5th Mar 2007 07:02
Paddy Power plc05 March 2007 RNS Number:Paddy Power plc5 March 2007 Paddy Power plc 2006 Preliminary Results Announcement Paddy Power plc today announces its preliminary results for the year ended 31December 2006. Financial highlights included: Turnover up 31% to almost Euro1.8 billion with growth across all channels. Gross win up 36% to Euro219m boosted by 64% increase in win from online gamingand FOBTs. Operating profit up 51% to Euro45.5m and profit before tax up 52% to Euro47.6m,both before inclusion of a once off property gain. Total dividend for the year up 56% reflecting proposed increase in dividendpayout ratio to 40%. Share buyback programme planned for this year, whilst maintaining flexibilityfor substantial growth opportunities. Business highlights included: Continued enhancement of our online businesses which has propelledpaddypower.com to be the third largest online sportsbook in the UK measured bythe number of visitors. Launch of more new online businesses, such as a German language sportsbook andbingo, and increased resources for further business development. Continued strong growth in Irish retail driven by investment in the estate andthe positive external backdrop. Commenting on the results Patrick Kennedy, Chief Executive, Paddy Power plcsaid: "2006 has been an exceptional year for Paddy Power, with very strong growth ineach of our businesses. Notably the results also reflect substantial investmentto exploit future growth opportunities, which position us well for continuedsuccess in 2007 and beyond." ENDS 5 March 2007 Issued on behalf of Paddy Power plc by Drury Communications Ltd For reference: Patrick Kennedy Jack MasseyChief Executive Finance DirectorPaddy Power plc Paddy Power plcTel: + 353 1 404 5912 Tel: + 353 1 404 5912 Billy Murphy / Oonagh Daly Trevor PhillipsDrury Communications Ltd Holborn PRTel: + 353 1 260 5000 Tel: + 44 20 7929 5599Mobile: + 353 87 855 4406 (OD) Mobile: + 44 7889 153 628 Chairman's Statement Dear Shareholder, I am pleased to report on an exceptional year of growth and profitability forPaddy Power. 2006 % ChangeTurnover €1,795m +31%Pre tax profit €47.6m +52%Adjusted basic EPS 78.6 cent +45%Dividend 32.2 cent +56%Cash balances €87.1m +66% (Results above and throughout this statement exclude the exceptional propertygain of €2.1m in 2006) (Turnover or amounts staked represents amounts placed on sporting events and netwinnings on gaming activities) These record profits were driven by strong turnover growth across the Group.The ongoing investment in business development that I reported on last year hascome through strongly in the 2006 results. In addition, Irish retail turnoverreceived a boost from the introduction of tax-free betting, while all channelsbenefited from the World Cup. Our online business continues to grow strongly inboth sportsbook and gaming and I am pleased to confirm that the results alsoreflect a significant level of investment for future growth. We also benefited from an improved run of sporting results compared to 2005, butthe overall run of results, while good, was not exceptionally favourable tobookmakers. As always there were plenty of fraught moments with patrioticpunters rubbing their hands following a record haul of ten Irish winners atCheltenham, an Irish winner at the Grand National, Ireland winning the TripleCrown and last but certainly not least, Munster finally fulfilling their destinyto win the Heineken Cup! However a fine showing by a range of outsiders in lateDecember raised the Group's overall sportsbook gross win percentage marginbroadly in line with expected levels. 2006 also marked the 18th anniversary of Paddy Power's formation through themerger of three Irish retail bookmakers. The evolution of the business since isevidenced by the fact that, while the Irish retail business has gone fromstrength to strength, it now accounts for just under half of our operatingprofit. Since its inception our non retail business has similarly evolved withover 50% of its turnover in 2006 coming from the UK and over 30% of its grosswin generated from online gaming rather than sports betting. Many other thingshave changed during that period but the core ethos of Paddy Power to remain themost punter-friendly, innovative and entertainment based bookmaker lives onthroughout our entire business. Regulation 2006 saw some significant regulatory developments. The passing of the UnlawfulInternet Gambling Enforcement Bill in the US in September effectively outlawedonline gambling by US residents and the facilitation of related money transfersby banks. Overnight this resulted in billions of euro being wiped off the stockmarket valuation of companies which had targeted US gamblers and the creation oflegal uncertainty for their executives. Paddy Power has never targeted the USmarket so our market value was not impacted in any material way. The Group hasnever sought players from the US and has for years had measures in place toproactively prevent any play from the US including: Prominent graphics, statements and terms and conditions at customer registrationstating that we do not accept US customers; Payment controls to block deposits from bank cards issued in the US, transfersfrom US bank accounts or payments from US residents via e-wallet paymentmethods; Never targeting any advertising or promotional activity at US residents. Closer to home, there was media coverage during the year in relation to thepossibility of certain bookmakers, not including Paddy Power, introducing FixedOdds Betting Terminals ('FOBT's) into Irish betting shops. While such machinesare an established part of the UK betting environment and culture, our view wasthat neither the Government nor the punter in Ireland were likely to be infavour of their introduction. This view of the Government's position appearsconfirmed by the Government statement in December 2006 that they 'wished to warnthose in the industry, in the strongest possible terms, that the Government wasopposed to the introduction of such machines'. The Minister for Justice,Equality and Law Reform also announced, in August 2006, the possible regulationof land based casinos in Ireland. Given our knowledge and experience of theIrish market place and the strength of our brand, we would considerparticipation in land based casino developments in Ireland. We would hope tosee clarification and implementation of the Government's position in the nextnumber of months. In continental Europe, the regulatory landscape continues to be far fromuniform, with periodic swings towards increased liberalisation and restrictionwithin individual member states. Overall however we are encouraged by ourprospects in the medium term for online expansion, both as a result of countriesthat have already moved towards liberalisation and by ongoing action by theEuropean Commission to ensure that any restrictions on the provision of serviceswithin the European Union are necessary, proportionate and non-discriminatoryand therefore consistent with EU Law. The Board As noted in the 2005 Annual Report, Tom Grace and Jack Massey were appointed tothe Board in January 2006 and April 2006 respectively. Both appointments havebrought valuable experience and new perspectives to the Group. More recently,we have announced the appointment of David Johnston as Company Secretary. Wewelcome David from O2 Ireland where he had been Chief Legal Counsel and CompanySecretary. We also express our sincere gratitude and best wishes to the formerCompany Secretary, Nuala Hunt, who is leaving the Group. Dividends and Capital Structure As announced in our Interim Report for 2006, the Board is committed to aprogressive dividend policy and is recommending an increase in the dividendpayout ratio to 40% in the current year. A final dividend of 22.77 cent pershare is therefore proposed, payable to shareholders on the register at 16 March2007. This brings the total dividend for the year to €16.5m or 32.2 cent pershare, an increase of 56% on the 20.59 cent paid in 2005. In the six yearssince flotation in 2000, Paddy Power will have therefore grown dividends pershare at an average annual rate of 42%, a growth rate ahead of the alreadysignificant increase in average earnings per share growth of 29%. The Group has historically retained a positive cash balance in order to be in astrong position to exploit the many development opportunities available to it.Given the very strong growth in the business in the last number of years, itsvery strong cash generative abilities and the significant growth in the Group'scash balances, maintaining flexibility for future growth and returningadditional cash to shareholders are no longer mutually exclusive objectives.The Board obtains shareholder approval annually to buy back up to 10% of thecompany's issued share capital, and we will seek that approval again at thisyear's AGM. It is the Board's current intention to conduct share buybacks thisyear. The timing and amount of shares bought back will depend on the Group'spipeline of development opportunities as well as equity market conditions. Outlook 2007 promises to be another exciting year for Paddy Power as we continue toexpand across the Group. Trading for the year to date has been satisfactory andI look forward to updating you on progress at our AGM in May. Fintan DruryChairman 2 March 2007 Chief Executive's Statement Introduction Paddy Power is a growth company. In the six years since flotation in 2000, wehave increased turnover from €363m to almost €1.8 billion, an average annualgrowth rate of 31%, and earnings per share at an average annual growth rate of29%. A particular feature of this very strong growth is that it has beenachieved almost entirely organically, without recourse to acquisition. Moreimportantly, looking forward, the Group today has a strong portfolio ofbusinesses, each of which is well positioned to drive further turnover andprofit growth. Our Existing Businesses These businesses are at varying stages of their life cycles; indeed, one of theparticular attributes of Paddy Power is the excellent balance of activities thatwe have at different stages of development. Some are long established,substantial businesses; others are more recently launched, emerging businesses;whilst others are very recent investments which, although unlikely to contributematerially in the short-term, have excellent medium term prospects. It is worthwhile considering our businesses in each of these three stages ofdevelopment in greater detail: (i) Our longer established, substantial businesses include ourIrish retail and our telephone businesses. Both benefit from positions ofleadership in the Irish market, from our unique brand, from the Group'sinnovative product range, and from the fantastic customer service for whichPaddy Power is renowned. Both are also benefiting from significant recentinvestment: in the last five years, we have newly opened, refitted, extended orrelocated over 85% of the 160 shops in our Irish estate, whilst our telephonebusiness moved to a new state-of-the-art call centre in May 2006. Finally, bothbenefit from a positive external backdrop: continued population and economicgrowth, particularly in Ireland, and the continuing growth in live televisedsport. The move to tax-free betting for punters, which Paddy Power introducedin December 2005, is a further positive for our Irish retail business. These positive market conditions attract increased competition every year, andthe migration of customers from the telephone to the online channel iscontinuing. Nonetheless, our businesses have continued to grow strongly, withamounts staked increasing by 23% and 18% in the telephone and Irish retailbusinesses respectively last year. (ii) Our recently launched emerging businesses include ouronline sportsbook, online casino, online games and online poker, as well as ourUK retail business. The online businesses are expanding rapidly, with amounts staked and gross winincreasing by 60% and 57% respectively last year. Some people hold the viewthat products and services sold online can only be differentiated on the basisof price. We disagree with this; we differentiate ourselves versus ourcompetition just as strongly in the online world as in our retail markets. Thistakes a number of different forms: - Trading Product and Specials: our broader range of product as well asour Money-Back Specials, early payouts, double result payouts and the many otherimaginative refunds that we regularly offer are highly valued by our onlinecustomers, and the centre piece of the paddypower.com home page is alwaysdedicated to our latest such offering; - Brand: the strength of our brand, as well as our retail presence inboth the UK and Ireland, differentiates us against the myriad online-onlyplayers. We also employ a team of journalists to ensure that our websites andcustomer emails reflect the fun, and occasionally irreverent, side to our brand. For example, as a result of the polls introduced on our website last year, wenow know "what's the most painful?" between "a fractured skull" (12% of votes),"a kick in the nuts" (43%), "childbirth" (11%) and "watching Bolton" (34%); - Customer Service: great customer service, an absolute throughout ourbusinesses, is a particular feature of our online channel. Many of our onlinecompetitors outsource customer service; we on the other hand insist on itremaining in-house, and regard it as a recruitment ground for the rest of ourbusinesses, with a substantial proportion of our customer service staff beingthird level students or graduates; - Technology: our development team continues to use technology veryeffectively to tailor our websites to provide better and more accessibleinformation, improve customer service and increase cross-selling opportunities. As well as holding the leading market position in online betting and gaming inIreland, this focus on differentiation has propelled paddypower.com to be thethird largest online sportsbook in the UK (measured by number of visitors in thesecond half of 2006), ahead of many more substantial rivals. This is anenormous achievement, from a standing start a number of years ago. Many of our online competitors have big international brands with verysubstantial budgets and indeed competition has increased even further in thelast five months since the US market was effectively closed down. Nonetheless,the prospects for all of our online businesses are strong, as betting and gamingcontinue to increase in popularity, as the economies and also broadbandpenetration in our key markets continue to grow, and as we focus relentlessly ondifferentiating our proposition against the competition. Another emerging business is our UK retail business. A great job has been donesince 2003 developing our UK retail estate, and at the end of 2006 we had asubstantial footprint of 58 shops within the M25. The 2005 Gaming Act whichtakes effect later this year in the UK will allow for extended shop openinghours, the installation of higher payout gaming machines and improved shopopening opportunities. Our priority now is to optimise our proposition inanticipation of this deregulated market and, in this regard, our overridingfocus for 2007 is to continue to improve the performance of the existing estaterather than open a substantial number of additional new shops. We remain optimistic about the prospects of our UK retail estate for severalreasons, referred to in greater detail in the Operating & Financial Review,including: - Our gross win continues to grow strongly, on both a total andlike-for-like basis; - Our brand recognition continues to grow strongly; - Our market research indicates that our customers rate us much morehighly than those of our competitors, and are more loyal and less likely toswitch, whilst competitor customers are most likely to switch to us. (iii) Our very recent investments include our online Germanlanguage sportsbook and our online bingo business. These businesses rely lesson cross selling to existing customers, but rather bring Paddy Power to entirelynew customer groups. As such, they may take longer to have a material impact onthe business than other online businesses launched in the last number of years,but we are confident about their medium-term prospects. Business Development In addition to the strong prospects of our existing businesses, we haveincreased the focus on new business development in 2006. Breon Corcoran's newrole as managing director of non retail and development enables him to dedicatea substantial part of his time to seeking new opportunities for the Group, andthrough a number of senior hires he has built a top class development team tofind the next set of new businesses for Paddy Power. These opportunities fall into a number of categories: - Accessing other segments of the betting market, as we did last yearwith our online bingo business; - Expanding our presence in existing geographies, for examplepotentially opening Paddy Power casinos in Ireland; - Deeper use of existing Group resources, such as our risk capabilities; - Further geographic expansion, as we commenced in the last 12 monthswith our German language website; - Stretching our brand into new areas, as we did last year with ouronline reverse auctions business. Summary As a result of these substantial opportunities, both in existing and potentialnew businesses, along with the quality of our people and our brand, we lookforward to 2007 and beyond with confidence. Patrick KennedyChief Executive 2 March 2007 Operating & Financial Review Paddy Power is a multi-channel, multi-national betting and gaming company. Itoperates through two main divisions: the retail division, which operatesbookmaking shops in Ireland and the UK, and the non retail division, whichprovides telephone betting services to customers in Ireland and the UK togetherwith an online channel that provides both betting and gaming services to Englishand German speaking customers in the UK, Ireland and continental Europe. 2006 was a year of spectacular growth in turnover, gross win and operatingprofits in both divisions. Our brand, the quality of our people and ourinnovative product range drove this growth, as they do every year. In addition,results last year benefited from the largest betting event in history, the 2006football World Cup, which generated €4.0m of gross win for us directly, as wellas a significant number of new customers. The Retail Division 2006 2005 % ChangeAmounts staked €963m €794m +21%Sportsbook gross win percentage 12.54% 11.92% +5% The amounts staked over-the-counter ('OTC'), that is excluding FOBT gross win,in the combined Irish and UK estate grew by 21% to €956m. The average stake perslip increased by 9% to €20.82, while the number of slips grew by 10% to 45.9m.The OTC gross win percentage in the retail sportsbook was 12.5% as compared to11.9% last year. This strong performance reflected a number of factors specificto the retail division. These included an increase in multiples within the mix,higher than average racing margins, as well as the anticipated positive impactof our Electronic Point of Sale ('EPOS') system. EPOS was rolled out across the entire estate in 2006, bar a handful of shopsscheduled for redevelopment, at a total capital cost of €10.4m which was underthe budget we set out last year. The deployment was supported by a significanttraining investment and has met with a positive response from both customers andstaff. Our priority has been to use the system to improve customer service byincreasing the speed and accuracy of customer payouts, extending the productrange and freeing up staff to devote more time to enhancing the special buzz andatmosphere that so differentiates Paddy Power shops. The system has alsoenabled us to measure more accurately customer demand for new offerings, as wellas the effectiveness of accompanying point of sale, screen, audio and otherpromotions. We have also leveraged the intranet communications infrastructureof EPOS to provide in-shop customer information terminals and in-shop printingof marketing materials and coupons thereby reducing distribution costs. Furtherbenefits also accrue in relation to risk management and security. Overall, weare confident of recouping an attractive return on our investment in EPOS. Our trademark product innovation continues to give more choice to the retailcustomer. In horse racing, we now provide early prices for every UK and Irishhorse race and lead the market in betting-without-the-favourite, match bettingand distance betting. We have also expanded our sports betting, adding forexample 15 extra soccer leagues from a range of countries including Poland,Japan, Romania, Hungary and Russia. To complete the package, we even providePaddy Power soccer coupons in Polish, which involves more than just adding on '-ski' to the end of every team name! (i) Irish Retail •m 2006 2005 % ChangeAmounts staked 833.1 703.8 +18%Gross win 104.4 83.6 +25%Gross profit 91.5 74.0 +24%Operating costs (69.5) (59.9) +16%Operating profit 22.0 14.1 +56% The amounts staked within Irish retail grew by 18% to €833m. Strong shopopening opportunities existed in 2006 and we opened 10 new shops, bringing ourtotal number to 160. In addition, we grew like-for-like amounts staked by 14%as compared to 9% in 2005. This strong growth is driven by the factors common to all our businesses, ourbrand, our product innovation and our customer service, but also by thefollowing factors specific to our Irish retail estate: - The very significant investment we have made in the estate in the lastfive years; - The continuing positive economic and demographic backdrop in Ireland; - The move to 'tax-free' betting in December 2005 which boosted growthin 2006. When the Irish Government announced in the December 2005 budget that it waseliminating the 2% customer based betting tax and replacing it with a 1% taxlevied on the bookmaker from 1 July 2006, we decided not to wait; instead weoffered our customers a discount equal to the tax from the morning after thebudget. During 2006, this resulted in an average cost to Paddy Power, as apercentage of amounts staked, of 1.5% or €12.5m based on a 2% cost in the firsthalf of the year and a 1% cost in the second half. This compares with a cost of€8.3m in 2005 when discounts to cover the 2% tax were offered within partsrather than all of the estate. In 2007 onwards, a full year at the lower taxrate of 1% should save the Group approximately €4m as compared to 2006. In addition to the 10 shops newly opened during 2006, a further five shops wererelocated, 10 refitted and three extended. Such shop developments incorporateour high quality interior furnishings and state-of-the-art technologyinfrastructure. This features 24 information screens, a dedicated sportsgantry, customised audio and large screen televisions, all controlled viainfrared technology from a central production studio. This enables us toco-ordinate and tailor information and coverage to local preferences, greatlyimproving the in-shop experience for customers. This substantial investment inour estate has contributed significantly to the growth in Irish retail byretaining existing retail punters and also attracting new footfall. During the year, the Group made an exceptional profit of €2.1m on the sale of anIrish shop property. The Group acquired the property in 2006 under a purchaseoption within its lease and at the same time entered into an arms-length saleand lease back of the property. This is in line with the Group's policy inrecent years to operate shops under leases rather than owning and managingproperty, giving us more flexibility in locating shops and ensuring we can reactswiftly to any market changes. The Group currently owns 13 of its shops and hasno current plans to sell any of these properties. In-house valuations of thesepremises indicate a market value of approximately €13m. These properties arecarried on the balance sheet at a net book value based on their historical costof €5m. (ii) UK Retail We have continued to make substantial progress in our UK retail estate: - We operated 58 outlets as at the end of December, an increase of 13since December 2005; - Our gross win grew by 59%, and by 15% on a like-for-like basis; - The group of shops opened before 2006 generated positive EBITDA in2006; - Our brand continues to grow strongly, with recognition of 21% amongstall adults in London, up from 16% in 2005; - Market research indicates that our customers rate us more highly, onall key attributes, than those of our two largest competitors, and are moreloyal and less likely to switch. It also indicates that customers of localcompetitors who would consider switching are, by a distance, most likely toswitch to Paddy Power. Thus while the overall estate continues to be loss making, due to the opening ofnew loss making shops and the necessary investment in the centralinfrastructure, the underlying trend is positive and the more mature outlets arecash positive. We expect this positive trajectory to continue as further shopsreach maturity and we continue to focus on realising the benefits of thereasonable scale now achieved. •m 2006 2005 % ChangeAmounts staked 123.0 86.3 +43%Gross win 23.6 14.8 +59%Gross profit 18.0 11.0 +64%Operating costs (24.0) (15.7) +53%Operating profit (6.0) (4.7) +29% (2006 FOBT gross win above and throughout this review is shown inclusive of VATof €1.2m for consistency with 2005) In 2006, the amounts staked grew by 43% to €123m. Gross win growth of 59% to€23.6m was comprised of 88% growth in FOBT gross win to €8.1m, and 47% growth inOTC gross win to €15.5m. Like-for-like gross win grew by 15%, with OTC growthof 7% and FOBT growth of 38%. The OTC growth was impacted by the very strongFOBT growth with some punters switching their stakes between these products.There were 226 machines installed as at the end of the year, an increase of 31%compared to the end of 2005. The average gross win per machine per monthincreased 44% to €3,600 compared to €2,500 in 2005. During 2006 we conducted an extensive review of our UK business, and itspotential opportunities. We also strengthened its management team. We have asa result identified a number of valuable initiatives to improve the performanceof the existing estate and implemented a number of these in late 2006, with moreto come in 2007. We are pleased with progress to date. We expect just a fewshop openings in 2007 as compared to the 15 or so in previous years as wecontinue to prioritise improving the performance of the existing estate in therun up to deregulation. We also increased our FOBT profitability during 2006 by holding a competitivetender to improve our commercial terms, leveraging the growth in the estate andour increased turnover per machine, while also maintaining a first class productand service. The dual screen 'Rainmaker' machines we selected were installedacross the estate in late 2006. We have also commenced a range of FOBTpromotion initiatives and have recruited a dedicated FOBT manager. FOBTperformance improvement is needed to offset the impact of the introduction ofAmusement Machine License Duty ('AMLD') and the possible impact of the UKsmoking ban. AMLD was introduced from August 2006 at a cost of €0.2m in 2006and an expected cost of €0.7m in 2007. A smoking ban is scheduled to come intoforce in the UK in July 2007 and, while the introduction of the smoking ban inIreland had no significant effect on retail turnover, the experience may besomewhat different in the UK due to the presence of FOBTs. We welcome the implementation of the Gambling Act effective from September 2007which will feature extended shop opening hours, the installation of higherpayout gaming machines and improved shop opening opportunities. The removal ofthe 'demand test' for openings also gives us more flexibility in the format andsize of our new shops. The Group is currently progressing the related licenseapplications and is well prepared for the new requirements. The Non Retail Division The non retail division comprises telephone betting and online betting andgaming. Operating profit from the division increased by 43% to €29.4m,comprising €6.0m from the telephone channel, an increase of 65%, and €23.4m fromthe online channel, an increase of 38%. Betting on soccer represents a greaterproportion of turnover in the non retail division as compared to retail, henceboth non retail channels benefited particularly from the World Cup in 2006. The guided range for non retail gross win percentages in 2006 was 8.0% to 9.0%.The actual gross win percentage was at the bottom of the guided range in thetelephone channel at 8.0% and slightly outside the range in the onlinesportsbook at 7.9%. Nonetheless, the absolute amount of sportsbook gross winwithin the non retail division grew strongly by 41% in 2006, driven byexceptional turnover growth of 43%. This compares with growth in gross win of14% and turnover of 19% in 2005. There were a number of reasons for the margin performance including someunfavourable results for bookmakers in sports such as rugby where non retailderives a greater proportion of its turnover as compared to retail. However thekey factor behind this margin reduction were changes in the mix of businessdriven by a greater propensity of punters to bet on 'odds on' selections and thepopularity of certain new products. For example, we experienced particularlystrong growth in the year in financial markets betting and betting-in-running ina range of sports including soccer, tennis and snooker. These products tend tobe single bet selections and have a bias towards 'odds on' selections resultingin lower than average margins. Nonetheless they are innovative, differentiatingand popular new products, attracting good incremental turnover as evidenced bythe 41% growth in non retail absolute gross win and we will continue to make newproduct decisions on the basis of such criteria. We would expect non retailmargins to be approximately 50 basis points lower in the 7.5% to 8.5% rangegoing forward. (i) The Telephone Channel •m 2006 2005 % ChangeAmounts staked 306.6 249.9 +23%Gross win 24.5 19.5 +26%Gross profit 22.4 17.2 +30%Operating costs (16.4) (13.6) +21%Operating profit 6.0 3.6 +65% The amounts staked within the telephone channel grew by 23% to €307m. Withinthis, bet volumes grew 9% to 3.0m while the average stake per bet increased 12%to €102.98. We prioritise profitability ahead of such metrics as customernumbers or market share and achieved growth in operating profit of 65% in 2006despite a small reduction in active customers at the end of 2006. Telephone Channel Active Customers 2006 2005 % ChangeIreland and Rest Of World 11,048 10,783 +2%UK 8,923 10,148 -12%Total 19,971 20,931 -5% (Active customers are defined as those who have bet in the last three months) If you can't stand the sound of an unanswered phone, you'd be in good companywith our dedicated Dial-A-Bet team that answered in excess of 2.5m calls in2006, over 90% in less than 10 seconds. We continue to invest and refine ouruse of technology to improve our customer service and the volume of calls we canhandle. For example, in 2006 we adapted and expanded the operators' on screeninformation to enhance our management of customer calls. The successful growth of this business, together with Paddy Power as a whole,necessitated the relocation of our call centre to a new building beside ourexisting headquarters in Dublin in May 2006. The new building increased thecall centre capacity by an initial 25% and also offers additional capacity asneeded over the next few years. Operating costs within the telephone channel increased by 21% to €16m reflectingvolume growth and the investment in the new call centre location, partiallyoffset by savings from operational efficiencies and reductions negotiated onthird party charges. (ii) The Online Channel •m 2006 2005 % ChangeAmounts staked 525.4 327.5 +60%Gross win 67.4 42.9 +57%Gross profit 51.7 33.4 +55%Operating costs (28.3) (16.4) +72%Operating profit 23.4 17.0 +38% The online channel had another strong year with 38% growth in operating profits,while at the same time making a number of important investments for futuregrowth. These investments were reflected in the increase in operating costs by€11.9m to €28.3m. The major drivers of this increase were: - The launch of new businesses and expansion of businesses recentlylaunched; - Volume driven promotional spend and marketing spend; - Growth in variable costs due to increased activity levels. Customer numbers in the online channel continue to grow strongly in both themore mature sportsbook and the newer gaming products. The growing customer basehas also demonstrated a developing propensity towards multi product usage. Online Channel Active Customers 2006 2005 % ChangeIreland and Rest Of World 42,735 25,646 +67%UK 67,380 48,015 +40%Total 110,115 73,661 +49% Online Customers Product Usage 2006 2005 % ChangeSportsbook only 60,811 48,137 +26% Gaming only 25,885 11,277 +130% Multi product customers 23,419 14,247 +64%Total 110,115 73,661 +49% (Active customers are defined as those who have bet in the last three months) (a) Sportsbook The amounts staked online on the sportsbook increased by 60% to €497m. Withinthis, bet volumes grew 70% to 16.2m while the average bet value decreased 6% to€30.74. Gross win in the sportsbook increased by 52% to €39.1m. Product innovation continues to be a key driver of this level of growth. During2006 we introduced a range of new products to cater for the different timehorizons and risk preferences of our customers. For those with less timeavailable, we expanded our betting-in-running options, introducing 'next game'betting in tennis, 'next frame' betting in snooker and substantially expandedour successful financial indices betting. For the more risk adverse, wecreated race insurance, unique to Paddy Power, with the punter being refunded ifhis horse is placed. We are also the only bookmaker offering place-only bettingon all UK races each day and most Irish races. For those with varying riskpreferences, we even provide the 'bet randomiser' which generates a proposed betfor punters who submit their current state of luckiness! We upgraded our sportsbook web site in 2006 to reflect the major growth in ourevents, markets and channels as well as changing customer preferences andtastes. The enhanced site includes easier navigation, better cross promotion ofchannels and a superior betting-in-running interface. We have also expanded ourvalue added content and services comprising WAP and Java mobile phone services,'bet-and-watch' racing, historical horse racing and soccer statistics as well aslive score updates. The German language online sportsbook launched in April incurred a small loss in2006, in line with our expectations. It has been progressing satisfactorily,although our growth has been restricted by the German regulatory environmentwhich has in particular constrained our promotional activity. Nonetheless weare encouraged by the EU Commission's strong position on freedom of choice forconsumers. We have also expanded our product range to meet continental Europeanpreferences with the inclusion of ice-hockey, basketball and additional soccerleagues. Payment options were expanded to include Neteller and Moneybookers,both popular on the continent. We have also introduced the German speakingpunter to our novelty bets with good media interest in our market on whichperson mentioned in former Chancellor Schroder's memoirs would take legal actionagainst him - no winners as yet but the wife would always seem a good bet inthis context, particularly at 33/1! (b) Gaming The online channel generates gaming revenues from casino, games, poker andbingo. Revenue from these sources, representing the operator's 'hold' orcommission income, increased by 65% to €28.3m, with growth achieved across allfour product categories. Our commitment to poker and to the ongoing promotion of our brand led to oursponsorship of the 2006 Irish Open poker tournament. The Irish Open is thelongest running poker tournament in Europe, but its 25th anniversary set newlandmarks for the tournament as Ireland's first ever guaranteed €1m event andIreland's largest ever poker event. The final was broadcast live across Europeon Sky Sports and was hailed as a tremendous success by commentators, the pokermedia and players alike. Paddy Power will guarantee the 2007 event for €2m,reflecting both the growth of our own poker business and the poker marketoverall. The first half of 2007 involves an important operational challenge forpoker as we tackle the migration of our customers from the software of ourexisting network supplier to that of another operator that acquired them. Product expansion in the gaming area also continued with the launch of onlinebingo, 'Live Games' with a studio presenter and an online version of the popularTV game show 'Deal Or No Deal'. These products encapsulate the Paddy Powerbrand values of fun, fair and friendly and give us particular potential toattract new types of customers. Trading & Risk Management Trading and risk management is at the heart of bookmaking and the function atPaddy Power is at the forefront of industry practice. The core responsibilityof the function is the creation and pricing of all markets and the trading ofthose markets through their life. The function employs a mix of traditionalbookmaking approaches married with risk management techniques from otherindustries and the extensive use of mathematical models and informationtechnology. The quality of the function provides a powerful resource forproduct innovation and differentiation. For instance, in a typical match duringthe football World Cup finals we offered 70 markets as compared to 46 by ournearest UK or Irish competitor. Offering this range of markets directlyaddresses feedback from customer surveys but it also differentiates us, promotesloyalty, spreads our trading risk, and of course drives turnover! In October 2006, the Starting Price Regulatory Commission ('SPRC') chaired byLord Donoughue set out recommendations to strengthen the Starting Price ('SP')compilation process. The principal changes implemented were to increase thenumber of bookmakers included in the sample and to give priority to bookmakersoffering each-way prices. Paddy Power believes the changes will contribute to afairer and more accurate representation of the on-course market. However wewould not expect the increase in the bookmakers sampled to have a dramaticimpact on our margins given that intense competition between bookmakers,particularly amongst prices on the more favoured selections where the vastmajority of turnover arises, ensures that prices on these selections are withina narrow range. Marketing Marketing has been a consistent strength at Paddy Power enabling us to develop abrand not only highly recognised, but recognised for what it stands for. Wecontinue to strive to apply our fun, fair and friendly values consistently andthroughout all aspects of our business. The World Cup gave us a stage to demonstrate these values, particularly topotentially new customers to Paddy Power. For example, we not only offereddifferent Money-Back Specials on every match day, we also refunded punters iftheir team was knocked out in penalty shoot outs, thereby bailing outunfortunate supporters of England, Argentina, France and Switzerland. Inaddition, we offered our English and other customers the best price amongst allbookmakers on England in the quarter finals. We also followed our punters intothe pub for the match with our pub kits, including wee-goals (don't ask!) andpint glasses branded with pertinent bets including '10/1 Her Place; 5/4 TheChipper'! We also continue to put marketing investment into local events to buildrelationships and interact on a more personal basis with our customers. During2006 these events included the Paddy Power London '5-a-side' tournament, whichattracted over 400 teams, and the Irish Karaoke Championships, where theultimate winner from the 88 participating pubs went on to become World Champion. At Paddy Power we pride ourselves on our range of novel and innovative bettingmarkets, which both generate turnover and media coverage. During 2006 we tappedinto the dominant topic of Irish conversation and national obsession of the last15 years, property prices. Punters can now put their money where their mouth isas regards their views on the property market without recourse to the servicesof solicitors, estate agents or removal men! When the many betting markets weoffer do nonetheless come up short relative to the needs of our punters, we arehappy to try and oblige. Such was the case when Adrian Hayward approached us tohave a bet on Liverpool's Xabi Alonso to score a goal from inside his own half,following a dream he'd had about it. In January 2006 he won £25,000 on the £200he had at 125-1! Crucially, we also always want to be fair to our customers. Living up to thisprinciple manifests itself in many practical low profile ways such asresponsible customer care and transparency on charges and terms. However, itis in our approach to certain official results that probably demonstrates thedifference most prominently. As we put it when explaining the decision torefund backers of the Pakistan cricket team when they were deemed to haveforfeited the fourth Test against England following an alleged ball tamperingincident: 'In these circumstances we don't look at our rules but we askourselves what would we consider to be a fair result if we were the punter'.For the record, we also refunded losing bets on the draw - ensuring that nobodybetting on this event ended up out of pocket. In addition to being the rightthing to do, we believe that the differentiation, loyalty and turnover that thisapproach generates more than covers any short term cost. People Our people are critical to everything we do and we are fortunate to have some ofthe most dedicated, skilled and creative people working in the industry. As wecontinue to grow, we have a significant need for more people and new skills, andwe are committed to developing staff internally for new or expanded roles, aswell as recruiting externally. Accordingly, we invest substantially in trainingand development courses through our own human resources team and utilisingexternal specialists as required. We also focus heavily on bringing new talentinto the organisation. In 2006, we ran targeted graduate recruitment campaignsin both the UK and Ireland. We also expanded the net globally to track down thebest people and have benefited from the diversity of experience and skills thatrecruits from as far afield as South Africa, India, Russia and Poland havebrought to us during 2006, particularly in areas such as information technology.While high calibre people continue to be a scarce resource for many parts ofour business, especially e-commerce, we have been successfully attracting,developing and retaining such people. Some positions are certainly easier tofill than others. We teamed up with RTE, the Irish national TV channel, tooffer a dream job as a Paddy Power sports trader in the documentary 'NoExperience Required'. Julian Canny came out the winner out of over 100 hopefulsand continues to trade soccer betting-in-running with us. The average number of employees in the Group during 2006 was 1,414 (2005:1,255). At the year end, the total number of employees was 1,468 (2005: 1,374). Taxes The corporation tax charge for the year was €8.5m. Excluding adjustmentsrelating to prior years, the underlying effective tax rate for 2006 was 16.4% ascompared to 14.7% for 2005. As highlighted in our Interim Report, the Group'seffective tax rate increased from July 2006 as a result of the non-deductibilityof the revised 1% turnover based tax on amounts staked within Irish retail.Given the amount staked within Irish retail, this change added €0.5m to the taxcharge for the second half of 2006. Excluding the impact of the highercorporation tax applicable to the Irish retail property disposal, the underlyingeffective tax rate for the second half of 2006 was approximately 17%. Nocorporation tax is currently payable in the UK due to tax losses. The Group'seffective tax rate is above the Irish statutory rate due to the impact of anumber of non-deductible expenses. Cash Flow, Cash Balances and Foreign Exchange Risk Cash balances at 31 December were €87.1m compared to €52.3m at 31 December 2005,an increase of €34.8m. This includes cash balances held on behalf of customersof €13.4m compared to €10.0m at 31 December 2005. Net cashflow from operatingactivities was €67.7m in 2006 compared to €41.4m in 2005, an increase of 64%.This was driven by operating profit growth of 51% combined with the net cashinflow into customers' accounts of €3.4m. Capital expenditure on tangible andintangible assets of €25.8m primarily comprised the fit out of new and theupgrading of existing retail outlets, and the roll out of EPOS. The Group has no borrowings. Exposures from interest rate changes are thereforelimited to the direct impact on interest income on deposits and the indirectimpact from any resulting changes in consumer spending. Cash balances areinvested in accordance with defined treasury policies approved by the Board.These policies limit the risk rating of institutions that can be used, theconcentration of risk with any one institution or within any category ofinstitutions and the term of deposits. Cash balances are substantially investedin short-term bank deposits with maturities of 120 days or less. Foreignexchange risk in the business is small. The Group generates sterling inflowsfrom UK based customers of the online and telephone channels, partially offsetby the Group's need for sterling as it expands in the UK. Group policy allowsthe Group to hedge foreign exchange exposure for up to six months. At the yearend, no foreign exchange contracts were open. The Group's presentation currencyis the euro and translation risk exists with its sterling subsidiaries. Patrick Kennedy Jack MasseyChief Executive Finance Director 2 March 2007 CONSOLIDATED INCOME STATEMENTYear ended 31 December 2006 Before Exceptional exceptional item Note item (Note 5) Total Total 2006 2006 2006 2005 (restated) •'000 •'000 •'000 •'000 Amounts staked by customers 1,795,090 1,371,710 Continuing Operations Revenue 218,706 - 218,706 160,848 Direct betting costs 4 (35,090) - (35,090) (25,278) Gross profit 183,616 - 183,616 135,570 Employee expenses (64,227) - (64,227) (51,076) Property expenses (21,174) - (21,174) (17,398) Marketing expenses (17,309) - (17,309) (11,346) Technology and communications (11,537) - (11,537) (8,171) Depreciation and amortisation (15,512) - (15,512) (11,295) Other expenses, net (8,395) 2,098 (6,297) (6,166) Total operating expenses (138,154) 2,098 (136,056) (105,452) Operating profit 45,462 2,098 47,560 30,118 Financial income 2,149 - 2,149 1,226 Financial expense (10) - (10) - Profit before tax 47,601 2,098 49,699 31,344 Income tax expense 6 (8,033) (421) (8,454) (4,390) Profit for the year from continuing operations 39,568 1,677 41,245 26,954 Earnings per Share Basic 7 €0.819 €0.541 Diluted 7 €0.811 €0.529 The profit for the year is entirely attributable to equity holders of theCompany. Notes 1 to 9 form part of these consolidated financial statements. On behalf of the Board Patrick Kennedy Jack Massey 2 March 2007 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEYear ended 31 December 2006 2006 2005 •'000 •'000 Profit for the year 41,245 26,954Foreign exchange translation difference 1 (1)Total recognised income and expense 41,246 26,953 The total recognised income and expense for the year is entirely attributable toequity holders of the Company. Notes 1 to 9 form part of these consolidated financial statements. On behalf of the BoardPatrick Kennedy Jack Massey 2 March 2007 CONSOLIDATED BALANCE SHEETAs at 31 December 2006 31 December 2006 31 December 2005 •'000 •'000AssetsProperty, plant and equipment 76,240 72,400 Intangible assets 9,260 3,615 Goodwill 1,880 1,880 Deferred tax assets 195 167Total non current assets 87,575 78,062 Trade and other receivables 4,203 2,134 Cash and cash equivalents 87,061 52,318Total current assets 91,264 54,452 Total assets 178,839 132,514 EquityIssued capital 5,124 5,040 Share premium 10,163 7,548 Shares held by long term incentive plan trust (8,137) (4,929) Other reserves 6,536 4,142 Retained earnings 114,445 84,250Total equity 128,131 96,051 LiabilitiesDeferred tax liabilities - 843Total non current liabilities - 843 Trade and other payables 49,140 34,873Current tax payable 1,568 747Total current liabilities 50,708 35,620 Total liabilities 50,708 36,463 Total equity and liabilities 178,839 132,514 Notes 1 to 9 form part of these consolidated financial statements. On behalf of the Board Patrick Kennedy Jack Massey 2 March 2007 CONSOLIDATED CASH FLOW STATEMENTYear ended 31 December 2006 2006 2005 •'000 •'000Cash flows from operating activitiesProfit before taxation 49,699 31,344Financial income (2,149) (1,226)Depreciation and amortisation 15,512 11,295Cost of employee share-based payments 3,184 2,289(Gain) / loss on disposal of property, plant and equipment (1,183) 267Cash from operations before changes in working capital 65,063 43,969(Increase) / decrease in trade and other receivables (2,013) 222Increase in trade and other payables 13,209 3,320Cash generated from operations 76,259 47,511Income taxes paid (8,526) (6,101)Net cash from operating activities 67,733 41,410 Cash flows from investing activitiesPurchase of property, plant and equipment (17,855) (23,925)Purchase of intangible assets (7,921) (2,068)Proceeds from disposal of property, plant and equipment 3,028 329Interest received 2,094 1,254Net cash used in investing activities (20,654) (24,410) Cash flows from financing activitiesProceeds from the issue of new shares 2,699 903Purchase of shares by employee trust (3,742) (2,623)Dividends paid (11,293) (10,168)Net cash used in financing activities (12,336) (11,888)Net increase in cash and cash equivalents 34,743 5,112Cash and cash equivalents at start of year 52,318 47,206 Cash and cash equivalents at end of year 87,061 52,318 Notes 1 to 9 form part of these consolidated financial statements. On behalf of the Board Patrick Kennedy Jack Massey 2 March 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General information Paddy Power plc (the "Company") and its subsidiaries (together referred to asthe "Group") provide sports betting services through a chain of licensed bettingoffices ('Paddy Power Bookmaker') together with telephone betting ('Dial-a-Bet')and online interactive betting services ('paddypower.com'). The Group alsoprovides online gaming services through 'paddypower.com', 'paddypowerpoker.com','paddypowercasino.com' and 'paddypowerbingo.com'. It provides these servicesprincipally in Ireland and the United Kingdom. The Company is a public limited company incorporated and domiciled in theRepublic of Ireland and has its primary listing on the Irish Stock Exchange. The consolidated financial statements of the Group for the year ended 31December 2006 comprise the financial statements of the Company and itssubsidiary undertakings and were authorised for issue by the Board of Directorson 2 March 2007. 2. Basis of preparation and summary of significant accounting policies The consolidated financial statements are prepared on the historical cost basisexcept for betting transactions, which are recorded as financial instruments,and share-based payments, both of which are stated at fair value. Theconsolidated financial statements are presented in euro, rounded to the nearestthousand. Further to IAS Regulation (EC1606/2002) ('Accounting standards adopted for usein the EU'), EU law requires that the annual consolidated financial statementsof the Group be prepared in accordance with International Financial ReportingStandards ('IFRSs') adopted by the European Union ('EU'). The consolidatedfinancial statements have been prepared on the basis of IFRSs adopted by the EUand effective at 31 December 2006. The accounting policies set out below havebeen applied consistently by Group entities. The accounting policies applied in the preparation of these consolidatedfinancial statements are consistent with those set out in the Annual Report forthe year ended 31 December 2005 except for a change in the Group's revenuerecognition policy which is outlined below. Restatement of revenue presentation and recognition of ante post bets accrual atfair value In 2006, as a result of a change in industry practice, the Group has concludedthat a sportsbook bet is a financial instrument. As a result, the Group nowaccounts for betting transactions as trading financial instruments in accordancewith IAS 39 'Financial Instruments: Recognition and Measurement'. Theimplications of classifying betting transactions as trading financialinstruments are twofold: 1. In relation to sports betting activities, revenue nowrepresents the net gain/ (loss) on betting transactions (stake less payout) fromcustomers, whereas previously revenue represented amounts staked by customersand the payout was shown separately in cost of winning bets. In the 2005 AnnualReport this gain/ (loss) on betting transactions was reported by the Group as 'Gross Win'. 2. Under IAS 39, amounts received from customers on sportingand other events that have not occurred by year end are measured at fair value.Thus at year end, sports betting open positions (included in trade and otherpayables) are carried at fair market value and gains and losses arising on thisvaluation are recognised in revenue, together with the gains and losses realisedon positions that have closed. In previous financial statements, amountsreceived from customers on events that had not occurred by period end weretreated as deferred income. There was no material adjustment from therevaluation of sports betting open positions at either 31 December 2006 or 2005. The consolidated income statement for the year ended 31 December 2005 has beenrestated to reflect the change in reported revenue and direct betting costs asfollows: Cost of winning Direct betting bets costs Gross revenue Revenue Gross profit •'000 •'000 •'000 •'000 •'000As previously reported 1,371,710 (1,236,140) - ** - ** 135,570Adjustment (1,371,710) 1,236,140 160,848 (25,278) -Restated -* -* 160,848 (25,278) 135,570 * Does not form part of the 2006 income statement presentation** Did not form part of the 2005 income statement presentation The consolidated income statement of the Group will continue to show amountsstaked by customers but this is for information purposes only. Amounts stakedrepresent amounts received in respect of bets placed on sporting events in theperiod and net winnings from gaming. This is consistent with the presentationof gross revenue in the year ended 31 December 2005. Recent accounting pronouncements The IFRSs adopted by the EU applied by the Company and Group in the preparationof these financial statements are those that were effective at 31 December 2006. The following provides a brief outline of the likely impact on futurefinancial statements of relevant IFRSs adopted by the EU which are not yeteffective and have not been adopted early in these financial statements: • Amendment to IAS 1, 'Capital Disclosures': This amendment will requireadditional disclosures regarding the capital structure of the Group. The impactis not expected to be material in terms of Group reporting. • IFRS 7, 'Financial Instruments: Disclosures': This standard updatesand extends the existing disclosure requirements of IAS 32 and will requireadditional disclosures relating to risk management policies and processes. Theimpact of IFRS 7 is not expected to be material in terms of Group reporting. • IFRIC 8, 'Scope of IFRS 2 Share-based Payment' addresses theaccounting for share-based payment transactions in which some or all goods orservices received cannot be specifically identified. IFRIC 8 will becomemandatory for the Group's 2007 financial statements, with retrospectiveapplication required. This IFRIC is not expected to have a material impact onthe Group. Basis of consolidationThe Group's financial statements consolidate the financial statements of PaddyPower plc and its subsidiary undertakings based on accounts made up to the endof the financial year. A subsidiary is an entity controlled by the Company.Control is achieved where the Company has the power to govern the financial andoperating policies of an entity so as to obtain benefits from its activities.Intra-group balances and any unrealised gains and losses or income and expensesarising from intra-group transactions are eliminated on consolidation except tothe extent that unrealised losses provide evidence of impairment. Judgements and estimatesThe preparation of financial statements in conformity with IFRS adopted by theEU requires certain critical accounting estimates. It also requires managementto make judgements, estimates and assumptions that affect the application ofaccounting policies and reported amounts of assets and liabilities, income andexpenses. The estimates and underlying assumptions are based on historicalexperience and various other factors, including expectations of future eventsthat are believed to be reasonable and appropriate under the circumstances, theresults of which form the basis of making the judgements about carrying valuesof assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are continually reviewed and evaluatedto reflect the Group's view of current conditions. New events or additionalinformation may result in a revision of these estimates over time. Revisions toaccounting estimates are recognised in the period in which the estimate isrevised if the revision affects only that period, or in the period of therevision and future periods if the revision affects both current and futureperiods. It is possible that actual results may differ from these estimates. Judgements made by management in the application of IFRSs that have a highdegree of complexity or a significant effect on the financial statements, andestimates with a significant risk of material adjustment in the forthcoming yearare discussed in Note 9. Revenue The services provided by the Group comprise sports betting, fixed odds gamesbetting, online casino and games and peer to peer games, including online pokerand bingo. Revenue is stated exclusive of value-added taxes and certain freebets, promotions and bonuses. Retail, telephone and online sportsbook betting activities are classified asfinancial instruments. Revenue from these activities represents the net gain orloss from betting activities in the period plus the gain or loss on therevaluation of open positions at period end. Revenue from fixed odds games and online casino represents net winnings ('customer drop'), being amounts staked net of customer winnings. Revenue frompeer to peer games represents commission income ('rake') and tournament feesearned from games completed by the period end. Interest income is recognised on an accruals basis by reference to the principaloutstanding and the effective rate of interest. 3. Segment reporting The revenue, operating profit and net assets of the Group relate to theprovision of betting and gaming activities, substantially all of which areconducted in the Republic of Ireland and the UK. (a) By business segment The Group considers its primary business segments to be 'retail' and 'nonretail'. The retail business segment comprises the Group's Irish and UKlicensed bookmaking shop estates. The non retail business segment comprises theGroup's online and telephone sports betting businesses and its online gamingbusinesses, primarily casino, games, poker and bingo. Business segment information for the year ended 31 December 2006: Retail Non retail Other unallocated Total 31/12/06 31/12/06 31/12/06 31/12/06 •'000 •'000 •'000 •'000Revenue 126,783 91,923 - 218,706Direct betting costs (17,250) (17,840) - (35,090)Gross profit 109,533 74,083 - 183,616Depreciation and amortisation (12,035) (3,449) (28) (15,512)Other operating costs (79,258) (36,911) (6,473) (122,642)Operating profit before property gain 18,240 33,723 (6,501) 45,462 Property gain 2,098 - - 2,098Operating profit 20,338 33,723 (6,501) 47,560 Financial income - - 2,149 2,149 Financial expense - - (10) (10)Profit before tax 20,338 33,723 (4,362) 49,699Total assets 87,970 12,350 78,519 178,839Segment liabilities 14,559 22,466 13,683 50,708Capital expenditure 22,422 4,421 2 26,845 Business segment information for the year ended 31 December 2005: Retail Non retail Other unallocated Total 31/12/05 31/12/05 31/12/05 31/12/05 (restated) (restated) (restated) (restated) •'000 •'000 •'000 •'000Revenue 98,460 62,388 - 160,848Direct betting costs (13,484) (11,794) - (25,278)Gross profit 84,976 50,594 - 135,570Depreciation and amortisation (8,481) (2,814) - (11,295)Other operating costs (64,348) (23,737) (6,072) (94,157)Operating profit 12,147 24,043 (6,072) 30,118Financial income - - 1,226 1,226Profit before tax 12,147 24,043 (4,846) 31,344Total assets 67,346 9,141 56,027 132,514Segment liabilities 10,432 12,165 13,866 36,463Capital expenditure 24,302 3,166 - 27,468 The amounts shown in the 'other unallocated' category above, representing itemsthat cannot be allocated to either the retail or non retail segments, areprimarily in respect of management costs relating to the Group as a whole, cashdeposits held centrally and certain accounts payable, tax and accrual balances. (b) By geographic segment The Group considers that its primary geographic segments are 'Ireland & other'and 'UK'. The Ireland & other geographic segment is composed of the Irishretail bookmaking business, online and telephone sports betting from non-UKcustomers (principally in Ireland), and online gaming from non-UK customers.The UK geographic segment consists of the UK retail bookmaking business, onlineand telephone sports betting from UK customers, and online gaming from UKcustomers. Ireland & Ireland & other other UK UK Total Total 31/12/06 31/12/05 31/12/06 31/12/05 31/12/06 31/12/05 (restated) (restated) (restated) •'000 •'000 •'000 •'000 •'000 •'000Revenue 148,462 112,338 70,244 48,510 218,706 160,848Segment assets 131,269 106,623 47,570 25,891 178,839 132,514Capital expenditure 14,369 18,598 12,476 8,870 26,845 27,468 Further analysis of the business segments bychannel is as follows: 2006 2005 (restated) •'000 •'000Amounts stakedRetail - Ireland 833,125 703,780Retail - UK 129,936 90,541Retail 963,061 794,321Telephone 306,604 249,871Online 525,425 327,518 1,795,090 1,371,710 RevenueRetail - Ireland 104,385 83,642Retail - UK 22,398 14,818Retail 126,783 98,460Telephone 24,519 19,454Online 67,404 42,934 218,706 160,848 Gross profitRetail - Ireland 91,510 73,970Retail - UK 18,023 11,006Retail 109,533 84,976Telephone 22,352 17,151Online 51,731 33,443 183,616 135,570 Operating profit before exceptional itemRetail - Ireland 22,025 14,136Retail - UK (5,995) (4,656)Retail 16,030 9,480Telephone 6,004 3,649Online 23,428 16,989 45,462 30,118 In December 2005, the tax regime for fixed odds betting terminals ('FOBTs') inthe UK retail estate was changed and gross profits tax was replaced by valueadded tax ('VAT'). While the amount of tax levied is broadly unchanged,accounting practice requires that income is included within revenue net of VAT,whereas previously the income was included gross with the gross profits taxbeing deducted in arriving at gross profit. The VAT charged on FOBT income in2006 was €1.2m. The equivalent gross profits tax in 2005 was €0.6m. 4. Direct betting costs Direct betting costs comprise: 2006 2005 (restated) •'000 •'000Betting taxes 12,895 6,549 Software supplier costs 7,487 4,651 Data rights 2,411 3,603 Other direct betting costs 12,297 10,475 35,090 25,278 Betting taxes comprise taxes levied on gross win and tax levied on Irish retailamounts staked generated in the period 1 July 2006 to 31 December 2006. On 1July 2006, the Irish government replaced the previous 2% customer based bettingtax with a 1% tax levied on the bookmaker. Software supplier costs comprise direct costs incurred under supplier agreementsin the provision of online casino and fixed odds gaming services and FOBTs. Data rights mainly comprise costs incurred in respect of British HorseracingBoard and UK statutory levies. Other direct betting costs comprise discounts on bets granted in the Irishretail estate prior to 1 July 2006, payments to third parties for new onlinecustomers acquired, prize and tournament costs and other miscellaneous directbetting costs. 5. Exceptional item 2006 2005 •'000 •'000 Gain on disposal of Irish retail shop property 2,098 - During the 2006 financial year, the Group disposed of a shop property. Thisproperty, which forms part of the Group's Irish retail licensed bookmakingoperations, was originally held under an operating lease. The Group exercised apurchase option contained in the lease and subsequently sold the property atarms-length to a third party, simultaneously entering into a leaseback agreementat arms-length with that third party. 6. Income tax expense 2006 2005 •'000 •'000Recognised in the income statement: Current tax charge 8,535 4,249Prior year under / (over) provision 789 (211) 9,324 4,038Deferred tax (credit) / charge (402) 352 Prior year over provision (468) -(Decrease) / increase in deferred tax (870) 352Total income tax expense in income statement 8,454 4,390 The difference between the total income tax expense shown above and the amountcalculated by applying the standard rate of corporation tax to the profit beforetax is as follows: 2006 2005 •'000 •'000 Profit before tax 49,699 31,344 Tax on Group profit on ordinary activities at the standardIrish corporation tax rate of 12.5% (2005: 12.5%) 12.5% 6,212 12.5% 3,918Depreciation on non-qualifying property, plant and 0.6% 285 2.7% 837equipmentBetting duty 1.1% 528 - -Expenses deductible for tax purposes 0.0% (4) (1.4%) (432)Other differences 0.4% 225 (0.0%) (2)Chargeable gains 0.3% 159 - -Interest income taxable at the higher rates 0.5% 260 0.9% 280Under / (over) provision in prior year 1.6% 789 (0.7%) (211)Total income tax charge 17.0% 8,454 14.0% 4,390 No corporation tax is payable in the UK due to the availability of tax losses.A deferred tax asset of €2,842,000 (2005: €2,760,000) relating to these lossesforward has not been recognised in accordance with the Group's accounting policyfor deferred tax. There is no expiry date in respect of these losses. No significant changes are expected to statutory tax rates in the future. 7. Earnings per share Earnings per share is calculated by dividing the profit attributable to equityholders of the Company by the weighted average number of ordinary shares inissue during the year as follows: 2006 2005Numerator in respect of basic and diluted earnings per share (•'000):Profit attributable to equity holders of the Company 41,245 26,954 Numerator in respect of adjusted earnings per share (•'000):Profit attributable to equity holders of the Company 41,245 26,954 Less: Property gain after taxation (1,677) -Profit for adjusted earnings per share calculation 39,568 26,954 Denominator in respect of basic earnings per share:Ordinary shares in issue at beginning of year 50,397,168 50,045,581Adjustments for - ordinary shares issued during year 494,991 152,251 - ordinary shares held by long term incentive plan trust (547,905) (357,952) Weighted average number of ordinary shares 50,344,254 49,839,880 Basic earnings per share €0.819 €0.541 Adjusted earnings per share €0.786 €0.541 Denominator in respect of diluted earnings per share: Basic weighted average number of ordinary shares in issue during 50,344,254 49,839,880year Adjustments for dilutive effect of share option schemes,sharesave scheme, shares held by long term incentive plan trustand long term incentive plan 501,021 1,127,252 Weighted average number of ordinary shares 50,845,275 50,967,132 Diluted earnings per share €0.811 €0.529 Adjusted diluted earnings per share €0.778 €0.529 8. Events after the balance sheet date In respect of the current year, the directors propose that a final dividend of22.77c per share (2005: 12.84c per share) will be paid to shareholders on 25 May2007. This dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in these financialstatements. The proposed dividend is payable to all shareholders on theRegister of Members on 16 March 2007. The total estimated dividend to be paidamounts to €11,665,000 (2005: €6,476,000). 9. Accounting estimates and judgements Key sources of estimation uncertainty and critical accounting judgements inapplying the Group's accounting policies Goodwill of €1.9m (2005: €1.9m) continues to be carried in the Group balancesheet as the directors believe that there has been no impairment in the fairvalue of the net identifiable assets of the acquired businesses. The share based payment reserve, which includes amounts in relation to the LongTerm Incentive Plan and various share option schemes, amounted to €5,613,000 at31 December 2006 (2005: €3,220,000). The fair value of share options grantedafter 7 November 2002 has been determined using a Black Scholes valuation model.The significant inputs into the model include certain management assumptionswith regard to the standard deviation of expected share price returns, expectedoption life and annual risk free rates. The fair value of the Group's sports betting open positions financial liabilityamounted to €2,877,000 (2005: €2,077,000) at 31 December 2006. The Groupperforms a revaluation of sports betting open positions at each balance sheetdate. The revaluation takes into account the expected probability of such openpositions resulting in a gain or loss to the Group in the future, and isdependent on factors that cannot always be reliably predicted. The majority of the Group's retail premises are held under operating leases.Under accounting standards there is a requirement for management to examine thebuildings element within such operating leases to determine if the lease meetsthe definition of a finance lease, and, if so, it should be accounted as such.This review involves determining the fair value of each property at theinception of the lease and analysing the minimum lease payments between their 'land' and 'buildings' elements. Based on management's review of operatingleases for the years ended 31 December 2006 and 2005, all retail premises leasesqualify as operating leases. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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