On the Rise and Rising

With Playtech Ltd. anticipated to report another quarter of strong revenue growth -- 73 percent versus the previous-year quarter by one estimate -- questions remain regarding the sustainability of, and drivers behind, that growth.

Evolution Securities, a brokerage in London, last week initiated coverage of Playtech and, bucking a trend of recent "buy" recommendations, drew attention to the company's paucity of "useful" publicly available information.

Ivor Jones, an analyst with Evolution, remarked in a research note that he knew neither where its revenue derived from, geographically, nor who its corporate clients are.

"We don't know whether the key growth drivers are numbers of players, spend per head, provision of services, or whether 'growth' is a product of merely shifting profits previously made by the founder's private companies into the public company," Mr. Jones observed.

Amid the ambiguity, however, one thing is certain: Playtech is growing -- and fast.

A second-quarter preview released by Numis Securities in London estimates the company will deliver revenue of $41.8 million, a 73 percent jump over the comparable period last year and a 7.3 percent rise quarter over quarter.

Richard Carter and Wyn Ellis, analysts with Numis, wrote in a research note that growth will be driven predominantly by existing licensees and partly by organic growth.

Casino is expected to remain its strongest contributor at $29.4 million, a 69 percent rise versus the previous-year quarter; poker, meanwhile, is expected to contribute $12.2 million, a 93 percent rise.

In the last week, however, share prices have fallen 8 percent, and selling is thought to have come as a result of negative knock-on effects from PartyGaming's second-quarter update.

Party's struggles with its core poker offering persist, as certain of its competitors continue to invest heavily in United States marketing. The UEFA European Football Championship was also cited by the Gibraltar company as having negatively impacted second-quarter poker revenues.

Playtech's poker revenue growth, Numis suggests, is driven not by average players per licensee but new contract wins, nine of which have come in the 2008 fiscal year.

"This is what is driving Playtech's superior growth relative to its quoted peers and helps mitigate the group from increasing competition in the European poker market," the note said.

Similarly, Simon J. Holliday, a partner with Global Betting and Gaming Consultants, said on the company's first-quarter results in May: "The key is that they continue to gain licensees."

With Evolution estimating that Playtech's profits before tax will jump by more than 50 percent this year, what conclusions about this growth, if any, can be drawn?

For one, the company is sitting on a war chest of more than $300 million in cash and is poised to make, as Mr. Jones put it, a transformative acquisition -- though it could just as well allow its cash to grow.

For another, its operating margins, which sat at 67 percent during the first quarter, were extremely high and are being maintained (by comparison, CryptoLogic Ltd., also a gambling software licensing company, is looking to maintain a net margin of 20 percent during the 2008 fiscal year).

"Far from being encouraged by the remarkably high margins and revenue growth rate, we find them disturbing as they suggest that Playtech is materially different from other companies in the sector in ways we do not understand," Mr. Jones wrote.

However Playtech is doing it, near-term growth -- despite the recent hiccup in share value -- certainly doesn't look to be slowing.

And with a price-to-earnings ratio of over 20, Mr. Jones said the market appears to be expecting several more years of spectacular cash-generative growth.