CryptoLogic: Have They Set the Bar Too High?

CryptoLogic (CRYP) is encountering a significant loss of revenue (30%) as it focuses on the gaming opportunities in the UK and Europe. It will require 50% growth in revenue ($20 million to $30 million) just to reach the revenue level the company achieved in the 2nd quarter 2006. While historically the company grew revenues at rates from 35 to 45%, that growth is slowing due to loss of U.S. based growth, the global economic slowdown, and difficulty in sustaining such high growth rates. Further, it is unclear how much of the last 2 years growth was from within the U.S. However, I suspect revenue growth in the U.S. was higher than in Europe.

The table below offers three growth scenarios for revenue: 15% for low growth; 20% for medium, yet below historical average; and 30% close to their historical average. It identifies how many months it will take for revenue to return to $30 million quarterly rate from the expected $20 million quarterly rate expected in the 4th quarter 2006.

So is CRYP currently a value buy, given these revenue assumptions? The conservative investor should delay taking a position until the revenue and profit situation becomes clearer after the next earnings release in 2007. An aggressive stance might be to begin building a position on price dips, if confident that the revenue growth will remain close to historical levels.