5th Mar 2008 07:01
PartyGaming Plc05 March 2008 5 March 2008 PartyGaming Plc Preliminary announcement of results for the year ended 31 December 2007 Financial SummaryUS$ million 2007 2006Net revenue# Poker 295.0 268.4 Casino 146.7 51.0 Sports Betting 16.1 5.6 Net revenue before non-recurring item 457.8 325.0Non-recurring adjustment to net revenue 18.2 -Net revenue - Continuing operations 476.0 325.0Discontinued operations## - 779.9Total net revenue 476.0 1,104.9 Clean EBITDA^ Poker 62.4 39.1 Casino 43.6 15.9 Sports Betting 3.4 (1.6) Unallocated Corporate 2.3 (2.5)Clean EBITDA - Continuing operations* 111.7 50.9Discontinued operations## (24.7) 499.8Total Clean EBITDA 87.0 550.7 Operating profit (loss) - Continuing 5.3 (77.6)Profit (loss) before tax - Continuing 6.7 (77.4)Profit (loss) after tax - Continuing 13.9 (83.4) Continuing Basic EPS (cents) 0.3 (2.2)Continuing Clean EPS* (cents) 1.6 0.4 Highlights • Continuing net revenue before non-recurring adjustment torevenue up 41% to $457.8m (2006: $325.0m) reflecting strong growth in Europe;total revenue down 57% to $476.0m (2006:$1,104.9m) • Continuing Clean EBITDA* up 119% to $111.7m (2006: $50.9m);Discontinued Clean EBITDA of Loss: $24.7m (2006 Profit: $499.8m); total CleanEBITDA of $87.0m (2006: $550.7m) • Continuing operating profit of $5.3m (2006: operating loss$77.6m); total operating loss $20.7m (2006: profit $138.7m) • Continuing Clean EPS* of 1.6 cents (2006: 0.4 cents); totalClean EPS of 1.0 cent (2006: 12.9 cents); Continuing Basic EPS of 0.3 cents(2006: loss per share of 2.2 cents); total Basic EPS of 1.0 cent (2006: 3.4cents) • Current trading: Clean EBITDA in line with expectations albeit fromlower than expected revenue growth. Group remains confident about full yearoutlook # During 2007 $9.6m has been derived from inactive fees and similar itemsincluded in net revenue. In prior years, these were netted against operatingcosts as they were not material. ## Operations located outside of the US but which relate to US customers and wereterminated following the enactment of the Unlawful Internet Gambling EnforcementAct ('UIGEA') on 13 October 2006 ^ Prior year comparatives have been restated to reflect a change in theallocation of marketing costs between business segments * EBITDA / EPS before reorganisation costs, non-recurring adjustment to revenue,charges relating to share-based payments and release of tax provision (seereconciliation of Clean EBITDA to operating profit below). Commenting on today's results announcement, Michael Jackson, PartyGamingChairman said: "During the past year we have succeeded in growing revenue and Clean EBITDA andtransforming ourselves into a more broadly based and internationally focusedbusiness. These results are a testament to our chosen business strategy, keepus at the forefront of the industry and provide us with a robust and scaleableplatform for growth. This has all been achieved whilst adopting a conservative,but we believe responsible view of the regulatory environment. Whilst ourapproach means that we continue to forego revenue opportunities in theshort-term, we believe that such revenue streams are at risk and we remainconfident that our chosen strategy will generate superior returns forshareholders over the long-term. We have continued to build and leverage theGroup's franchise by refreshing and expanding our suite of games as well asthrough a series of alliances with 'blue chip' companies. These initiatives,together with encouraging regulatory developments at the European Commissionlevel in recent months and a solid start to the current financial year, provideus with confidence for 2008." "Whilst saddened that Mitch Garber, Group CEO, has decided not to extend hiscontract beyond May 2009, as set out in a separate press release today, theBoard respects his decision to return to North America and is highly confidentof being able to secure a replacement and manage a smooth transition well beforehis departure. Mitch has been instrumental in refocusing and rebuilding thebusiness and delivering strong financial results in challenging circumstances.He will remain as CEO until a successor is found and has also agreed to remainavailable thereafter to ensure an orderly and seamless transition." Contacts:PartyGaming Plc On 5 March 2008: +44 (0)20 7831 3113Peter Reynolds, Director of Investor RelationsJohn Shepherd, Director of Corporate Communications Financial Dynamics +44 (0)20 7831 3113Edward Bridges / Juliet Clarke Analyst meeting, webcast, dial-in and conference call details: Wednesday 5 March2008 There will be a simultaneous webcast and dial-in broadcast of a presentation tobe made by Mitch Garber, Chief Executive Officer, and Martin Weigold, GroupFinance Director at 9.30am GMT. To access the live webcast, please visit theGroup website (www.partygaming.com). The slide presentation and a replay of thewebcast will be available on the Group's website later today. In addition,there will be an interactive conference call for international investors andanalysts starting at 2.30pm GMT, details of which are set out below. An interview with Mitch Garber, Chief Executive Officer, and Martin Weigold,Group Finance Director, in video/audio and text will also be available from7.00am GMT on 5 March 2008 on: http://www.partygaming.com and on http://www.cantos.com. Dial-in details to listen to the analyst presentation on Wednesday 5 March 20089.20 am Please call +44 (0)20 8609 05829.30 am Meeting starts A recording of the meeting will be available for a period of seven days from 5March 2008. To access the recording please dial the following replay telephonenumber: UK Replay telephone number: +44 (0)20 8609 0289UK Replay passcode: 206049 Conference call: Wednesday 5 March 2008 For international analysts and investors there will also be an opportunity toput questions to Mitch Garber, Chief Executive Officer, and Martin Weigold,Group Finance Director, by way of a conference call. The details of the callare as follows: 2.20 pm Please call +44 (0)1452 562 815 (UK)2.30 pm Conference call starts A recording of the conference call will be available for a period of seven daysfrom 5 March 2008. To access the recording please dial the following replaytelephone number: UK Replay telephone number +44 (0) 1452 550 000UK Replay passcode: 36141775 All times are GMT. Business Review Introduction The Group's financial performance in 2007 continued to be impacted by thepassing of the Unlawful Internet Gambling Enforcement Act (the "UIGEA") in theUnited States and the Group's decision to terminate immediately all real moneygames to customers in the US upon its enactment on 13 October 2006. Despite theimpact of the UIGEA on the Group's operations, PartyGaming's Continuing non-USfacing business grew strongly in 2007. Results - Group (including Discontinued operations) Continuing operations grew revenue, before a non-recurring item, by 41% to$457.8m reflecting strong growth, particularly in Europe. Total revenue was down57% to $476.0m (2006: $1,104.9m) due to the termination of all real money gamesto players based in the US from 13 October 2006. Total administrative expenses fell by 13% to $304.4m, as a result of reducedcosts following the enactment of the UIGEA, including a 41% reduction in theworkforce. Total distribution expenses fell by 46% to $195.3m. This reflected lower mediaspend as well as substantially reduced payments to affiliates in respect ofplayers located in the US. These savings were partially offset by increasedmarketing spend in non-US markets and an increase in webhosting and technicalservices costs. Discontinued operations incurred a loss at the Clean EBITDA level of $24.7m(2006: Clean EBITDA of $499.8m) due to certain costs associated with thetermination of all real money games to customers located in the US. The primarycomponents of these costs related to legal costs associated with the ongoingdiscussions with the Department of Justice ("DoJ") in the US, part of which maybe recoverable under the Group's insurance arrangements, and the write-off ofcommitted marketing expenditure relating to contracts entered into before theenactment of the UIGEA for which no benefit to the Group arose. Taking into account all of these factors, total operating profit moved into aloss of $20.7m and the Group made a loss before tax of $19.3m (2006: profit of$138.9m). The fall in profit after tax to $41.6m (2006: $128.4m) was mitigatedby a tax credit arising from a reduction in the provision for corporate incometax (see note 7). Total Clean EBITDA fell by 84% to $87.0m (2006: $550.7m) reflecting the loss ofUS revenue versus the prior year. Total Clean EPS fell from 12.9 cents to 1.0cent per share and Total Basic EPS fell to 1.0 cent (2006: 3.4 cents). The table below provides a reconciliation of the movements between Clean EBITDAand operating profit after including Discontinued operations. Reconciliation of Clean EBITDA to operating profit Year to 31 December 2007 2006 $m $mClean EBITDA* - Continuing operations 111.7 50.9Depreciation (23.6) (20.3)Amortisation (21.7) (10.1)Share-based payments (79.3) (90.9)Non-recurring adjustment to revenue 18.2 -Operating profit (loss) from Continuing operationsbefore reorganisation costs 5.3 (70.4)Operating (loss) profit from Discontinued operationsbefore reorganisation costs# (26.7) 459.5Operating (loss) profit before reorganisation costs (21.4) 389.1Reorganisation income (costs) 0.7 (250.4)Total operating (loss) profit (20.7) 138.7 Continuing Clean earnings per share* (cents) 1.6 0.4Continuing Basic earnings (loss) per share (cents) 0.3 (2.2)Total Clean earnings per share* (cents) 1.0 12.9Total Basic earnings per share (cents) 1.0 3.4 * EBITDA / EPS before reorganisation costs, non-recurring adjustment to revenue,charges relating to share-based payments and release of tax provision. #After charging share-based payments of $2.0m (2006: $22.3m) and depreciationand amortisation of $nil (2006: $18.0m) to Discontinued operations To provide a clearer picture of PartyGaming's Continuing operations and incompliance with relevant accounting standards, the financial results for both2007 and 2006 are for Continuing operations only (comprising revenues and costsassociated with customers located outside the US) with Discontinued operations(operations located outside of the US but which relate to customers in the USand were terminated following the enactment of the UIGEA on 13 October 2006)included as a single line in the income statement after profit (loss) after taxfrom Continuing operations. Full details of the consolidated performance ofContinuing and Discontinued operations are contained in the financialinformation and the accompanying notes. All references to financial performanceor key performance indicators throughout the remainder of this document refer tothe continuing non-US facing business only, unless otherwise stated. Results - Continuing operations The Continuing operations delivered a solid performance in 2007 with net revenueup 41% to $457.8m (2006: $325.0m). While this did include certainitems that had previously been netted from costs totalling $9.6m, like-for likegrowth was still 38% year-on-year. As a result of events occurring in thelatter part of 2007, there was a non-recurring reversal of a creditor in theGroup's balance sheet, the charge for which had historically been netted fromrevenue. As a result there has been a corresponding credit to 2007 revenue of$18.2m. This adjustment is non-cash and non-recurring in nature. All revenuefigures in the following segmental analysis represent net revenue before thebenefit of this non-recurring credit. Further details are provided in note 3 tothe financial information. Clean EBITDA from Continuing operations grew strongly in 2007, up by 119% overthe previous year to $111.7m (2006: $50.9m), driven by strong revenue growthacross all business segments. While Poker remains the Group's most importantindividual business segment in terms of revenue and profit, representing 64% ofContinuing revenues (2006: 83%) and 56% of Clean EBITDA (2006: 77%), the productsplit of the Group's revenue and EBITDA is becoming more broadly-based, in linewith our strategy. Operating profit before reorganisation costs increasedsubstantially over the prior year to $5.3m, up from a loss of $70.4m also due tothe strong growth in revenues across all business segments. PartyPoker continues to dominate the Group's poker business and in 2007 pokerrevenue grew by 10% to $295.0m (2006: $268.4m). This was a strong performancegiven a number of factors that impeded growth during the year, including themigration of a number of high value players to competitor sites that continue toaccept players based in the US, strong cross-selling of the Group's other gamingproducts to its poker customers, which consequently reduces the amount of timethey spend on poker, as well as the Group's decision to cease taking bets fromcustomers in certain jurisdictions following regulatory developments in thosemarkets. Clean EBITDA from poker increased by 60% to $62.4m (2006: $39.1m),driven by the growth in poker revenue, particularly in Europe. The casino business has again delivered a very strong performance in 2007 withrevenue growth up 188% to $146.7m (2006: $51.0m). This was driven by theacquisition of certain casino assets from EOL and IOG in January 2007 as well asa substantial improvement in the quality of the Group's PartyCasino software.Clean EBITDA increased strongly by 174% to $43.6m (2006: $15.9m). Sports Betting also grew strongly during the year with revenue up by 188% to$16.1m (2006: $5.6m) and Clean EBITDA of $3.4m (2006 loss of $1.6m). Thisreflected a full year contribution from Gamebookers which was acquired in August2006, as well as increased betting volumes following the launch ofPartyBets.com. The operational gearing inherent in the Group's business model meant that theGroup's Continuing Clean EBITDA margin increased from 15.7% in 2006 to 24.4% in2007. Operating profit from Continuing operations was $5.3m versus an operating lossof $70.4m the previous year reflecting the strong growth in Clean EBITDA, areduced share-based payments charge and a non-recurring adjustment to revenue of$18.2m, further details of which are set out in note 3 to the FinancialInformation. Regulation The dynamic and relatively nascent nature of the online gaming market means thateffective management of operational risk and regulatory compliance is animportant ongoing process for the Group. During 2007 there have been a numberof regulatory developments in some of the Group's major markets as well as inother territories, including the US. While PartyGaming no longer acceptsdeposits or bets from players located in the US, developments there continue tobe important because of their potential impact on the Group's longer-termprospects and because of the possible ramifications in other territories. Immediately upon the enactment of the UIGEA on 13 October 2006, PartyGamingstopped customers in the US from playing or making deposits on any of theGroup's real money sites. This is despite the fact that a number of otheronline gaming companies have chosen to continue to offer real money games tocustomers in the US. During 2007, legislative proposals were introduced in theUS that seek to move away from prohibition towards a properly regulatedframework for online gaming in the US under which operators would be licensed,regulated and taxed. However, the impending Presidential election in the US maymean that little, if any, progress will be made on reviewing these proposalsuntil after the election in November 2008 and therefore the prospects of successfor any of these measures remains uncertain. At the World Trade Organisation ("WTO"), the US legislative position on internetgambling was found to be in violation of US trade commitments and as a resultthe US was forced to give trade concessions in favour of Antigua and Barbuda.Separately, the US has withdrawn commitments previously given under the GeneralAgreement on Trade in Services ("GATS") and is currently in discussions with anumber of territories to determine what level of compensation should be given tothem in lieu of the withdrawal of their original commitment. On 4 June 2007 the Group announced that, in light of actions taken by US lawenforcement agencies following enactment of the UIGEA, it had initiateddiscussions with the United States Attorney's Office for the Southern Districtof New York. The Group is continuing to respond voluntarily to any requests forinformation issued by that office. The Group remains unable to assess thelikelihood of any particular outcome of these discussions but is activelypursuing a resolution as soon as practicable. While it is possible that aconclusion may be reached in the foreseeable future, the exact timing of such aconclusion remains uncertain. In Europe, the European Court of Justice issued its judgment in the Placanicacase, which deals with the compatibility of the Italian gambling legislationwith EU law and concluded that, inter alia, where the prohibition to offergambling services was found contrary to EU law, a Member State could not applycriminal sanctions to an activity which contravened this prohibition. A totalof ten Member States have now been formally notified by the European Commissionthat they are deemed to be in breach of European Community law, specificallyArticle 49 of the European Community Treaty. Of particular note have been thetwo most recent letters of formal notice ('LFN') sent by the European Commissionto Germany and Sweden. In Germany's case, the recently enacted State LotteryTreaty is believed to be in breach of Article 43 (freedom of establishment);Article 49 (the freedom to provide and receive services within the EU withoutdiscrimination on grounds of nationality); and Article 56 (the free movement ofcapital and payments across the EU). This LFN is also important because of itsbreadth - it encompasses not just online sports betting but all games of chanceon the internet. The LFN to Sweden is the first EU infringement actioninvolving online poker and is in addition to an existing infringement actionregarding sports betting. Several Member States, now including the Netherlandsand Greece, have also received reasoned opinions from the European Commissionexplaining why they are deemed to be in breach of European Community law.Following receipt of such an opinion, if the Member State fails to address theissues raised within a reasonable time and if no solution is forthcoming, theEuropean Commission may refer the matter to the European Court of Justice. Asia remains an exciting prospect for the Group which is why we continue tobuild local relationships with potential partners and are exploring a number ofstrategic alliances in the region. However, the prevailing regulatory regime inmost territories means that opportunities to replicate the Group's success inthe region are currently limited. Despite the challenges presented by this complex regulatory background, onlinegaming is increasingly recognised as being a well-established element within theglobal leisure economy, one that is enjoyed by millions of adults around theworld and one that is continuing to grow strongly. According to Global Bettingand Gaming Consultants ("GBGC")1, the online gaming market, excluding the US,grew by over 17% in 2007. GBGC estimates that the global online gaming market2excluding the US, is expected to grow from $7.4 billion in 2007 to approximately$13.9 billion in 2012 implying a compound annual growth rate of almost 14%.Whilst the withdrawal by all of the large listed online gaming companies fromthe US certainly had an impact, the GBGC data appears to show that the onlinegaming market in the US is alive and well (worth an estimated $4.2 billion in2007) and demonstrating that prohibition has simply driven customers in the USto less transparent online gaming operators that may be less likely to providethe protection afforded by publicly-listed and regulated companies. The Board continues to believe that the development of a modern regulatoryframework, like those in Gibraltar, Alderney and the UK is the most sensible wayforward. Online gaming is popular throughout the world and the market isexpected to continue to grow substantially. By combining excellent technologyand a balanced regulatory framework, it is possible to strike the right balancebetween providing adults with great entertainment in a safe and secure onlinegaming environment and ensuring that appropriate protections are put in place toprotect children and the vulnerable. 1GBGC - January 2008 2 Including poker, bingo, sports betting, casino but excluding lotteries andskill games Objectives and Strategy 2007 marked the Group's tenth anniversary as a business. It would be anunderstatement to say that there have been ups and downs during that period.One of our biggest challenges came in 2006 with the effective closure ofPartyGaming's then largest geographic market and the consequent loss ofapproximately three quarters of Group revenues overnight. But, rather thantriggering the collapse of our business, our response to the enactment of theUIGEA might actually be seen in future years as a defining moment in the Group'shistory. Despite losing the majority of our revenue, our business has not onlysurvived, it has thrived. This performance needs to be seen in context. Online gaming is a truly globaland dynamic market, one with a large number of operators. The barriers to entryare low but we believe that the barriers to success are high. It is also amarket that many governments are looking to restrict in order to protectindigenous monopolies. Although they may claim that the primary objective is toprotect the general public, this is something that in most cases is notconsistent with their stated gambling policy. These characteristics make for ahighly challenging business environment but we believe our business strategy andour approach to delivering that strategy are already bearing fruit, as evidencedby our financial results in 2007. Our strategy Despite the need to effectively repackage and re-launch our business, there hasbeen no change of strategy: we had already chosen a course that would withstandthe greatest of challenges. The Group's performance post-UIGEA is a testamentto the robust nature of the strategy. Revenue growth is at the heart of ourobjectives, but it can only be translated into long-term shareholder value ifdelivered at both acceptable cost and risk. Our business model comprises anumber of key revenue drivers but which essentially can be distilled down intothree elements: (i) the number of active players we have; (ii) how often theyplay; and (iii) the amount of revenue they generate each time they play. The Group's strategy is therefore focused on growing the key metrics whilstensuring that such growth is achieved at attractive margins and withinacceptable parameters of risk and a framework of legal and regulatorycompliance. The four individual business strategies that we have identified toachieve the long-term objectives are as follows: • Grow the player base • Localise the customer offer • Grow the product base • Act responsibly Grow the player base - PartyGaming has continued to deliver strong growth in itsactive player base by growing new player sign-ups and through improved trends inplayer retention. Whilst the popularity of online gaming is relatively low whencompared with the total for all types of gaming, it is one of the fastest areasof growth. Not all markets have the same growth potential. Differingregulatory approaches mean that PartyGaming has chosen not to accept customersfrom a large number of countries. In this context, the Group's continued growthin the number of active players is even more impressive. It has been achievedthrough the continued exploitation of traditional marketing channels, such asonline and offline marketing, as well as affiliates. In 2007, we added afurther channel through a series of business alliances with leading companiesaround the globe. Using their brands, products or media we hope to be able toexpand our reach even further. Mergers and acquisitions have also proven to bea helpful source of new customers, although such deals must first meet ourstrict financial and strategic criteria. Localise the customer offer - At the beginning of 2006, all of the Group'sonline games were conducted in one language (English) and one currency (USdollars). Today our Party-branded integrated systems platform offers websitesin up to 12 languages and also the opportunity to play games in US dollars,pounds sterling and euros. Reducing barriers for international customers helpsto improve the appeal of our games, as does the development of localisedpromotions on national sporting events. Broaden the product base - The Group already offers a full suite of the mostpopular games online, including poker, casino, bingo and sports betting.However, continuing to add new games and features is important for retainingplayers and maintaining the appeal of the customer offer. While we continue todevelop games in-house, the strength of the Group's operating platform, paymentstechnology and international marketing reach now means that the Group canlicense games and associated products from third parties at commerciallyattractive rates. Act responsibly - Being responsible is an essential cost of doing business andmaintaining our corporate reputation. Being the world's leading listed onlinegaming company requires more than just good systems and a snappy marketingcampaign. You need to instil trust and confidence, not just in your players,but also in business partners and regulators around the globe. Ensuring thatour players can have fun in a safe and secure environment is priority number onefor us. That means constantly looking at how we can improve standards ofresponsibility. Whilst the vast majority of our customers enjoy playing gameswith us, a small minority can find themselves in a position where gaming may beassuming too large a part of their lives. The recent prevalence study in the UKestimated that the proportion of the UK population that may have problems withtheir gambling was 0.6%1. A separate study by Harvard Medical School identifieda similar proportion of around 1% of a large sample of online betting customersthat displayed what may represent excessive gambling patterns2. While problemgambling appears, on the basis of the recent evidence, to be a small problem inrelative terms, the Group takes its responsibility in this area very seriouslyand continues to enhance its tools and processes to help players recognise thesigns of problem gaming and provide them with information about where they canget help. Just as important is ensuring that children are protected. Our real money gamesare for adults only and we have in place a rigorous process to verify theidentity and age of customers before they play. We also encourage parents andguardians to keep their own log-in and payment details confidential to preventpossible misuse by children. While such occurrences are rare, we are determinedto keep it that way. 1 The British Gambling Prevalence Survey 2007 - Wardle, Sproston, Orford, Erens,Griffiths,Constantine and Pigott 2 "Assessing the Playing Field - A prospective longitudinal study of internetsports gambling behaviour" - LaBrie, LaPlante, Nelson, Schumann and Shaffer -Harvard Medical School, Boston Business developments in 2007 2007 has been a year of transformation. In the aftermath of the UIGEA, therewas a need to focus on executing the four elements of the business strategy andon improving the balance of our business in terms of product, language andcurrency. This needed to happen as quickly as possible despite having to adaptto continuing shifts in the regulatory landscape. The Group's first full year'sperformance post-UIGEA is a testament to the resilience of the business and thestrength, skill and dedication of its management and employees. Grow the player base - 2007 saw the number of non-US unique active players reachover one million for the first time, a 53% increase over 2006. This wascertainly helped by the addition of over 683,000 new player sign-ups to thesystem, a 30% increase over the previous year, as well as improved playerretention initiatives. Of these new players, over 80% came from Europe, MiddleEast and Africa that continues to remain the Group's most important geographicregion. Localise the customer offer - this remains a priority and since the end of March2007 customers have been able to hold their accounts in a choice of currencynamely US dollars, pounds sterling or euros. Also in 2007 our PartyPokersoftware was launched in an additional seven languages namely French, Spanish,Portuguese, Russian, Swedish, Danish and Finnish. The design and implementationof an increasing number of locally tailored promotions was another keydevelopment during 2007. Broaden the product base - during the year PartyPoker introduced a number of newtournament structures such as "Heads-Up Rematch" and "Sit & Go Replay" as wellas a variety of new cash game features including higher limits and speed cashgames. PartyPoker.com received Gambling Online Magazine's Gold Award for thebest online poker tournaments in 2007, a recognition of some of the innovationsintroduced during the year. In Casino, a re-launched roulette on PartyCasino atthe end of the first half had a significant impact while the introduction of newslots and jackpot slots such as "Graveyard Bash" and "Mega Fortune Wheel" havealso been important drivers behind the year-on-year increase in gross revenueper day. The launch of a no-download flash version of PartyBingo means thatplayers can log on more easily and can enjoy this increasingly popular gamewithout having to download software onto their PC. In sports betting, through analliance with Sporting Index, we added a full UK horse racing service to therange of sports offered on PartyBets and Gamebookers, we also increased thenumber of live betting events offered. Act responsibly - the Group was delighted to have again been awarded a GamCarecertificate in June 2007 in recognition of our approach to and high standards ofresponsible gaming. The Group continues to raise the standards of its businesspractices and is one of the founding members of the European Gaming and BettingAssociation ("EGBA") that has established a demanding code of conduct that isbeing adopted by all of its members. For further information on the EGBA visitwww.egba.eu. The Group is also a member of the Remote Gambling Association ("RGA"). For further information on the RGA visit www.rga.eu.com. In the UK, theGroup is an active contributor to the Responsibility in Gambling Trust, GamCareand Gordon House. Business alliances - During 2007, the Group announced that it would be seekingto establish a number of alliances with blue chip organisations around the worldthat would complement the four pillars of the Group's strategy. We have madeexcellent progress having completed deals with ITV, The English Football League,Sporting Index, RTL and Paramount Pictures. The delivery of a white-labelgaming service for ITV was a major milestone for the Group with the introductionof Emmerdale Bingo, Friends Reunited Poker, ITV Casino, ITV Bets, ITV Bingo andITV Poker in the second half of 2007. The alliance has also led to thedevelopment of a number of branded slot machines such as "I'm a Celebrity Get MeOut Of Here", "X-Factor" and "Bullseye". The Group's alliance with the English Football League provides access to over2.5 million adults that are fans of over 70 football clubs and which can nowaccess both PartyPoker and PartyCasino via their football club's website. In Europe, the popularity of poker in Germany prompted RTL to launch a newGerman language website, dedicated to providing information and tips for itsviewers who enjoy playing the game. The new site, www.RTLPoker.de, containsexclusive links to PartyPoker.net, the Group's world leading online pokerschool. RTL is now co-promoting www.RTLPoker.de and www.PartyPoker.net via itsother websites and the German RTL television channel ("RTL TV"). Through an alliance with Sporting Index, the Group is now able to offer acomprehensive fixed odds horse racing product on both PartyBets and Gamebookers,increasing the quality and appeal of the Group's sports betting product anddrawing upon the considerable expertise of the team at Sporting Index. The use of strong consumer brands in slot machines is a strategy that has longbeen recognised as a particularly effective source of revenue and profit forland-based casino operators. The Group believes that a similar strategy canalso apply in the online world and has already established an alliance withParamount Pictures, the major Hollywood studio, to licence some of its mostrecognised brands. Under the terms of the exclusive licensing arrangement, theGroup will create a range of online slot machine games based on four of thestudio's blockbuster films - Top Gun, The Godfather, Saturday Night Fever andMission: Impossible. Versions of each of these new slot machines are expected tobe launched in PartyCasino during the first half of 2008. The Group hopes to announce further alliances in 2008 that will result in theaddition of a completely new business segment and several new games usingglobally-recognised consumer brands, as well as increased media promotion andadditional content for the Group's existing products and brands. The quality ofthe Group's marketing, systems and customer service have been instrumental insecuring the deals done to-date and continue to be a differentiating factor forthe Group. Each of the four elements of the Group's business strategy is being implementedby the three distinct areas of business operations: sales and player marketing,systems and product development and customer service. An update on developmentswithin each of these areas during 2007 is provided below. 1. Sales and player marketing Signing up new players and retaining them are key objectives given theirimportance for the Group's revenue model. The Group's marketing function isresponsible for supporting these activities and has delivered an excellentperformance in 2007. Over 683,700 new real money players were added in 2007 - a30% increase over the previous year. New players are driven to the Group'ssites through a number of different channels including direct marketing (bothonline and offline), affiliates, customer referrals (tell-a-friend) and throughour new alliances. During the first half of 2007, the Group's extensive affiliate network was amajor source of new player traffic, particularly in Europe. At the same timethere was also a large increase in the number of new players being signed up onCPA1 and hybrid2 deals that resulted in a sharp increase in affiliate expensesas a proportion of revenue during the first half of 2007. Having already addedover 403,000 new players in the first half, over the rest of the year the Groupsought to rebalance the mix of sign-ups by channel and also reduce theproportion of players being signed-up through affiliates on a CPA/hybrid basisversus a revenue share basis. This process also resulted in the Groupterminating relationships with a number of less profitable affiliates thatreduced the growth in new player sign-ups in the second half but is expected toimprove margins going forward. The net effect was that for the year as a whole,affiliate costs as a proportion of revenue were broadly flat versus the prioryear. An analysis of the growth in international sign-ups, unique activeplayers and consolidated active player days in each of the main geographicregions is provided below: New player sign-ups (000) 2007 2006 % increaseEMEA(1) 572.3 382.6 50%Americas (non-US) 77.8 102.2 (24%)Asia Pacific 33.6 42.4 (21%) ------ ------Total 683.7 527.2 30% ------ ------ Unique active players (000) 2007 2006 % increaseEMEA3 908.4 530.3 71%Americas (non-US) 179.8 162.3 11%Asia Pacific 57.4 56.4 2% ------ ------Total 1,145.6 749.0 53% ------ ------ Active player days (m) 2007 2006 % increaseEMEA3 22.2 11.3 96%Americas (non-US) 4.9 4.7 4%Asia Pacific 1.3 1.0 30% ------ ------Total 28.4 17.0 67% ------ ------ The total number of unique active players for the twelve months to 31 December2007 increased by 53% to 1.1 million (2006: 749,000) with the average number ofdaily players increasing by 67% to nearly 78,000 (2006: 47,000). In addition tothe continued use of television advertising and advertiser funded programming ina number of territories, the Group is also leveraging its expertise in searchengine optimisation techniques to increase the volume of traffic going to theGroup's sites. Contracting with new dedicated affiliates for casino and bingois also expected to continue to drive new player sign-ups. (1) Cost per acquisition ("CPA") affiliate sign-ups are those where the Companypays a fixed fee to the affiliate for each real money sign-up whereas theassociated revenue benefit is received over the lifetime of the player. Thiscontrasts to revenue share affiliate sign-ups where a % of the revenue generatedby the player (minus certain deductions) is paid to the affiliate over thelifetime of the player. 2 Hybrid affiliate sign-ups are those where the Company pays a fixed fee and arevenue share to the affiliate for each real money sign-up. 3 Europe, Middle East and Africa 2. Systems and product development The Group's product development, systems and infrastructure activities continuedto evolve at a rapid pace throughout 2007. The year began with the integrationof the casino assets acquired from EOL and IOG followed by the launch ofmulti-currency in March 2007, following which customers were able to hold theiraccount balances in US dollars, pounds sterling or euros. Since beingintroduced over 325,000 customers now hold their accounts in a currency otherthan US$ and on average 26% of new player sign-ups in Europe did the same1. For some time the Group had wanted to upgrade its casino software and amend thepresentation of some of the games in order to improve their appeal for anincreasingly European customer base. The re-launch of roulette and the additionof new slot machines in 2007 in PartyCasino have had a significant impact on theperformance of the Group's casino business with strong growth in both activeplayer days and player yields. By way of example, since its introduction, MegaFortune Wheel has been our most played slot and roulette has experienced asubstantial increase in average daily revenue. Having introduced a no-downloadversion of poker in 2006, 2007 saw the introduction of no-download versions ofboth casino and bingo that also helped to boost the popularity of these twoproducts. As well as improving the Group's own products and systems infrastructure, thelaunch of a series of websites and games for ITV in the second half of 2007 wasthe culmination of a major project to create the Group's first white labelproduct. For some time the Group has recognised the opportunity to capitaliseon the strength of its unique systems platform and associated infrastructure byoffering this expertise to third parties. As well as creating all of ITV'sonline gaming sites (ITV Bingo, ITV Bets, ITV Poker, ITV Casino, Emmerdale Bingoand Friends Reunited Poker), the Group also created ITV-specific slot machineswhich are based on the 'I'm a celebrity', 'X-Factor' and 'Emmerdale' brandfranchises. Irrespective of whether customers are playing on one of the PartyGaming sitesdirect or via a white label, the Group's proprietary technology infrastructureand operating platform are critical in determining the quality of a customer'soverall experience. As well as a continuous stream of new products and services,there is also a relentless programme of upgrades and system improvements, all ofwhich are designed to keep players happy and increase the entertainment factor. While mobile gaming remains a relatively untested product in most markets,PartyCasino is already available on over 300 different handsets and can beaccessed via any of the major mobile networks in the UK. The Group is nowlooking to exploit opportunities in other parts of Europe. Also during 2007, the Group successfully implemented an online enterpriseresource planning tool that unites all of our offices. Managers and employeescan now source information about any aspect of the working mechanics of thebusiness through the Group's intranet. This new tool enables us to bettermanage core parts of the business such as finance, procurement, productplanning, assets and human resources. (1) Based on the 45 day period to 25 February 2008 3. Customer service As an international customer facing business, offering round-the-clock customersupport to our players, in multiple languages, is a pre-requisite for long-termsuccess. With our websites now available in up to 12 different languages, bythe end of 2007 the Group had increased the total number of full-timemulti-lingual customer service operators to 79 (versus 59 at 30 June 2007).This allows the Group to provide dedicated local language support in severallanguages (English, German, French, Russian, Spanish and Portuguese). By helpingcustomers with their enquiries, we hope to improve player loyalty and enhancethe overall customer experience. In the 12 months to 31 December 2007 the Groupdealt with approximately 980,000 customer contacts of which over 14% wereresolved in languages other than English. The Group was awarded its third successive GamCare certificate in June 2007, inrecognition of our approach to and high standards of responsible gaming.GamCare is widely regarded as one of the world's leading promoters ofresponsible attitudes towards gaming. That said, we are not complacent andcontinue to invest in new processes and procedures to try to raise the bar evenhigher. The Group continues to work closely with the Remote Gaming Associationand the European Gaming and Betting Association to promote the highest standardsin responsible gaming. Management Lars Berg, a non-executive director of the Group since before the IPO in June2005 stepped down from the Board on 4 May 2007 and was replaced by Tim Bristowas an independent non-executive director. There were four further non-executivedirectors appointed to the Board on 13 December 2007 namely; Stephen Box, JohnDavy, Emilio Gomez and Lord Moonie. Biographical details of the Board areavailable on the Group's website: www.partygaming.com. Since the year end, the Group announced the promotion of John O'Malia to ChiefGames Officer. John was Chief Executive of Gamebookers, up until it was acquiredby PartyGaming. Also during the year, BD Goel was promoted to the position ofChief Operating Officer. Acquisitions The Group completed two acquisitions during 2007 for a total consideration ofapproximately $66m that was financed through an issue of 115,193,842 new shares.A summary is provided below: Date completed Business and assets acquired Description Consideration19 January 2007 Various websites from Empire Online Limited Casino and poker $48m 19 January 2007 Various websites from Intercontinental Casino, poker and bingo $18m Online Gaming Limited Dividend Having not declared an interim dividend for the period to 30 June 2007, theBoard believes that in the current environment it would also be imprudent torecommend a final dividend for the year ended 31 December 2007. The Board willcontinue to review the appropriate dividend policy for the Group going forward. Future developments Following the enactment of the UIGEA, 2007 was very much a year oftransformation for the Group: we grew the player base, localised the customeroffering and broadened the product base whilst continuing to act responsibly.Having reconfigured the Group into a much more broadly-based business, theGroup's focus in 2008 will be on continuing to execute the four pillars of theGroup's strategy whilst also seeking to achieve a number of specific objectives.Reaching a satisfactory conclusion to our ongoing discussions with the US DOJremains a priority for the Group, although the nature of the discussions meansthat predicting the exact timing of any such conclusion is difficult. From anoperational perspective, we plan to make good progress in bingo, improve thequality of our poker offer, launch a number of new branded slot machines, launcha dedicated casino affiliate programme, launch an improved sports bettingproduct with much greater live betting capability and continue to drivecross-selling across all of the Group's products. Current trading and outlook The Group announced its fourth quarter key performance indicators and tradingupdate on 30 January 2008. Taking into account the reclassification of certainrevenues, as highlighted above, the trading data for the four weeks ended 28January 2008 was as follows: average gross daily revenue was $1,708,100. Inpoker, new player sign-ups averaged 1,341 per day and there were on average66,760 active players per day, generating average gross daily revenue of$1,037,300. In casino, average gross daily revenue was $598,600 while in sportsbetting, gross win per day averaged $72,200 per day. In the following five weeks, ended 3 March 2008, average gross daily revenueincreased to $1,776,200, a 4% increase over January. While growth in netrevenue has been lower than expected, Clean EBITDA, our primary measure offinancial performance, is in line with expectations and the Group remainsconfident about the full year outlook. In poker, new player sign-ups averaged1,428 per day and there were on average 67,582 active players per day,generating average gross daily revenue of $1,025,000. Having peaked at 19% inthe fourth quarter of 2007, fair value adjustments to revenue including bonusesand PartyPoints as a percentage of gross poker revenue are expected to return tobetween 12% and 13% of gross poker revenue during the second quarter of 2008.In casino, average gross daily revenue had increased to $653,200 per day whilein sports betting, gross win per day had increased by 36% to $98,100 per day. Income from territories within the EMEA region continues to grow rapidly. Thelatest actions by the European Commission should help to promote the creation ofa level playing field in key European markets thereby providing furtheropportunities for the Group. Having established a presence on the ground inAsia, we are continuing to explore several initiatives in the region and believethat these will ensure we are well placed to take full advantage of changes inthe regulatory environment, as and when they occur. While the legislative and market dynamics in many countries around the worldmean that it continues to be difficult to predict the macro-economic environmentover the medium-term, it is clear that online gaming remains an increasinglypopular leisure pursuit among adults around the world and that this trend isexpected to continue. SUMMARY OF RESULTS - Continuing operationsYear to 31 December Net revenue Clean EBITDA* 2007 2006 2007 2006 $m $m $m $m Poker 295.0 268.4 62.4 39.1Casino 146.7 51.0 43.6 15.9Sports Betting 16.1 5.6 3.4 (1.6)Unallocated Corporate - - 2.3 (2.5)Total Continuing operations 457.8 325.0 111.7 50.9Discontinued operations - 779.9 (24.7) 499.8Total 457.8 1,104.9 87.0 550.7 * EBITDA before reorganisation costs, non-recurring adjustment to revenue andcharges relating to share-based payments (see reconciliation of clean EBITDA tooperating profit above) Net revenue from Continuing operations before a non-recurring adjustment($18.2m) was up 41% over the previous year, EMEA delivering a particularlystrong performance with revenue up 57% year-on-year. Competitive pressures inthe Americas, particularly from those sites that still accept US players, meantthat growth in that territory was limited to 10% whilst Asia Pacific grew by 5%.In terms of product, casino was the star performer in 2007 with revenue up188% year-on-year, driven by a combination of acquisitions, strong productdevelopment and cross-selling from poker. Poker revenue was up by 10% versus2006, year-on-year growth being held back by the migration of high value non-USplayers to sites that continued to take US players following the enactment ofthe UIGEA. Sports betting revenue grew by 188% versus the prior year, primarilyreflecting a full year's contribution from Gamebookers and PartyBets in 2007.Clean EBITDA from Continuing operations increased by 119%, driven by the stronggrowth in revenues. The Clean EBITDA margin for the continuing business increased to 24.4% (2006:15.7%), in part driven by the strong growth in casino and sports betting butalso by the operational gearing inherent within the Group's business model. Clean earnings per share from Continuing operations were 1.6 cents (2006: 0.4cents). Total Clean earnings per share (including Discontinued operations), was1.0 cent per share (2006: 12.9 cents). Consolidated Key Performance Indicators (including Sports Betting) Year to 31 December 2007 2006 Annual growthContinuing operations*Active player days (m) 28.4 17.0 67%Daily average players (000s) 77.9 46.6 67%Yield per active player day ($) 16.1 19.1 (16%)Yield per unique active player ($) 399.7 433.5 (8%)New real money sign-ups (000s) 683.7 527.2 30%Unique active players during the period (000s) 1,145.6 749.0 53%Average daily revenue ($000) 1,254.4 889.5 41% * excluding skins Total active player days for the Continuing operations increased by 67% to28.4m, driven by the growth in new player sign-ups that increased by 30% to over683,700 as well as by improved trends in player retention. Sign-ups wereparticularly strong in EMEA with Europe again proving to be a major source ofgrowth. The number of unique active players increased strongly to over 1.1mplayers for the year as a whole, an annual increase of 53% over the full year in2006, with over 587,000 players active in the fourth quarter alone. EMEA againperformed strongly with a 71% increase in unique active players to over 908,000,or 79% of the total, while the Americas grew by 11% year on year and AsiaPacific was up by 2%. The loss of a number of high value players during the final quarter of 2006 andthe first quarter of 2007, many of whom migrated to sites that continue to takebets from players based in the US, had a significant impact on yield per activeplayer day that fell to $15.1 in the first half of 2007 versus $16.8 in thesecond half of 2006. This recovered in the second half of 2007 to $17.2 butoverall the average yield per active player day for the year was down 16%year-on-year to $16.1. However, average daily revenue for the year as a wholeincreased by 41% to over $1.3 million per day, up from $890,000 in 2006. There follows a more detailed review of the Continuing operations including eachof the individual product segments. An updated version of all quarterly keyperformance indicators, reflecting the reclassification of revenue that hadpreviously been netted from costs can be downloaded from the Group's website at:http://www.partygaming.com/investor/documentation.html POKER Year to 31 December 2007 2006 % changeContinuing Operations $m $m Gross revenue 339.1 303.2 12%Bonuses and other fair value adjustments to revenue* (44.1) (35.1) 26%Net revenue from own sites 295.0 268.1 10%Income from skins - 0.3 N/ANet poker revenue before non-recurring adjustments 295.0 268.4 10%Non-recurring adjustment to net revenue 15.8 - -Net poker revenue 310.8 268.4 16% Continuing Clean EBITDA 62.4 39.1 60%Clean EBITDA margin 21.2% 14.6% *Before non-recurring adjustment to creditors (see note 3) While the balance of the Group's revenue mix has improved substantially, pokerremained the Group's largest business segment, representing 64% of net gamingrevenue (before non-recurring adjustment to revenue) and 56% of Clean EBITDA.Continuing net poker revenues increased by 10% versus the previous year to$295.0m (2006: $268.4m) with average daily revenue of over $808,300 (2006:$735,100). Year-on-year growth was held back by the migration of high valuenon-US players to sites that continued to take US players following theenactment of the UIGEA and this meant that 2007 began with a significantly lowerrevenue base for non-US poker than in the third quarter of 2006, prior to theenactment of the UIGEA. Clean EBITDA margins in poker increased to 21.2% from 14.6% the previous year,reflecting growth in revenues, lower transaction fees and the underlyingoperating leverage of the business. Poker - Key Performance IndicatorsYear to 31 December 2007 2006 Annual growth Continuing Operations*Active player days (m) 23.9 15.1 58%Daily average players (000s) 65.4 41.5 58%Yield per active player day ($) 12.4 17.7 (30%)Yield per unique active player ($) 319.1 420.7 (24%)New real money sign-ups (000s) 573.0 469.9 22%Unique active players during the period (000s) 924.7 637.1 45%Average daily revenue ($000) 808.3 735.1 10% * excluding skins The performance of the Group's poker business needs to be viewed in the contextof the overall Group performance as poker continues to represent the main sourceof players for all of the Group's gaming products. Increased cross-selling ofcasino and other games can act as a drag on poker revenues as customers spendless time and money on poker in favour of the Group's other games. Growth wasalso affected in 2007 by the Group's decision to cease accepting players fromcertain territories where online poker remains popular, but where regulatorychanges suggest that a more conservative approach is appropriate. However,despite these factors, both new player sign-ups and the number of unique activeplayers grew strongly by 22% and 45% respectively. Total active player days inpoker also grew strongly reaching 23.9m (2006: 15.1m), driven by a combinationof new player sign-ups and a series of successful player retention initiatives. The trends in player attrition rates have been as expected with a modestimprovement in rates since 2006 that was adversely affected by the impact of theUIGEA. As at 31 December 2007 and excluding EOL and IOG (which arepredominantly casino businesses), approximately 25% of all 2007 poker sign-upsremained active after six months and 22% after 12 months. This compares withthe six and twelve month figures for 2006 non-US sign-ups a year earlier of 24%and 20% respectively. Across all non-US poker sign-ups as at 31 December 2007,the proportion of players who were active after six months was approximately27%, after 12 months it was 21% and after 18 months it was 17%. Yield per active player day fell by 30% versus the previous year to $12.4 (2006:$17.7), although much of this fall was incurred in the last quarter of 2006 andthe first quarter of 2007, when poker yield fell to $11.7 due to the migrationof high yielding players to sites that continue to accept US players. Sincethen, yields have improved on the back of some operational changes made, from$12.0 in the first half of 2007 to $12.8 in the second half. Whilst suchinitiatives can favourably influence player yields in the short-term, the Boardcontinues to believe that the addition of an increasing proportion of casualplayers can be expected to continue to place downward pressure on poker yieldsover time. PartyPoints and bonuses as a percentage of gross revenue were 13% in 2007 (2006:12%) following the introduction of a new loyalty scheme in the second half of2007. CASINO Year to 31 December 2007 2006 % changeContinuing Operations $m $m Gross revenue 191.6 59.7 221%Bonuses and other fair value adjustments to revenue* (44.9) (8.7) 416%Net casino revenue before non-recurring adjustments 146.7 51.0 188%Non-recurring adjustment to net revenue 2.4 - N/ANet casino revenue 149.1 51.0 192%Clean EBITDA 43.6 15.9 174%Clean EBITDA margin 29.7% 31.2% *Before non-recurring adjustment to creditors The Group's casino business has again delivered an excellent performance.Whilst this was impacted to a degree by the businesses acquired from EOL andIOG, that themselves generated total revenue of $37.3 million in the period, thelike-for-like business still achieved revenue growth of over 115% in 2007 toreach a total of $146.7m in the full year (2006: $51.0m). The Clean EBITDA margin fell by 1.5 percentage points to 29.7% (2006: 31.2%) dueto higher affiliate expenses arising from a change in mix of games played.However, the change in mix of games played, from lower yielding games such asblackjack towards higher yielding games such as roulette and slots, helped toincrease the average gross win margin in casino from 2.3% to 2.9%. A summary ofthe key performance indicators for the casino business during the year are shownin the table below: Casino - Key Performance Indicators Year to 31 December 2007 2006 Annual growth Continuing Operations*Active player days (000s) 4,156.8 1,838.9 126%Daily average players (000s) 11.4 5.0 128%Yield per active player day ($) 35.3 27.8 27%Yield per unique active player inthe period ($) 274.6 184.4 49%New real money sign-ups (000s) 49.1 25.8 90%Unique active players duringthe period (000s) 534.6 276.8 93%Average daily revenue ($000) 402.1 139.8 188% * excluding skins This performance was driven by a significant uplift in player activity withdaily average players up by 128% to 11,400. New player sign-ups, which excludeall players that are cross-sold from PartyPoker, were up 90%, although theabsolute numbers remain small in the context of poker - something that isexpected to be addressed by an increased level of marketing for PartyCasino in2008. The impact of new products and revitalised software has been most visiblein terms of yield per active player day that rose consistently throughout 2007,reaching a record $39.6 in the fourth quarter of 2007 and driving the averagefor the year to $35.3 (2006: $27.8). For example, the addition of a revitalisedroulette product more than doubled the amount bet from its previous level.Average net daily casino revenue increased substantially from just under$140,000 in 2006 to over $402,100 in 2007. As expected, the reduced importanceof blackjack in favour of other casino games meant that customer bonuses andother fair value adjustments to revenue increased to more normalised levels,averaging 23% of gross revenue in 2007 (2006: 15%). SPORTS BETTINGYear to 31 December 2007 2006 % changeContinuing Operations $m $m Total Stakes 349.9 114.3 206% Gross Revenue (or Gross Win) 22.1 7.8 183%Bonuses and other fair value adjustmentsto revenue (6.0) (2.2) 173%Net Sports Betting revenue 16.1 5.6 188%Gross win margin 6.3% 6.8%Clean EBITDA 3.4 (1.6) N/AClean EBITDA margin 21.1% N/A As the most recent addition to the Group's games portfolio, sports bettingdelivered a strong performance with net revenue up 188% versus 2006 to $16.1m.Gross win margins decreased from 6.8% to 6.3% in part reflecting the launch ofPartyBets and the consequent growth in volume of betting on North Americansporting events that typically have lower margins than other sports. The growthin live betting volumes, where the gross win margin is lower than on the mainbook, also held back the gross win margin. Clean EBITDA increased from a lossof $1.6m to a profit of $3.4m. Sports Betting - Key Performance Indicators Year to 31 December 2007 2006 Annual growth Continuing OperationsActive player days (000s) 3,197.7 1,409.0 127%Daily average players (000s) 8.8 9.3 (5%)Yield per active player day ($) 5.0 4.0 25%Yield per unique active player inthe period ($) 95.4 71.4 34%New real money sign-ups (000s) 61.6 31.4 96%Unique active players duringthe period (000s) 168.5 78.8 114%Average daily revenue ($000) 44.0 37.3 18% Gamebookers remains the main contributor within sports betting althoughPartyBets is catching up fast, moving from 11% of total amount wagered inJanuary 2007 to 34% in December 2007. Betting volumes have grown strongly, upby 206% to $349.9m (2006: $114.3m), reflecting the increased capability in livebetting and increased player traffic. This was despite the fact that the Groupchose to withdraw from a number of markets, such as Turkey, following regulatorychanges in those markets. In October 2007 the Group launched fixed odds UKhorse racing in an alliance with SPIN, a division of Sporting Index Ltd.Previously the Group had only offered odds on racing at Starting Prices (SP)whereas we now have a full suite of horse racing products including Ante Post,Outright, Each Way, Forecast and Tricast as well as SP. Within eight weeks themonthly amount wagered on horse racing went up from $0.1m in September 2007 to$2.3m in December 2007. DISTRIBUTION COSTSYear to 31 December 2007 2006 % change $m $m Customer acquisition and retention 77.2 60.1 28%Affiliates 76.5 56.1 36%Other customer bonuses (not nettedfrom revenue) 4.1 4.6 (11%)Customer bad debts 1.7 4.5 (62%)Webhosting and technical services 24.7 8.1 205%Total Continuing distribution costs 184.2 133.4 38%Continuing distribution costs as %of revenue 40.2% 41.0%Discontinued distribution costs 11.1 229.4 (95%)Total distribution costs 195.3 362.8 (46%) Distribution costs for the Continuing operations increased by 38% compared with2006, the most significant increases being in affiliate costs and customeracquisition and retention costs that increased by 36% and 28% respectively.This reflects a successful campaign to grow the player base, particularly in thefirst quarter of 2007. Distribution expenses as a proportion of revenue showeda small decrease year-on-year to 40.2% (2006: 41.0%). Customer bad debts saw a marked reduction versus the previous year due tosuccess in combating fraud. Webhosting and technical service costs grew sharplyversus the prior year due to the acquisition of certain gaming assets from EOLand IOG which are currently hosted on the Playtech platform, as well as theopening of a disaster recovery centre in the Channel Islands. ADMINISTRATIVE EXPENSESYear to 31 December 2007 2006 % change $m $m Transaction fees 32.1 22.1 45%Depreciation 23.6 20.3 16%Amortisation 21.7 10.1 115%Staff costs 87.5 68.2 28%Other overheads 44.6 47.9 (7%) 209.5 168.6 24%Share-based payments 79.3 90.9 (13%)Continuing administrative costs 288.8 259.5 11%Continuing administrative costs as a% of revenue 63.1% 79.8%Discontinued administrative costs 15.6 91.0 (83%)Total administrative costs 304.4 350.5 (13%) Administration costs before share-based payments increased by 24% to $209.5m,primarily due to an increase in staff costs and increased amortisation. Therise in staff costs reflects increased staff numbers required to handle theincreasing complexity of the business such as multi-lingual and multi-currencyfunctionality, as well as a one-off retention payment to the CEO totalling$4.1m. Amortisation costs increased by $11.6m due to a full year's amortisationof intangible assets arising on the acquisition of Gamebookers, as well as theacquisitions of EOL and IOG. However, the relatively fixed nature of staffcosts and other overheads resulted in an overall reduction in administrationcosts as a proportion of net revenue (before non-recurring adjustment torevenue) to 63.1% from 79.8% in 2006. Share-based payments Prior to flotation, the Principal Shareholders established a share option planfor the benefit of the current and future workforce. Under the terms of theplan, existing employees were granted a number of nil-cost options to besatisfied by existing shares which had effectively been gifted by the PrincipalShareholders to a dedicated employee trust. As such, the exercise of theseoptions had no dilutive effect on shareholders who subscribed at the IPO andwill have no cash impact on the Company. International Financial ReportingStandards require that the fair value of options be amortised through the incomestatement over the life of the options. As a result, there is a non-cash chargeof $71.6m relating to nil-cost options (2006: $86.4m) as well as a $2.2m chargerelating to The Bonita Trust (2006: $26.8m) which has been included within theincome statement. In May 2007 the Company granted awards to Executives and Group employees under anumber of new share option schemes that had previously been approved byshareholders. This resulted in an additional charge of $7.5m during the year(2006: $nil). Further details are contained in note 5 to the FinancialInformation below. Bonita Trust The Bonita Trust was established in Gibraltar in 2004, effectively by theGroup's Principal Shareholders, to benefit the communities where the Group andits employees and service providers operate. The Bonita Trust is operated by anindependent trustee. The Bonita Trust has philanthropic objectives and supports medical, cultural andeducational programmes, principally directed to benefit the communities ofGibraltar, India and the UK. In addition, employees of PartyGaming and theirfamilies are a beneficiary class of The Bonita Trust. In December 2006 and subsequently, The Bonita Trust made or committed to makepayments to certain individuals that were employed or had previously beenemployed by the Group. These payments were made independently of the Group andwere over and above the amounts that the Board had already determined should bepaid by the Group to those employees and former employees. However, as thesepayments were based primarily on the Company's share price, the Board considersthese to fall under IFRS2 - Share-Based Payments and in the 12 months to 31December 2007 has charged an amount to the income statement totalling $2.2m(2006: $26.8m) as if such amounts had been paid by the Group itself. Acorresponding amount has been recorded as a capital contribution in the Group'sbalance sheet. Associates and joint ventures The Group acquired a 35% interest in a company incorporated in England duringthe first half of 2005 which was sold in November 2006. The Group's share oflosses during the period totalled $nil (2006: $0.3m). Finance income and costs Year to 31 December 2007 2006 $m $m Interest payable and other charges (1.6) (3.7)Interest receivable 3.0 4.2Net interest receivable 1.4 0.5 Tax The effective tax rate based on the total tax charge is a credit of 315.5%(2006: charge of 7.6%). The effective tax rate for the period is 4.9% beforeshare-based payments (2006: charge of 9.8% before share-based payments). In calculating the tax provision, in addition to any amounts due in respect ofjurisdictions in which Group companies are currently incorporated or domiciled,provisions have been made to cover the Directors' best estimate of additionaltaxation exposures which may arise. Where the actual outcome differs from theamounts originally recorded, the tax and any deferred tax provisions will beaffected in the period(s) in which the determination is made. In the latterpart of 2007, the Group implemented certain geographic operational changes andhas also been able to undertake a further review of approaches that may be takenby taxation authorities in major jurisdictions. Additionally, more detailedguidance has been published such that it is now the broad consensus of OECDmember countries that the automated nature of the functions performed bye-commerce equipment means that the assets or risks attributable to it are onlylikely to be those directly associated with the hardware and that, in theabsence of personnel acting on behalf of an enterprise, little or no profitshould be attributed to e-commerce activity. Accordingly the Directors haverevised their estimate of the potential liability, resulting in a release in thecurrent year of a tax provision brought forward of $64.5 million. Net cash1 As at 31 December 2007 the Group had net cash of $127.8m (31 December 2006:$43.4m). Following the enactment of the UIGEA and subsequent discussions withits bankers, the Group's multi-currency revolving credit facility was repaid infull and cancelled on 12 April 2007. (1) Net cash is defined as cash, cash equivalents and short term investmentsless bank debt CASHFLOW Year to 31 December 2007 2006 $m $mCashflow from operations before movements inworking capital 107.6 431.0Working capital movements (11.8) (116.2)Net cashflow from operating activities 95.8 314.8Capital expenditure net of disposals (6.7) (48.3)Acquisitions of intangibles (6.4) (224.4)Short term investments 0.6 (2.3)Net finance income 1.7 1.4(Repayment) drawdown of revolving credit facility (12.0) 12.0Equity dividends paid - (200.0)Cash inflow (outflow) 73.0 (146.8) Cashflow from operations was substantially lower than the previous year due tothe decision to cease taking bets or deposits from customers located in the USfollowing the enactment of the UIGEA, falling from $314.8m to $95.8m. However,the acquisition of Gamebookers in the previous year, a marked reduction incapital expenditure following the UIGEA and the absence of any dividend payment,resulted in a substantial increase in cash balances retained by the Group. Capital expenditure Capital expenditure during the year fell substantially from $48.3m to $9.1mreflecting cutbacks in capital expenditure made following the enactment of theUIGEA. The primary component of capital expenditure during the year was ITequipment. Purchase of intangible assets During the year the Group acquired the business and assets of EOL and IOG via anissue of new shares. Further details are contained in note 23 of theaccompanying Financial Information. About PartyGaming Plc PartyGaming Plc is the world's leading listed online gaming company. Founded in1997, the Group is a constituent of the FTSE 250 share index with its shareslisted on The London Stock Exchange under the ticker: PRTY. In the year to 31December 2007, PartyGaming's Continuing operations generated revenues (beforenon-recurring fair value adjustments) of $457.8m and Clean EBITDA of $111.7m.PartyGaming's principal brands are PartyPoker.com, one of the world's largestonline poker rooms, EmpirePoker.com, PartyCasino.com, PartyBingo.com,PartyGammon.com, PartyBets.com and Gamebookers.com. None of the Group's sitesaccept real money customers located in the US. PartyGaming is regulated and licensed by the Government of Gibraltar and by theAlderney Gambling Control Commission and is certified by GamCare as aresponsible gaming operator. For more information, please visitwww.partygaming.com. Glossary and definitions 'active player aggregate number of days in the given period in which active players have contributed to rakedays' and/or placed a wager and is calculated by multiplying average active players by the number of days in the period 'affiliates' third party online or offline marketers who drive traffic to PartyGaming's gaming sites for a flat fee or on a revenue share basis 'attrition' the ratio of real money signups which are active during the period. The measure indicates retention profile of the players 'average active the daily average number of players who contributed to positive rake and/or placed a wager inplayers' the given period and is calculated by dividing active player days in that period, by the number of days in that period 'Clean EBITDA/EPS' EBITDA / EPS before reorganisation costs, non-recurring adjustment to revenue, charges relating to share-based payments and release of tax provision 'Company' or ' PartyGaming PlcPartyGaming' 'Continuing the Group's operations and activities that relates to players located outside of the USoperations' 'Discontinued operations located physically outside of the US but which relate to customers in the US andoperations' were terminated following the enactment of the UIGEA on 13 October 2006 'EBITDA' earnings before interest, tax, depreciation and amortisation 'EMEA' Europe, the Middle East and Africa 'Empire Poker' EmpirePoker.com 'Employee Trust' the PartyGaming Plc Shares Trust, a discretionary share ownership trust established by the Company 'EOL' Empire Online Limited 'Gamebookers' www.gamebookers.com, one of the Group's sports betting websites 'Group' or ' the Company and its consolidated subsidiaries and subsidiary undertakings from time to timePartyGaming Group' 'IOG' Intercontinental Online Gaming Limited ("IOG") 'KPIs' Key Performance Indicators, such as active player days and yield per active player day 'PartyBets' www.partybets.com, one of the Group's sports betting websites that is also fully integrated into the PartyAccount shared wallet 'PartyBingo' www.partybingo.com, the Group's principal bingo website 'PartyCasino' www.partycasino.com, the Group's principal casino website 'PartyGammon' www.partygammon.com, the Group's backgammon website 'PartyPoker' www.partypoker.com, the Group's principal poker website 'Principal Anurag Dikshit (holding through Crystal Ventures Limited), James Russell DeLeon (holdingShareholders' through Stinson Ridge Limited), Ruth Monicka Parasol (holding through Emerald Bay Limited) and Vikrant Bhargava (holding through Coral Ventures Limited), each of which was a promoter of the Company 'real money A new player who has registered and deposited funds into an account with the company.sign-up' Customers are categorised between lines of business according to where they first register on the gaming site to address the issues posed by shared wallets 'UIGEA' The Unlawful Internet Gambling Enforcement Act that was enacted in the US on 13 October 2006 'unique active A player who has contributed to rake or placed a wager in the periodplayer' 'yield per active net revenue, net of customer bonuses and other fair value adjustments to revenues (but beforeplayer day' non-recurring fair value adjustment) divided by active player days in the period 'yield per unique net revenue, net of customer bonuses and other fair value adjustments to revenues (but beforeactive player' non-recurring fair value adjustment) divided by the number of unique active players in the period Financial Information Audited consolidated income statement Year ended 31 Dec 07 31 Dec 06$ million NotesContinuing Operations Net revenue - ongoing 3 457.8 325.0 Non-recurring adjustment to net revenue 3 18.2 - Net revenue 3 476.0 325.0 Other operating income (expense) 2.3 (2.5)Administrative expenses• Other administrative expenses (209.5) (168.6)• Share-based payments 5 (79.3) (90.9) ------ ------Total administrative expenses (288.8) (259.5) Distribution expenses (184.2) (133.4) ------ ------Profit (loss) from operating activities before 5.3 (70.4)reorganisation costs Reorganisation costs 4 - (7.2) ------ ------Profit (loss) from operating activities 5.3 (77.6) Finance income 6 3.0 4.2Finance costs 6 (1.6) (3.7)Share of loss of associate 12 - (0.3) ------ ------Profit (loss) before tax 6.7 (77.4) Tax 7 7.2 (6.0) ------ ------Profit (loss) after tax from Continuing operations 13.9 (83.4) Profit after tax from Discontinued operations 2 27.7 211.8 ------ ------Profit after tax 41.6 128.4 ------ ------Continuing earnings (loss) per shareBasic (cents) 8 0.3 (2.2)Diluted (cents) 8 0.3 (2.2) Audited consolidated statement of recognised income and expense Year ended 31 Dec 07 31 Dec 06$ million Exchange differences on translation of foreign operations 2.2 0.2 ------ ------Net income recognised directly to equity 2.2 0.2 Profit after tax for the year 41.6 128.4 Total recognised income and expense ------ ------for the year 43.8 128.6 ------ ------ Audited consolidated balance sheet As at 31 Dec 07 31 Dec 06$ million Notes Non-current assetsIntangible assets 9 203.2 151.9Property, plant and equipment 10 37.7 54.6 ------ ------ 240.9 206.5 ------ ------ Current assetsTrade and other receivables 13 64.0 67.3Cash and cash equivalents 14 119.3 46.3Short-term investments 15 8.5 9.1 ------ ------ 191.8 122.7 ------ ------Total assets 432.7 329.2 ------ ------ Current liabilitiesBank and other loans 16 - (14.1)Trade and other payables (107.1) (78.7)Income taxes payable (3.8) (67.6)Other taxes payable - (18.2)Client liabilities and progressive prize pools (123.4) (109.1)Provisions 17 (5.0) (5.5) ------ ------ (239.3) (293.2) ------ ------Non-current liabilitiesTrade and other payables - (30.0)Bank and other loans 16 - (3.7) ------ ------ - (33.7) ------ ------Total liabilities (239.3) (326.9) ------ ------ Total net assets 193.4 2.3 ------ ------EquityShare capital 19 0.1 0.1Share premium account 20 66.4 0.4Share-based payments 20 - 155.9Capital contribution reserve 20 34.7 32.5Retained earnings 20 915.2 638.6Other reserve 20 (825.4) (825.4)Currency reserve 20 2.4 0.2 ------ ------Equity attributable to equity holders of the parent 193.4 2.3 ------ ------ Audited consolidated statement of cashflows Year ended 31 Dec 07 31 Dec 06$ million (Loss) profit before tax (note 7) (19.3) 138.9Adjustments for: Amortisation of intangibles 21.7 25.6 Impairment of intangibles - 115.5 Interest expense 1.6 3.7 Interest income (3.0) (4.2) Depreciation of property, plant and equipment 23.6 22.8 Impairment of tangible assets - 7.8 Increase in share-based payment reserve 79.1 87.1 Increase in capital contribution reserve 2.2 32.5 Loss on investment in associate - 0.3 Impairment of associate - 0.7 (Profit) loss on sale of assets (0.5) 0.1 Currency translation reserve 2.2 0.2 ------ ------Operating cashflows before movements in working capital and provisions 107.6 431.0 ------ ------Decrease in trade and other receivables 3.3 61.0Decrease in trade and other payables (11.7) (175.7)Decrease in provisions (0.5) (0.7)Income taxes paid (2.9) (0.8) ------ ------Cash used by working capital (11.8) (116.2) ------ ------Net cash inflow from operating activities 95.8 314.8 Investing activitiesPurchases of property, plant and equipment (9.1) (48.3)Sale of property, plant and equipment 2.4 -Purchases of intangible assets (6.4) (224.4)Interest received 3.0 4.2Decrease (increase) in short term investments 0.6 (2.3) ------ ------Net cash used in investing activities (9.5) (270.8) ------ ------Financing activitiesInterest paid (1.3) (2.8)Equity dividend paid - (200.0)Revolving credit facility (12.0) 12.0 ------ ------Net cash used in financing activities (13.3) (190.8) ------ ------Net increase (decrease) in cash and cash equivalents 73.0 (146.8) Net cash and cash equivalents at beginning of year 46.3 193.1 ------ ------Net cash and cash equivalents at end of year 119.3 46.3 ------ ------ Cash and cash equivalents 119.3 46.3 ------ ------ This information is provided by RNS The company news service from the London Stock ExchangeMORE TO FOLLOWRelated Shares:
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