CryptoLogic Seeks Profit via International Strategy

Lewis Rose, interim president and CEO of CryptoLogic Inc., told investors this morning that the company is embarking on a "back to basics"-style plan to return to profitability that will include pursuing alternate payment methods and expansion into non-U.S. markets.

"While this focus on financial strength will not change, what has changed is the financial market... The key is now we as a company will deal with the change," he said.

The Toronto-based software supplier released its second-quarter financials Wednesday morning. Revenue is down to US$8.9 million for the second quarter compared with revenue of $10.8 million in the second quarter of 2001.

Net income before non-recurring items was $2 million, or 17 cents per share, down from $4.8 million, or 35 cents per share in 2001. Additionally, the company suffered a net loss during the quarter of $7.8 million, or 65 cents per share. The net loss regards a special charge the company took because of a write-down of its investment in Sports.com, which was subsequently placed into administration.

Rose told investors the single most immediate situation facing the company is that some U.S. banks are refusing to accept online gambling transactions. The company is evaluating non-credit card based payment programs and has appointed a task force headed by its CFO, Jim Ryan, to tackle the problem.

Ryan, who blamed the company's 46-cent loss per share for the first six months of the year squarely on credit card transaction problems, said the task force is looking into five specific alternatives to credit card payments, including: a telephone billing system in which players would be able to put gambling expenses on their telephone bills; a stored-value card that players could purchase and use for online gambling; an electronic wallet that would be "PayPal-like," which CryptoLogic is developing internally; and a system for customer credit in which ECash Direct, a CryptoLogic subsidiary, would extend credit to approved customers.

Rose additionally mentioned that the firm is working on the development of a poker product, which is slated for a fall launch. The company has also made progress on the software for its licensee Ritz Online, which Rose said would be operational "shortly."

Along with its quarterly results, CryptoLogic announced today that its licensee, Littlewoods Leisure, has been granted regulatory certification from the Isle of Man to operate an online casino. The Littlewoods gambling site will be up and running by the end of August, Rose said.

In a press release, Rose said the certification was a milestone in CryptoLogic's quest to expand its reach into the Europe.

"Combining a trusted brand, a large player base and a local currency offering a state-of-the-art technology in a highly regulated jurisdiction is a formula for continued success in the European market," he said.

The company is also making an effort to concentrate more of its licensee revenue in markets outside of the United States. Ryan said that during the first six months of this year the amount of revenue generated by the company's U.S.-based licensees fell to 65 percent of total revenue from 71 percent last year, while the U.K.-generated revenue climbed to 23 percent from 14 percent last year. Rose said CryptoLogic is aiming to have 50 percent of its revenue come from U.S. licensees and 50 percent from non-U.S. licensees.

Ryan said the company has instituted cost-cutting measures, including trimming its staff 10 percent to 150 people and instituting a hiring and capital asset freeze.

Rose, when asked by an investor to explain the departure of the firm's former CEO, Jean Noelting, in mid July and its COO, David Outhwaite, on Aug. 2, said both executives left based on personal decisions.

"While both Jean and David had made some good progress in developing the company's strategic plan, both have decided to move on," he said.

As for his own position, Rose said he was appointed as interim president and CEO after Noelting left because the company needed a new leader in place immediately. He said it is likely that his position will be long term.

"There is no search for a CEO," he said. "The expectation is that [the position] will be made permanent."