development
expenses 19.4 0.0 19.4 11.3 0.0 11.3
Selling and marketing
expenses 51.0 33.3 84.3 54.9 45.1 100.0
Administrative expenses* 19.8 3.3 23.1 17.0 3.1 20.1
Operating profit* 17.3 68.3 85.6 (3.5) 70.2 66.7
Profit (loss) before tax* 22.2 68.3 90.5 (2.8) 70.2 67.4
*Excluding share benefit charges of US$8.8 million (2005: US$17.2 million)
and reorganisation cost of US$4.0 million (2005: US$nil).
** Rounded.
Results - Group (continuing and discontinued operations)
Revenue
Total Net Gaming Revenue ('NGR') of the Group in 2006 was up almost 7% at
US$289.9 million (2005: US$271.0 million) driven by 28% turnover growth from
operations outside the US. NGR from the US was down by 10% reflecting the
cessation of all real-money games to US customers in October 2006 following
UIGEA.
Expenses
Operating expenses increased 6.2% to US$77.5 million (2005: US$73.0 million)
slightly lower than the NGR percentage growth. This was primarily as a result of
expansion of the customer facing employee base and maintaining the overall
operating expense ratio of NGR at 27%, despite considerable decline in NGR
following the withdrawal of US operations in October 2006.
Research and development expenses increased 71.2% to US$19.4 million (2005:
US$11.3 million) due to the expansion of our product development, a direct
result of our strategic decision to accelerate development and release of our
innovative product range.
Marketing expenses fell 15.7% to US$84.3 million (2005: US$100.0 million) due to
the cessation of our marketing activities to US based customers in October 2006
following the enactment of UIGEA and our tightened control over our marketing
activities focusing our efforts on attracting and retaining valuable customers.
Administrative expenses* increased 14.8%** to US$23.1 million (2005: US$20.1
million) as a result of an increase of US$6.7 million in salaries to US$14.6
million (2005: US$7.9 million) and higher lobbying expenses partly offset by
US$4.7 million exchange gain (2005: US$0.4 million exchange loss). The increased
salaries reflected the change in management structure required for a quoted
company and the payment due to the outgoing Chief Executive Officer under his
agreement.
Reorganisation costs
For a number of years the Group sought to minimise its exposure to the US market
and as a result of the decision to cease real-money games offered to US
customers in October 2006 the Group incurred relatively modest reorganisation
costs of only US$4.0 million (2005: US$nil). This amount primarily represents
the cost of regrettable but necessary redundancies of US facing employees across
the Group's three main operating units in Gibraltar, Antigua and Israel.
Share benefit charges
At the time of our IPO, as part of our commitment to investment in human
capital, eligible management and employees received equity awards under the 888
All Employee Share Plan ('Share Plan') including a grant by the founders of
immediately vested shares. These equity grants had no cash effect on the Group,
but under the applicable Accounting Standard (IFRS 2) this results in a charge
against income calculated on a phased basis as set out in the accounting
policies section of the financial statements.
In 2006 the Group awarded shares and options to seven senior executives vesting
over the period 14 April 2007 to 14 September 2010 and subject to certain
performance related targets being met.
Finance income
With the Group continuing to generate and retain cash surpluses throughout the
year net interest income increased to US$4.9 million (2005: US$0.7 million).
Profit before tax*
As a result of increased revenues, keeping expenditure under control and better
management of resources, profit before tax increased 34% to US$90.5 million
(2005: US$67.4 million).
Reconciliation of profit before tax
2006 2005
US$m US$m
Profit before tax 90.5 67.4
Reorganisation costs (4.0) 0.0
Share benefit charges (8.8) (17.2)
Profit before tax after share benefit
charges and reorganisation costs 77.6** 50.2
*2006 excluding share benefit charges of US$8.8 million
(2005: US$17.2 million) and reorganisation costs of US$4.0 million
(2005: US$nil).
**Rounded.
Cash flows and balance sheet
In accordance with the Group's practice, customers are required to deposit funds
into their accounts prior to participating in any real-money activity. As a
matter of policy the Group keeps sufficient liquid resources to meet the
possible withdrawal of all customer balances at any time.
The Group is highly cash generative with a net cash increase in 2006 of US$52.2
million (2005: US$21.9 million) after the payment on 31 October of an interim
dividend of 4.5c per share and a special dividend of 4.0c per share totalling
US$28.7 million (aggregate dividend 2005: US$63.1 million).
Cash position at 2006 year end remained strong at US$114.4 million (2005:
US$62.2 million) and represented 83.1% of total assets (2005: 71.0%). Out of
this amount US$22.7 million was owed to customers (2005: US$29.3 million). The
Group has no debt.
Results - Continuing operations
The continuing operations demonstrated strong growth in 2006 with NGR up 27.6%
to US$157.0 million (2005: US$123.0 million) driven mainly by strong growth in
our Poker product particularly in the EMEA region. Operating profit* increased
after a loss in 2005 of US$3.5 million to a profit in 2006 of US$17.3 million.
The table set out below includes a summary of the continuing operations.
2006 2005
US$m US$m
Net Gaming Revenue
Poker 68.2 37.8
Casino 88.8 85.2
Total 157.0 123.0
Operating profit (loss)* 17.3 (3.5)
Profit (loss) before tax* 22.2 (2.8)
*2006 excluding share benefit charges of US$8.8 million (2005: US$17.2 million).
Poker
The Poker operations delivered the strongest growth in 2006 with NGR increasing
by 81% to US$68.2 million (2005: US$37.8 million). The progressive development
of our Poker product in combination with strong customer recruitment are the
major factors contributing to the success of our Poker offering. The Poker
segment result, after directly attributable costs but before allocation of
overheads, increased by 196% to US$41.4 million (2005: US$14.0 million)
reflecting the volume driven nature of this business. Poker now contributes 43%
(2005: 31%) of the Group's NGR.
Casino
Growth in our Casino business was moderate with NGR up by 4% to US$88.8 million
(2005: US$85.2 million). The introduction of Blackjack into Poker at the end of
2006 was an instant success and the addition of further Casino games into Poker
and the migration into our unified platform planned for 2007 are expected to
accelerate Casino growth. Nonetheless the Casino segment result, after directly
attributable costs but before allocation of overheads, increased by 26% from
US$41.2 million to US$52.1 million as the focus of the marketing expenditure was
tightened.
Expenses
Operating expenses increased 14.1% to US$49.4 million (2005: US$43.3 million)
primarily as a result of the increase in customer facing staff and communication
costs which offset the reduction in the cost of chargebacks. The ratio of
operating expenses to NGR reduced to 31.5% (2005: 35.2%).
Research and Development expenses increased 71.2% to US$19.4 million (2005:
US$11.3 million) due to the expansion of our product development, a direct
result of our decision to accelerate development and the release of our
innovative product range.
Marketing expenses fell 7.1% to US$51.0 million (2005: US$54.9 million) as we
focused our marketing expenditure on attracting and retaining valuable
customers. The ratio of marketing expenses to NGR reduced to 32.5% (2005:
44.7%).
Administrative expenses* increased 16.8% to US$19.8 million (2005: US$17.0
million) as a result of an increase of US$6.5 million in salaries to US$13.9
million (2005: US$7.3 million) offset by US$4.7 million exchange gain (2005:
US$0.4 million exchange loss). Increased salaries reflect the change in
management structure required for a fully listed quoted company and payment due
to the outgoing Chief Executive Officer under his agreement.
The ratio of administrative expenses* to NGR reduced to 12.6% (2005: 13.8%).
Profit before tax*
After finance income of US$4.9 million (2005: US$0.7 million) profit before tax
grew from a loss of US$2.8 million in 2005 to a profit of US$22.2 million in
2006.
* 2006 excluding share benefit charges of US$8.8 million (2005: US$17.2
million).
Our strategy
We aim to achieve profitable growth through the acquisition and retention of
valuable customers by providing our customers with a differentiated, intentional
customer experience. Our goal is to become the world leading online
entertainment gaming company and exceed our pre-US shutdown annual revenue and
profit. To do this we must give our best customers the right customer
experience. The main cornerstones of our strategy are summarised below.
•Thinking global while acting local: Providing a consistent, first class,
relevant experience to our customers
•Enhanced and innovative offering: Offering a full range of entertainment
options to our customers
•State of the art integrated marketing: Coordinating our marketing channels to
provide a strong relevant marketing message using an integrated multi-channel
approach to maximise the acquisition and retention of valuable customers
•Customer intimacy: Using our customer knowledge to maximise their customer
experience while prioritising our resource allocation to them
•Market leading customer service: To provide the most positive customer
interface possible
•Focused, efficient and effective organisation: To remain competitive we must
run the operation efficiently and maintain focus on our particular plans and
goals
•Employer of choice: Our aim is to be the employer of choice in the market
in which we operate.
Review of 2006
In 2006 the Group underwent two fundamental changes. The impact of UIGEA on the
industry, competitive landscape and our business environment are well
documented. The impact on our business was less severe than some of our
competitors as in previous years one of our main strategic objectives had been
to reduce our reliance on the US market and diversify into other geographical
markets. We will continue to build on the strength of our brand and utilise
our unique experience and know-how, gained over years of operating in non-US
markets, to accelerate our geographical expansion and localisation focus.
The other fundamental change has been our management re-focus designed to
utilise our resources more efficiently in face of the changing business
environment. The recruitment of several key senior management team members
signified a shift in our execution capabilities necessitated by the changes we
faced. This in turn led to a change in our management and regional operational
focus which has allowed us to withstand the adverse effect of UIGEA. The key
aspects of this are set out below.
Organisation structure
The new organisation structure is aimed at re-focusing the core elements of our
organisation; marketing, R&D, product offering and support, but at the same time
improving interfaces and communication between them.
Marketing and CRM is now focused on a regional basis with the goal of recruiting
the customer segment of our choice and providing the smoothest route from
initial brand awareness to playing real-money games.
R&D is focused on developing and integrating our gaming and back office systems
to ensure a shorter time to market of our innovative offering.
Product offering is focused on ensuring that we offer the best set of games and
the widest selection of payment methods available in all locations.
The final element is our support function that is tasked with ensuring that we
provide world class customer support, maintaining close, intimate contact with
our customers and thereby ensuring we leverage and deliver through all core
functions.
Player growth
Attracting valuable new customers is a key driver of our business growth. During
the year our continuing operations recruited more than 260,000 new First Time
Depositors ('FTDs') from more than 920,000 new real play registrations despite
the normal seasonal slowdown during the summer months which this year suffered
particularly from the World Cup effect. Total customer registrations increased
by 34.7% in 2006.
Player retention
The ability to retain customers is as an important factor in the success of our
business as is the ability to recruit them in the first place. High churn rates
can mean that the cost of recruiting new customers outweighs their value, so
recruiting and retaining customers with high lifetime values is a key component
to profitability.
We measure retention by tracking the revenue generated by groups of customers
pooled together according to the quarter they joined, over successive quarters.
Poker exhibited steady performance for the Poker product during the last two
years.
A considerable portion of our revenue in each given period is derived by
dedicated customers who joined more than a year ago representing the monetary
'stickiness' of our revenue stream.
Another method to measure retention is by comparing the level of revenue
received from customers active over a specific period, over the following
months.
We compare the rake and tournament fees received from Poker customers active in
January 2005 and January 2006 over the following 12 months. As can be seen from
the two sample populations, on average customers tend to play more during the
first few months after joining with spend profile decaying over time. In
addition, revenue is generally higher for 2006 customers until the last three
months of the year when the loss of American customers reduced liquidity on
higher value tables with the result that customers contributed 46% of their
January levels in December 2006 compared with 59% for the 2005 customers in
December 2005. Nevertheless overall NGR from our Poker offering rose 17% in
Quarter 4 2006 compared to Quarter 3 2006 due to successful customer acquisition
efforts coupled with increased yield per customer as described in the KPI
analysis on the opposite page.
Similarly the Casino revenue retention compares the net deposits (a close proxy
to NGR) received from Casino customers active in January 2005 and January 2006
over the following 12 months. As can be seen from the two sample populations the
revenue is generally higher for 2006 customers than 2005. However, by year end
2006 customers contribute 38% of their January levels in December compared with
44% for the 2005 customers.
KPIs - Continuing operations
The performance of the business is reviewed on the basis of a number of key
determinants. These are analysed below on a quarterly basis for the last two
years for the Casino and Poker operations and for the business in total.
Casino
Year 2005 2006
Quarter 1 2 3 4 1 2 3 4
NGR ('000) 20,227 21,856 21,647 21,498 21,496 22,531 22,646 22,088
Active customers 50,565 56,812 56,553 62,933 54,053 48,425 46,444 41,307
NGR per active custom 400 385 383 342 398 465 488 535
The Casino has delivered a steadily increasing NGR per quarterly active
customer in 2006 reaching US$535 in Quarter 4 2006. This follows the
developments of the offering with greater localisation and the rollout of
new games, particularly the higher margin Video Slots introduced in early
2006, and the migration of customers to these games. Casino NGR increased
further in Quarter 1 2007 with the introduction of Blackjack into Poker.
This growth has compensated for, on an NGR basis, a decline in active
customer levels after strong growth in 2005.
Nevertheless the Casino offering has seen a steady annual growth in NGR with
a similar seasonal pattern of quarter by quarter movement within each year.
Poker
Year 2005 2006
Quarter 1 2 3 4 1 2 3 4
NGR ('000) 5,254 7,808 10,166 14,527 17,857 16,322 15,686 18,374
Active customers 61,710 92,489 105,714 119,116 134,710 122,087 132,995 147,805
NGR per active customer 85 84 96 122 133 134 118 124
Poker has seen constant strong growth across all KPIs since Quarter 1 2005
demonstrating the value of the enhancements made to the product over the period.
NGR per quarterly active customer has once again resumed its climb aided by the
growth in liquidity from the continuing increase in active customers. Customer
growth remained strong despite the seasonal pattern and the competition from the
World Cup.
The combination of these two factors have resulted in impressive NGR growth over
the period which has continued in Quarter 1 2007.
Total
Year 2005 2006
Quarter 1 2 3 4 1 2 3 4
NGR ('000) 25,481 29,664 31,813 36,025 39,353 38,853 38,332 40,463
Active customers 112,275 149,301 162,267 182,049 188,763 170,512 179,439 189,112
NGR per active customer 227 199 196 198 208 228 214 214
The combined KPIs reveal a healthy increase in NGR over the period which has
continued with 16% growth in Quarter 1 2007. Active customer growth has been
steady, coupled with a stable total NGR per active customer.
Our products
Casino
Founded in 1997, Casino on Net, our major Casino brand, has consistently been
ranked as the leading online Casino brand in the world. The Casino continues to
generate substantial business, and represented more than 55% of the Group's NGR
in 2006. In our non-US business from Quarter 1 2005 to Quarter 4 2006 we
experienced 9% NGR growth.
2006 has seen consistent development of our Casino offering. January 2006 saw a
major update with new games, added promotional features and a more contemporary
design. The Video Slot offering gives a unique playing experience and has proved
a hugely popular feature with a growth rate of 227% from January to December for
non-US customers. To capitalise on this we aim to add one new slot machine a
month and with its greater margins we are actively promoting the feature across
our customer base and across languages.
The integration of Blackjack into our Poker client in December 2006 was an
overnight success. Poker customers can now play our exciting and innovative
Blackjack while enjoying our successful Poker games. With 18% of 888's Poker
customers in the first two months of 2007 playing Blackjack, this enhancement of
our offering has proven to be both popular and profitable, supporting our plans
to integrate more Casino games into our Poker client.
As part of our localisation strategy, we will be releasing our new Casino
version in further languages. In October 2006, the new French version was
released and has already shown significant increase in revenue and first time
depositors compared to the previous version. In January 2007, the new version
was released in German and Spanish and will soon be available in 12 languages in
total.
Our commitment to provided our diverse membership base with unique games,
features and more convenient payment methods to support local markets, will
further our international growth and our plan is to add more languages in 2007.
Poker
2006 has been in many ways a transition year for our Poker brand, Pacific Poker.
The growth phase from a new, young and raw Poker room into a mature, competitive
and influential Poker room has been achieved by addressing previous gaps in our
offering.
In January 2006 the Jackpot features 'Bad Beat' and 'Royal Jackpot', were
introduced and have created additional activity and excitement. Multi-table, the
ability to play at more than one table at the same time, was introduced in March
2006, and was probably the most influential positive product upgrade of the
year. 27% of the customers at any given time are using this feature, playing in
two or more ring games and/or tournaments. This feature aids retention of our
more experienced customers and obviously increases liquidity and profitability.
In Quarter 3, in an effort to increase our growing global reach and to connect
between big offline tournaments and our online experience, we created a section
dedicated to sending our customers to exciting offline tournaments around the
world; customers can find online qualifying tournaments to the WSOP in Las
Vegas, Aussie Millions in Melbourne, the European Poker Tour and World Poker
Tour tournaments among others.
In October, following UIGEA and feedback from our customers, a major effort was
made to revamp all our tournaments; sit and go and multi-table tournaments,
reviewing buy-in amounts, fees, playing times, and guaranteed amounts. Initial
results suggest this has had a positive effect, creating a more exciting
environment for customers and increasing the appeal of our tournaments to our
customers.
December marked a big step in our quest to become a one stop shop for gaming by
the addition of Blackjack to the Poker client, generating significant interest
from our customers and adding NGR by complementing the Poker product.
As one of the market leaders, we cannot rest on our laurels and we plan to
continue our progress in two directions; improving our Poker offering and
continuing the progress towards a one stop entertainment shop. 2007 will see the
introduction of further uplifts, enhancements, updates and new games.
Bingo
Since the year end we have announced the acquisition of our online Bingo
business from Globalcom Limited. The Bingo business operates its own leading
network of 45 online Bingo sites or 'skins' including Bingoballroom.com,
UK-Bingo.net, Bingofabulous.com and Twofatladies.com. In addition it provides
Bingo solutions to business partners operating their own networks and other
third party sites. This acquisition is a landmark step forward in delivering our
strategy of a one stop shop - providing our customers with all of their online
gaming needs. This is already a well established market leader, highly cash
generative and profitable which uses its own proven and scalable software.
Bingo will be a valuable addition to our entertainment services, and we expect
to be able to provide excellent cross-selling opportunities for customers
worldwide. This is a great acquisition which is expected to be earnings
enhancing for us in the current financial year. It also supports our newly
established partnership approach, as the Bingo business today provides services
to many licensees and skins.
Sports licence - Italy
In December 2006 the Group was awarded one of the Italian Sports Betting
licences issued by the Italian Government. This gives us the right to provide
online betting facilities to the Italian market. The Group is currently
negotiating for the provision of odds setting facilities from the approved list
of vendors and intends to launch its full online Sports Betting service in Italy
later this year. The licence process also represents a step forward in relation
to the e-gaming industries' relationship with the jurisdictions in which they
operate.
Sportsbook
The Group continues to investigate opportunities to add a Sportsbook proposition
to its offering to fulfil our one stop shop strategy. While this process
continues we will continue to offer a sports betting option through our Betmate
betting exchange.
Customer service
Excellent customer service continues to be a central tenet of the Company's
proposition. Our dedicated contact centres in Gibraltar and Antigua offer first
class customer support 24/7 to our customers around the world. We offer support
in 11 languages. During the year we further upgraded our call routeing and call
monitoring systems in Antigua to ensure the consistency of our global service.
The termination of real-money games to customers in the US resulted in an
adjustment to staff numbers in the contact centres but we are committed to
maintaining the high standards of service previously enjoyed by our customers.
During the year the following performance was attained by the Gibraltar contact
centre:
Casino
• 98.9% of all phone calls in English answered within, on average, 18
seconds.
• 81.4% of all e-mails received in English replied to within, on
average 20 minutes.
Poker
• 98.6% of all phone calls in English answered within, on average, 16
seconds.
• 76.5% of all e-mails received in English replied to within, on
average 20 minutes.
The ongoing dialogue with customers is maintained by a dedicated Customer
Relationship Management team whose aim is to enrich the customer experience. The
Group has developed sophisticated data mining tools that assist in identifying
and predicting customer behaviour, based on data collected since the Group was
founded, which allows the Group to offer its customers tailor made incentives to
suit their profile and thus maximise their lifetime values. The level of service
given to individual customers is also differentiated, with our best customers
receiving a more personalised service.
Payments and Risk Management
In 2006 customers were offered a total of 21 different depositing and 10
different withdrawal methods. When customers enter 888.com they are
offered a range of payment options tailored to suit their local market
based on their physical location and from which they can choose their
preferred method. The aim is to offer a wide selection of secure payment
methods in each location so as not to restrict the ease of customer
deposit or withdrawal.
Credit cards and debit cards are the most popular method of payment
representing 86.7% of total deposits in 2006 (2005: 87.7%) followed by
online wallets representing 11.7% (2005: 11.1%).
Deposits and withdrawals are carefully monitored by our in-house Fraud
and Payment Risk Management department. This department has a depth of
experience in fraud prevention from many years' operation and has
integrated their internally developed prevention and verification
procedures with conventional commercially available measures.
Marketing
We have created a world leading brand through multi-channel integrated
marketing across all media channels worldwide. Our vision for marketing is:
• to find every person worldwide, who wants to play games and to bring
them to the 888 lobby to play;
• to let them play more games, to play more often and to play more
of the time; and
• in a safe, responsible and trustworthy environment.
The Group leads the industry in online marketing including search engine
optimisation, advertising banners, pop-ups on websites and portals and the new
tools of viral advertising, RSS and others. The Group is constantly copied as it
pioneers the use of all media including traditional advertising, direct mail,
sponsorships and public relations activities. Indirectly the Group also partners
with affiliate sites to generate traffic and drive new customers to the site by
paying a commission or revenue share to the affiliate. Finally, effective use of
CRM tools, loyalty and VIP programmes allow a personalised brand experience for
new and existing customers.
Employees
At the year end the Group had 736 employees (2005: 886) at the following
locations; Gibraltar, Israel, Antigua, London.
The UIGEA had a dramatic effect on our financial performance. However, due to
our diversified customer base and internal structure the readjustment to
compensate for this lost revenue was not too significant. It did, however,
require an adjustment to those US facing parts of the operation and redundancies
were unfortunate but inevitable. Overall headcount was reduced by 210 with the
largest percentage losses being in the Antigua and Gibraltar support centres.
Dividend
The Group's stated policy at the time of IPO was that it intended to pay
dividends to holders of Ordinary Shares and depositary interests representing at
least 50% of annual profit. On 31 October 2006 the Group paid an interim
dividend of 4.5c per share and also a special dividend of 4.0c per share, in all
totalling US$28.7 million. Given the Group's strong financial performance, and
despite the negative effect of the UIGEA, the Board recommends a final dividend
of 8.88c per share.
Responsible gaming
The Group is dedicated and committed to a policy of social responsibility. The
Group has taken a proactive role in setting, maintaining and improving high
standards of protection for its customers. This is essential for shaping future
regulation through industry best practice, improving communications with
customers and eradicating the incidence of problematic and underage gambling.
The Group recognise that while most people gamble for entertainment and even
though studies suggest that only a very small percentage of the adult population
encounters compulsive gambling problems the problem does exist. We take this
matter seriously and have accordingly implemented a number of measures to
address this matter.
The Group has sought to take the lead in setting industry standards for self
regulation to ensure customer protection, fair gaming, and responsible
conduct are met. It was one of the founding members of eCOGRA (e-Commerce
Online Gaming Regulation and Assurance), an independent body, which has
developed a rigorous series of self-regulatory guidelines. These guidelines
have been adopted by our Casino and Poker businesses and they are subject to
independent review to ensure compliance with these guidelines. The Group has
been awarded a seal of approval by eCOGRA for the Casino and Poker
businesses following examination of its procedures and controls. The Group
is also an active participant in the Interactive Gaming Council and has
adopted their Code of Conduct which requires fairness, honesty and integrity
in members' operating procedures.
John Anderson, while CEO, was a key driver of industry self-regulation and
is a board member of the IGC and a founder of eCOGRA.
The Group does not rely solely on external certification and continues to
update its policies and practices to ensure a safe environment is provided to
its customers. The Group has developed, and continues to update, its procedures
to address underage and compulsive gaming. The Group's contact centre staff
receive training on a regular basis on all issues of social responsibility and
problem gambling. The Group enables customers to set their own stringent deposit
limits and upon request to self exclude themselves should they feel the need to.
In order to protect minors, verification systems are used wherever available to
verify and identify the age and identity of our customer before they are able to
play for real money. In Quarter 3 2006 the Group appointed a dedicated Director
of Responsible Gaming, whose role is to manage the internal and external
responsible gaming policy. She brings considerable relevant experience to the
Group including working at Gamcare.
The Group has recently finalised its Gamcare audit and will soon be
receiving the Gamcare certificate. Gamcare is a UK recognised charity which
has a commitment to promote responsible attitudes to gambling and to work
for the provision of proper care for those who are vulnerable. Gamcare with
its pro-responsible stance maintains a dialogue with all sectors of the
gambling industry, including regulators and governments.
In addition, the Group has also added the GamAid button to the site to
provide information and support for those customers who feel that their
gambling habit is a matter of concern. The 'GamAid Safety Net' is accessed
through a link from the 888.com home page and also the responsible gambling
page. The GamAid link supplies core services to the customers; one to one
live online advice, an e-mail advice service, a full support database (which
includes a directory for local services in 13 countries including the UK)
and a self help information section where the problem gambler can educate
and assist themselves.
In 2006 the Group formalised its Corporate Social Responsibility programme
which replaces the charitable donations previously made by the individual
subsidiary companies. Through this global scheme it provides the means to
encourage employees to become actively involved in their local community.
The new programme's success will rely on the initiative, involvement, skills
and knowledge of our employees. During 2007 the Group aims to develop
programmes with a broader global reach. The aim is also to judge results not
just by the input but also by outcomes: the difference the Group makes to
the world of which it is a part.
Principal risks
The Group operates in a new and dynamic business environment. In addition to the
day to day commercial risks faced by most enterprises the online gaming industry
presents particular risks of which regulatory and compliance risks are
highlighted in the review below.
Regulatory and Compliance Review
The regulatory framework of online gaming in different countries around the
world remains as dynamic and rapidly evolving as ever. While some jurisdictions
have moved to curtail the activities of online gaming sites, others are
currently contemplating liberalisation and regulation of the industry. The Board
notes that there are significant risks, unique to the online gaming industry,
including from past activity in the US where customers of 888 generated in 2006
46% of its NGR. The Board remains committed to monitoring closely and addressing
regulatory changes as they occur, and to fostering, so far as possible, the
trend towards liberalisation and regulation of online gaming throughout the
world.
888 is licensed and regulated in Gibraltar. In December 2005, the Government of
Gibraltar enacted a new Gambling Act. The Act introduces a tailor-made regime
for the regulation of remote gaming. 888 has actively supported the introduction
of such legislation and the Board looks forward to its continued implementation
in the coming months, which will include the appointment of a new regulator.
In the US, UIGEA added a new section to the United States Code making it illegal
for anyone engaging in the business of betting or wagering to knowingly accept
any credit, electronic funds transfer, check, draft etc. in connection with the
participation of another person in unlawful Internet gaming. In essence, the
bill prohibits online gambling operators from receiving the proceeds of
financial transactions in connection with Internet gaming if the gaming is
illegal in the state where the bettor is located. In addition, the United States
Secretary of Treasury and Federal Reserve are directed under UIGEA to promulgate
regulations which will require financial institutions to block transactions in
connection with Internet gaming. In October 2006 the Group stopped taking bets
from US customers.
It was recently found by the World Trade Organisation that the US legislative
position with respect to Internet gambling violates US trade commitments. The
effect of this ruling, and whether any further action will be taken, is at this
current time unclear.
The EU Commission is challenging the online gambling regulatory regime of
various European states, as the Commission holds that these regimes might
infringe the enshrined freedom to provide services and freedom of establishment.
This effort is reflected in, inter alia, the infringement proceedings initiated
against several EU States. While these proceedings may, in the end, cause the
European States to liberalise their gambling markets, it should be noted that
they could last for a very long time before (if at all) resolutions or
judgements are reached.
Recently, the European Court of Justice issued its ruling in the Placanica case,
involving criminal proceedings initiated against agents of Stanley International
Betting placed in Italy. The court, although not calling for a liberalisation of
the European gambling market, placed heavier burdens on the European states if
they maintain their restrictive policies toward online gambling. It remains to
be seen what impact this judgement will have.
In Italy, the Group received a Sports Betting licence, which allows it to offer
Sports Betting services (supervised by the State Monopoly Authority). In France,
during March 2007, 888's Non-executive Director and former Chief Executive
Officer, John Anderson, attended an interview with the French authorities. 888
is in consultation with its legal advisers with regards to this matter and
closely monitors the situation for any developments.
In Israel, law enforcement authorities have raided the offices of several
Internet portals and arrested several individuals on the suspicion that they had
advertised online gaming sites in Israel, in contravention of the Israeli Penal
Law. The Group does not allow Israelis to wager on its websites and has systems
to prevent them doing so. 888 has been advised that since it does not
facilitate, offer or provide gaming activities prohibited under the Penal Law to
Israeli residents, the Penal Law will not be applicable to the Group since no
offence is committed wholly or in part within Israeli territory.
The Board continues to monitor these developments closely and is alert to
changes as they may occur in areas where the Group operates.
The Group also has potential risk relating to:
Taxation
The Group benefits from favourable fiscal arrangements in the jurisdictions in
which it operates without which its results would be adversely affected. All
gaming activities are based in Gibraltar where the Group currently benefits from
a tax exempt status. The tax exempt status is due to be removed in 2010 when the
Government of Gibraltar intends to introduce a fiscal regime that complies with
EU requirements. The replacement regime is still to be unveiled although the
Gibraltar Government has pledged its commitment to maintain fiscal
competitiveness. The Group is required to pay a gaming duty currently set at 1%
of the gaming yield with an annual maximum cap of £425,000. The Group's
subsidiary in Israel, Random Logic Limited, and the Israeli branch of Intersafe
Global Limited have each entered into separate transfer pricing agreements on an
arm's length basis with the Israeli Income Tax Commissioner. The arrangements
for Random Logic Limited are effective until 2010 while the position for the
Intersafe Global Limited branch after 2007 has yet to be agreed.
The operation in Antigua also benefits from a low tax regime and the current
scale of the operation there mitigates against a significant exposure to any
change.
2007 Plans
This year will see full implementation of our strategy which will provide the
infrastructure for future growth. The Group will continue to expand its
innovative product offering, platforms, diversify its geographical footprint and
localisation, and extend its multi-channel customer acquisition campaigns
including by striking additional strategic alliances with business partners.
Finally, we will continue to offer the same, excellent, customer service as we
always have.
Our offering
Poker - our Poker offering has already benefited from a further uplift released
at the end of March 2007 with enhanced graphics and significantly improved game
play features. We have also introduced additional Casino games as well as our
Backgammon game into the Poker environment.
Casino - in Quarter 1 2007 the Casino offering has been updated with two new
Video Slots and the introduction of Crazy Blackjack featuring side bets and a
special jackpot. In addition, our Casino product underwent additional
localisation with the release of the new Casino-on-Net in four additional
languages. Future upgrades in 2007 will include new languages, more Video Slots
and new Casino games.
Backgammon - 888's Backgammon game is being launched in Quarter 2 2007 and will
be available to all customers, initially from the Poker client. We believe that
Backgammon will become an important anchor in our P2P games offering.
Bingo - following the aforementioned acquisition of the Bingo assets of
Globalcom Limited, the Group will be able to immediately launch an 888 Bingo
brand in the second half of the year.
Sports book - the Group will be adding a Sports Betting proposition to its
customers in 2007.
Unified offering - to enhance the customer entertainment experience, we will be
moving all our offerings into a single software client making all the games
available in one location. This process has already started with the successful
introduction of Blackjack into Poker and customers will soon be able to access
all our Casino games and our new Backgammon offering in the same software
client. Additional products (Bingo and Sports Betting) will be integrated into
the client later on to create a full one stop shop.
New platforms - in February 2006, the Group successfully launched its mobile
Casino, offering customers easy, secure, and entertaining access to three of our
most popular Casino games; Blackjack, Roulette, and Slots all available in fun
or real-money play. The mobile software is compatible with over 340 models
representing approximately 85% of the European market. In 2007 we will seek to
expand our mobile reach and extend our offering to additional platforms such as
television.
New entertainment and community features and tools - We will be adding video and
audio entertainment to our proposition throughout the year, with the specific
content selected based on studies of our customers' interest areas conducted in
2006. We will also be creating an 888 virtual community to allow greater
interaction between customers to enhance the entertainment experience.
Our local focus
In 2007 we will aim to continue investing in localising our offering, not only
by introducing localised versions of our offerings but also by adding games
which are relevant to that specific target market.
While we will push to grow in various markets worldwide, some markets will get
special attention in 2007. One such market would be Italy, where we plan to
leverage our recently obtained Italian Sports Betting licence to generate rapid
growth.
Adding new payment methods in each country is a key factor in the ability to
expand geographically. In 2007, the Group will be performing the first phase of
updating its back office payments system. This upgrade would increase ease of
use for customers, and will significantly speed up the integration of new
payment methods into our offering, ensuring better penetration to new markets.
Our integrated marketing
The Group plans to continue investing in its brand and use integrated marketing
campaigns to acquire new customers. In addition, in 2007 we will commence
partnering with key brands to deliver specific online gaming propositions to
target segments. These partnerships will enable us to reach new customers
rapidly through a 'white label', leveraging the partners' assets and sharing the
revenues. In February, the Group announced a pioneering cooperation agreement
with the owner of Rileys, the UK's leading chain of Snooker and Pool clubs.
888.com will power and support a www.rileyspoker.com website which will be
promoted by Rileys to their members. This deal provides the blueprint for future
online expansion via business partnerships with a carefully selected set of
capable partners. We expect to reach agreement on a few similar additional
partnership deals in 2007.
A further key part of our 2007 marketing plan includes The Max, our state of the
art Members Club, which will give customers an improved membership experience.
The club will have simple, 'airline-like' 4-tier membership levels, innovative
tangible prizes, quicker points accumulation to the higher-tier members and many
additional features important to our customers. The Max will be soft-launched
mid year.
Effective and efficient organisation
In March 2007 the Group's operation in Israel moved from the two central Tel
Aviv locations it operated from to new offices located near Tel Aviv. The new
offices provide a significant upgrade and should increase the integration
between the various units of the Company and ensure better coordination by
improving ease of communication.
Consolidated Income Statement
for the year ended 31 December 2006
Year ended Year ended
31 December 31 December
2006 2005
Note US$'000 US$'000
Continuing operations
Net Gaming Revenue 3 157,000 122,982
Operating expenses 49,448 43,308
Research and development expenses 19,381 11,318
Selling and marketing expenses 51,037 54,920
Administrative expenses 4 28,653 34,208
Operating profit (loss) before share benefit charges 17,310 (3,538)
Charges in respect of shares granted to employees on IPO - 15,087
Charges in respect of share and option awards 8,829 2,147
Total share benefit charges 8,829 17,234
Operating profit (loss) 5 8,481 (20,772)
Finance income 4,883 735
Profit (loss) before tax 13,364 (20,037)
Taxation 6 3,117 2,136
Profit (loss) from continuing operations 10,247 (22,173)
Profit from discontinued operations 21 4,254 70,188
Profit after tax for the year attributable to equity
holders of parent 74,501 48,015
Earnings per share 7
Basic 3.0c (6.6)c
Diluted 3.0c (6.6)c
Discontinued operations 21f
Basic 19.1c 20.8c
Diluted 18.8c 20.8c
Total 7
Basic 22.1c 14.2c
Diluted 21.8c 14.2c
Consolidated Balance Sheet
at 31 December 2006
31 December 31 December
2006 2005
Note US$'000 US$'000
Assets
Non-current assets
Intangible assets 9 - -
Property, plant and equipment 10 13,033 8,341
Deferred taxes 11 546 361
13,579 8,702
Current assets
Cash and cash equivalents 12 114,356 62,202
Trade and other receivables 13 9,669 15,013
Amounts due from related parties 18 - 1,649
124,025 78,864
Total assets 137,604 87,566
Equity and liabilities
Equity attributable to equity holders of the parent
Share capital 14 3,073 3,068
Share benefit reserve 9,332 2,147
Retained earnings 74,597 27,115
Total equity attributable to equity holders of the parent 87,002 32,330
Liabilities
Current liabilities
Trade and other payables 15 27,931 25,593
Member deposits 22,671 29,325
Amounts due to related parties 18 - 318
Total liabilities 50,602 55,236
Total equity and liabilities 137,604 87,566
Consolidated Statement of Changes in Equity
for the year ended 31 December 2006
Share Share benefit Accumulated
capital reserve profit Total
US$'000 US$'000 US$'000 US$'000
Balance at 1 January 2005 3,066 - 27,113 30,179
Profit for the year - - 48,015 48,015
Dividend paid - - (63,100) (63,100)
Redemption of preference share capital (1) - - (1)
Share benefit charge - 17,234 - 17,234
Transfer of shares granted on IPO - (15,087) 15,087 -
Redenomination translation effect 3 - - 3
Balance at 1 January 2006 3,068 2,147 27,115 32,330
Profit for the year - - 74,50 74,501
Dividend paid - - (28,658) (28,658)
Issue of shares 5 (5) - -
Lapsed share benefit charge - (1,639) 1,639 -
Share benefit charge - 8,829 - 8,829
Balance at 31 December 2006 3,073 9,332 74,597 87,002
Consolidated Statement of Cash Flows
for the year ended 31 December 2006
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2006 2006 2005 2005
US$'000 US$'000 US$'000 US$'000
Cash flows from operating activities
Profit before tax 77,618 50,151
Adjustments for
Depreciation 3,801 2,700
Loss on sale of property, plant and equipment 29 32
Amortisation - 20
Impairment - 832
Translation effect of redenomination of share capital - 3
Interest received (4,879) (683)
Share benefit charges 8,829 17,234
85,398 70,289
Decrease in trade receivables 6,346 579
Decrease (increase) in related party balances 1,331 (638)
(Increase) decrease in other accounts receivable (1,002) 142
(Decrease) increase in trade payables (1,439) 1,177
(Decrease) increase in member deposits (6,654) 10,184
Increase in other accounts payable 3,527 9,680
Cash generated from operations 87,507 91,413
Tax paid (3,052) (3,160)
Net cash generated from operating activities 84,455 88,253
Cash flows from investing activities
Purchase of intangibles - (400)
Cash acquired on combination with ACTeCASH - 263
Purchase of property, plant and equipment (8,621) (3,831)
Proceeds from sale of property, plant and equipment 99 -
Interest received 4,879 683
Net cash used in investing activities (3,643) (3,285)
Cash flows from financing activities
Issue/redemption of shares - (1)
Dividends paid (28,658) (63,100)
Net cash used in financing activities (28,658) (63,101)
Net increase in cash and cash equivalents 52,154 21,867
Cash and cash equivalents at the beginning of the year 62,202 40,335
Cash and cash equivalents at the end of the year 114,356 62,202
Notes to the Consolidated Financial Statements
1 General information
Company description and activities
888 Holdings Public Limited Company (the 'Company') and its subsidiaries
(together the 'Group') was founded in 1997 and originally operated as a holding
company domiciled in the British Virgin Islands. On 12 January 2000, the Company
was continued in Antigua and Barbuda as a corporation under the International
Business Corporation Act 1982 with registered number 12512. On 17 December 2003,
the Company redomiciled in Gibraltar with the Company number 90099. On 4 October
2005, the Company was admitted to the Official list of the UKLA and admitted to
trading on the London Stock Exchange.
The Group has developed innovative proprietary software applications solutions
for virtual Casinos, for Poker rooms, e-commerce, credit-card clearing services
and online advertising methodologies.
Cassava Enterprises (Gibraltar) Limited (a subsidiary) carried out the
operations of the Group during the year, principally under the name www.888.com
under the terms of a gaming licence issued in Gibraltar.
Definitions
In these financial statements:
The Company 888 Holdings Public Limited Company.
The Group 888 Holdings Public Limited Company and its subsidiaries.
Subsidiaries Companies over which the Company has control (as defined in
International Accounting Standard 27) 'Consolidated and
Separate Financial Statements' and whose accounts are
consolidated with those of the Company.
Related parties As defined in International Accounting Standard 24 -
'Related Party Disclosures'.
2 Significant accounting policies
The significant accounting policies applied in the preparation of the financial
statements are as follows:
Basis of preparation
The consolidated financial statements of the Group have been prepared in
accordance with International Financial Reporting Standards, including
International Accounting Standards ('IAS') and Interpretations, adopted by the
International Accounting Standards Board ('IASB') and endorsed for use by
companies listed on an EU regulated market.
The significant accounting policies applied in the financial statements of the
Group in the prior years are applied consistently in these financial statements.
The financial statements are presented in thousands of US dollars (US$'000)
because that is the currency the Group primarily trades with its customers in.
The consolidated financial statements comply with the Gibraltar Companies
(Accounts) Act 1999, the Gibraltar Companies (Consolidated Accounts) Act 1999
and the Gibraltar Companies Act 1930.
The following interpretations, issued by the International Financial Reporting
Interpretations Committee (IFRIC), are effective for the first time in the
current financial year and have been adopted by the Group with no significant
impact on its consolidated results or financial position:
IFRIC 4 - Determining whether an arrangement contains a lease (effective for
annual periods beginning on or after 1 January 2006).
IFRIC 5 - Rights to interests arising from decommissioning, restoration and
environmental rehabilitation funds (effective for annual periods beginning on or
after 1 January 2006).
IFIRC 6 - Liabilities arising from participating in a specific market, waste
electrical and electronic equipment (effective for annual periods beginning on
or after 1 December 2005).
The following standards and interpretations, issued by the IASB or IFRIC, have
not been adopted by the Group, and the Group is currently assessing the impact
these standards and interpretations will have on the presentation of its
consolidated results in future periods:
IFRS 7 - Financial instruments: disclosure (effective for annual periods
beginning on or after 1 January 2007).
IFRS 8 - Operating segments (effective for annual periods beginning on or after
1 January 2009).
IFRIC 7 - Applying the restatement approach under IAS 29 - Financial reporting
in hyperinflationary economies (effective for annual periods beginning on or
after 1 March 2006).
IFRIC 8 - Scope of IFRS 2 - Accounting for share-based payments (effective for
annual periods beginning on or after 1 May 2006).
IFRIC 9 - Reassessment of embedded derivatives (effective for annual periods
beginning on or after 1 June 2006).
IFRIC 10 - Interim financial reporting and impairment (effective for annual
periods beginning on or after 1 November 2006).
IFRIC 11 - Group and treasury share transactions (effective for annual periods
beginning on or after 1 March 2007).
IFRIC 12 - Service concession arrangements (effective for annual periods
beginning on or after 1 January 2008).
IAS 23 (revised) - Borrowing costs (effective for annual periods beginning on or
after 1 January 2009).
IFRS 8 contains requirements for the disclosure of information about an entity's
operating segments and also about the entity's products and services, the
geographical areas in which it operates, and its major customers. The standard
is concerned only with the disclosure and replaces IAS 14 - Segment reporting.
Critical accounting policies, estimates and adjustments
The preparation of consolidated financial statements under IFRS requires the
Group to make estimates and judgements that affect the application of policies
and reported amounts. Estimates and judgements are continually evaluated and are
based on historical experience and other factors, including expectations of
future events that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates.
Included in this note are accounting policies which cover areas that the
Directors consider require estimates and assumptions which have a significant
risk of causing a material adjustment to the carrying amount of assets and
liabilities within the next financial year. These policies together with
references to the related notes to the financial information can be found below:
Taxation Note 6
Share-based payments Note 17
Discontinued operations Note 21
Contingent liabilities Note 22
Presentation of continuing and discontinued operations
As a result of enactment of the UIGEA in October 2006, the Group withdrew from
offering real-money activity to the US facing market.
Although the Group did not operate the US facing business as a separate
business, it is a separate geographical segment of the Group's business and in
accordance with IFRS 5 - 'Non-Current Assets Held for Sale and Discontinued
Operations' the income statement and related notes are required to show
continued and discontinued operations separately.
Net Gaming Revenue and certain direct costs associated with the discontinued
operations, which are of distinct nature, were allocated accordingly. Other
costs (such as R&D expenses, IT expenses, Share benefit charges, office rent and
associated cost, depreciation of fixed assets, gaming duty, Directors and
Officers insurance, Directors' fees and tax), which are not distinguishable,
were all allocated to the continuing operations and not to the discontinued
business. In allocating the rest of the costs of the Group between the two
operations, management has applied reasonable estimates in accordance with
applicable accounting standards. However, as estimates have necessarily been
used in disclosing a geographical segment as a discontinued operations, the
results do not necessarily reflect the financial performance which would have
been achieved had the discontinued operations been managed as a stand-alone
business.
Basis of consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The subsidiaries are Companies controlled by 888 Holdings
Public Limited Company. Control exists where the Company has the power to govern
the financial and operating policies of an entity so as to obtain benefits from
its activities. Subsidiaries are consolidated from the date the parent gained
control until such time as control ceases.
The financial statements of the subsidiaries are included in the consolidated
financial statements using the purchase method of accounting. On the date of the
acquisition, the assets and liabilities of a subsidiary are measured at their
fair values and any excess of the fair value of the acquisition over the fair
values of the identifiable net assets acquired is recognised as goodwill.
Inter-company transactions and balances are eliminated on consolidation.
The financial statements of subsidiaries are prepared for the same reporting
period as the parent company and using consistent accounting policies.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Net Gaming Revenue
Revenue is recognised to the extent that it is probable that economic benefits
will flow to the Group and the revenue can be reliably measured.
Net Gaming Revenue is defined as follows:
Casino
Casino winnings that are the differences between the amounts of bets placed by
members less amounts won by members.
Poker
Ring games - Rake, which is the commission charged from each winning hand
played.
Tournaments - Entry fees charged for participation in Poker tournaments.
Casino winnings and revenues from the Poker business are stated after deduction
of certain bonuses granted to members.
Foreign currency
Monetary assets and liabilities denominated in non-US dollar currencies are
translated into US dollar equivalents using year-end spot foreign exchange
rates. Non-monetary assets and liabilities are translated using exchange rates
prevailing at the dates of the transactions. Exchange rate differences on
foreign currency transactions are included in administrative expenses.
The results and financial position of all Group entities that have a functional
currency different from US dollars are translated into the presentation currency
as follows:
(i) monetary assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance sheet;
(ii) income and expenses for each income statement are translated at an average
exchange rate (unless this average is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction dates, in which
case income and expenses are translated at the dates of the transactions); and
(iii) exchange rate differences on translation of Group entities that have
functional currencies different from US dollars are included in administrative
expenses.
Research and development costs
Research and development expenditure is charged to the statement of income as
incurred. IAS 38 'Intangible Assets' requires capitalisation of certain software
development costs, subsequent to technological and commercial feasibility being
established and the Group having sufficient resources to complete development.
Based on the Group's product-development process, technological feasibility and
therefore the creation of substantially improved product, is only established
upon the completion of a working model. The Group generally does not incur any
significant costs between the completion of the working model and the point at
which the product is ready for general release.
Taxation
The tax expense represents tax payable for the year based on currently
applicable tax rates.
Deferred tax assets and liabilities are recognised where the carrying amount of
an asset or liability in the balance sheet differs from its tax base.
Recognition of deferred tax assets is restricted to those instances where it is
probable that taxable profit will be available against which the difference can
be utilised. The amount of the asset or liability is determined using tax rates
that have been enacted or substantively enacted by the balance sheet date and
are expected to apply when the deferred tax liabilities/(assets) are settled/
(recovered).
Intangible assets
All intangible assets are initially recognised at cost.
Amortisation is provided to write off the cost, less estimated residual values,
of all intangible assets, evenly over their expected useful lives, and the
charge is included within operating expenses. Intangible assets are reviewed
annually for evidence of impairment. The annual amortisation rate is as follows:
Domain names - 10%
Property, plant and equipment
Property, plant and equipment is stated at historic cost less accumulated
depreciation. Carrying amounts are reviewed at each balance sheet date for
impairment.
Depreciation is calculated using the straight-line method, at annual rates
estimated to write off the cost of the assets less their estimated residual
values over their expected useful lives. The annual depreciation rates are as
follows:
IT equipment 33%
Office furniture and equipment 7-15%
Motor vehicles 15%
Leasehold improvements Over the shorter of the term of the lease or useful lives
Impairment of non-financial assets
Impairment tests on goodwill and other intangible assets with indefinite useful
economic lives and other non-financial assets are subject to impairment tests
whenever events or changes in circumstances indicate that their carrying amount
may not be recoverable. Where the carrying value of an asset exceeds its
recoverable amount (i.e. the higher of value in use and fair value less costs to
sell), the asset is written down accordingly.
Where it is not possible to estimate the recoverable amount of an individual
asset, the impairment test is carried out on the asset's cash generating unit
(i.e. the lowest group of assets in which the asset belongs for which there are
separately identifiable cash flows).
Trade receivables
Trade receivables are recognised and carried at the original transaction value
and principally comprise amounts due from the credit card companies and from
e-payment companies. An estimate for doubtful debts is made when collection of
the full amount is no longer probable. Bad debts are written off when
identified.
Cash and cash equivalents
Cash comprises cash in hand and balances with banks. Cash equivalents are
short-term, highly liquid investments that are readily convertible to known
amounts of cash. They include short-term bank deposits originally purchased with
maturities of three months or less.
Equity
Equity issued by the Company is recorded as the proceeds received, net of direct
issue costs.
Trade and other payables
Trade and other payables are recognised and carried at the original transaction
value.
Chargebacks and returned e-cheques
The cost of chargebacks and returned e-cheques is included in operating
expenses.
Leases
Leases are classified as finance leases wherever the terms of the lease transfer
substantially all the risks and rewards of ownership to the Group. All other
leases are classified as operating leases and rentals payable are charged to
income on a straight-line basis over the term of the lease.
Provisions
Provisions are recognised when the Group has a present or constructive
obligation as a result of a past event from which it is probable that it will
result in an outflow of economic benefits that can be reasonably estimated.
Financial instruments
The carrying amounts of cash and cash equivalents, related parties, trade
receivables, other accounts receivable, trade payables, member deposits and
other accounts payable approximate to their fair value.
The Group does not hold or issue derivative financial instruments for trading
purposes.
Segment information
A business segment is a distinguishable component of the Group that is engaged
in providing an individual product or service or a group of related products or
services and that is subject to risks and returns that are different from those
of other business segments. A geographical segment is a distinguishable
component of the Group that is engaged in providing products or services within
a particular environment and that is subject to risks and returns that are
different from those of components operating in other economic environments.
The Group operates in the following online gaming segments:
• Casino
• Poker
Member deposits
Member deposits are the amounts that clients place in the Group's electronic
'wallet' or bankroll, including provision for bonuses granted by the Group,
less management fees and charges applied to member accounts, along with full
provision for Casino jackpots. These amounts are repayable on demand in
accordance with the applicable terms and conditions.
Dividends
Dividends are recognised when they become legally payable. In the case of
interim dividends this is when declared by the Directors. In the case of final
dividends, this is when approved by the shareholders at the Annual General
Meeting.
3 Segment information
Business segments - continuing operations
Year ended 31 December 2006
Casino Poker Consolidated
US$'000 US$'000 US$'000
Net Gaming Revenue 88,760 68,240 157,000
Result
Segment result 52,101 41,374 93,475
Unallocated corporate expenses1 84,994
Operating profit 8,481
Finance income 4,883
Tax expense (3,117)
Profit for the period - continuing operations 10,247
Profit for the period - discontinued operations (Note 21a) 64,254
Profit for the period 74,501
Assets
Unallocated corporate assets 137,604
Total assets 137,604
Liabilities
Segment liabilities - Poker 15,445
Segment liabilities - Casino 7,226
Unallocated corporate liabilities 27,931
Total liabilities 50,602
1 Including share benefit charges of US$8,829,000.
Year ended 31 December 2005
Casino Poker Consolidated
US$'000 US$'000 US$'000
Net Gaming Revenue 85,227 37,755 122,982
Result
Segment result 41,163 13,957 55,120
Unallocated corporate expenses1 75,892
Operating loss (20,772)
Finance income 735
Tax expense (2,136)
Loss for the period - continuing operations (22,173)
Profit for the period - discontinued operations (Note 21a) 70,188
Profit for the period 48,015
Assets
Unallocated corporate assets 87,566
Total assets 87,566
Liabilities
Segment liabilities - Poker 20,099
Segment liabilities - Casino 9,226
Unallocated corporate liabilities 25,911
Total liabilities 55,236
1 Including share benefit charges of US$17,234,000.
Other than where amounts are allocated specifically to the Casino and Poker
segments above, the expenses, assets and liabilities relate jointly to both
segments. Any allocation of these items would be arbitrary.
Geographical segments
The Group's performance can also be reviewed by considering the geographical
markets and geographical locations within which the Group operates. This
information is outlined below:
Net Gaming Revenue by geographical market
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
UK 70,562 53,871
Europe 57,056 47,289
Americas (excluding US) 17,601 12,007
Rest of World 11,781 9,815
Net Gaming Revenue - Continuing operations 157,000 122,982
Net Gaming Revenue - Discontinued operations (Note 21c) 132,907 148,049
Net Gaming Revenue 289,907 271,031
Assets by geographical location
Carrying amount of segment Additions to property, plant
assets by location and equipment
Year ended Year ended Year ended Year ended
31 December 31 December 31 December 31 December
2006 2005 2006 2005
US$'000 US$'000 US$'000 US$'000
Caribbean 357 235 281 72
Europe 121,008 74,589 1,832 1,731
Rest of World 16,239 12,742 6,508 2,028
137,604 87,566 8,621 3,831
4 Administrative expenses
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Share benefit charges - all equity settled 8,829 17,234
Other administrative expenses 19,824 16,974
Administrative expenses - Continuing operations 28,653 34,208
Administrative expenses - Discontinued operations (Note 21a) 7,284 3,120
Administrative expenses 35,937 37,328
5 Operating profit (loss) from continuing operations
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Operating profit (loss) is stated after charging:
Staff costs 52,131 36,822
Audit fees 434 357
Other fees paid to auditors 179 104
Depreciation 3,801 2,700
Amortisation - 20
Impairment - 832
Chargebacks and returned e-cheques 2,507 3,226
Exchange (gains) losses (4,742) 423
Payment service providers' commissions 9,140 9,719
Share benefit charges - all equity settled 8,829 17,234
In the income statement total staff costs, excluding share benefit charges of
US$8,829,000 (2005: US$17,234,000), are included within the following
expenditure categories.
2006 2005
US$'000 US$'000
Operating expenses 23,810 19,507
Research and development expenses 14,467 9,968
Administrative expenses 13,854 7,347
52,131 36,822
At 31 December 2006 the Company employed 736 (2005: 886) staff.
6 Taxation
Corporate taxes
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Current tax 3,663 2,497
Deferred tax (546) (361)
Taxation expense 3,117 2,136
Analysis of current tax for the year
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Profit before taxation 77,618 50,151
Current tax at the effective tax rate for the year 3,663 2,497
Effect of provisions (note 11) (546) (361)
Taxation expense 3,117 2,136
Current tax is calculated with reference to the profit of the Company and its
subsidiaries in their respective countries of operation:
Gibraltar - 888 and its Gibraltar registered subsidiaries are subject to the
provisions of the Gibraltar Companies (Taxation and Concessions) Act (the
'CTCA') as a tax-exempt Company. Subject to a change of ownership or activity of
a tax-exempt company, the grandfathering of tax-exempt benefits in respect of
existing tax-exempt companies will extend up to 31 December 2010. Domestic
corporate tax in Gibraltar is 35% (2005: 35%).
Israel - 888's subsidiaries in Israel have entered into separate transfer
pricing agreements on an arm's-length basis with the Israeli Income Tax
Commissioner. Those agreements are effective until the end of 2007 in respect of
the Israeli branch of Intersafe Global Limited and 2010 in respect of Random
Logic Limited. Domestic corporate tax in Israel is 31% (2005: 33%).
UK - 888's subsidiary in the UK pays corporate tax in the UK at the applicable
rate of 30% (2005: 30%).
7 Earnings per share
Basic earnings per share from continuing operations
Basic earnings per share have been calculated by dividing the profit (loss)
attributable to ordinary shareholders by the weighted average number of shares
in issue during the year.
Diluted earnings per share
In accordance with IAS 33, 'Earnings per share', the weighted average number of
shares for diluted earnings per share takes into account all potentially
dilutive shares and share options granted, which are not included in the number
of shares for basic earnings per share. In addition, certain employee options
have also been excluded from the calculation of diluted EPS as their exercise
price is greater than the weighted averaged share price during the year and
therefore would not be advantageous for the holders to exercise the option. The
number of options excluded from the diluted EPS calculation is 3,230,182 (2005:
US$nil).
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Profit (loss) from continuing operations attributable to
ordinary shareholders 10,247 (22,173)
Weighted average number of Ordinary Shares in issue 337,223,724 337,096,320
Weighted average number of dilutive Ordinary Shares 341,834,214 338,419,476
Continuing operations
Basic 3.0c (6.6)c
Diluted 3.0c (6.6)c
Discontinued operations (Note 21f)
Basic 19.1c 20.8c
Diluted 18.8c 20.8c
Total
Basic 22.1c 14.2c
Diluted 21.8c 14.2c
Earnings per share excluding share benefit charges
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Profit (loss) from continuing operations attributable to
ordinary shareholders 10,247 (22,173)
Share benefit charges 8,829 17,234
Profit (loss) excluding share benefit charges 19,076 (4,939)
Weighted average number of Ordinary Shares in issue 337,223,724 337,096,320
Weighted average number of dilutive Ordinary Shares 341,834,214 338,419,476
Continuing operations
Basic earnings per share excluding share benefit charges 5.7c (1.5)c
Diluted earnings per share excluding share benefit charges 5.6c (1.5)c
Discontinued operations (Note 21f)
Basic earnings per share excluding share benefit charges 19.1c 20.8c
Diluted earnings per share excluding share benefit charges 18.8c 20.8c
Total
Basic earnings per share excluding share benefit charges 24.8c 19.3c
Diluted earnings per share excluding share benefit charges 24.4c 19.3c
8 Dividends
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Interim dividend 15,172 -
Special dividends 13,486 63,100
Dividends paid 28,658 63,100
The Board of Directors has recommended to the shareholders a final dividend in
respect of the year ended 31 December 2006, of 8.88c per share.
9 Intangible assets
During 2005 there were additions to goodwill and domain names of US$452,000 and
US$400,000 respectively. During the course of 2005 these balances were amortised
and impaired to US$nil. Consequently the net book value of intangible assets at
31 December 2005 was US$nil.
There have been no movements in respect of intangible assets during the current
year and hence the net book value of intangible assets at 31 December 2006 was
US$nil.
10 Property, plant and equipment
Office
furniture and Motor Leasehold
IT equipment equipment Vehicles Improvements Total
US$'000 US$'000 US$'000 US$'000 US$'000
Cost
At 1 January 2006 10,614 2,077 459 5,202 18,352
Additions 3,163 254 - 5,204 8,621
Disposals - - (163) - (163)
At 31 December 2006 13,777 2,331 296 10,406 26,810
Accumulated depreciation
At 1 January 2006 7,576 618 61 1,756 10,011
Charge for the year 2,085 208 128 1,380 3,801
Disposals - - (35) - (35)
At 31 December 2006 9,661 826 154 3,136 13,777
Depreciated cost
At 31 December 2006 4,116 1,505 142 7,270 13,033
At 31 December 2005 3,038 1,459 398 3,446 8,341
Prior year amounts
Depreciated cost at
1 January 2005 2,248 1,087 215 3,692 7,242
Additions in 2005 2,420 702 272 437 3,831
Disposals in 2005 - - (32) - (32)
Depreciation in 2005 (1,630) (330) (57) (683) (2,700)
Depreciated cost at
31 December 2005 3,038 1,459 398 3,446 8,341
11 Deferred taxes
Deferred taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for tax purposes. The Group's deferred tax assets resulting
from temporary differences are as follows:
31 December 31 December
2006 2005
US$'000 US$'000
Accrued severance pay 141 195
Provision for share option charges 176 -
Provision for vacation 213 154
Provision for convalescence 16 12
546 361
12 Cash and cash equivalents
31 December 31 December
2006 2005
US$'000 US$'000
Cash and cash equivalents 106,811 56,146
Restricted cash 7,545 6,056
114,356 62,202
Restricted cash primarily relates to deposits held by banks for guarantees.
13 Trade and other receivables
31 December 31 December
2006 2005
US$'000 US$'000
Trade receivables 6,189 12,535
Other receivables and prepayments 3,480 2,478
9,669 15,013
The carrying value of trade and other receivables approximates to their fair
value.
14 Share capital
Share capital comprises the following:
Authorised
31 December 31 December 31 December 31 December
2006 2005 2006 2005
Number Number US$'000 US$'000
Ordinary Shares of US$1 each - 3,101,000 - 3,101
Effect of share split - (3,101,000) - (3,101)
Ordinary Shares of £0.005 each 426,387,500 426,387,500 3,880 3,880
426,387,500 426,387,500 3,880 3,880
Allotted, called up and fully paid
31 December 31 December 31 December 31 December
2006 2005 2006 2005
Number Number US$'000 US$'000
Ordinary Shares of US$1 each - 3,064,512 - 3,065
Effect of share split - (3,064,512) - (3,065)
Ordinary Shares of £0.005 each 337,096,320 337,096,320 3,068 3,068
Issue of Ordinary Shares of £0.005 each 522,500 - 5 -
337,618,820 337,096,320 3,073 3,068
On 4 October 2006, the Company issued 522,500 Ordinary Shares of £0.005 each in
respect of shares issued and nil cost options exercised as part of the Company's
employee share option plan (see note 17).
Shares issued are converted into US$ at the exchange rate prevailing on the date
of issue. The issued and fully paid share capital of the Group amounts to
US$3,073,000 (2005: US$3,068,000) and is split into 337,618,820 (2005:
337,096,320) ordinary shares. The share capital in UK Sterling (GBP) is
£1,688,094 (2005: £1,685,482) and translates at an average exchange rate of
US$1.82 (2005: US$1.82) to GBP.
15 Trade and other payables
31 December 31 December
2006 2005
US$'000 US$'000
Trade payables 3,111 4,550
Corporate taxes 1,016 766
Other payables and accrued expenses 23,804 20,277
27,931 25,593
The carrying value of trade and other payables approximates to their fair value.
16 Principal investments in subsidiaries
Percentage of Percentage of
equity interest equity interest
Country of 2006 2005
Name incorporation % % Nature of business
Intersafe Global Limited Gibraltar 100 100 Payment processor
Cassava Enterprises Limited Antigua 100 100 Member call centre operator
Virtual Services Limited BVI 100 100 Advertising
Virtual Holdings Management Services
(Gibraltar) Limited Gibraltar 100 100 Operates Group headquarters
Intersafe Global (Europe) Limited Gibraltar 100 100 Payment processor
Cassava Enterprises Services
(Gibraltar) Limited Gibraltar 100 100 Gaming website operator
Virtual Marketing Services
(UK) Limited UK 100 100 Advertising
Cassava Sports Limited Gibraltar 100 100 Domain site owner through
which a third-party operates
a betting exchange
Active Media Limited BVI 100 100 Member call centre employer
Virtual Marketing Services
(Gibraltar) Limited Gibraltar 100 100 Marketing acquisition
Dixie Operation Limited Antigua 100 100 Member call centre operator
Random Logic Limited Israel 100 100 Research, development and marketing
ACTeCASH Limited1 Gibraltar - - e-Wallet service
1 On 20 December 2005, the Group took responsibility for the management of
ACTeCASH Limited, a company with common shareholders. From this date ACTeCASH
was managed as a unit of the Group and utilised staff employed by the Group. In
accordance with IAS 27 'Consolidated and Separate Financial Statements', the
Group is deemed to have control of ACTeCASH by virtue of the fact it has the
power to govern the financial and operating policies of this company and derives
economic benefit from doing so. As such ACTeCASH has been consolidated as part
of the Group.
17 Share-based payment
Prior to flotation, the Company adopted two equity-settled employee share
incentive plans - the 888 All-Employee Share Plan and the Long-Term Incentive
Plan. Awards have been granted under the 888 All-Employee Share Plan conditional
upon flotation. The 888 All-Employee Share Plan is open to all employees and
Executive Directors of the Group who are not within six months of their normal
retirement age at the discretion of the Remuneration Committee. Awards under
this scheme will vest in instalments over a fixed period of up to four years.
On 14 September 2006, the Company has granted awards to certain Executive
Directors and members of its senior management. These awards are subject to
performance conditions imposed by the Remuneration Committee at the date of
grant.
Details of shares and share options granted as part of the 888 All-Employee
Share Plan and shares granted vesting immediately on IPO and thereafter:
Share options granted
31 December 31 December
2006 2005
Number Number
Outstanding at the beginning of the year 3,578,287 -
Market value options granted during the year 2,224,131 3,578,287
Market value options lapsed during the year (1,597,499) -
Outstanding at the end of the year1 4,204,919 3,578,287
Weighted average exercise price £1.67 £1.75
1 Of the total number of options outstanding at the end of the year 784,491 had
vested and were exercisable at the end of the year (2005: nil).
Shares granted
31 December 31 December
2006 2005
Number Number
Outstanding at the beginning of the year 5,292,622 -
Share granted - future vesting 5,595,219 5,292,622
Share granted - immediate vesting - 5,078,357
Lapsed future vesting shares (2,003,294) -
Shares issued during the year1 (567,908) (5,078,357)
Outstanding at the end of the year 8,316,639 5,292,622
1 Of the total number of shares issued, 45,408 shares were issued as part of the
IPO.
The following information is relevant in the determination of the fair value of
options granted during the year under the equity-settled 888 All-Employee Share
Plan:
Valuation information
2006 2005
Option pricing model used Monte Carlo Binomial
Weighted average share price at grant date £1.61 £1.75
Weighted exercise price £1.67 £1.75
Exercise period of the market value options is from vesting until expiry of 10
years after grant date.
In accordance with International Financial Reporting Standards a charge to the
income statement in respect of any shares or options granted under the above
schemes will be recognised and spread over the vesting period of the shares or
options based on the fair value of the shares or options at the date at grant,
adjusted for changes in vesting conditions at each balance sheet date. This
charge has no cash impact.
Share benefit charges
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Charges in respect of shares granted to employees on IPO - 15,087
Charges in respect of share and option awards 8,829 2,147
Charge for the year 8,829 17,234
The source of the shares granted to employees on IPO was the shareholders'
immediately before the IPO rather than the Company. An amount equalling the
charge in relation to these shares has therefore been transferred from the share
benefit reserve to accumulated profit in the prior year.
18 Related party transactions
At 31 December 2006, the Group was owed US$nil by companies controlled by
shareholders of the Group and by its shareholders (2005: US$1,649,000), of which
US$nil (2005: US$1,633,000) was due from shareholders relating to flotation
expenses.
At this date the Group owed to its shareholders US$nil (2005: US$318,000).
During the year the Group paid US$212,464 (2005: US$198,768) in respect of rent
and office expenses to companies of which Mr John Anderson is a Director. At 31
December 2006 the amount owed to those companies was US$nil (2005: US$nil).
Remuneration paid to the Directors in the year totalled US$9,258,000 (2005:
US$3,176,000).
Share benefit charge in respect of awards granted to the Directors totalled
US$4,544,000 (2005: US$6,059,000).
19 Commitments
Lease commitments
Future minimum lease commitments under property operating leases as at 31
December for the year ended 31 December 2006, are as follows:
31 December 31 December
2006 2005
US$'000 US$'000
Leases expiring within
One year 3,060 1,985
One to five years 8,204 2,617
11,264 4,602
The amount paid in the year was US$2,620,000 (2005: US$2,052,463).
Lease commitments on the Group's property are shown to the date of the first
break clause.
20 Financial risk management objectives and policies
The Group is exposed through its operations to currencies, interest rate and
credit risk. Policy for managing these risks is set by the Board following
recommendations from the Chief Financial Officer. The policy for each of these
risks is detailed below.
Currency risk
The Group incurs foreign currency risk on sales and purchases that are
denominated in a currency other than US dollars. The Group continually monitors
the foreign currency risk and takes steps to ensure that the net exposure is
kept to an acceptable level.
Interest rate risk
The Group's exposure to interest rate risk is limited to the interest bearing
deposits in which the Group invests surplus funds. Downside interest rate risk
is minimal as the Group has no borrowings. Management monitors liquidity to
ensure that sufficient liquid resources are available to the Group.
Credit risk
The Group's credit risk is primarily attributable to receivables from payment
service providers. Management monitors those balances on a regular basis.
21 Discontinued operations
(a) Consolidated Income Statement from discontinued operations
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Net Gaming Revenue 132,907 148,049
Operating expenses 28,086 29,652
Research and development expenses - -
Selling and marketing expenses 33,283 45,089
Administrative expenses 7,284 3,120
?Operating profit before reorganisation costs 68,287 70,188
?Charges in respect of reorganisation costs 4,033 -
Operating profit 64,254 70,188
Finance income - -
Profit from discontinued operations 64,254 70,188
(b) Segment information
Business segments
Year ended 31 December 2006
Casino Poker Consolidated
US$'000 US$'000 US$'000
Net Gaming Revenue 71,972 60,935 132,907
Result
Segment result 40,186 37,678 77,864
Unallocated corporate expenses 13,610
Operating profit 64,254
Finance income -
Tax expense -
Profit for the period 64,254
Year ended 31 December 2005
Casino Poker Consolidated
US$'000 US$'000 US$'000
Net Gaming Revenue 75,987 72,062 148,049
Result
Segment result 38,392 41,212 79,604
Unallocated corporate expenses 9,416
Operating profit 70,188
Finance income -
Tax expense -
Profit for the period 70,188
Other than where amounts are allocated specifically to the Casino and Poker
segments above, the expenses relate jointly to both segments. Any allocation of
these items would be arbitrary.
(c) Geographical segments
Net Gaming Revenue by geographical market
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
US 132,907 148,049
132,907 148,049
(d) Profit from discontinued operations
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Profit from discontinued operations is stated after charging:
Staff costs 6,638 5,114
Chargebacks and returned e-cheques 15,465 15,417
Payment service providers' commissions 5,821 7,936
In note 21(a) total staff costs, are included within the following expenditure
categories:
2006 2005
US$'000 US$'000
Operating expenses 5,842 4,542
Administrative expenses 796 572
6,638 5,114
(e) Cash flows from discontinued operations
Year ended Year ended
31 December 31 December
2006 2005
US$'000 US$'000
Net cash from operating activities 53,506 79,496
Net cash generated from investing activities 2,244 376
Net cash used in financing activities (14,951) (34,705)
Net increase in cash and cash equivalents 40,799 45,167
(f) Earnings per share
Year ended Year ended
31 December 31 December
2006 2005
Profit from discontinued operations attributable to
ordinary shareholders 64,254 70,188
Weighted average number of Ordinary Shares in issue 337,223,724 337,096,320
Weighted average number of dilutive Ordinary Shares 341,834,214 338,419,476
Basic earnings per share 19.1c 20.8c
Diluted earnings per share 18.8c 20.8c
22 Contingent liabilities
From time to time the Group is subject to legal claims and actions against it.
The Group takes legal advice as to the likelihood of success of such claims and
actions.
Regulatory issues
As part of the Board's ongoing regulatory compliance and operational risk
assessment process, the Board continues to monitor legal and regulatory
developments, and their potential impact on the business, and continues to take
appropriate advice in respect of these developments. Following the enactment of
the UIGEA on 13 October 2006, the Group stopped taking any deposits from
customers in the US and barred such customers from wagering real-money on all of
the Group's sites.
Notwithstanding this, there remains a residual risk of an adverse impact arising
from the Group having had customers in the US prior to the enactment of the
UIGEA. The Board is not able to identify reliably at this stage what if any
liability may arise and accordingly no provision has been made.
23 Events subsequent to the balance sheet date
On 29 March 2007, the Company announced the acquisition of the online Bingo
business of Globalcom Limited, a privately owned company registered in Belize,
by way of an asset acquisition for an all cash consideration of US$32.4 million
(less amounts payable to customers). A further earn-out payment of up to US$11.0
million may be payable in cash 12 months from completion on the basis of actual
performance during the financial year ended 31 December 2007. The consideration
is broken down as follows: US$10.8 million, initial consideration, payable at
completion, US$5.4 million (less amounts payable to customers) payable 90 days
from completion and the balance, payable on the first anniversary of completion
of the acquisition. The majority of the consideration pertains to goodwill.
Certain conditions must be met prior to acquisition being finalised. It is
expected that the transaction will be completed during 2007.
This information is provided by RNS
The company news service from the London Stock Exchange
|
