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Cryptologic (CRYP) is a 21st century play on the old sin stock concept. They develop the software for online gaming sites -- mainly casinos and poker rooms.

Pros

  • Historically high margins and returns on capital
  • Rock-solid balance sheet -- no debt
  • Cash balance ~$77M ($6/shr) & tangible assets ~$37M (~$3/share)
  • Largest share of the European poker market
  • Casino revenues (the largest segment of operating results) up 1Q 2007
  • Operating leverage fix @ around $18M -- revenues above this flow directly to bottom line
  • Establishing relationships in China
  • Licensee roster: World Poker Tour, William Hill, Holland Casino, Playboy
  • Dividend ~ 2%
  • Cons

  • Appear to be losing European poker market share to competitors like Playtech, even excluding the loss of Betfair
  • Betfair accounted for a quarter of CRYP non-US poker business and they took their tech operations in-house.
  • Though they don't think other clients have the circumstances to do same, always a possibility
  • Anti-gambling US legislation has killed that market, which accounted for the majority of online gambling revenues
  • Recent $4M jackpot provision may have been accounting attempt to bolster results
  • Paid $11.8M for Norwegian poker site, Parbet.com, with $11.4 M being allocated to goodwill
  • 2Q 2007 projected at a loss of $0.11/shr. Limited visibility on our end as to how they'll turn it around without access to US market. China at this moment is just a seed
  • New CEO -- bad time to bring in a new CEO in any case
  • Playtech is a formidable competitor and may continue to gain market share
  • Assessment

    The company has a good track record of creating value for shareholders but there's a little too much uncertainty right now in my mind regarding their ability to compete in Europe & Asia. Playtech announced a very strong 1st quarter compared to Crypt even as they both face the same US headwinds. Playtech increased market share and have stronger licensees in Partygaming & Tribeca on the poker side as well as already running operations in China (where they are having limited success) and mobile phone gaming. I'm not sure what would be different to allow Cryptologic to fare any better in China so that part of the growth story is questionable. Playtech also has much better margins than CRYP and I'm not sure where it's written that CRYP has to return to profitability.

    The safe money on this stock has already been made, when CRYP moved from the $15 range after the US gambling legislation last year to ~$24 currently.

    If it falters back down near the previous lows then we'll take another look, but the poor business visibility is enough to scare me away.

    CRYP 1-yr chart

    cryp

    Disclosure: none

    Source: CryptoLogic's Future Too Uncertain