PartyGaming's poker stats disappoint

Shares in the online casino slide after its gross daily poker revenue fell 8% in April.

PartyGaming said it remained confident about prospects for the full year after delivering revenue up 21% to $128.9m in the first quarter through March. Quarter on quarter, turnover was up 6% and in line with analyst expectations.


The company's poker revenue grew 12% for the period, reversing a weak fourth quarter when unexpectedly large incentive payments weighed on takings.


Bonuses had now normalised towards 12-13% of revenue, PartyGaming said, compared with 14.6% on average in the first quarter and 19% in the fourth.


But average gross daily revenue was down 1% in April versus the first quarter average, with poker alone off 8% and weaker than expected. Even though daily active players were up 12% year-on-year, the average number of players fell 1%.


"It is difficult to assess exact reasons for this, but clearly some initiatives to stimulate business have not produced the results that had been anticipated," said Deutsche Bank.


However, the reduced bonus payments mean net poker revenue should still be higher despite the seasonally weaker period, analysts said.


Casino income was ahead of forecasts, up 9%, with real-money subscriptions up 59% against the fourth quarter as the group's PartyCasino marketing programme bore fruit.


But sports betting, a relatively new area for the company, was showing some growing pains. While the amount wagered rose 18% against the fourth quarter, revenue was still just $4.7m and a margin of 5.1% was materially below industry average.


These meagre takings are partly because the group is trying to carve out a niche for iself with in-run live betting, which is a lower margin business.


In response to the numbers, Deutsche Bank cut its 2008 EBITDA forecast from $175m to $168m, and EPS by 6% to 2.9 cents. This compares with a 2008 consensus of $170mm the broker said.


"Our downgrade is driven by two factors - slightly lower net revenues (higher casino revenues, more than offset by a reduction in our poker revenue forecast), as well as slightly higher staff costs than we had previously forecast."


Deutsche cut its share price target from 32p to 30p and repeated "hold" advice.


On the regulatory environment, PartyGaming management said little new beyond noting that the picture in continental Europe was "improving". That was perhaps in reference to recent comments from the French government, which have backed up hopes that European governments will slowly deregulate their gaming markets.


The group reiterated that it has been in talks with the US Department of Justice over the threat of prosecution for accepting online wagers. That case could be resolved this year, but it would require major changes in the law for the group to re-enter what was formerly its biggest market.


Dresdner Kleinwort, one of PartyGaming's most vocal cheerleaders, repeated "buy" advice with a 55p target but conceded that the shares may now lack short-term catalysts.


"Whilst we continue to believe that the group is fundamentally undervalued, the stock is currently 39% up from its trough (on March 18). Further significant upside is likely to come from delivery of 2008 numbers, potential DoJ settlement and M&A activity," Andrew P Lee said.


Shares in PartyGaming were down 1p, or 3.7%, to 25.5p to value the company at just over £1bn.

News Added: 30 April, 2008

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