3rd Mar 2008 07:00
Paddy Power plc03 March 2008 Paddy Power plc3 March 2008 Paddy Power plc 2007 Preliminary Results Announcement Paddy Power plc today announces its preliminary results for the year ended 31 December 2007. Highlights: - Operating profit growth of 59% to €72.1m; - Online gross win growth of 41%, including gaming gross win growth of 44%; - Continued trading profitability in our UK Retail business compared to a loss of €6.0m in 2006; - Operating profit growth of 57% in our Irish Retail business; - Operating profit growth of 36% and 7% in our online and telephone businesses respectively; - Expanding UK Retail estate into Manchester and Glasgow with an expectation to at least double the size of our estate over the next three years; - Continued investment to drive future growth including: o the introduction of online financial spread betting, online Spanish language betting and sports risk management businesses; o the addition of 18 shops in Ireland, 10 new openings and eight acquisitions; - Significantly increased cash returns to shareholders to €73m in 2007 from €11m in 2006 through both dividends and share buybacks; - Last, but not least, a favourable run of sporting results. Commenting on the results Patrick Kennedy, Chief Executive, Paddy Power plc said: "We have grown our business very substantially in 2007. Pre-tax profits havegrown by 53% to €75.8 million, with strong growth in every division. Particularhighlights included the 57% profit growth in Irish Retail, 44% growth in onlinegaming gross win and the turnaround of our UK Retail business. Furthermore, wehave conducted a detailed review of the UK retail market, and will open shops inGlasgow and Manchester as well as in London this year. The outlook for Paddy Power remains strong, underpinned by our momentum and ourstrong market positions. We are confident in our prospects for 2008 andbeyond." ENDS 3 March 2008Issued on behalf of Paddy Power plc by Drury Communications Ltd For reference: Patrick Kennedy Jack Massey Chief Executive Finance Director Paddy Power plc Paddy Power plc Tel: + 353 1 404 5912 Tel: + 353 1 404 5912 Billy Murphy / Sarah Ryan Trevor Phillips Drury Communications Ltd Square1 Consulting Limited Tel: + 353 1 260 5000 Tel: + 44 20 7929 5599 Mobile: + 353 87 676 7452 (SR) Mobile: + 44 7889 153 628 Chairman's Statement Dear Shareholder, I am delighted to report on a year of increased profitability at Paddy Power. 2007 % ChangeAmounts staked €2,028m +13%Pre tax profit €75.8m +59%Basic EPS 127.4 cent +62%Dividends 51 cent +58%Cash balances €87.9m +1% (Amounts staked or turnover represents amounts placed on sporting events andnet winnings on gaming activities)(Percentage changes in profitability are calculated based on 2006 resultsexcluding the exceptional property gain of €2.1m pre tax) Increased profits were recorded across all our business channels, with the twoparticular highlights being the 44% growth in online gaming gross win, achieveddespite increased competition and a challenging year for our poker business, andthe turnaround in UK Retail, which traded profitably in both the first andsecond half of 2007 compared to a loss of €6.0m in 2006. This marked improvement in UK Retail performance achieved our target ofSeptember 2006 to have an optimised proposition coinciding with UK marketderegulation. Following a detailed market review, we have identified twofurther cities with high potential for our UK Retail offering and will openshops in Glasgow and Manchester as well as in London this year. We expect to atleast double the size of our UK estate over the next three years. We are also investing in new online businesses and launched an online financialspread betting business and a Spanish language betting business in 2007. Wecontinue to expand our Irish Retail business, growing our estate by 18 shops(11%) last year via organic openings and acquisitions, and increasing itsoperating profit by 57% to €34.6m. We experienced significant once-off benefits in 2007 from favourable sportingresults. An unprecedented set of bookmaker friendly results in the first halfof the year was followed by "glorious Goodwood", a "lovely Listowel" and a "riotous Rugby World Cup" (Ireland out in the group stages, New Zealand out inthe quarter finals and England in the Final - 1,440/1 available pre tournament....if you saw that coming you were a genius!). We didn't get it all our own way though with the man who saved Ireland'ssporting blushes in 2007, Padraig Harrington, costing us our biggest ever payout when he won the Open Golf Championship. It was an expensive afternoon butwell deserved for golf punters after lightly backed long shots won the Masters(Zach Johnson at 175/1) and the US Open (Angel Cabrera at 125/1). Punters camewith a further late rattle close to home in October and November, but we clearedthe final hurdle in December with room to spare, combining a decent run ofsporting results in the second half with outrageous good fortune in the first. 2007 saw us run some of our most generous 'specials', including refunding moneyon any horse that fell over the three days of our nemesis meeting of recentyears - Cheltenham in November. Predictably enough they dropped like RickyHatton on the Las Vegas canvas! Regulation 2007 was a year of significant regulatory developments. In continental Europe,there was a further mix of pro and anti-competition events. From a positive perspective, Spain became the second major continental Europeanmarket to pursue deregulation with two regions progressing licensing, followingItaly's decision to issue licenses in 2006. From a negative perspective, inDecember 2007 the German state legislatures voted through a new gaming treaty,effective 1 January 2008, extending the state monopolies and making internetbetting and gaming activity illegal. The market in Germany is consequently in a state of flux as the interaction ofEuropean law and its new domestic law remains to be resolved. This creates aseries both of commercial and legal uncertainties in providing internet-basedservices in the country. Having assessed these uncertainties (along with theimportance of Germany within our overall market for German speakers), we haveconcluded that the balance of commercial risk and reward is not favourable inthe short term and have suspended our German language website. This decisiondoes not give rise to any material closure costs or impact on our expectedprofits over the next number of years. The Board The Board has appointed Nigel Northridge as senior independent director. Nigel,a former Chief Executive of Gallaher Group plc and a non- executive director ofPaddy Power since 2003, brings a wealth of valuable experience to this importantposition. He is also the senior independent director of Aggreko plc. Dividends, Share Buyback Programme and Capital Structure During 2007, we returned a total of €73.1m of cash to shareholders through acombination of dividends and share buybacks. Total cash dividends paid toshareholders in 2007 were €19.5m, an increase of 73% over 2006. In addition,further to the programme announced last March, €54.2m was spent on returningcash to shareholders via a share buyback programme. This comprised purchases of2.39m shares or 4.7% of the Company's share capital at an average price of€22.42. In line with a dividend payout ratio of 40%, the Board is proposing a finaldividend of 35 cent per share, payable to shareholders on the register at 14March 2008. This brings the total dividend in respect of 2007 to €25.0m or 51cent per share, an increase of 58% on the 32.2 cent paid in respect of 2006. Despite these significantly increased cash returns to shareholders, theexceptional growth and cash generative nature of the business meant that cashbalances at the end of 2007 remained strong at €88m, broadly unchanged from2006. While the Board is committed to capital discipline, as evidenced by theincreasing dividend payout ratio and share buybacks, it also continues tomaintain flexibility for future growth, both organic and possibly viaacquisitions. These objectives of capital discipline and flexibility for growthare not mutually exclusive, and it is the Board's current intention to considerfurther share buybacks in line with the approval granted by shareholders. Thetiming and amount of shares bought back will depend on the Group's pipeline ofdevelopment opportunities as well as equity market conditions. Outlook The outlook for Paddy Power remains strong. Although Britain and Ireland - thetwo principal economies in which we operate - are projected to grow at a slowerpace than in recent years, we are encouraged by the Group's strong marketpositions and momentum. Broadly half of our operating profits come from onlinebetting and gaming, the overall market for which is projected to continue togrow well; we have a strong leadership position in both the Irish Retail andtelephone markets; and the prospects for our UK Retail business havesubstantially improved over the last 12 months. While sterling depreciation against the euro will negatively impact thetranslation of our sterling profit stream by approximately €4m in 2008 atcurrent exchange rates, trading in the year to date has benefited from goodsportsbook gross win percentages. The Group is confident of its prospects for2008 and beyond, and I look forward to updating you on progress at our AGM inMay. Fintan DruryChairman 29 February 2008 Chief Executive's Statement Paddy Power continues to grow strongly on many fronts and we had 12% moreemployees at the end of the year than the start. Many who join us remark on thetwo very different sides to the Group, and the healthy dynamic that existsbetween them - both are sources of competitive advantage for Paddy Power, andboth were advanced well in 2007. The first is how many external observers perceive us - a fun, fair, brand-ledbusiness. For Paddy Power betting has always been about entertainment. Bettingwith Paddy Power is a fun experience that means a lot more than simply winningor losing money. We offer more novelty bets than other bookmakers along withgreat customer service. My favourite novelty market of 2007 was on the nexthigh profile American to get arrested; Al Gore was rated a 14-to-1 outsider, butwas backed by over 50 "shrewdies". Problem was we had neglected to specifywhich Al Gore we had in mind, and the former US vice president's son - Al GoreIII - duly obliged, being arrested the next day on drugs charges. Needless tosay, we paid out! This approach is backed up with stunts and sponsorship that make existingcustomers smile and hopefully attract some new ones into the fold. Highlightsin 2007 included sponsoring the world's first Father Ted festival, having aTongan player change his name by deed poll to Paddy Power for the duration ofthe 2007 Rugby World Cup (as well as all his team mates dyeing their hair greenin support) and buying punters over 5,000 pints in Liverpool to celebrate anIrish trained winner at the English Grand National (Paddy'sone-for-you-one-for-me policy accounting for a large percentage of this total). Being fair, and being perceived by our punters to be fair, is just as importantin distinguishing our brand against the competition. Our punters benefited fromover 200 early payouts and refunds of losses during the year. Highlightsincluded returning losing bets on heavy ante-post favourite Teofilo when he waswithdrawn from the 2000 Guineas, paying out in June on Lewis Hamilton to be 2007BBC Sports Personality of the Year (doh!) and refunding on all losers in theTour de France, following the stream of drug abuse revelations. Meanwhile, ourLondon shops pushed this approach to a whole new level, with money back on alllosers for three selected races on Turf TV days. The significant ongoing investment in our brand, through these and many otherinitiatives, is what creates differentiation and loyalty, and ultimately therequired financial payback through higher revenues and profits per shop andlower customer acquisition costs than our competitors. There is however another and equally vital side to Paddy Power - one which isanalytical and data-led, driven and challenging. We see this in our 52-strongtechnology team, who not only produce in excess of 150 different daily reportsto ensure that business performance is monitored in minute detail, but also havefacilitated the very strong growth in our online business. They underpin 35different active websites, and enable us to take over 1,000 bets per minute onGrand National day. Just think how many shops we'd need for that! When Paddy Power floated at the end of 2000, we had nine risk and tradingpersonnel; today we have 48, with a trading room not dissimilar to that of anyfinancial institution - only slightly less sub-prime exposure... This team alsohave responsibility for product innovation, which has been key to the success ofthe Group. For example, we had 59 markets available for the Rugby World Cupfinal and 77 for the Champions League final - our competitors had on average 23and 31 respectively. The team has developed Betting-In-Running product for mostof our key sports, and Betting-In-Running now accounts for 40% of our Non Retailsports betting. Innovation is not just at the product level - we continue to invest in newbusinesses which will bring Paddy Power to new consumers and new geographies.In the last twelve months we have launched an online financial spread bettingbusiness and Spanish language website, as well as a sports risk managementbusiness targeted at companies with exposure to sporting events. Neither of the two sides to Paddy Power - the fun, fair brand-led external face,or the analytical, data-led, challenge culture - could on its own generatelong-term competitive advantage. However, when blended it works, each elementcomplements and stimulates the other, generating passionate, (mostly)intelligent, and noisy debate. This debate focuses on delivering the bestpossible consumer experience, and that is what truly drives long-termcompetitive advantage. It is this blend that ultimately differentiates us. Each element is founded on offering customers something different to thecompetition - better value, better service, better product and overallentertainment. Furthermore, their value to Paddy Power grows as our scaleincreases, and they differentiate us against all competition, particularlysmaller operators whose scale cannot justify an attempt to match them. Finallyboth can be applied to add value when we expand by acquisition, as we did lastyear with three modest acquisitions in our Irish Retail business. Although our markets are increasingly competitive and are exposed to economieswhose growth has slowed, our ongoing investment in these very different yetcomplementary sources of advantage give us confidence for the current year andbeyond. Patrick KennedyChief Executive 29 February 2008 Operating & Financial Review Paddy Power is a multi-channel, multi-national betting and gaming Group. Itoperates through two main divisions: the Retail division, which operatesbookmaking shops in the Republic of Ireland and the UK, and the Non Retaildivision, which provides telephone betting services to customers in the Republicof Ireland and the UK together with an online channel that provides both bettingand gaming services to English and Spanish speaking customers in the UK, theRepublic of Ireland and continental Europe. •m 2007 2006 % Change Amounts staked 2,028 1,795 +13%Gross win 279.0 218.7 +28%Gross profit 242.4 183.6 +32%Operating costs (170.3) (138.1) +23%Operating profit 72.1 45.5 +59%Exceptional property gain - 2.1Interest income 3.7 2.1 +74%Profit before tax 75.8 49.7 +53%Profit after tax 62.8 41.2 +52% 2007 was a terrific year for Paddy Power with operating profit increasing by 59%to €72.1m. Exceptionally favourable sporting results were a key profitabilitydriver but not the only one. Despite the run of bookmaker-friendly resultsinevitably reducing growth in the amounts staked, and the absence of the WorldCup, we achieved growth of 12% in Group sportsbook turnover. In addition withinRetail, a turnaround in the profitability of our UK estate, combined with a fullyear's benefit from lower Irish betting tax, drove an increase in profits of110% to €33.7m. In Non Retail, additional key profit drivers were a 44%increase in gaming gross win and a lower level of betting taxes achieved throughrestructuring, which combined to drive 30% profit growth to €38.4m. The Retail Division•m 2007 2006 % Change Irish Retail gross win % 13.6% 12.5%UK Retail gross win % 12.6% 12.6%Retail division operating profit 33.7 16.0 +110% While retail punters had the worst of the sporting results in 2007, they didenjoy a better second half in 2007 than 2006, helped by many generous PaddyPower 'specials' including 'guaranteed early and board prices' across all ourIrish estate in December. The gross win percentages in the second half of 2007were down 0.2% compared to 2006 in both Irish and UK Retail at 12.4% and 12.5%respectively, but still slightly above the 12.0% mid-point of the guided range.For the full year there were certainly no complaints about sporting results fromour end and we enjoyed gross win percentages of 13.6% in Irish Retail and 12.6%in UK Retail, compared to 12.5% and 12.6% in 2006. The relatively higherpercentage in Irish Retail was explained in large part by little evidence of the'luck of the Irish' in the first half with a succession of fancied Irish horsesbeaten at Cheltenham and Ascot. The Electronic Point of Sale ('EPOS') system implemented in 2006 has, asexpected, contributed to these gross win percentages, as well as other areas ofoperational efficiency. We continue to be particularly pleased with thecustomer service benefits of EPOS, for example in product range and delivery.Thousands of betting markets and more niche betting coupons are now available ineach shop every day through data transfer via EPOS, enabling us to serveefficiently a huge range of national and non-national customer tastes. Thisspeed of data delivery also facilitates the introduction of new services such asthe 'Paddy Times', a newspaper style form and price guide for the main racingand sports fixtures each weekend, including specials exclusive to Paddy Power,distributed free in shops on Friday and Saturday afternoons. The launch of Turf TV in April with picture rights from six of the UK's 59racecourses was a significant development in the supply of pictures to shops.Paddy Power was the first major chain of bookmakers to sign up for Turf TV.Call us old fashioned, but we believe if you place a bet on a race, it's nice towatch the race. In addition, our infrared shop television control technologyand central production studio ensures seamless integration of the SIS and TurfTV pictures. Prior to other major UK bookmakers signing up to Turf TV at the start of 2008,we focussed on winning customers from those competitors, complementing thepictures differentiation with an unbeatable offer - money back on all losers -for three races over the day, announced immediately after the off. Overall,while some new customers may now return to a more conveniently locatedcompetitor's shop, Turf TV showcased what drives our long term success - anunrelenting commitment to differentiating customer service, product quality andour brand values. (i) Irish Retail •m 2007 2006 % Change Amounts staked 930.0 833.1 +12%Gross win 126.1 104.4 +21%Gross win % 13.6% 12.5%Gross profit 116.5 91.5 +27%Operating costs (81.9) (69.5) +18%Operating profit 34.6 22.0 +57%Shops at year end 178 160 +11% The amounts staked within Irish Retail grew by 12% to €930m with a 21% increasein gross win to €126m. Excluding the impact of new shops, like-for-like amountsstaked and gross win increased by 5% and 14% respectively. The growth in theamounts staked was notwithstanding an exceptionally high gross win percentageinevitably affecting turnover ('negative recycling'). There was also a 4%reduction in Irish and UK horse racing during Irish shop opening hours in thesecond half of 2007 compared to 2006, primarily due to adverse weatherconditions in July and December. While additional racing arose from new eveningopenings allowed during floodlit all-weather meetings in Dundalk, this wasoffset by the loss in 2007 of certain late afternoon UK winter meetingsrescheduled to after Irish shop closing time. Gross profit in 2007 as compared to 2006 benefited from the change in Irishretail betting tax. Paddy Power had incurred an additional cost of 1% ofturnover or €4m in the first half of 2006 from giving its customers the benefitof tax free betting early, which did not arise in the first half of 2007.Operating costs increased by 18% driven by a 10% increase in average shopnumbers, increased depreciation (primarily related to EPOS and additional shops)and growth in divisional and central variable costs due to increased levels ofactivity. Operating profits grew 57% to €34.6m. During the year, we opened 10 new shops and expect to continue to open six to 10shops per annum organically in line with our medium term guidance. In addition,we acquired eight shops from other operators. While we continue to prefer theeconomics of organic expansion in the Republic of Ireland, these smallacquisitions offered prime locations in areas in which we have wished to expandfor some time; an excellent fit with our existing estate; and significantpotential to increase the units' profitability with the Paddy Power brand,product and customer service. We have been pleased with the trading of theunits since acquisition. The 18 additional shops trading in 2007 took our total Irish estate to 178 as at31 December 2007. The estate is very well invested with over 88% of shops newlyopening or redeveloped within the last 5 years. In 2007 nine units wererefurbished (seven refits and two relocations). The significant programme ofredevelopment during 2003 to 2006, combined with the use of high quality andwell wearing materials, allowed us to maintain the quality of the estate in 2007with more modest redevelopment spending. (ii) UK Retail •m 2007 2006 % Change Amounts staked 171.5 129.9 +32%Over-the-counter gross win 20.2 15.5 +30%Gross win % 12.6% 12.6%Machine gross win* 10.8 6.9 +58%Total gross win* 31.0 22.4 +39%Gross profit 25.8 18.0 +43%Operating costs (25.5) (24.0) +6%Trading profit / (loss) 0.3 (6.0) n/aProvision for shop closure costs (1.2) - n/aOperating loss (0.9) (6.0) n/aShops at year end 58 58 - (*Machine gross win above excludes VAT ) UK Retail achieved its first trading profit in 2007, generating €0.3m prior to aprovision for shop closure costs of €1.2m. This compares to ongoing lossessince the initial openings in 2002 and a loss of €6.0m in 2006. We announced in2006 that we would prioritise enhancing the performance of our existing estate,rather than further shop openings, in the period prior to deregulation of the UKmarket in September 2007. As a result, we implemented a range of initiatives toincrease revenues and reduce costs which came to fruition in 2007 resulting in aonce off step change increase in profitability. From a revenue perspective, turnover grew by 32% to €171m. Gross win growth of39% to €31m was comprised of 58% growth in gaming machine gross win to €10.8m,and 30% growth in over-the-counter ('OTC') gross win to €20.2m. Like-for-likegross win grew by 22%, with OTC growth of 12% and machine growth of 46%. Therewere 232 gaming machines installed as at 31 December 2007, an increase of 3%compared to 31 December 2006. The average gross win per machine per weekincluding VAT was £725, an increase of 28% compared to £565 in 2006. While thesmoking ban introduced in England in July had a negative effect on machine grosswin, this was subsequently offset by the implementation of the Gambling Act inSeptember which allowed for longer shop opening hours and higher payout and morevaried content on machines. The longer shop opening hours resulted in 8% moreopening hours in 2007 compared to 2006, with a further 6% increase in openinghours expected in a full year. An aggressive review of the cost base of our UK Retail estate deliveredsubstantial savings in 2007 where, amongst other things, we successfullyleveraged the growth in our estate and the increased levels of activity withineach shop to achieve economies. Excluding the shop closure provision of €1.2m,operating cost growth was restricted to 6%, despite a 15% increase in theaverage number of shops and a 4% increase in costs due to extended eveningopening hours and the imposition of Amusement Machine License Duty. The shopclosure provision relates to two specific units, one of which has already ceasedtrading. This progress on costs and revenues has resulted in each of the group of shopswe opened in the four years 2003 to 2006 achieving an EBIT positive result in2007. The overall EBIT of the shop estate was €4.0m, before central overheadsof €3.7m, comprising the London head office and an allocation of central costs.From a cashflow perspective, the shop estate before central overheads achievedEBITDA of €8.1m or €139K per shop. The shop depreciation charge of €4.1mreflects a historical capital cost per new shop of over €0.5m. The removal ofthe 'demand test' for new openings within the Gambling Act gives us importantadditional flexibility in the format and size of our new shops, as well asreducing legal expenses, thereby giving an opportunity to reduce the capitalcost of new shops. Given the marked improvement in the performance of the UK estate, together withthe improved regulatory environment for shop opening, we conducted a detailedreview of the potential for expansion in other UK cities last year. The reviewleveraged our experience of what drives the performance of our best shops andcomprehensive local area profiles to produce a shortlist of cities. A rigorousinvestigation of this shortlist was completed including numerous shop visits,market research and site assessments, to test and refine our financialprojections. Based on the results of this work, in addition to opening furthershops in London, we will also open shops in Manchester and Glasgow this year andexpect to at least double the size of the estate over the next three years. Weexpect new shops opened to be loss-making initially with up-front central costsalso arising from the appropriate investment in a local office infrastructure inboth Manchester and Glasgow. The Non Retail Division•m 2007 2006 % Change Sportsbook gross win % 9.2% 7.9%Divisional operating profit 38.4 29.4 +30% The Non Retail division comprises online betting and gaming and telephonebetting. In 2007, we added a sports risk management service to the sportsbooktargeting companies with exposure to sporting results from marketing or playerbonus arrangements. Operating profit from the division increased by 30% to€38.4m, comprising €32.0m from the online channel, an increase of 36%, and €6.4mfrom the telephone channel, an increase of 7%. Sportsbook turnover within the Non Retail division is broadly an even mix fromIrish and UK based customers. This influenced the average gross win percentagein 2007 of 9.2%, with an exceptionally high percentage achieved from Irishcustomers, partially diluted by a lower percentage in line with expectationsfrom UK customers. This rate of 9.2% in 2007 compares to an expected mid-pointfor the division of 8.0% and a rate in 2006 of 7.9%. As a result of tax developments that became effective last September, we saved€1.8m in betting tax within the Non Retail division in 2007. Assuming acontinuation of the new tax situation, the impact of these changes in a fullyear based on 2007 levels of activity would be approximately €5m, therebyincreasing Non Retail gross profit by approximately another €3.2m. (i) The Online Channel •m 2007 2006 % Change Amounts staked 629.7 525.4 +20%Sportsbook gross win 54.1 39.1 +38%Sportsbook gross win % 9.2% 7.9%Gaming gross win 40.7 28.3 +44%Total gross win 94.8 67.4 +41%Gross profit 75.4 51.7 +46%Operating costs (43.4) (28.3) +53%Operating profit 32.0 23.4 +36% The online channel continues to be characterised by strong growth, combined witha significant level of investment to drive future growth. Operating profitincreased by 36% or €8.6m in 2007, notwithstanding investments of approximately€6m made to expand online activities into new geographies through the German andSpanish language betting businesses, and into new product markets such as bingoand financial spread betting. The major drivers of the total €15.1m increase inoperating costs were: - The launch of new businesses and expansion of businesses recently launched;- Investment in people to drive further development and growth;- Volume driven promotional spend and marketing spend; and- Growth in variable costs due to increased activity levels. Customer numbers in the online channel continued to grow strongly with a 32%increase at the end of 2007 compared to 2006. The growing customer base hasalso demonstrated a strong propensity towards multi product usage, highlightingthe importance of Paddy Power's broad and expanding product offering. Wecontinue to invest in people and technology to optimise our online customeracquisition, through both affiliate and non-affiliate sources, and our customerretention. For example, we added our newly developed affiliate managementsystem to paddypower.com during the year, automating the process for other website operators to promote our products on their websites. An Irish generalelection micro site also attracted political punters and media to our site andgave them a taste of Paddy Power early payouts when we paid out on Bertie Ahernto lead the incoming government before the count commenced. Online Channel Active Customers 31 December 2007 31 December 2006 % Change Ireland and Rest Of World 57,852 42,735 +35%UK 87,723 67,380 +30%Total 145,575 110,115 +32% Online Customers Product Usage 31 December 2007 31 December 2006 % Change Sportsbook only 80,578 60,811 +33%Gaming only 29,957 25,885 +16%Multi product customers 35,040 23,419 +50% Total 145,575 110,115 +32% (Active customers are defined as those who have bet in the last three months) (a) Sportsbook The amounts staked on the online sportsbook increased by 18% to €589m - thanksin no small part to the Football Association of Ireland being unable to appointa new manager leading to one of the most open contests since an Anna NicoleSmith paternity test. Within this turnover increase, bet volumes grew 24% to20.0m while the average bet value declined by 4% to €29.40, affected somewhat bya higher average gross win percentage. Gross win in the sportsbook increased by38% to €54.1m, helped by a 9.2% gross win percentage as compared to 7.9% in thecomparative period and our mid-point expectation of 8.0%. Sports punters benefited from a range of refunds and early payouts. Followingthe disappointment for Irish rugby backers of the team's last minute defeat toFrance, we reacted with a high profile early payout on bets on Ireland to beatEngland and win the Triple Crown, the day before the historic encounter withEngland at Croke Park, and two weeks before the trip to Murrayfield. Equally,we refunded backers of Lewis Hamilton following concerns that team orders costhim victory at his maiden Monaco Grand Prix. While England's failure to secureat least a draw against Croatia and qualify for Euro 2008 was a financialdisappointment for us, we took some of the financial sting out of it forcustomers who took advantage of our 'Cro-tastrophy' Money-Back Special - moneyslipping out to hurting punters like a tamely struck football through ScottCarson's fingers. Our trademark product innovation continues to give more choice to the customerwith over 80 new markets added in 2007. Highlights included horse racingbetting-in-running for all races on terrestrial TV, Asian and alternative Asianhandicap markets (don't ask!) in soccer and total tries and pointsbetting-in-running markets for rugby and gaelic football. Despite the recent German legislation, we remain encouraged by prospects in themedium term for expansion in continental Europe. We developed our knowledge,product offering and technology significantly through experience with the Germanlanguage site. The Spanish language online betting site we launched in Augustis performing in line with expectations. Our commitment to a fully localisedoffering, combined with a Paddy Power approach, was demonstrated by ourintroduction of the world's first bull fighting betting markets. Thesebusinesses represent investments for the medium term, as we tackle thesignificant challenge of attempting to replicate our successful penetration ofthe UK online market, in the face of regulatory, competitive and culturalhurdles. (b) Gaming Our online channel generates gaming revenues from casino, games, poker, bingoand financial spread betting. Revenue from these sources, representing theoperator's 'hold' or commission income, increased by 44% to €40.7m. This wasdriven by a very strong performance in Casino and Games, aided by particularlystrong growth in Poker in the first quarter and all gaming in the summer withthe absence of the distractions for players in 2007 of the World Cup andsunshine! While standing out from the pack in online Casino and Games is particularlychallenging, their revenue growth last year highlights what can be achieved withthe Paddy Power combination of breadth and depth of product, brand, customerservice and technology expertise. In 2007, these capabilities were used todeliver a wide and expanded selection of quality games for customers includingnew big brand games such as 'Monopoly', 'Deal Or No Deal' and 'MegaJackpots'(the world's largest seeded network progressive game with a £1.5 millionjackpot); a redesign and upgrade to the Games website to improve navigation,download times and promotion of the expanded product range; and highly effectivecustomer service, segmentation and cross selling activity. During March 2007, we migrated our poker customers to another network, Playtech,which had acquired our supplier. We subsequently implemented a range ofinitiatives to counter the negative impact of the change in software and theloss of liquidity from high staking customers of other members of the previousnetwork, both of which adversely affected yield per player. These initiativesincluded leveraging relative strengths of the new software such as theavailability of side card games; focussing hard on our normal growth drivers tooffset the peak in customer churn at migration; and advancing software changeswith the supplier to improve the customer experience, where work is stillcontinuing. These initiatives had a positive impact but were hampered by anaverage 8% depreciation in the US dollar relative to the Euro in 2007 comparedto 2006, online poker being generally played in dollars even on sites like ourswithout US resident players. While the poker business therefore faced newchallenges last year, we have made progress since the migration and ourcommitment is underlined by our sponsorship of the Irish Open poker tournament.The 2007 event set a further landmark as Europe's largest ever tournament withover 700 players and Paddy Power is guaranteeing the 2008 event with a €3million prize fund, an additional €1 million over 2007. Bingo increased its contribution to revenue benefiting from significant earlygrowth in the market and a gradually increasing level of investment. InSeptember, the growth in our liquidity enabled us to transition to a standaloneplatform supplied by Parlay. This has given us greater independence to buildcommunity, offer value and innovate, consistent with core Paddy Power values.In December, we also invested in a billboard advertising campaign for bingo,playing on the fact that 80% of the industry's online bingo players arereportedly female. We used the strap line 'where have all the women gone?'discovering in the process that a picture of a man's naked 'breast' is now alsoliable to be censored - I guess that's equality for you. We launched paddypowertrader.com, an online financial spread betting business,in July. Paddy Power Trader markets spread betting opportunities on equities,commodities, currencies and indices with a differentiating emphasis on educationand, of course, entertainment giving the customer the roller-coaster excitementexperience of investing in Northern Rock with the added bonus of the chance ofseeing their money again. We are satisfied with the initial performance andincreased our level of investment in this attractive market with a print mediaadvertising campaign in January. (ii) The Telephone Channel •m 2007 2006 % Change Amounts staked 296.6 306.6 -3%Gross win 27.0 24.5 +10%Gross win % 9.1% 8.0%Gross profit 24.8 22.4 +11%Operating costs (18.4) (16.4) +12%Operating profit 6.4 6.0 +7% Active customers in the telephone channel increased by 10% in full year 2007compared to 2006 and the average stake per bet was broadly unchanged at €102.52. However bet volumes were 3% lower at 2.9m. This resulted overall in a 3%reduction in the amounts staked driven by: - Negative recycling as a result of the high gross win percentage in the first half of the year (10.1% compared to 8.0% in the comparable period); - A reduction in betting events due to the absence of the football World Cup and an increase in cancelled racing in the second half of the year; - Increased net migration of customer spending from our telephone to our online channel; and - Continued competition in the market. Profitable growth continues to be the priority within the telephone channel and,despite a tough comparative following the 65% increase in operating profitachieved in 2006, we were pleased to achieve growth in operating profit of 7% in2007. Telephone Channel Active Customers 2007 2006 % Change Ireland and Rest Of World 11,417 11,048 +3%UK 10,064 8,923 +13%Total 21,481 19,971 +8% (Active customers are defined as those who have bet in the last three months) People Our people are pivotal to everything we do and we are fortunate to have such arange of talented people that epitomise our devotion to customer service, ourdedication to product excellence and our brand values of 'fun, fair andfriendly'. We have been investing heavily in recruitment and the average numberemployed in the Group during 2007 increased by 9% to 1,536. The additionalpeople employed augment teams in our growing existing businesses and thosedeveloping our portfolio of newer businesses. During 2007 we also introducedthe workwithpaddy.com site to showcase working life and job opportunities atPaddy Power. Once employees are on board, we believe in developing people andgiving talented individuals the best informal and formal training in theindustry. Eight out of ten senior managers at Paddy Power have grown throughthe ranks, (the other two of the ten having stumbled into the wrong office onemorning, liked what they saw, sobered up and stayed). We also want people tohave a longer term stake in the Group's performance and have introduced schemesto encourage share ownership amongst all employees and to retain key staff. Marketing Needless to say, we take our business, and growing and investing in it, veryseriously. But we're committed to never letting this driven, analytical anddisciplined aspect of Paddy Power overrule what remains our greatest asset andsource of difference - our brand. Our brand - and brand values of fun, occasional irreverence, and putting thecustomer first - differentiates us from the rest of the pack, and wecontinuously invest in it to stay ahead. We apply these values in numerous waysto give something extra to customers such as the 50,000 bottles of branded waterwe gave away at the Galway races. You couldn't drink tap water in Galway Cityduring the races because it was contaminated with......well suffice to say ourbottles were branded 'free refreshing natural spring water - no s**t!' Our traditional racing and sports sponsorship deals, also received a new stablemate in 2007 with our sponsorship of the inaugural Ted Fest - a weekend of feck,arse and girls for Father Ted aficionados on Inis Mor. Great fun, and great 'onbrand' cost effective marketing, like the many examples referenced in thisreport. Trading & Risk Management Trading and risk management is pivotal to our business and we have continuouslyinvested to build a function that can maintain a leadership position in theindustry. Not only does it give us better management of the volatility inherentwith sporting results, but also superior product and operational efficiency. Insampled high profile soccer matches, we actually increased our leadershipposition in the number of markets offered from the position a year earlier. Wehad introduced a further seven betting-in-running markets while our competitorson average had withdrawn one such market. This highlights the necessity forabsolute operational efficiency in order to profitably introduce incrementalbetting markets. We now provide betting-in-running for pretty much every soccergame for which the UK or Irish punter can get TV pictures - that's over 100matches a week during the Premiership. Racing product also stays ahead of thecompetition. For example we offer betting-without-the-favourite on all UKraces, a product our competitors only offer on a rare ad-hoc basis. Thisculture of innovation also facilitates cross fertilisation of ideas with forinstance the 'insure bet' product we introduced for horse racing (with thepunter getting refunded if his horse is second) now extended to football, rugbyand golf. This range of product is not merely a source of turnover but also asource of competitive advantage and a barrier to any new entrant consideringentering the market. Taxation The corporation tax charge for 2007 was €13.0m, an effective tax rate of 17.2%,compared to 17.0% in 2006. No corporation tax is currently payable in the UKdue to tax losses. A deferred tax asset has not been recognised in respect ofaccumulated UK losses given the expected losses from the planned initialexpansion into new cities. The Group's effective tax rate is above the standardrate of Irish corporation tax due to the impact of non-deductible expenses andpassive interest income which is taxed above the standard rate. Cash Flow and Cash Balances Cash balances at 31 December 2007 were €87.9m compared to €87.1m at 31 December2006. This included cash balances held on behalf of customers of €15.3mcompared to €13.4m at 31 December 2006. Net cash generated from operatingactivities was €97.5m in 2007 compared to €67.7m in 2006, an increase of 44% or€29.8m. This was driven by operating profit growth of 52% or €24.5m. Capitalexpenditure on tangible and intangible assets was €15.4m, comprising primarilythe organic opening and upgrading of retail outlets. Additional capitalexpenditure of €5.4m was incurred on purchase consideration and transactionexpenses for the acquisition of eight shops. Cash returns to shareholders were€73.7m, an increase of €62.5m over 2006 driven by share buybacks of €54.2m. Foreign Exchange Risk and Impact of Sterling Weakness The significant turnaround in UK Retail and Non Retail's increased profits fromUK customers in 2007 means that net sterling denominated income now representsapproximately half of Group EBIT. An average sterling euro exchange rate for2008 in line with the current rate of approximately 0.76 - a 10% depreciationcompared to last year's average rate of approximately 0.68 - would have anegative impact on Group operating profit of approximately €4m. From a cashflowperspective, this is partially offset by the Group's need for sterling forcapital expenditure as it expands in the UK, with in turn lower futuredepreciation costs. A similar but significantly smaller currency exposure alsoarises in relation to any depreciation in the US dollar against the euro as aresult of poker activity being transacted in US dollars. Group policy allowsthe Group to hedge foreign exchange exposure. At the year end, no foreignexchange contracts were open. Patrick Kennedy Jack MasseyChief Executive Finance Director 29 February 2008 CONSOLIDATED INCOME STATEMENTYear ended 31 December 2007 Before Exceptional exceptional item item (Note 5) Total Note 2007 2006 2006 2006 •'000 •'000 •'000 •'000 Amounts staked by customers 2,027,777 1,795,090 - 1,795,090 Continuing OperationsIncome 3 278,952 218,706 - 218,706 Direct betting costs 4 (36,534) (35,090) - (35,090)Gross profit 242,418 183,616 - 183,616 Employee expenses (78,890) (64,227) - (64,227)Property expenses (23,403) (21,174) - (21,174)Marketing expenses (23,705) (17,309) - (17,309)Technology and communications (13,685) (11,537) - (11,537)Depreciation and amortisation (20,848) (15,512) - (15,512)Other expenses, net (9,781) (8,395) 2,098 (6,297)Total operating expenses (170,312) (138,154) 2,098 (136,056) Operating profit 72,106 45,462 2,098 47,560 Financial income 3,722 2,139 - 2,139 Profit before tax 75,828 47,601 2,098 49,699 Income tax expense 6 (13,050) (8,033) (421) (8,454)Profit for the year from continuingoperations - all attributable toequity holders of the Company 62,778 39,568 1,677 41,245 Earnings per shareBasic 7 €1.274 €0.819Diluted 7 €1.252 €0.811 The profit for the year is entirely attributable to equity holders of theCompany. Notes 1 to 9 form part of these consolidated financial statements. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEYear ended 31 December 2007 2007 2006 •'000 •'000 Profit for the year 62,778 41,245Foreign exchange translation difference (1) 1Total recognised income and expense 62,777 41,246 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. CONSOLIDATED BALANCE SHEETAs at 31 December 2007 31 December 2007 31 December 2006 •'000 •'000AssetsProperty, plant and equipment 69,432 76,240Intangible assets 9,947 9,260Goodwill 5,473 1,880Deferred tax assets 364 195 Total non current assets 85,216 87,575 Trade and other receivables 4,206 4,203Cash and cash equivalents 87,885 87,061 Total current assets 92,091 91,264 Total assets 177,307 178,839 EquityIssued capital 4,923 5,124Share premium 10,819 10,163Treasury shares (5,975) -Shares held by long term incentive plan trust (13,089) (8,137)Other reserves 11,149 6,536Retained earnings 109,535 114,445 Total equity 117,362 128,131 LiabilitiesTrade and other payables 51,850 45,016Derivative financial instruments - sports bettingopen positions 3,556 2,848Current tax payable 667 1,568 Total current liabilities 56,073 49,432 Trade and other payables 3,685 1,247Derivative financial instruments - sports bettingopen positions 187 29 Total non current liabilities 3,872 1,276 Total liabilities 59,945 50,708 Total equity and liabilities 177,307 178,839 Notes 1 to 9 form part of these consolidated financial statements. CONSOLIDATED CASH FLOW STATEMENTYear ended 31 December 2007 2007 2006 •'000 •'000Cash flows from operating activitiesProfit before tax 75,828 49,699Financial income (3,722) (2,139)Depreciation and amortisation 20,848 15,512Cost of employee share-based payments 6,216 3,184Loss / (gain) on disposal of property, plant and equipmentand intangible assets 211 (1,183)Cash from operations before changes in working capital 99,381 65,073Decrease / (increase) in trade and other receivables 61 (2,013)Increase in trade and other payables 12,251 13,209Cash generated from operations 111,693 76,269Income taxes paid (14,144) (8,526)Net cash from operating activities 97,549 67,743 Cash flows from investing activitiesPurchase of property, plant and equipment (12,466) (17,855)Purchase of intangible assets (2,945) (7,921)Purchase of businesses (5,415) -Proceeds from disposal of property, plant and equipment andintangible assets 184 3,028Interest received 3,712 2,084Net cash used in investing activities (16,930) (20,664) Cash flows from financing activitiesProceeds from the issue of new shares 669 2,699Purchase of treasury shares (54,242) -Purchase of shares by long term incentive plan trust (6,715) (3,742)Dividends paid (19,507) (11,293)Net cash used in financing activities (79,795) (12,336) Net increase in cash and cash equivalents 824 34,743 Cash and cash equivalents at start of year 87,061 52,318 Cash and cash equivalents at end of year 87,885 87,061 Notes 1 to 9 form part of these consolidated financial statements. 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 online interactive bettingservices ('paddypower.com') and telephone betting ('Dial-a-Bet'). The Groupalso provides online gaming services through 'paddypower.com', 'paddypowerpoker.com', 'paddypowercasino.com' and 'paddypowerbingo.com', andfinancial spread betting services through 'paddypowertrader.com'. It providesthese services principally 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 2007 comprise the financial statements of the Company and itssubsidiary undertakings and were authorised for issue by the Board of Directorson 29 February 2008. 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 derivative financialinstruments, and certain share-based payments, both of which are stated at fairvalue or grant date fair value, respectively. The consolidated financialstatements are presented in euro, the Company's functional currency, rounded tothe nearest thousand. 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 2007. The accounting policies set out below havebeen applied consistently by Group entities. The accounting policies applied in the preparation of these consolidatedfinancial statements have been applied consistently during the year and prioryear. 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 2007. 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: - IFRS 8, 'Operating segments' (effective for periods beginning on or after 1 January 2009). This standard replaces IAS 14, 'Segment Reporting'. The Directors are currently considering the impact of this standard on Group reporting. - IFRIC 11, IFRS 2 - 'Group and Treasury Share Transactions' (effective for periods beginning on or after 1 March 2007). This IFRIC is not expected to be material in terms of Group reporting. 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.In assessing control, potential voting rights that currently are exercisable aretaken into account. Intra-group balances and any unrealised gains and losses orincome and expenses arising from intra-group transactions are eliminated onconsolidation except to the extent that unrealised losses provide evidence ofimpairment. Judgements and estimates The preparation of financial statements in conformity with IFRSs requiresmanagement to make judgements, estimates and assumptions that affect theapplication of accounting policies and the reported amounts of assets,liabilities, income and expenses. Actual results may differ from theseestimates. Estimates and underlying assumptions are reviewed on an ongoing basis.Revisions to accounting estimates are recognised in the period in which theestimates are revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty andcritical judgements in applying accounting policies that have the mostsignificant effect on the amounts recognised in the financial statements isincluded in Note 9. Income 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. Income is stated exclusive of value-added taxes and certain freebets, promotions and bonuses. The Group's betting and gaming activities, with the exception of the peer topeer games on which commission income and tournament fees are earned, areclassified as derivative financial instruments. Income from retail, telephone and online sportsbook betting activitiesrepresents the net gain or loss from betting activities in the period plus thegain or loss on the revaluation of open positions at period end. Income from fixed odds games and the online casino represents net winnings ('customer drop'), being amounts staked net of customer winnings. Income from peer to peer games represents commission income ('rake') andtournament fees earned from games completed by the period end. These derivatives are recognised initially at fair value and subsequently atfair value through the income statement, within the income line as thisrepresents the Group's principal activity. Commission income earned is alsorecorded within income but is analysed separately in the notes to the accounts. The Group does not enter into any other derivative activities other than thosedescribed above. 3. Segment reporting The income, operating profit and net assets of the Group relate to the provisionof betting and gaming activities, substantially all of which are conducted inthe Republic of Ireland and the UK. Income for the years ended 31 December 2007 and 2006 is analysed as follows: 2007 2006 •'000 •'000 Income in respect of sportsbook and gaming activities 264,191 207,101Other commission revenue (included in non retail income) 14,761 11,605 Total income 278,952 218,706 As more fully described in our accounting policies, betting activities areconsidered to be derivative financial instruments as set out in IAS 39. Othercommission revenue is earned from peer to peer gaming and, as these activitiesdo not involve customers taking a direct position against the Group, it is notclassified as income from derivative financial instruments. (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 2007: Retail Non retail Other unallocated Total 31/12/07 31/12/07 31/12/07 31/12/07 •'000 •'000 •'000 •'000 Income 157,115 121,837 - 278,952Direct betting costs (14,880) (21,654) - (36,534)Gross profit 142,235 100,183 - 242,418Depreciation and amortisation (16,680) (4,148) (20) (20,848)Other operating costs (88,737) (51,587) (9,140) (149,464)Operating profit 36,818 44,448 (9,160) 72,106Financial income - - 3,722 3,722Profit before tax 36,818 44,448 (5,438) 75,828 Total assets 82,122 14,393 80,792 177,307Segment liabilities 20,389 23,771 15,785 59,945Capital expenditure 9,276 3,945 - 13,221 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 •'000 Income 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) 45,462Property gain 2,098 - - 2,098 Operating profit 20,338 33,723 (6,501) 47,560Financial income - - 2,139 2,139 Profit before tax 20,338 33,723 (4,362) 49,699 Total 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 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 principal 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 31/12/07 31/12/06 31/12/07 31/12/06 31/12/07 31/12/06 •'000 •'000 •'000 •'000 •'000 •'000 Income 188,407 148,462 90,545 70,244 278,952 218,706Segment assets 128,331 131,269 48,976 47,570 177,307 178,839Capital expenditure 11,787 14,369 1,434 12,476 13,221 26,845 2007 2006 •'000 •'000Amounts staked by customersRetail - Ireland 930,005 833,125 Retail - UK 171,497 129,936Retail 1,101,502 963,061Online 629,671 525,425Telephone 296,604 306,604 2,027,777 1,795,090IncomeRetail - Ireland 126,086 104,385Retail - UK 31,029 22,398Retail 157,115 126,783Online (including commission revenue) 94,794 67,404Telephone 27,043 24,519 278,952 218,706Gross profitRetail - Ireland 116,451 91,510Retail - UK 25,784 18,023Retail 142,235 109,533Online 75,394 51,731Telephone 24,789 22,352 242,418 183,616Operating profit before exceptional itemRetail - Ireland 34,607 22,025Retail - UK (904) (5,995)Retail 33,703 16,030Online 31,962 23,428Telephone 6,441 6,004 72,106 45,462 Further analysis of the business segments by channel is as follows: 4. Direct betting costs Direct betting costs comprise: 2007 2006 •'000 •'000 Betting taxes 18,263 12,895Software supplier costs 8,711 7,487Data rights 3,269 2,411Other direct betting costs 6,291 12,297 36,534 35,090 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 2007. 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 agreementsfor the provision of online casino, poker, 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 2007 2006 •'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 formed 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 atarm's length to a third party, simultaneously entering into a leasebackagreement at arm's length with that third party. 6. Income tax expense 2007 2006 •'000 •'000Recognised in the income statement:Current tax charge 13,336 8,536Prior year (over) / under provision (117) 789 13,219 9,325 Deferred tax (credit) (169) (403)Prior year (over) provision - (468) (Decrease) in deferred tax (169) (871) Total income tax expense in income statement 13,050 8,454 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: 2007 2006 •'000 •'000 Profit before tax 75,828 49,699 Tax on Group profit before tax at the standard Irishcorporation tax rate of 12.5% (2006: 12.5%) 12.5% 9,479 12.5% 6,212Depreciation on non-qualifying property, plant andequipment 2.1% 1,576 0.6% 285Betting duty 1.5% 1,165 1.1% 528Other differences 0.6% 475 0.4% 221Chargeable gains 0.0% - 0.3% 159Interest income taxable at the higher rates 0.6% 472 0.5% 260(Over) / under provision in prior year (0.1%) (117) 1.6% 789 Total income tax expense 17.2% 13,050 17.0% 8,454 No corporation tax is payable in the UK due to the availability of tax losses.A deferred tax asset of €2,646,000 (2006: €2,842,000) 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 Ireland, howeverthere will be a decrease in the UK corporation tax rate from 30% to 28% as andfrom 1 April 2008. 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: 2007 2006 Numerator in respect of basic and diluted earnings per share (•'000):Profit attributable to equity holders of the Company 62,778 41,245 Numerator in respect of adjusted earnings per share (•'000):Profit attributable to equity holders of the Company 62,778 41,245Less: Property gain after tax - (1,677) Profit for adjusted earnings per share calculation 62,778 39,568 Denominator in respect of basic earnings per share:Ordinary shares in issue at beginning of year 51,238,437 50,397,168Adjustments for weighted average number of: - ordinary shares issued during year 65,971 494,991 - ordinary shares purchased and cancelled or held in treasury (1,317,283) - - ordinary shares held by long term incentive plan trust (727,302) (547,905) Weighted average number of ordinary shares 49,259,823 50,344,254 Basic earnings per share €1.274 €0.819Adjusted earnings per share n/a €0.786 Denominator in respect of diluted earnings per share: Basic weighted average number of ordinary shares in issue duringyear 49,259,823 50,344,254Adjustments for dilutive effect of share option schemes,sharesave scheme, shares held by long term incentive plan trustand long term incentive plan Weighted average number of ordinary shares 871,785 501,021 50,131,608 50,845,275 Diluted earnings per share €1.252 €0.811Adjusted diluted earnings per share n/a €0.778 8. Events after the balance sheet date In respect of the current year, the directors propose that a final dividend of35.00c per share (2006: 22.77c per share) will be paid to shareholders on 23 May2008. 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 14 March 2008. The total estimated dividend to be paidamounts to €17,142,000 (2006: €11,665,000). 9. Accounting estimates and judgements Key sources of estimation uncertainty and critical accounting judgements inapplying the Group's accounting policies Goodwill of €5,473,000 (2006: €1,880,000) continues to be carried in the Groupbalance sheet as the directors believe that there has been no impairment in thefair value 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 €10,013,000 at31 December 2007 (2006: €5,613,000). 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 amounted to€3,743,000 at 31 December 2007 (2006: €2,877,000) and the Group considers sucharrangements to be derivative. The Group performs a revaluation of sportsbetting open positions at each balance sheet date. The revaluation takes intoaccount the expected probability of such open positions resulting in a gain orloss to the Group in the future, and is dependent on factors that cannot alwaysbe 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 for assuch. 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 2007 and 2006, all retail premises leasesqualify as operating leases. A potential deferred tax asset of €2,646,000 (2006: €2,842,000) relating to theUK retail business has not been recognised as of 31 December 2007. Managementcontinue to believe that there is considerable uncertainty as to the futureprofitability of the UK retail business and the timing of that profitability dueto future business expansion plans. Management therefore deem it prudent not torecognise the potential deferred tax asset as at 31 December 2007. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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