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August 04, 2006

Cryptologic's Cryptic Quarter (Nasdaq CRYP)

posted by MR WAVETHEORY at 8/04/2006 08:42:00 PM
Based in Toronto, Ontario, Cryptologic (CRYP) provides software that powers Internet poker sites like Betfair. Recently, the company announced earnings that came out at $.59 vs $.49 estimate or roughly $.10 ahead. The top line was $30.4 million and as the company put it, "well ahead of the company's estimate of $26.4 to $26.7 million."

However, the guidance was notably weaker for the current quarter which seems very odd:

"For Q3 2006, CryptoLogic forecasts revenue of $26.5-$27.0 million and earnings of $6.6-$7.0 million, or $0.48-$0.51 per diluted share. These estimates reflect the fact that Q3 is typically the softest quarter for Internet gaming, as players spend less time online during summer months. Also, licensees' poker room activity may decline between July 28 and August 10 when serious players are focused on the main event of the game's premier land-based tournament, the World Series of Poker."

One often wonders how this little earnings beating quarter could be followed by such a notably weaker follow-on act. It is quite clear why when the careful reader digs deeper into the press release:

"The increases in both Q2 2006 and year-to-date results over the comparable periods of 2005 are primarily attributable to revenue from our exit agreement with Betfair, higher revenue from our marketing support services, and increased advertising revenue associated with our gaming information portal."

Betfair is a significant customer of Cryptologic and Betfair will be leaving fairly soon:

"As announced in August 2005, Betfair, a poker software licensee, is expected to leave the central poker room before January 2007. We are awaiting notice of their ultimate departure date. WagerLogic is receiving fees from Betfair such that CryptoLogic's annual results for 2006 are not expected to be adversely affected."

From what I gather, Betfair appears to have made a fairly substantial payment to Cryptologic - shall we say "breakup fee" to terminate the relationship. Cryptologic does not mention the amount, but judging from the weak guidance for this upcoming quarter, I surmise the entire upside for the current quarter was due to the Betfair bounty. I doubt this shot in the arm will do much for Cryptologic.

As with unhappy marriages, it seems like one (aka Betfair) can always buy ourselves out of an unhappy arrangement.

Mr Wave Theory

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