Revenue Growth Slows for PartyGaming

PartyGaming Plc's first financial interim report as a publicly traded company reveals that the company's revenue growth is slowing while retention rates and player yields are declining at quicker rates than expected.

"Poker isn't dead, but the talk of 45 percent growth now looks unrealistic."

Following the release of the report on Monday, the company lost one third of its share value, or more than US$4 billion, throughout the course of the day. Shares, which were valued as high as 156.75 prior to the release of the report, closed on the day at 105p--below their initial price of 116p in June.

Overall the company returned a solid interim report. Revenue during the first half of 2005 reached $437 million--an improvement of 81 percent compared to the same period in 2004. The number of daily active players rose from 60,738 to 123,447, and EBITDA before share option and IPO-related expenses rose 70 percent to $257.7 million.

The yield per each active player day, however, slipped from $19.20 to $17.80, and CEO Richard Segal confirmed during a conference call that revenue growth in July and August was slower and weaker than expected. The number of days in 2004 in which regular users played poker rose by 102 percent in July and August when compared to the first half of the year; for the months of July and August just passed, that figure has slipped to 59 percent.

Party's finance director, Martin Weigold, downplayed the slippage.

"We may have revenues which are slightly lower than what we had initially anticipated based on a softer pick-up in the third quarter." Weigold explained. "That may just be a blip; it may be a trend."

Also becoming evident to investors is that customer retention rates are beginning to fall as more casual players start playing online.

The company's report states, "Retention rates and players yields continue to decline, albeit at rates that are greater than anticipated, as more casual players are attracted to the player pool.

"Against a background of moderating market growth, group revenues are expected to continue to show good year on year growth, although at rates lower than the substantial rates previously experienced. In addition, further increases in the proportion of player bonuses netted from revenue are expected to contribute to reduced rates of revenue growth but with the benefit of correspondingly lower distribution expenses."

Robin Chhabra of Evolution Securities explained told the BBC, "Poker operators are having to attract casual players who are not as profitable as the hardcore, and that is changing the economics of the business. . . . Poker isn't dead, but the talk of 45 percent growth now looks unrealistic."

Today's papers were filled with analysts' comments about what the sharp fall in PartyGaming's share value means for the market. Henk Potts, a fund manager at Barclays Private Clients, stated, "There were some clear dangers in relation to the valuation of this company and our concerns have been realized. PartyGaming is all about its growth potential, and some investors decided to bet on the growth rather than consider the potential slowdown."

Paul Leyland, an analyst for Seymour Pierce, said, "The market has misinterpreted what's actually just happened in the same way that it misinterpreted that poker was going to the moon ad infinitum initially."

Bidding War

Sportingbet was revealed over the weekend as the mystery company bidding to purchase Empire Online, which announced Friday that it had received an offer. Empire's share price subsequently jumped 7 percent to 283p, putting the value of the shares above the offer value of 280p.

That the unidentified suitor turned out to be Sportingbet rather than PartyGaming surprised many, considering the business arrangement between Empire and Party: Through a royalty-based licensing agreement, Empire drives about 9 percent of the global online poker market to Party.

Purchasing Empire would eliminate the royalty fee, and that would translate to 11 percent increase in EBIT PartyPoker. That, combined with the fact that Empire could choose to redirect its players to another network if it is purchased, could drive PartyPoker to pitch a counter offer for Empire Online.

PartyGaming's Interim Report (First Half of 2005)