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Executives

Brian Hadfield – President and CEO

Stephen Taylor – CFO

Analysts

Brian Kinstlinger – Sidoti

Todd Eilers – Roth Capital

James Hollins – Daniel Stewart

Gary Dvorchak – Aviance Capital

Jane Anscombe – Edison Investment

Mark Williams – Clarion Capital

CryptoLogic Limited (CRYP) Q1 2009 Earnings Call Transcript May 7, 2009 8:30 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the 2009 first quarter results conference call. Your host for today will be Mr. Brian Hadfield. Please go ahead, Mr. Hadfield.

Brian Hadfield

Thank you, Ruth. Ladies and gentlemen, welcome to CryptoLogic's 2009 first quarter conference call. I am Brian Hadfield, President and CEO of CryptoLogic. With me here in Dublin is Steve Taylor, our Chief Financial Officer.

The first quarter of 2009 was an important one for CryptoLogic as we laid the final foundations for CryptoLogic's return to profitability and cash generation this year. We continued the transition to our new business model, which leverages CryptoLogic's world-class reputation as a developer and licensor of Internet casino and branded gaming software.

We continued to release new games that enjoyed immediate popularity and acclaim from our peers and players. We continued to add new customers who have agreed to release a large number of CryptoLogic games throughout this year. And we continued to reduce our costs, delivering better than forecasted reductions in the first quarter.

These achievements give us reason for optimism. But in any business seeking a share of the consumers discretionary spending in a global recession, much is uncertain and unpredictable. We see this reflected in our revenue numbers.

In this challenging environment, CryptoLogic continues to control what we can, containing costs, signing and supporting customers, accelerating innovation and focusing on execution. CryptoLogic’s cost reduction program is on track and yielding positive results. In March, we completed the move to a shared poker network right on schedule. As promised, this move is reducing CryptoLogic’s costs substantially, while improving the player experience by adding more liquidity to the poker room.

We have also taken other major steps to reduce our operating costs. You will hear about the positive financial impact of these decisions from Steve in a few minutes.

2008 marked the most rapid customer acquisition in the history of CryptoLogic, and this aggressive strategy continued into 2009 as we attracted some of the biggest names in the European gaming business.

Earlier this year, we announced a deal with Gaming Technology Solutions PLC to make CryptoLogic games available to their many leading gaming operators that use the GTS platform. Like our deal with Orbis Technology last autumn, this is very significant. It’s another new channel that makes our games available to multiple customers with unprecedented ease and speed.

We also signed an exclusive agreement with The Gaming Network to provide Internet casino software to some of the U.K.’s top gaming sites. And after the quarter end, we announced two major deals to license CryptoLogic’s most popular slot games to blue-chip customers.

Gala Coral is a large U.K. based company that operates four of Europe’s most popular gaming sites, and Betfair is the world’s largest online betting community. Betfair was a CryptoLogic customer in the past and their renewed confidence is a sign of our renewed momentum.

With other major operators such as PartyGaming and 888.com already on our roster, CryptoLogic has three of the world’s big four e-gaming operators as its customers. Betfair will make our games available to its 2 million customers in the next quarter and along with SkyBet, will become one of the first CryptoLogic licensees to launch games through the Orbis platform.

Accelerating innovation is a major focus for our team. I am pleased to say that we are faster than ever in releasing the most innovative games of today. And we continue to sign deals with some of the world’s most recognizable brands to develop the games of tomorrow.

In January, we added to our roster of branded games by launching the three-game pack featuring the world’s favorite web-slinger Spider-Man. We also announced the multi-year licensing agreement with Warner Brothers’ Digital Distribution and DC Comics to bring Superman, Batman and other universally recognized superheroes to Internet casinos in the fourth quarter of 2009.

Casino games based on superhero characters have proven to be very popular with Internet gaming operators, and generate significant licensing revenue for CryptoLogic. By adding Superman and Batman to a lineup that already include Spider-Man, The Hulk, Fantastic Four, and so many others, we have the most profitable and popular superheroes working for us attracting new players and new customers.

We also signed an exclusive deal with Paramount Digital Entertainment to bring movie brands like Braveheart to the world’s Internet casinos starting later this year. This past Tuesday, we announced the launch of a new game pack that features the casino version of Jenga, the very popular casual game. This shows the versatility of CryptoLogic’s software development team. Whether it’s a casino game based on the Super Hero or a branded casual game like Jenga, Bejeweled, or Sudoku CryptoLogic’s software appeals to anyone and everyone.

Jenga is also important for another reason too, because it’s the first game from our new CryptoLogic Centre for Innovation. As I announced in January, the Centre is a space for creative collaboration between our customers, partners, universities, and others interested in defining and guiding the future of e-gaming, that’s less than four months from conception to deployment one-third of the usual time.

All this being said we have to execute with excellence. That means not just signing up new customers, but also supporting them in a challenging environment. We have recently added some high-level marketing talent to our Ads Dot Com subsidiary, which provides support and services to our largest licensees. I believe that our customers’ marketing will be a key to their success and ours in 2009.

There is a reason for optimism. Based on our customers’ business plans, approximately 19 CryptoLogic games should go live on various sites this quarter, followed by 50 more in the third quarter and another 30 by the end of this year. PartyGaming for instance, launched two games for their customers this week, Fantastic Four and Hulk – Ultimate Revenge. We are confident these games and others set for launch soon will be well received.

With this context, I am pleased to turn the call over to Steve, who will give you an overview of our first quarter numbers and our outlook for the months to come.

Stephen Taylor

Thank you, Brian. I remind listeners that CryptoLogic continues to report in U.S. dollars. In the first quarter, CryptoLogic saw a moderate decrease in revenue from 11.4 million in the fourth quarter of 2008 to 10.1 million in the first quarter of 2009. The company attributes this drop to lower discretionary spending by the most avid players coupled with the impact of the strong U.S. dollar.

Our quarter one revenue not only reflects a period of transition in our business model, but also volatile economic conditions and a global drop in discretionary spending by consumers. This continues to mean weakness in wagering activity, as we saw in the final months of 2008. That’s why, as Brian mentioned, we are working hard to broaden our customer base while adding new resources to support our largest customers with marketing and player acquisition.

I am pleased to say that CryptoLogic has been able to reduce its operating expenses faster than our forecast, down to 8.2 million in quarter one, a 43% reduction from the same period a year ago.

General and administrative expenses were higher than normal in the quarter due to professional fees related to a request for an Extraordinary General Meeting, which was later withdrawn. We do not expect this to be a recurring cost. We ended the quarter with a loss of 1.3 million or $0.10 per fully diluted share. While we are never satisfied with the loss, this reflects a continued improvement and a trend that puts us on track for return to profitability this year.

CryptoLogic continues to have a strong balance sheet, closing the quarter with 38.7 million in net cash, or $2.80 per diluted share. This is a reduction of 5.1 million from the fourth quarter of 2008.

The decrease in net cash is largely attributable to movements in working capital and the cost to secure the royalty rights to DC Comics. The company continues to be debt free.

CryptoLogic's working capital on March 31 was 39.8 million or $2.88 per diluted share compared with 41.2 million or $2.90 per diluted share as at December 31, 2008. We will continue to conserve our cash by limiting our capital spending.

Finally, the Board declared a dividend of $0.03 per share, which is unchanged from last quarter. CryptoLogic's financial goals for 2009 remain intact provided there is no further deterioration in economic conditions and a stabilization of currency markets.

With our focus on new customer acquisition, cost containment and the development of innovative games based on highly recognizable brands, we expect to return to profitability and cash generation in 2009 in line with previous guidance.

I’ll now turn the call back to Brian.

Brian Hadfield

Thank you, Steve. In summary, we are pleased with the progress we’ve made in executing our business strategy in the first quarter. Yes, it’s a very challenging business environment and some macroeconomic factors will affect our revenue in ways we cannot control. But what we can control is how we run our business. That's why we’re focused on containing our costs, on accelerating innovation, on signing and supporting new customers, and on executing with excellence. We have established a solid foundation for returning to cash generation and profitability this year and revenue growth over the longer term.

We would now be pleased to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). The first question is from Brian Kinstlinger from Sidoti. Please go ahead.

Brian Kinstlinger – Sidoti

Hi. Good morning, guys, or good afternoon.

Stephen Taylor

Hi.

Brian Hadfield

Hey, Brian.

Brian Kinstlinger – Sidoti

Can you give us, Stephen, the split of poker, casino, and other?

Stephen Taylor

Yes. Brian, we had noted that in the release.

Brian Kinstlinger – Sidoti

You did? I am sorry.

Stephen Taylor

Yes. Under the financial performance part, casino revenue was 6.5 million, poker revenue was 2 million. The balance is in our other revenue category.

Brian Kinstlinger – Sidoti

Okay. And the Gala Coral, if I said that right, what kind of player base is that? You guys said they have a lot of great sites in Europe. I’m just curious. Is that as meaningful as some of your other big ones? Or is it a little bit smaller?

Brian Hadfield

Gala Coral is a fairly large brand in Europe, Brian. I don’t have the exact number of players at hand, but I’ll get that for you. But they are well known brand both online and offline, if you are in Britain in particular, you’ll see them on the High Street.

Brian Kinstlinger – Sidoti

Okay. You mentioned Party launched, how many did they launch? And then can you give us a sort of expected rollout of their future games, SkyBet, Betfair and even Giga, since we haven’t heard a lot about them recently?

Brian Hadfield

Well, Party released two games on Tuesday. They’ve got a couple more that they are going to release in the next two weeks. And then they’ve got another game in June. There are two scheduled for July. And then they’ve got another one, I think, scheduled for September. They have got a couple more later in the year but those are the ones that I am fairly comfortable as at the moment. Betfair, they have got about nine games that they are planning to launch in the second quarter. Sky has got some games that they will be launching. This quarter there will be probably five games that they’ll launch between now and the end of June. On Giga, we are talking to Giga because they have been looking at some additional priorities and we are currently in discussions with them in regard to the rollout. So I can’t be specific on that one. But the others are the latest information.

Brian Kinstlinger – Sidoti

Okay. And with the sort of additional revenue deterioration, do you still expect to be profitable in Q2 or now will that likely be Q3?

Brian Hadfield

Can I just go back one second, Brian? Because when I said Betfair, they have got nine games that are coming out in the July/August timeframe. I can’t remember if I said second or third quarter, but its –

Brian Kinstlinger – Sidoti

Second quarter, right.

Brian Hadfield

It’s July/August timeframe for those nine for Betfair.

Brian Kinstlinger – Sidoti

Sounds good. My question is with the revenues moving the way they did, do you expect Q2 to be profitable? Or do you think Q3 might be that timeframe now where you’ll turn profitable?

Stephen Taylor

Brian, I think we’ll start to turn profitable and cash generative in the latter months of the second quarter. I think that may mean that we are not profitable overall for the second quarter, but we will be we think by June/July timeframe being profitable and cash generative each month.

Brian Kinstlinger – Sidoti

And that assumes no further deterioration in revenue, right?

Stephen Taylor

That’s correct.

Brian Kinstlinger – Sidoti

In fact, that assumes additional games being launched and seeing revenue go up a little bit?

Stephen Taylor

I think it assumes a couple of things. First of all, it assumes continued progress in our cost reduction program, which is, as we said before, we are ahead of the curve on. It also assumes that we have the rollout of branded games with licensees in accordance with the schedules we’ve agreed with them. And it doesn’t really assume much in the way of organic growth, if any at all, from our existing hosted casino and poker revenue bases.

Brian Kinstlinger – Sidoti

And how much of the cost benefit? I mean, they came down so much. How much did you already achieve in the March quarter? And how much incremental cost will you see fall out in the June quarter? And maybe split that between what you have done and maybe split that also between what that special meeting added as well?

Stephen Taylor

Well, there are a number of things. I think in the general and admin cost, not all of this is in respect of the EGM because we had first quarter was the audit going on and a bunch of other things, we always have more professional costs. But I think you can expect to see G&A in the about 2.2 million, I would think, is probably what target we’ll be looking for, for the next quarter. And the operating expenses, software development expenses are likely to come in slightly less than what we had in the first quarter.

Brian Kinstlinger – Sidoti

Okay. And how much of the G&A drop, was that special meeting that you were going to have?

Stephen Taylor

Well, as I’ve said Brian, we have a number of G&A costs related to not only that special meeting but our Annual General Meeting. Our legal and finance costs are always higher in the first quarter. And I think that’s all that we really want to say about it.

Brian Kinstlinger – Sidoti

Okay. Two quick questions. Finally, on DSO, revenue is going down, yet your receivables continue to go up and you are actually had a very high receivable for your historical business. Maybe talk about what’s happening there?

Stephen Taylor

Well, our receivables can vary from quarter-to-quarter. The one customer that you and I have spoken about a number of times, the receivables were up higher in the second quarter because of the balancing of revenue flows within the poker room. I don’t expect that that receivable is likely to be the same in the second quarter because that particular customer has left our poker operation. We will have more increasing receivable balances as we move into the branded game scenario because we are not in control of the cash. We will get monthly settlements on all of that revenue that we earn on the branded games. But it will result in higher receivables over time.

Brian Kinstlinger – Sidoti

Okay. And then actually two more. First of all, since the second quarter sounds like it might not be profitable, do you think still given that you have an incremental cost cutting that you think that you’ll achieve the EPS guidance you provided before? I mean you didn’t provide a specific number this time. So it just led me to think that, yes, you’ll be profitable, but will it be to the same degree that you thought?

Stephen Taylor

Sorry. For what period are you talking about, Brian?

Brian Kinstlinger – Sidoti

I think you gave annual earnings guidance last time and this time with specific numbers, and this time it wasn’t there. I think it $0.65 to $0.71?

Stephen Taylor

Yes. I think overall for the year –

Brian Kinstlinger – Sidoti

Yes.

Stephen Taylor

– we can still see our way to getting to the numbers we talked about before.

Brian Kinstlinger – Sidoti

Okay. And then, finally, can you just touch on your thoughts on Barney Frank’s proposal obviously? At what point did the company feel they may or may not need to prepare for what may or may not change obviously?

Brian Hadfield

Well, I think obviously we look at that on a daily basis because it’s pretty much in the news. As you know, we’ve always been a huge supporter of regulated and licensed online gaming. So a move in the U.S., we think, is a good thing. We like the fact that there appears to be a degree of bipartisan and support. However, I think we feel that there is quite a long way to go. The U.S. despite the fact that Barney is pushing this forward is still a relatively conservative country. Obama has not really come down on either side of it yet. And I think with things like the ability for States to opt out, there is a huge amount of discussion that’s still going to go on.

So conceptually, we certainly welcome it because we think it’s the right thing to do, again, providing it’s regulated and legislated. And we will continue to watch it. But I think at this point in time making concerted plans is probably not the thing to do. Our goal is to focus on what we said at the end of last year and the beginning of this year, which is to execute the transition plan, take the cost out of the business, generate cash and be profitable. So we will continue to watch it and we will support the endeavors, but our first goal is to focus on our current business plan.

Brian Kinstlinger – Sidoti

Okay. Thanks, guys.

Brian Hadfield

Thank you, Brian.

Operator

Thank you. The next question is from Todd Eilers from Roth Capital. Please go ahead.

Todd Eilers – Roth Capital

Hi, guys. Thanks for taking my question.

Brian Hadfield

Hi, Todd. How are you?

Todd Eilers – Roth Capital

Doing well. Can you guys tell us how much you generated from new licenses in the quarter? I think last time you mentioned how much you generated from 888. I am not sure if you had some additional partner revenue in the current quarter, but maybe just give us that number, it would be helpful.

Stephen Taylor

Our revenues are only up slightly from what we said at the last call from new customers because in the branded games, the Party games have just started to kick in now and that will ramp up with the 19 games that are expected to go live in this particular quarter. So I think, I had said, that it was around about 500,000 from new licensees last quarter. It’s slightly more than that this particular quarter.

Todd Eilers – Roth Capital

Okay. And that would have been the same number of games, then?

Stephen Taylor

That’s correct.

Todd Eilers – Roth Capital

Okay.

Stephen Taylor

We do have some other licensees that have come on stream more in the hosted casino area over the last few months. So they are slowly but surely starting to add and contribute as well.

Todd Eilers – Roth Capital

Okay. And then you guys mentioned that you’re starting to beef up some of the marketing and support services for some of your customers. And it looks like that obviously showed up in the other revenue for you guys this quarter. Can you maybe talk a little bit about how we should be looking at that going forward? I mean is this a good run rate? I think 1.6 million for that other revenue line item, is that kind of a good run rate going forward?

Stephen Taylor

Well, some of that, Todd is that other revenue comes from our portals business as well, and it comes from some management fees for the poker. So I think given that we’ve transitioned the poker to another network, it’s unrealistic to expect that that number is going to be in the vicinity of 1.6 million. I think you’d be better off looking at that in the sort of 0.5 million to 0.75 million range on a recurring basis going forward.

Todd Eilers – Roth Capital

Okay. And then on the expense side, it looks like you guys had a bit of a higher tax benefit than we were modeling in. Can you maybe talk a little bit about was there anything unusual there and maybe what should we expect going forward for an effective tax rate?

Stephen Taylor

Yes. I would say that you should continue to use an effective tax rate when we’re profitable in the vicinity of about 12%. The tax benefit that came in this quarter was, in fact, related to a change in legislation last was signed into law early in the year, this year, in Canada. It impacted our transfer pricing of technical services we bill out of Canada to our other companies. And so there was a benefit of about 1.4 million that came in, in the quarter in respect of that particular item.

Todd Eilers – Roth Capital

Okay. And that was kind of just a one-time item then?

Stephen Taylor

Yes. In fact, it’s an offset against some big tax charges that we had incurred in 2007 in respect of foreign exchange differences between Canada and the United States. So it is a one-time thing.

Todd Eilers – Roth Capital

Okay. And then can you maybe talk a little bit about, I think if I heard you right you said sequentially on operating cost side you expected to see slightly lower operating costs in the second quarter.

Stephen Taylor

Yes.

Todd Eilers – Roth Capital

I would have thought that maybe that sequential change might have been a little bit greater, considering the migration or outsourcing of the poker platform. Did you possibly see some of the cost savings in the first quarter from that? Or maybe just talk about that transition a little bit more?

Stephen Taylor

Well, yes, we did see some of the benefit of the migration of The Poker Network in the first quarter. The second quarter in terms of operating cost reduction is it’s a bit of a plateau for that three-month period. And then we expect those costs to continue to go downward in the third and fourth quarter as we work through some of the things like continued reduction of the size of our server farms, as we look at rationalizing some of our real estate leases and things like that that we’ve got. So there will be some additional savings from headcount reductions over the balance of the year, but there will be some other costs in Q3 and Q4 that go down as a result of changes we’re making in the business.

Todd Eilers – Roth Capital

Okay. Let’s see, can you also maybe talk about and I know in the past you guys haven’t really gotten too specific on it, but maybe talk a little bit about how the William Hill casino business is ramping down, I guess, (inaudible) site up and running? And maybe talk a little bit about what your expectations are at least with respect to your outlook for the year, what are you assuming for that business?

Stephen Taylor

In our plans that we articulated back in January, we had built in a reduction of William Hill casino revenue towards the back half of the year. We think that there has been some reduction in revenue from William Hill, not an overly significant amount. We don’t expect in the short term that there will likely be an overly significant amount. They have some things that they’re working through with their new provider from a technical perspective. So we think that the ramp down in William Hill will be fairly consistent with what we planned it was going to be at the beginning of the year.

Todd Eilers – Roth Capital

Okay. That does it for me. Thanks, guys.

Brian Hadfield

Thanks Todd.

Operator

Thank you. The next question is from James Hollins from Daniel Stewart. Please go ahead.

James Hollins – Daniel Stewart

Good morning, Brian and Stephen. In fact, good afternoon. Just three questions if I may, which I’ll just rattle off and you can quickly deal with them. The first one is you talked about I think basically challenging high roller casino revenue in Q1. According to the others in the sector, that seems to have picked up a little bit in April and the start of May. I wonder if you could give me an idea on whether you’re seeing that trend.

The second question. Have you seen some upside from moving to Boss in terms of maybe just player satisfaction into poker, and in fact, may be better revenue? And the final one was just a bit of clarity on who the four licensees are who are launching games, 19 games; I think you said across four licensees. I am assuming Betfair, SkyBet, Party, and one other. I was wondering if you could just clear that up. Thank you very much.

Brian Hadfield

Okay. I think on the high rollers, as with others, we saw a slight slowdown in that. We have seen a modest pickup in that area. Obviously, it’s an area we continue to look at. We look at every opportunity we can to develop that.

On the Boss side, as often happens when there is a network change, we saw a slight slowdown at the point that we changed the network. But we are seeing the numbers pick up post that. From a satisfaction perspective, we did do a sampling of some of the players after the transition. And certainly from a liquidity perspective and the ease of the transition, they were very pleased with that. So from that perspective, it was good.

On the licensees, Sky is one. Definitely, Party have also launched. Betfair will come in, candidly, in the third quarter, will start in July. And on the other two, based on the contracts we have with them, I can’t say who they are right at the moment.

James Hollins – Daniel Stewart

Okay. Thanks. And also I mean, across the customers launching games, I mean, are you seeing much discrepancy between them in terms of the speed at which they launch? I mean is it affecting your rollout in terms of their own aptitude in delivering these things?

Brian Hadfield

Well, I mean, it is variable. We have to be candid about that. I mean, let’s start with where we are. I mean, Orbis. If we think about Orbis and GTS as being sort of distribution channels for us, because that’s a two-step, distribution because Orbis converts a game to their platform and then a licensee will take up the game and do their testing. The way it stands at the moment, Orbis have got five games completed and they’ll have another four completed before the end of this month. So they’ll have nine games fully deployed on their platform. GTS has got three games that are ready for deployment and they will have two more next month.

So then it comes to the testing of the games. So if James Hollins decides that he is a casino and he wants to take those games, then you would go to Orbis or to GTS, you’d get the games, download it and then you’d go through your testing and stress testing. And I think occasionally what happens is with the best will in the world, priorities change or something happens within an organization and deadlines aren’t always met.

So we're comfortable that from a licensee perspective Orbis and GTS have done a great job in getting the games onto their platforms. We’ve worked closely with them and we work closely with the ultimate end licensee. So from my perspective, we are in a position to do a rollout much faster than we’ve been able to do in the past, and we anticipate that that will pick up which is why we are talking about 19 games this quarter, 50 games the next quarter, and 30, I think in the quarter after that. So there's no holdup from our perspective and I think that Orbis and GTS would say they get all the support and the licensees would do that. It’s just a question of resourcing, priorities, and timing.

James Hollins – Daniel Stewart

Brian, I think it’s fantastic. You’re certainly partnering with GTS and Orbis. Perhaps you could qualitatively describe some of the benefits you’re seeing; you are tied with NextGen as well on the content side.

Brian Hadfield

I think what we are attempting to do is, from a business perspective, we are changing the business model which says that we basically see ourselves as being excellent game developers and deployers. We want to work closely with partners that we think can add value to that. Clearly, in Orbis and GTS we’ve got channel partners that can provide excellent opportunity for us.

NextGen, a great developer of games. We’ve got a strong relationship with them. We’ve got a relationship that basically says that they will only develop branded games with us. So we have that exclusive relationship. And if you take that and the Innovation Centre, where we have the ability to generate games quickly, I mean I am extremely proud of the fact that we were able to deliver Jenga from a concept to a deployment in four months, when candidly last year that would have taken us a year. So being at the forefront and staying at the forefront is very much a part of our strategy, and having to distribution channels and partners like Orbis and GTS make it easier. And I think if we continue to execute and provide support for both the channel partner and the ultimate licensee, then the games that we have already on back order, for the want of a better term, will generate excellent, excellent revenue.

James Hollins – Daniel Stewart

Yes. That’s great. Doing a great job there. Keep it up. And thanks very much.

Operator

Thank you. Your next question is from Gary Dvorchak from Aviance Capital. Please go ahead.

Gary Dvorchak – Aviance Capital

Thanks. Can you guys elaborate a little more? I want to pick through the revenue a little bit because everyone I think will be fine with the cost cutting. You are doing a good job there. But the casino revenue in particular being down 50% year-over-year versus March of a year ago, I want to understand more what’s going into that. You mentioned foreign exchange impacts, how much was there? I would think a falloff from William Hill would be responsible for a lot of that you said that that isn’t falling off as fast as you had expected. Certainly, you have announced a lot of new partners and new games in the last six months. I am wondering when some of those are going to start kicking in with more strength. So maybe you can elaborate and pick that part a little bit more and give us more of a sense of why that casino line revs fall off –?

Stephen Taylor

Sure, Gary. I think first and foremost, the casino line from a year ago is down about 30% just because of exchange. That is because we have a big chunk of our casino earnings are in pound sterling and in euros that really is a significant chunk of the reduction. You figure all of William Hill’s casino is essentially in sterling, so that’s a fairly significant reduction as a result of the currency.

We also had Littlewoods on board in group of casino licensees a year ago. Now 888 has come on board, and the revenues from 888 have significantly replaced the revenues from Littlewoods. I think the rest of it we have had since October of last year, we’ve had a reduction in wagering from players in our licensees’ casinos. And that I think is a reflection of just the general state of the economy.

Gary Dvorchak – Aviance Capital

Okay. Clarify that again, you said most of the revenues that is there is from relatively new licensees and it’s just lower than expected or not ramping as quickly, is that what you said?

Stephen Taylor

Yes. I think it is fair to say that some of the new licensees that we have announced over the course of 2008 are starting to come up the curve in terms of contribution. But certainly, any of the ones that were relatively early stage or in newer stage businesses, it’s taking them in this current economic climate longer to come up the curve than might have happened two years ago.

Gary Dvorchak – Aviance Capital

Okay. The next thing, can you give us a little better sense of the economics on some of these newer games that are being rolled out on the platforms like Orbis or what have you? Because if indeed turn back the clock a few years, you were much more of a complete solution provider and you’re taking a higher percentage of the revenue. And it seems like you're announcing a lot in games on licensees and they are pretty big numbers, but it seems like most of these are going to be smaller in terms of the amount of revenue that they generate and/or because of the cut that you get because it’s more limited to functionality. So can you clarify that, explain (inaudible) correct or whether that’s wrong? Just give us more of a sense of how that dynamic has changed?

Stephen Taylor

Well, first and foremost, a lot of these new licensees that we have brought on board are amongst the biggest gaming brands in Europe. PartyGaming, 888, Betfair, Gala Coral are all big, big brands. And in those cases, we are licensing them games, taking a revenue share, but for what we are licensing is, we already built those games. The cost of licensing is significantly reduced, yes, our revenue share is less than what it might have been three or four years ago, but we don’t have any of the cost of running the network that we did or any of the other network integration costs that we had. We are running them in a hosted casino scenario.

So we will always have an R&D expense, the Innovation Centre, and costs that are incurred to bring new games on board, there will always be a refreshment of those games. We are, however, continuing for the licensees, we’ve got that are hosted casino, we would be building those games anyway. So to then we licensing them for someone else’s use, where we don’t have to incur the network cost is very, very profitable for us going forward.

Gary Dvorchak – Aviance Capital

Yes. I mean it totally makes sense. I’m just trying to understand the trajectory of revenue gain is going to be lower in the past, but that’s all extremely high margin revenue. So obviously it makes sense economically. I'm just trying to get a better sense of how it plugs into what our expectations should be going forward. Hey, one other thing, just, again, a clarification. Did you said (inaudible) the rest of the model. The G&A, you said it’s going to be down to 2.2 million or so and that’s a good level, a steady level going forward, is that correct?

Stephen Taylor

Yes. I think because in G&A, because of we’re a U.S. SEC registrant, we’ve got much higher audit costs than we had two years ago and Sarbanes-Oxley costs, it will be harder for us to get that G&A number down below the 2.2 million level. However, we will make some strides in that later in the year as we move out some rent expense that we have on properties that we’re no longer going to be needing or using.

Gary Dvorchak – Aviance Capital

That was a lead into what I was a little bit more concerned about on at the operating costs line. It sounded like you said there will be a little bit improvement in June, and then more games really start to kick in, in September and December. Is that correct?

Stephen Taylor

That is correct, Gary. And that's in accordance with the plan that we had in the first place. It’s all just the timing of when we would be making certain moves.

Gary Dvorchak – Aviance Capital

Sure. How far down can you push that? Is that something that that, let’s say, a year from now it can run at 8 million a quarter? Is that sort of the best (inaudible) you don’t have to give us an exact number, but sort of a range where you think you’re doing as best as you can on that side.

Stephen Taylor

I think in the current plan that we’ve got in place, we won’t suggest that it would get much below that level. However, no stone is being left unturned in terms of looking at different ways to do things. So as we move into 2010, there may be some further latitude to reduce that number.

Gary Dvorchak – Aviance Capital

Fair. Okay. Thanks a lot, guys.

Stephen Taylor

Okay. Gary. Thanks.

Operator

Thank you. The next question is from Jane Anscombe from Edison Investment. Please go ahead.

Jane Anscombe – Edison Investment

Good morning. I just wanted to ask, first of all, in your release, you talk about strengthening support services to the larger licensees, and I wondered what you were referring to in that respect.

Brian Hadfield

In that respect, we have a group of people that provide marketing support. They provide ideas for campaigns, promotions, et cetera. And we’ve candidly brought in a couple of people. We had a couple of positions open. We brought in some people with very strong industry background in that area to help us. So it’s really taking what we have and adding some additional skill and talent into that area. Based on the fact that obviously, we've reduced some costs in certain areas and in that particular area we felt at this point in time that was an area that we wanted to add some skills. So it’s basically designed on the promotion and the campaign and generating ideas for licensees that, perhaps, need a bit of marketing support and strength.

Jane Anscombe – Edison Investment

Thank you. And following on from a couple of previous questions about poker, can you just explain? I am not quite sure what we’re likely to see in terms of the trends on the poker revenue line and to a degree the cost line post the transition, post the outsourcing. Do we simply see the revenue share coming in on the poker line now?

Stephen Taylor

What you will see on the poker line, there will be a reduction in the poker line moving forward because obviously William Hill, they were a participant in a poker room up until the 19 of March. They’ve moved their business elsewhere. So poker, the absolute numbers for poker will go down, and we expect that as the transition has occurred now and our licensees are enjoying a very desirable liquidity market in the GTECH poker room that our poker offering whilst it’s not our prime line of business, it will continue to be attractive for people to be involved with us in poker and that that will grow over time.

Jane Anscombe – Edison Investment

Thank you.

Brian Hadfield

Thank you, Jane.

Operator

Thank you. The next question is from Mark Williams of Clarion Capital. Please go ahead.

Mark Williams – Clarion Capital

Hi, guys. With the new marketing effort that you said you have hired a high level in Q4, is that a cost you then pass on to the top level licensees? Or is that something that you are taking as a margin hit on your side?

Stephen Taylor

Well, the marketing costs that we are incurring, yes, it does get reflected. It gets charged out to the licensees in accordance with their contract. So, we don’t think that it’s going to have any significant impact on our margins.

Mark Williams – Clarion Capital

Okay. And then the announcement that you made a few days ago with the new GameTech roll out I guess why wasn't 888 or William Hill listed as places where the games are immediately available?

Stephen Taylor

Well, especially the situation with each of the branded games 888 falls into this category, each one of those branded game licensees comes and negotiates for a particular suite of games from us. So whilst they aren’t included in the initial rollout, that’s not to suggest that they won’t come back and request those games at some point in the future.

In terms of William Hill, William Hill is still working through from a casino perspective what its game plan is in terms of transitioning to its new partner’s technology. And there are ongoing discussions about the role that we will play in that. And potentially, that might mean that they would participate in the new games at some point in the future as well. But it’s not determined yet.

Mark Williams – Clarion Capital

Okay. And is there any opportunity to take some of these games like the Spider-Man and The Hulk to a land-based, or is your license with Marvel, for example, only for online?

Brian Hadfield

No. We would have the opportunity to it take in various directions including server-based gaming as well. The thing one always has to bear in mind is that the graphics on online and the graphics in land-based are significantly different, and there may be some additional options that people would look at.

Mark Williams – Clarion Capital

Okay. And then any update on Holland Casino and their legislative, I guess, position?

Stephen Taylor

There really haven’t been any developments since we spoke to people, but I think that question came up when we talked about our year-end results. There really hasn’t been any change since then.

Mark Williams – Clarion Capital

Okay. And then last question. Anything on the acquisition front, either companies that you’re talking to, or has anybody approached you about a potential acquisition especially in light of the low price that the stock is currently trading at?

Stephen Taylor

We haven’t had any discussions with anybody about them having an interest in us. And I think, as we had said before, this year and this period of time for CryptoLogic is all about executing on the business strategy that we have, which is to increase the revenue base that we’ve got and to lower our costs, and to be very, very careful and conscious about where the cash is being used. And so we don’t have any immediate plans to be out there acquiring anybody else. We’re being very, very careful about our cash usage.

Mark Williams – Clarion Capital

Okay. And that was my last one.

Brian Hadfield

Thank you.

Operator

Thank you. I’d like to turn the meeting back over to you, Mr. Hadfield. We have no more questions.

Brian Hadfield

Well, thank you for joining us today. I look forward to keeping you posted on CryptoLogic’s progress as we implement our plan to deliver profitability in 2009, on long-term growth in the years to come. Thank you all very much for attending. Bye, bye.

Operator

Thank you. The conference call has now ended. Please disconnect your lines. Thank you for your participation.

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Source: CryptoLogic Limited Q1 2009 Earnings Call Transcript
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