CryptoLogic Delivers Strong Second Quarter Performance.TORONTO Toronto (tərŏn`tō), city (1998 est pop. 2,400,000), provincial capital, S Ont., Canada, on Lake Ontario. Toronto is the largest city in Canada and since the 1970s has been one of the fastest-changing cities in North America, experiencing -- CryptoLogic Inc CryptoLogic Inc. is a Toronto-based online gambling software supplier, one of the four largest in the industry along with Microgaming, Playtech, and Real Time Gaming. CryptoLogic was founded by brothers Andrew and Mark Rivkin in 1995 from the basement of their parent's house. . (TSX TSX Toronto Stock Exchange (TSE before April, 2002) TSX Transfer from Stack Pointer to Index TSX True Space Extension :CRY)(NASDAQ NASDAQ in full National Association of Securities Dealers Automated Quotations U.S. market for over-the-counter securities. Established in 1971 by the National Association of Securities Dealers (NASD), NASDAQ is an automated quotation system that reports on :CRYP CRYP Cheyenne River Youth Project (Eagle Butte, SD) )(LSE LSE - Language Sensitive Editor :CRP C-reactive protein (CRP) A protein present in blood serum in various abnormal states, like inflammation. Mentioned in: Pelvic Inflammatory Disease CRP, n.pr See C-reactive protein. ) - ALL FINANCIAL FIGURES ARE IN US$ Q2 revenue up 33%, earnings up 48% as focused strategy and investments continue to pay off CryptoLogic Inc. (TSX:CRY)(NASDAQ:CRYP)(LSE:CRP), a leading software developer to the global Internet Internet Publicly accessible computer network connecting many smaller networks from around the world. It grew out of a U.S. Defense Department program called ARPANET (Advanced Research Projects Agency Network), established in 1969 with connections between computers at the gaming market, today announced its financial results for the second quarter and six months ended June June: see month. 30, 2005. In this seasonally softer period for online gaming See gaming. , CryptoLogic cryp·tol·o·gy n. The study of cryptanalysis or cryptography. cryp  to·log delivered strong revenue, excellent earnings and
positive operating cash flow Operating cash flowEarnings before depreciation minus taxes. Measures the cash generated from operations, not counting capital spending or working capital requirements. due to continued organic growth from existing customers in the company's primary Internet casino casino or cassino (both: kəsē`nō). 1 Card game played with a full deck by two to four players. Its origins are obscure though it probably traces back to the Italian game of Scopa. and Internet poker poker, card game, believed to have originated in Asia and first played in the United States in the 19th cent. A traditional cutthroat gambling game at first, it is now also an internationally popular social pastime. markets. "CryptoLogic continues to benefit from both the right products and the right strategy," said Lewis Rose, CryptoLogic's President and CEO (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. . "For CryptoLogic, this means offering the best games to some of the world's best gaming brands and investing in the world's best markets for online gaming. That's why we're we're Contraction of we are. we're we are achieving positive returns through solid casino performance and 17% sequential One after the other in some consecutive order such as by name or number. quarterly growth in poker, well ahead of the Internet poker industry." --------------------------------------------------------------------- Financial Highlights Three months ended Six months ended (in millions of US dollars, June 30, June 30, except per share data) 2005 2004 2005 2004 --------------------------------------------------------------------- Revenue $19.9 $14.9 $40.2 $30.1 Earnings $4.7 $3.2 $9.6 $7.0 Earnings per diluted share $0.33 $0.23 $0.67 $0.52 --------------------------------------------------------------------- Fiscal 2005 second quarter highlights included: - Quarterly revenue grew 33% to $19.9 million, and earnings grew 48% over Q2 2004 to $4.7 million or $0.33 per diluted di·lute tr.v. di·lut·ed, di·lut·ing, di·lutes 1. To make thinner or less concentrated by adding a liquid such as water. 2. To lessen the force, strength, purity, or brilliance of, especially by admixture. share. This exceeded analysts' average consensus of $0.30 per diluted share; - Internet poker fees derived de·rive v. de·rived, de·riv·ing, de·rives v.tr. 1. To obtain or receive from a source. 2. from the company's WagerLogic subsidiary rose approximately ap·prox·i·mate adj. 1. Almost exact or correct: the approximate time of the accident. 2. 180% over Q2 2004, and increased 17% over Q1 2005. Poker accounted for more than 30% of Q2 2005 revenue. Continued growth from Internet poker licensees and an expanding poker offering contributed to these strong results; - CryptoLogic released new enhancements to its poker software, including high-speed high-speed adj. 1. Operated or designed for operation at high speed: a high-speed food processor. 2. Taking place at high speed: a high-speed chase. 3. Lightning lightning, electrical discharge accompanied by thunder, commonly occurring during a thunderstorm (TM) games and an expanded range of lower-limit tables. These enhancements gave players more choice of games at their desired speed and skill level; - Internet casino revenue derived from WagerLogic continued steady growth, rising almost 4% over Q2 2004, and remained a major revenue generator generator, in electricity, machine used to change mechanical energy into electrical energy. It operates on the principle of electromagnetic induction, discovered (1831) by Michael Faraday. , accounting for approximately 60% of total Q2 2005 revenue; - Product innovation saw Bonus Pack 7 of the company's casino software introduce a suite of 12 new variations of highly popular, multi-line video slots and two new scratch card scratch card n. See scratch ticket. scratch card scratch n → carte f à gratter games - the first ever developed by CryptoLogic; - The company continued to enjoy excellent geographic diversification Diversification A risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Notes: Diversification is possibly the greatest way to reduce the risk. with licensees' revenue from international markets exceeding 65% of total revenue, up from over 60% in 2004; and - A quarterly dividend of $0.05 per share will be payable on September September: see month. 15, 2005 to shareholders of record as at September 8, 2005. Q2 Results: Strong Revenue, Excellent Earnings (all financial figures expressed in US dollars) CryptoLogic's strong revenue and earnings momentum continued in the second quarter ended June 30, 2005. Revenue rose 33% to $19.9 million (Q2 2004: $14.9 million). EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become (1) for the quarter grew 26% to $5.6 million (Q2 2004: $4.4 million). Despite increased costs associated with investing in the growth of the company's business to drive higher revenue generation, EBITDA(1) margin for the quarter remained solid at 28% as a percentage of revenue (Q2 2004: 30%). Earnings for the quarter rose 48% to $4.7 million or $0.33 per diluted share (Q2 2004: $3.2 million or $0.23 per diluted share). CryptoLogic achieved excellent second quarter performance notwithstanding the traditional softness of this period for online gaming. The company attributed this success to steady organic growth from existing customers in the company's core casino market, and to the continuing high growth of licensees' Internet poker businesses. As previously detailed, in Q3 2004, CryptoLogic embarked on a $12.5 million investment program to support the company's long term growth, and this continuing program contributed to the second quarter's positive results. As at Q2 2005, the company had invested approximately 74% ($9.2 million) of this program, of which $3.3 million were operating costs operating costs npl → gastos mpl operacionales and $5.9 million were capital expenditures (comprising $3.2 million for the purchase of capital assets capital assets n. equipment, property, and funds owned by a business. (See: capital, capital account) and $2.7 million in capitalized Capitalized Recorded in asset accounts and then depreciated or amortized, as is appropriate for expenditures for items with useful lives longer than one year. software development related to the investment program). Revenue for the first half of 2005 increased 33% to $40.2 million (Q2 2004 YTD See Year-to-date. YTD See year to date (YTD). : $30.1 million). EBITDA(1) for the first six months in 2005 rose by 26% to $11.4 million (Q2 2004 YTD: $9.0 million). EBITDA(1) margin for the first six months in 2005 remained solid at 28% as a percentage of revenue (Q2 2004 YTD: 30%). Earnings for the first half of 2005 improved by 36% to $9.6 million or $0.67 per diluted share (Q2 2004 YTD: $7.0 million or $0.52 per diluted share). Balance Sheet Strength: Healthy Cash Flow, No Debt At June 30, 2005, CryptoLogic had no debt, and total cash grew to $93.0 million or $6.53 per diluted share (comprising cash and cash equivalents, short term investments, and including security deposits of $7.0 million). CryptoLogic's working capital rose to $72.6 million or $5.10 per diluted share. On August 2, 2005, CryptoLogic's Board declared de·clare v. de·clared, de·clar·ing, de·clares v.tr. 1. To make known formally or officially. See Synonyms at announce. 2. To state emphatically or authoritatively; affirm. 3. the next quarterly dividend of $0.05 per share, payable on September 15, 2005 to shareholders of record as at September 8, 2005. Operating cash flow for the second quarter of 2005 rose to $6.6 million (Q2 2004: $2.6 million). This increase was largely attributed to higher earnings as well as timing of accounts receivables accounts receivable n. the amounts of money due or owed to a business or professional by customers or clients. Generally, accounts receivable refers to the total amount due and is considered in calculating the value of a business or the business' problems in paying and payables Payables Related: Accounts payable . Geographic Diversification: UK and Europe Europe (y  r`əp), 6th largest continent, c.4,000,000 sq mi (10,360,000 sq km) including adjacent islands (1992 est. pop. 512,000,000). Lead the WayCryptoLogic's business continued to be well-diversified across the world's major Internet gaming markets. Revenue generated from licensees' international players remained on target at more than 65% of Q2 2005 revenue, up from over 60% in 2004. The UK and Continental Europe Continental Europe, also referred to as mainland Europe or simply the Continent, is the continent of Europe, explicitly excluding European islands and, at times, peninsulas. continued to be the largest markets, together accounting for more than 60% of overall revenue in the quarter. Product Expansion: New Games, New Features CryptoLogic's ongoing investment in its poker software and system infrastructure continued to pay off. In the quarter, fees earned from Internet poker rose approximately 180% over Q2 2004, and up 17% over the first quarter of this year. Online poker Online poker is the game of poker played over the Internet. It has been partly responsible for a dramatic increase in the number of poker players worldwide. In 2005, revenues from online poker were estimated at US$ 200 million per month. fees accounted for more than 30% of total Q2 2005 revenue. The company's newly enhanced poker software, which now includes high-speed Lightning(TM) games and an expanded range of lower-limit tables, added to one of the most extensive poker offerings on the Internet. The software gives players greater choice to play the game they want, at the speed they want, for the stakes they want, and in multiple currencies. Today, the fast-growing adj. 1. tending to spread quickly; - used mostly of plants. Adj. 1. fast-growing - tending to spread quickly; "an aggressive tumor" strong-growing, aggressive central poker room shared by WagerLogic licensees attracts more than 6,700 simultaneous online players, and its system capacity has been expanded to support growth to more than 16,000. Internet casino remained a healthy cash contributor, accounting for approximately 60% of total Q2 2005 revenue and growing almost 4% over Q2 2004. The Internet casino market, while more developed than Internet poker, continues to offer vast potential as it still represents less than five percent of the world's land-based casino market (source: Global Betting & Gaming Consultants). In this environment, new market-targeted games are key drivers of growth; accordingly WagerLogic released Bonus Pack 7, a package of 12 new multi-line video slot and jackpot games with added elements of skill through arcade-style bonus rounds, and introduced the company's two first-ever scratch cards. Outlook CryptoLogic's disciplined execution and targeted investments in its primary Internet casino and Internet poker markets continued to generate strong revenue, profitability and cash flow. Although the third quarter is expected to benefit from the new casino games Games available in most casinos are commonly called casino games. In a casino game, the players gamble casino chips on various possible random outcomes or combinations of outcomes. Casino games are available in online casinos, where permitted by law. and the continued strength in poker, the summer months are seasonally the slowest period of the year as Internet activity tends to soften, particularly in the casino segment. Management forecasts third quarter revenue to range from $19.4-$19.7 million, with earnings of $4.5-$4.7 million or $0.31-$0.32 per diluted share. CryptoLogic's major investment program is continuing on schedule, and has already translated into growing near term returns. The program's goal is to enhance the company's long term global leadership and competitive advantage. 2005 Second Quarter Analyst Call A conference call is scheduled for 8:30 a.m. (Eastern) (1:30 p.m. GMT (Greenwich Mean Time) See UTC. GMT - Universal Time 1 ) on Thursday Thursday: see week. , August 4, 2005. Interested parties should call either 416-695-5259, 1-877-888-3490 (North America North America, third largest continent (1990 est. pop. 365,000,000), c.9,400,000 sq mi (24,346,000 sq km), the northern of the two continents of the Western Hemisphere. ) or international toll free number at (Country Code) 800-4222-8835. Instant replay will be available until Thursday, August 11, 2005 by calling 416-695-5275 or 1-866-518-1010. About CryptoLogic(R) (www.cryptologic.com) Focused on integrity and innovation, CryptoLogic Inc. is the world's leading, blue-chip blue chip also blue-chip·per n. 1. A stock that sells at a high price because of public confidence in its long record of steady earnings. 2. An extremely valuable asset or property. 3. public developer and supplier of Internet gaming software. Its leadership in regulatory reg·u·late tr.v. reg·u·lat·ed, reg·u·lat·ing, reg·u·lates 1. To control or direct according to rule, principle, or law. 2. compliance makes it one of the very few companies with gaming software that is certified See certification. to strict standards similar to land-based gaming. WagerLogic Limited, a wholly-owned subsidiary of CryptoLogic, is responsible for the licensing of its gaming software and services to an internationally-recognized blue-chip customer base worldwide. For information on WagerLogic(R), visit www.wagerlogic.com. CryptoLogic's common shares trade on the Toronto Stock Exchange Toronto Stock Exchange (TSE) Canada's largest stock exchange, trading approximately 1,200 company stocks and 33 options. (symbol: CRY), on the Nasdaq National Market (symbol: CRYP), and on the Main Market of the London Stock Exchange London Stock Exchange London marketplace for securities. It was formed in 1773 by a group of stockbrokers who had been doing business informally in local coffeehouses. (symbol: CRP). (1) Management believes that EBITDA (earnings before interest, taxes, and amortization) is a useful supplemental measure of performance. However, EBITDA is not a recognized earnings measure under generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). ) and does not have a standardized standardized pertaining to data that have been submitted to standardization procedures. standardized morbidity rate see morbidity rate. standardized mortality rate see mortality rate. meaning. Therefore, EBITDA may not be comparable to similar measures presented by other companies. CRYPTOLOGIC FORWARD LOOKING STATEMENT DISCLAIMER (networking) disclaimer - Statement ritually appended to many Usenet postings (sometimes automatically, by the posting software) reiterating the fact (which should be obvious, but is easily forgotten) that the article reflects its author's opinions and not necessarily those of the : Statements in this press release which are not historical are forward-looking statements forward-looking statement A projected financial statement based on management expectations. A forward-looking statement involves risks with regard to the accuracy of assumptions underlying the projections. made pursuant to the safe harbor Safe Harbor 1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated. 2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. provisions of the Private Securities Litigation Reform Act The Private Securities Litigation Reform Act of 1995 (PSLRA) implemented several significant substantive changes affecting certain cases brought under the federal securities laws, including changes related to pleading, discovery, liability, class representation and awards fees and of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, risks associated with the Company's financial condition and prospects, legal risks associated with Internet gaming and risks of governmental legislation and regulation, risks associated with market acceptance and technological changes, risks associated with dependence on licensees and key licensees, risks relating to relating to relate prep → concernant relating to relate prep → bezüglich +gen, mit Bezug auf +acc international operations Internal Operations (I.O., IO or I/O) is a fictional American Intelligence Agency in Wildstorm comics. It was originally called International Operations. I.O. first appeared in WildC.A.T.S. volume 1 #1 (August, 1992) and was created by Brandon Choi and Jim Lee. , risks associated with competition and other risks detailed in the Company's filings with securities regulatory authorities Noun 1. regulatory authority - a governmental agency that regulates businesses in the public interest regulatory agency administrative body, administrative unit - a unit with administrative responsibilities . These risks may cause results to differ materially from those projected in the forward-looking statements. MANAGEMENT'S DISCUSSION AND ANALYSIS Management's discussion and analysis (MD&A) A report from management to shareholders that accompanies the firm's financial statements in the annual report. It explains the period's financial results and enables management to discuss topics that may not be apparent in the financial CryptoLogic Inc. and our subsidiaries are referred collectively as "CryptoLogic", "the Company", "we", "us" and "our" throughout Management's Discussion and Analysis ("MD&A"), unless otherwise specified. The following MD&A should be read in conjunction with the unaudited consolidated con·sol·i·date v. con·sol·i·dat·ed, con·sol·i·dat·ing, con·sol·i·dates v.tr. 1. To unite into one system or whole; combine: interim financial statements of CryptoLogic, including the notes thereto there·to adv. 1. To that, this, or it. 2. Archaic In addition to that; furthermore. thereto Adverb Formal 1. to that or it 2. , for the three and six months ended June 30, 2005 and June 30, 2004, and the audited consolidated financial statements Consolidated Financial Statements The combined financial statements of a parent company and its subsidiaries. Notes: Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge and the MD&A for the year ended December December: see month. 31, 2004 as set out in our 2004 Annual Report. Except where otherwise indicated, the reader may assume that economic and industry factors are substantially unchanged from the 2004 year-end year-end also year·end n. The end of a year. adj. Occurring or done at the end of the year: a year-end audit. Noun 1. MD&A. This MD&A is dated August 4, 2005. Additional information relating to CryptoLogic, including our Annual Information Form, is available on SEDAR SEDAR System for Electronic Document Analysis and Retrieval SEDAR Southeast Data, Assessment, and Review at www.sedar.com or EDGAR Edgar or Eadgar (both: ĕd`gər), 943?–975, king of the English (959–75), son of Edmund, king of Wessex. In 957 the Mercians and Northumbrians rebelled against Edgar's brother Edwy and chose Edgar as their king. at www.sec.gov See .gov and GovNet. (networking) gov - The top-level domain for US government bodies. . All currency amounts are in US dollars, unless otherwise indicated. BUSINESS OVERVIEW CryptoLogic is a world leading and long-standing long-stand·ing adj. Of long duration or existence: a long-standing friendship. long-standing Adjective existing for a long time publicly traded online gaming software developer and supplier serving the global Internet gaming market. WagerLogic Limited ("WagerLogic"), a wholly-owned subsidiary of CryptoLogic, provides software licensing, e-cash (Electronic-CASH) See Web payment service, smart card and digital money. management and customer support services support services Psychology Non-health care-related ancillary services–eg, transportation, financial aid, support groups, homemaker services, respite services, and other services for our Internet gaming software to an internationally-recognized blue-chip client base ("licensees" or "customers") around the world who operate under government authority where their Internet businesses are domiciled dom·i·cile n. 1. A residence; a home. 2. One's legal residence. v. dom·i·ciled, dom·i·cil·ing, dom·i·ciles v.tr. 1. . OVERVIEW OF RESULTS In the second quarter of 2005, CryptoLogic continued to enjoy growth and enhanced market leadership in both our primary Internet casino and Internet poker markets. We continued to achieve our focused strategy and benefit from the organic growth of a core group of blue-chip international customers, supported by strategic investments in key areas of our business. In the more competitive and increasingly demanding online casino Online casinos, also known as virtual casinos or internet casinos, are online versions of traditional ("brick and mortar") casinos. Online casinos enable gamblers to play and wager on casino games through the Internet. market, licensees benefited from WagerLogic's broadening broad·en tr. & intr.v. broad·ened, broad·en·ing, broad·ens To make or become broad or broader. broad casino offering and ongoing introduction of new game choices and variations that help attract players and increase revenue potential. Fees from Internet casino continued to be a major cash generator, accounting for approximately 60% of overall Q2 2005 revenue, and rose almost 4% over Q2 2004. WagerLogic licensees' central poker room continued to be one of the fastest growing poker sites on the Internet. Our fees from Internet poker for Q2 2005 grew approximately 180% over Q2 2004, compared with the overall Internet poker industry growing at a pace of about 110% (source: PokerPulse.com, an independent industry research Web site). New poker software features and games were contributing factors to our licensees' growth in this rapidly-growing game area. Revenue rose 33% for both the second quarter of 2005 to $19.9 million (Q2 2004: $14.9 million), and to $40.2 million for the first half of 2005 (Q2 2004 YTD: $30.1 million). EBITDA(1) increased by 26% for both the second quarter of 2005 to $5.6 million (Q2 2004: $4.4 million), and to $11.4 million on a year-to-date Year-to-date (YTD) The period beginning at the start of the calendar year up to the current date. basis (Q2 2004 YTD: $9.0 million). Despite increased investments to drive higher revenue generation, EBITDA(1) margin remained solid at 28% as a percentage of revenue for both the second quarter and the first half of 2005 (Q2 2004 and YTD: 30%). Furthermore, earnings increased by 48% to $4.7 million or $0.33 per diluted share (Q2 2004: $3.2 million or $0.23 per diluted share), and grew by 36% to $9.6 million or $0.67 per diluted share in the first half of 2005 (Q2 2004 YTD: $7.0 million or $0.52 per diluted share). CryptoLogic's strong balance sheet continued to be reflected in $93.0 million in cash, cash equivalents and short term investments (including $7.0 million in security deposits) at quarter-end. Working capital grew to $72.6 million. CryptoLogic continued to benefit from the early incremental Additional or increased growth, bulk, quantity, number, or value; enlarged. Incremental cost is additional or increased cost of an item or service apart from its actual cost. returns of our major investment program, which is aimed at driving our long term growth. Since the program's implementation four quarters ago, approximately 74%, or $9.2 million of this program, has been invested. Even with these higher investments, we have posted solid margins derived from strong revenue generation. RESULTS OF OPERATIONS Revenue Revenue increased 33% for both the second quarter of 2005 to $19.9 million (Q2 2004: $14.9 million), and on a year-to-date basis to $40.2 million (Q2 2004 YTD: $30.1 million). In what is typically one of the two seasonally slower quarters of the year for Internet gaming, CryptoLogic generated strong second quarter revenue in 2005. Excellent top-line results reflected the growth of licensees' Internet poker activities and continued healthy performance in their Internet casino businesses. CryptoLogic continued to also benefit from the near term returns of our major investment program directed at key areas of our business: our casino and poker software offerings, system infrastructure and scalability How much a system can be expanded. See scalable. scalability - How well a solution to some problem will work when the size of the problem increases. For example, a central server of some kind with ten clients may perform adequately but with a thousand clients it , and back-office and customer care improvements. During the quarter, Internet poker fees increased approximately 180% over Q2 2004, and up 17% sequentially se·quen·tial adj. 1. Forming or characterized by a sequence, as of units or musical notes. 2. Sequent. se·quen over Q1 2005. Internet poker fees exceeded 30% of Q2 2005 revenue. This growth was driven by the continued growth of existing poker licensees, which was supported by ongoing enhancements of our poker software. New features included high-speed Lightning(TM) games and a wider range of lower-limit games with the addition of 10 new game levels to offer stake levels from 0.15/0.25 to 150/300 (in various currencies) to give players a greater variety of games at their desired speed and level. Tournament games also continued to attract more players, particularly with licensees offering online tournaments to qualify for the World Series of Poker The World Series of Poker is the largest set of poker tournaments in the world. It is held annually in Las Vegas, lasting just over a month. A bracelet is awarded to the winner of each of the fifty-plus events which include all the major varieties of poker. - the world's premier land-based poker event held this July July: see month. . With more than 6,700 live players simultaneously online and system capacity expanded to support growth to more than 16,000, WagerLogic licensees' central poker room continued to be one of the top-revenue generating rooms on the Internet, according to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. PokerPulse. Poker licensees are expected to experience continued strength as they benefit from WagerLogic's enhanced poker offering and capitalize on Cap´i`tal`ize on` v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>. the fast-growing Internet poker market. Although summer seasonality was a factor this quarter, Internet casino software fees continued to reflect healthy performance and grew almost 4% over Q2 2004. Casino represented approximately 60% of total Q2 2005 revenue. Our existing major brand name licensees continued to grow steadily in their online casino businesses, and benefited from WagerLogic's expanding casino game suite with new market-targeted game introductions. Most recently, we released 14 new casino games, rolling out more multi-line video slots with added elements of skill and bonus rounds as well as adding two new scratch card games - the first ever developed by CryptoLogic. We expect our broadening casino portfolio will continue to help our licensees strengthen their market position in this competitive and more sophisticated market segment. Licensees' revenue from international markets continued to be on target and accounted for more than 65% of overall Q2 2005 revenue, up from over 60% in fiscal 2004. The UK and Continental Europe represented the vast majority or together, accounted for more than 60% of total Q2 2005 revenue. Operating Costs Operating costs comprise software development and support costs that include all personnel and compensation costs, licensee licensee n. a person given a license by government or under private agreement. (See: license, licensor) LICENSEE. One to whom a license has been given. 1 M. Q. & S. 699 n. support, customer service costs and compliance-related expenditures. Operating costs were $12.4 million in Q2 2005 or 62% of revenue (Q2 2004: $9.2 million or 62%). For the six months ended June 30, 2005, operating costs were $25.2 million or 63% of revenue (Q2 2004 YTD: $18.2 million or 61%). Higher costs were in line with CryptoLogic's ongoing investments directed at new casino games, enhancement of our poker offering, an expanding system infrastructure to support growing player traffic and volumes, and improvement of our customer care and back-office processing and support services. Operating costs also rose with increased processing fees associated with growing financial transaction volumes. In Q3 2004, CryptoLogic embarked on a major investment program, which is above and beyond our normal course expenditures, to significantly upgrade our gaming platform and system and service infrastructure. Over the last four quarters, approximately 74%, or $9.2 million of this $12.5 million program, has been invested as follows: $3.3 million in operating costs and $5.9 million in capital expenditures (comprising $3.2 million for purchases of capital assets and $2.7 million in capitalized software development associated with the program). CryptoLogic continues to benefit from the early returns of these investments as evidenced by strong top-line performance and solid margins as we continue to manage expenditures in proportion to revenue generation. General and Administrative Costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. General and administrative (G&A) expenses were $1.8 million for the quarter (Q2 2004: $1.2 million). For the first six months of 2004, G&A expenses were $3.5 million (Q2 2004 YTD: $2.7 million). The rise in G&A costs was principally due to increased facilities and infrastructure expenditures to support a growing organization. Given our larger company, G&A expenses will rise modestly, although are expected to remain fairly consistent as a percentage of revenue. Finance Costs Finance costs include bank charges and fees for bank drafts. These costs were up marginally to $0.1 million for Q2 2005 (Q2 2004: $0.09 million), and $0.19 million on a year-to-date basis (Q2 2004 YTD: $0.18 million) due to increased usage of bank drafts for user withdrawals. EBITDA(1) EBITDA(1) rose 26% for both Q2 2005 to $5.6 million (Q2 2004: $4.4 million), and on a year-to-date basis to $11.4 million (Q2 2004 YTD: $9.0 million). Despite increased costs associated with investing in key areas of our business and infrastructure to support long term growth, EBITDA(1) margin remained solid at 28% as a percentage of revenue for both Q2 and year-to-date in 2005 (Both Q2 2004 and YTD: 30%). EBITDA(1) is expected to remain at solid levels as major investments continue into 2005 as planned, but are managed in proportion to revenue generation. (1) Management believes that EBITDA (earnings before interest, taxes, and amortization) is a useful supplemental measure of performance. However, EBITDA is not a recognized earnings measure under generally accepted accounting principles (GAAP) and does not have a standardized meaning. Therefore, EBITDA may not be comparable to similar measures presented by other companies.
EBITDA is reconciled to earnings as follows:
For the For the
three months six months
ended June 30, ended June 30,
---------------------------------------------------------------------
(In thousands of US dollars) 2005 2004 2005 2004
---------------------------------------------------------------------
Earnings $4,739 $3,197 $9,578 $7,018
Income taxes 819 1,040 1,614 1,651
Interest income (874) (262) (1,511) (506)
Amortization 897 443 1,699 867
---------------------------------------------------------------------
EBITDA $5,581 $4,418 $11,380 $9,030
---------------------------------------------------------------------
---------------------------------------------------------------------
Amortization Amortization expense during the quarter rose to $0.9 million (Q2 2004: $0.4 million), and to $1.7 million in the first six months of 2005 (Q2 2005 YTD: $0.9 million). The increase reflected higher investments in computer equipment, leasehold improvements Leasehold Improvement Improvements on a leased asset that increase the value of the asset. Notes: A leasehold improvement is classified as an asset that must be depreciated over time. , software and licenses to support our growing organization and the Company's major investment program. Interest Income Interest income rose to $0.9 million in the second quarter (Q2 2004: $0.3 million), and $1.5 million in the first six months of 2005 (Q2 2004 YTD: $0.5 million). The increase was a result of a higher cash position and better interest yield. Provision for Income Taxes Income taxes for the quarter were $0.8 million (Q2 2004: $1.0 million), and $1.6 million for the first six months of 2005 (Q2 2004 YTD: $1.7 million), which reflected a taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. mix that was lower in certain markets. The future income tax decline of $0.09 million arose from the change in foreign exchange rates during the second quarter of 2005. Earnings Earnings for the second quarter rose 48% to $4.7 million or $0.33 per diluted share (Q2 2004: $3.2 million or $0.23 per diluted share). On a year-to-date basis in 2005, earnings increased by 36% to $9.6 million or $0.67 per diluted share (Q2 2004 YTD: $7.0 million or $0.52 per diluted share).
Summary of Quarterly Results
---------------------------------------------------------------------
(In thousands of US dollars,
except per share data)
Fiscal Fiscal
2005 2004
---------------------------------------------------------------------
Q2 05 Q1 05 Q4 04 Q3 04 Q2 04 Q1 04
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue $19,923 $20,274 $17,949 $15,616 $14,925 $15,224
---------------------------------------------------------------------
Interest income 874 637 426 361 262 244
---------------------------------------------------------------------
Earnings 4,739 4,839 3,794 2,856 3,197 3,821
---------------------------------------------------------------------
Earnings per share
Basic 0.34 0.36 0.29 0.22 0.25 0.30
Diluted 0.33 0.34 0.27 0.21 0.23 0.28
---------------------------------------------------------------------
Basic weighted
average number of
shares (000's) 13,736 13,573 13,185 13,076 12,979 12,641
---------------------------------------------------------------------
Diluted weighted
average number of
shares (000's) 14,361 14,184 13,871 13,642 13,734 13,419
---------------------------------------------------------------------
---------------------------------------------------------------------
Fiscal
2003
---------------------------------------------------------------------
(In thousands of US dollars,
except per share data) Q4 03 Q3 03
---------------------------------------------------------------------
---------------------------------------------------------------------
Revenue $13,540 $10,944
---------------------------------------------------------------------
Interest income 160 196
---------------------------------------------------------------------
Earnings 3,033 2,157
---------------------------------------------------------------------
Earnings per share
Basic 0.25 0.18
Diluted 0.23 0.17
---------------------------------------------------------------------
Basic weighted average number
of shares (000's) 12,280 12,256
---------------------------------------------------------------------
Diluted weighted average
number of shares (000's) 12,972 12,696
---------------------------------------------------------------------
Typically, our first and fourth quarters (during the winter and fall seasons) are our strongest periods, and revenue in the middle two quarters can slow down as Internet usage moderates in the summer months when players tend to be outdoors. The more moderate sequential decrease in Q2 2005 revenue over Q1 2005 was consistent with this seasonal trend, particularly in the casino segment, which was offset by continued high growth in Internet poker fees. LIQUIDITY AND CAPITAL RESOURCES In the quarter, CryptoLogic continued to add to our strong financial position. As at June 30, 2005, the Company had no debt, and a cash position of $93.0 million or $6.53 per diluted share, which comprised cash and cash equivalents, short term investments, and included $7.0 million of security deposits. Working capital grew to $72.6 million or $5.10 per diluted share. Operating cash flow in Q2 2005 was $6.6 million (Q2 2004: $2.6 million), compared with $9.2 million on a year-to-date basis (Q2 2004 YTD: $7.7 million). This increase was largely due to higher earnings as well as timing of accounts receivables and payables, which offset higher prepaid expenses Prepaid Expense An asset that arises on a balance sheet because of the payment of something in advance (prepayment). Services for the payment will be received in the near future. . The rise in prepaid expenses was primarily due to royalty licensing fees related to new games under development, strengthening the resiliency The ability to recover from a failure. The term may be applied to hardware, software or data. of the Company's network environment, and prepayment Prepayment 1. The payment of a debt obligation prior to its due date. 2. The excess payment over a scheduled debt repayment amount. Notes: 1. Examples include deferred expenses such as rent and early loan repayments. 2. of fees related to the World Series of Poker on behalf of our licensees. CryptoLogic currently has 13.8 million common shares issued and outstanding, and 1.1 million stock options and warrants outstanding. CRITICAL ACCOUNTING POLICIES, CHANGES IN ACCOUNTING POLICIES AND OFF-BALANCE SHEET ARRANGEMENTS These items are substantially unchanged as discussed in the Company's MD&A for the year ended December 31, 2004 as contained in our 2004 Annual Report. RISKS AND UNCERTAINTIES The primary risks and uncertainties that affect and may affect us and our business, financial condition and results of operations are substantially unchanged from those discussed in the Company's MD&A for the year ended December 31, 2004 as contained in our 2004 Annual Report. OUTLOOK CryptoLogic's excellent second quarter performance reaffirmed the strength of our disciplined strategy, which is aimed at driving the organic growth of a core group of blue-chip international customers in the major Internet casino and Internet poker markets. While there remains vast global potential for online gaming, competition is increasing for player loyalty and market share, as well as persistent challenges of US uncertainty. We will continue to leverage our strong performance and financial position to invest significantly in our business to provide a comprehensive, premium product and service offering that enhances the player experience and helps our licensees expand revenue potential. CryptoLogic is clearly seeing the benefits today of our focused strategy. We will continue to invest for long term growth in order to strengthen our global leadership and achieve profitable results in both our core casino business and the high-growth poker arena - all aimed at maximizing returns for shareholders.
CRYPTOLOGIC INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of US dollars)
---------------------------------------------------------------------
As at As at
June 30, 2005 December 31, 2004
(unaudited)
---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $84,025 $43,182
Security deposits 7,000 7,000
Short term investments 2,000 35,782
Accounts receivable and other 6,905 6,487
Prepaid expenses 7,183 1,754
---------------------------------------------------------------------
107,113 94,205
User funds on deposit 22,557 18,908
Capital assets 12,752 9,227
Intangible assets 92 106
Goodwill 1,776 1,776
---------------------------------------------------------------------
$144,290 $124,222
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $31,516 $30,056
Income taxes payable 3,054 1,331
---------------------------------------------------------------------
34,570 31,387
User funds held on deposit 22,557 18,908
Future income taxes 1,590 1,840
---------------------------------------------------------------------
58,717 52,135
---------------------------------------------------------------------
Shareholders' equity:
Share capital 25,402 20,380
Stock options 1,371 1,114
Retained earnings 58,800 50,593
---------------------------------------------------------------------
85,573 72,087
---------------------------------------------------------------------
$144,290 $124,222
---------------------------------------------------------------------
---------------------------------------------------------------------
CRYPTOLOGIC INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In thousands of US dollars)
(Unaudited)
---------------------------------------------------------------------
For the For the
three months six months
ended June 30, ended June 30,
2005 2004 2005 2004
---------------------------------------------------------------------
Retained earnings,
beginning of period $54,748 $42,195 $50,593 $38,758
Earnings 4,739 3,197 9,578 7,018
Dividends paid (687) (392) (1,371) (776)
---------------------------------------------------------------------
Retained earnings, end of
period $58,800 $45,000 $58,800 $45,000
---------------------------------------------------------------------
---------------------------------------------------------------------
CRYPTOLOGIC INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands of US dollars, except per share information)
(Unaudited)
---------------------------------------------------------------------
For the For the
three months six months
ended June 30, ended June 30,
2005 2004 2005 2004
---------------------------------------------------------------------
Revenue $19,923 $14,925 $40,197 $30,149
---------------------------------------------------------------------
Expenses
Operating costs 12,399 9,230 25,153 18,244
General and administrative 1,844 1,185 3,475 2,691
Finance 99 92 189 184
Amortization 897 443 1,699 867
---------------------------------------------------------------------
15,239 10,950 30,516 21,986
---------------------------------------------------------------------
Earnings before undernoted 4,684 3,975 9,681 8,163
Interest income 874 262 1,511 506
---------------------------------------------------------------------
Earnings before income taxes 5,558 4,237 11,192 8,669
Income taxes:
Current 906 472 1,864 749
Future (87) 568 (250) 902
---------------------------------------------------------------------
819 1,040 1,614 1,651
---------------------------------------------------------------------
Earnings $4,739 $3,197 $9,578 $7,018
---------------------------------------------------------------------
---------------------------------------------------------------------
Earnings per common share
Basic $0.34 $0.25 $0.70 $0.55
Diluted $0.33 $0.23 $0.67 $0.52
Weighted average number of
shares ('000s)
Basic 13,736 12,979 13,655 12,810
Diluted 14,361 13,734 14,247 13,515
CRYPTOLOGIC INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of US dollars)
(Unaudited)
---------------------------------------------------------------------
For the For the
three months six months
ended June 30, ended June 30,
2005 2004 2005 2004
---------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Earnings $4,739 $3,197 $9,578 $7,018
Adjustments to reconcile
earnings to cash provided by
(used in) operating
activities:
Amortization 897 443 1,699 867
Future income taxes (87) 568 (250) 902
Stock options 420 274 845 537
Changes in operating assets
and liabilities:
Security deposits -- -- -- (450)
Accounts receivable and other 1,383 (1,544) (418) (1,362)
Prepaid expenses (4,091) (756) (5,429) (553)
Accounts payable and accrued
liabilities 2,527 225 1,460 (20)
Income taxes payable 832 218 1,723 788
---------------------------------------------------------------------
6,620 2,625 9,208 7,727
---------------------------------------------------------------------
Financing activities:
Issue of capital stock 553 1,482 4,434 5,892
Dividends paid (687) (392) (1,371) (776)
---------------------------------------------------------------------
(134) 1,090 3,063 5,116
---------------------------------------------------------------------
Investing activities:
Purchase of capital assets (3,616) (2,573) (5,208) (3,337)
Purchase of intangible assets -- -- (2) (89)
Short term investments 11,899 (7,571) 33,782 (30,558)
---------------------------------------------------------------------
8,283 (10,144) 28,572 (33,984)
---------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents 14,769 (6,429) 40,843 (21,141)
Cash and cash equivalents,
beginning of period 69,256 29,298 43,182 44,010
---------------------------------------------------------------------
Cash and cash equivalents, end
of period $84,025 $22,869 $84,025 $22,869
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
Supplemental cash flow
information:
Non cash portion of options
exercised $150 $265 $588 $469
---------------------------------------------------------------------
---------------------------------------------------------------------
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS As at June 30, 2005 (All figures are in thousands of US dollars, except per share disclosure and where otherwise indicated) (Unaudited) These consolidated interim financial statements of CryptoLogic Inc. (the "Company") have been prepared in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with Canadian Canadian (kənā`dēən), river, 906 mi (1,458 km) long, rising in NE New Mexico. and flowing E across N Texas and central Oklahoma into the Arkansas River in E Oklahoma. generally accepted accounting principles using the same accounting policies as were used for the audited consolidated financial statements for the year ended December 31, 2004. These consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2004, as set out in the 2004 Annual Report. 1. Stock Option Plan In accordance with the guidelines guidelines, n.pl a set of standards, criteria, or specifications to be used or followed in the performance of certain tasks. of the Canadian Institute of Chartered Accountants The Canadian Institute of Chartered Accountants (CICA) is the umbrella body for the Chartered Accountant profession in Canada and Bermuda. Membership of the CICA totals 70,000 Chartered Accountants and 8,500 students. , the Company has expensed the costs of all stock option grants issued on or after January January: see month. 1, 2003. The fair value of the options granted for the first six months of 2005 and 2004 was made using the Black-Scholes option pricing model option pricing model A mathematical formula for determining the price at which an option should trade. The model expresses the value of an option as a function of the value of the underlying asset, length of time until maturity, exercise price, yields on under the following weighted assumptions:
2005 2004
---- ----
Dividend yield 0.75% 0.75%
Risk-free rate 3.25% 2.75%
Expected volatility 50.0% 50.0%
Expected life of options in years 5.0 5.0
The estimated fair value of options is recorded over the vesting Vesting The process by which employees accrue non-forfeitable rights over employer contributions that are made to the employee's qualified retirement plan account. Notes: period of the options. The costs of stock options of $420 in Q2 2005 (Q2 2004: $274), and $845 in Q2 2005 YTD (Q2 2004 YTD: $537) are included in operating costs. Consideration paid by employees on the exercise of stock options is recorded as share capital. Had compensation expense been determined based on the fair value of the employee stock option awards for 2002 grants at the grant dates in accordance with the new recommendations, the Company's earnings and earnings per common share would have been changed to the following pro forma As a matter of form or for the sake of form. Used to describe accounting, financial, and other statements or conclusions based upon assumed or anticipated facts. The phrase pro forma amounts:
Three months ended
June 30,
2005 2004
---------------------------------------------------------------------
As As
reported Pro forma reported Pro forma
---------------------------------------------------------------------
('000) ('000) ('000) ('000)
Earnings $4,739 $4,608 $3,197 $3,073
Earnings per share:
Basic $0.34 $0.33 $0.25 $0.24
Diluted $0.33 $0.32 $0.23 $0.22
Six months ended
June 30,
2005 2004
---------------------------------------------------------------------
As As
reported Pro forma reported Pro forma
---------------------------------------------------------------------
('000) ('000) ('000) ('000)
Earnings $9,578 $9,266 $7,018 $6,710
Earnings per share:
Basic $0.70 $0.68 $0.55 $0.52
Diluted $0.67 $0.65 $0.52 $0.50
2. Share Capital
Authorized:
Unlimited common shares
Issued and Outstanding:
Total
Common Shares Series F Warrants Stated
Issued Stated Value Issued Stated Value Value
---------------------------------------------------------------------
('000) ('000) ('000)
Balance, December
31, 2003 12,300 $11,078 30 $272 $11,350
Exercise of stock
options 1,011 9,030 -- -- 9,030
---------------------------------------------------------------------
Balance, December
31, 2004 13,311 $20,108 30 $272 $20,380
---------------------------------------------------------------------
Balance, December
31, 2004 13,311 $20,108 30 $272 $20,380
Exercise of stock
options 438 4,596 -- -- 4,596
Exercise of Series
F warrants 23 630 (23) (204) 426
---------------------------------------------------------------------
Balance, June
30, 2005 13,772 $25,334 7 $68 $25,402
---------------------------------------------------------------------
3. Normal Course Issuer Bid In September 2004, the Board of Directors approved a share repurchase plan share repurchase plan A corporation's plan for buying back a predetermined number of its own shares in the open market. Institution of a share repurchase plan derives from management's view that the company has limited outside investment opportunities and , under a Normal Course Issuer Bid, to repurchase re·pur·chase tr.v. re·pur·chased, re·pur·chas·ing, re·pur·chas·es To buy (something) again. n. The act of buying something that one previously sold or owned. Noun 1. and cancel (character) Cancel - (CAN, Control-X) ASCII character 24. up to 1,250,000 of the Company's outstanding common shares for the period commencing September 23, 2004 and ending September 22, 2005. As at June 30, 2005, the Company has not repurchased any shares under this plan. 4. Comparative Figures Certain of the prior period's figures have been reclassified for consistency with the current period's presentation. CryptoLogic Inc. (TSX:CRY) (NASDAQ:CRYP) (LSE:CRP) |
|
||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion