Financial Review

Trading summary

Turnover for the year ended 31 July 2007 was £1,324.9m (2006: £2,063.5m), earning a gross profit of £154.1m (2006: £303.3m) at 11.6% of turnover (2006: 14.7%). Sports betting turnover was £1,241.0m (2006: £1,869.8m), earning a gross profit of £70.2m (2006: £109.6m) at a gross margin percentage of 5.7% (2006: 5.9%). Casino and gaming, poker and fee income contributed a further £37.5m, £44.5m and £1.9m respectively to both turnover and gross margin (2006: £65.8m, £117.2m and £10.7m). Of the £154.1m of gross margin generated, £105.2m (2006: £89.6m) was generated by customers residing in Europe, £33.3m (2006: £196.7m) by US-based customers and £15.6m (2006: £17.0m) by the rest of the world.

Turnover and margin for the period are stated after a deduction for customer bonuses of £10.4m (2006: £19.6m). The sports gross margin percentage as reported was 5.7% (2006: 5.9%). Without the bonus deduction, sports margin percentage was 6.1% (2006: 6.4%).

Operating costs (excluding exceptional items, goodwill amortisation and share option charges) in the year of £134.0m (2006: £200.3m) represented 87.0% (2006: 66.0%) of gross profit. Costs comprised marketing £61.4m (2006: £80.7m), banking fees £19.2m (2006: £42.5m), information technology £10.9m (2006: £19.1m), employee costs £25.0m (2006: £33.6m), other administration costs £10.2m (2006: £19.1m) and depreciation £7.3m (2006: £5.5m).

Operating profit (before exceptional items, goodwill amortisation and share option charge) for the year was £20.1m (2006: £103.0m), representing a margin of 13.0% (2006: 34.0%) of gross profit.

Loss before tax was £311.6m (2006: £71.2m profit), after including share option charge of £8.2m (2006: £6.7m), goodwill amortisation of £6.6m (2006: £22.1m), net interest receivable of £2.5m (2006: £3.0m payable), and exceptional items of £319.2m (2006: £nil).

Exceptional items

Significant exceptional items were incurred during the year, totalling £319.2m (2006: nil). The loss on cessation of the US-facing sports and casino operations resulted in a charge of £108.9m and related reorganisation charge of £14.2m. The blocking of US players from the Paradise Poker business resulted in an impairment charge to goodwill of £178.1m. A further impairment charge, fixed asset write off and related costs of £14.2m were taken following the migration of Paradise Poker players onto the Boss Media network. These impairment charges write the Paradise Poker related goodwill down to £3.7m. Further exceptional charges of £7.4m were incurred during the year in relation to the move of certain European operations to Dublin and the Channel Islands. In addition, following the merger of the Sportingodds and Sportingbet brands in the UK market, an impairment charge of £3.6m has been taken against the goodwill of the Sportingodds business. Of the total of £319.2m, £20.0m is cash related expenditure.

Finance costs

Finance costs comprised interest receivable on the Group’s cash balances of £1.9m (2006: £1.8m), interest payable on bank loans of £0.1m (2006: £1.7m), £0.2m (2006: £1.0m) relating to the amortisation of bank fees, and a non-cash interest receivable of £0.9m (2006: £2.1m payable) arising from the discounting of future earn-out liabilities back to current values in accordance with FRS 7.

 

Earnings per share

Basic earnings per share before exceptional items, share option charge and amortisation of goodwill was 5.1p (2006: 24.9p). Diluted earnings per share before exceptional items, share option charge and amortisation of goodwill was 4.7p (2006: 23.8p).

Cash flow

During the year ended 31 July 2007, the Group generated cash from operating activities of £0.6m (2006: £118.8m). As at 31 July 2007, the Group had £37.0m (2006: £97.2m) of cash and liquid resources on its balance sheet, of which £12.9m (2006: £38.6m) represented customer deposits.

Gross financial liabilities amounted to £5.4m (2006: £47.5m). This comprised a bank loan of £5.3m (2006: £10.8m), and £0.1m due to the vendors of the shareholding in Sportingbet Italia (2006: £3.3m).

Trading summary - continuing operations

Turnover for the year ended 31 July 2007 was £1,097.8m (2006: £890.1m), earning a gross profit of £120.8m (2006: £106.6m) at 11.0% of turnover (2006: 12.0%). Sports betting turnover in Europe was £599.8m (2006: £473.6m), earning a gross profit of £49.7m (2006: £30.0m). Australian sports betting turnover was £439.3m (2006: £346.6m), earning a gross profit of £12.4m (2006: £12.9m).

Turnover and margin for the year are stated after a deduction for customer bonuses of £7.9m (2006: £7.5m). The European and Australian sports gross profit as reported was 8.3% and 2.8% of turnover respectively (2006: –6.9% and 3.7%). Without the bonus deduction the equivalent numbers would have been 9.0% and 2.9% (2006: 7.5% and 3.8%).

Poker, now all branded as Paradise Poker, achieved gross profit of £27.8m (2006: £30.0m) as a result of much reduced liquidity and the disruption of the migration of Paradise Poker players to the Boss Media Network. Casino and gaming contributed gross profit of £30.8m (2006: £30.2m), a marginal performance, year-on-year, ahead of the major upgrade now being rolled out.

Costs (excluding exceptional items, share option charge and goodwill amortisation) during the year were £113.4m (2006: £102.4m). Whilst costs accounted for 93.8% of gross margin (2006: 96.1%), a number of the major initiatives undertaken by the Group during the year are aimed at driving further efficiencies within the business impacting on the 2007/08 financial year and beyond.

Continuing business operating profit (before exceptional items, share option charge and goodwill amortisation) for the year was £7.4m (2006: £4.2m).

Continuing business loss before tax after exceptional charges of £26.8m (2006: £nil), share option charge of £9.9m (2006: £4.8m) and goodwill amortisation of £3.0m (2006: £5.6m) and after crediting £2.5m of interest income (2006: £3.0m charge) was £29.8m (2006: £9.2m).

 

Earnings per share – continuing operations

Continuing business basic earnings per share before share option charges and amortisation of goodwill was 2.1p (2006: 0.2p). Diluted earnings per share before exceptionals, share option charges and amortisation of goodwill was 2.0p (2006: 0.2p).

Treasury management

The Group’s treasury function provides a centralised service for the provision of finance and the management and control of liquidity, foreign exchange and interest rates. The function operates as a cost centre and manages the Group’s treasury exposure to reduce risk in accordance with policies approved by the Board.

It is not the policy of the Group to trade in or enter into speculative transactions. Authorities, procedures and reporting responsibilities are documented and regularly reviewed.

Due to the international nature of its core activities, the Group’s reported profits, net assets and cash flows are all affected by foreign exchange rate movements.

Operations are financed by a mixture of retained profits, bank borrowings and long-term loans. In addition, various financial instruments, such as trade debtors and trade creditors, arise directly from the Group’s operations.

Certain customers in the Australian region are allowed to place bets on credit. The Group’s policy in respect of credit risk is to require appropriate credit checks are made on potential customers before bets are placed and credit limits set accordingly.

Accounting standards

The Group keeps up to date in respect of the work of the Accounting Standards Board and gives careful consideration to early application of the ASBs Financial Reporting Standards. The Group will be adopting international Financial Reporting Standards in the new financial year.

Financial conduct

In addition to the financial probity obligations resulting from statutory, regulatory, and London Stock Exchange requirements, and the Customer Charter and Code of Conduct, the Group applies the following Financial Code:

Financial Code

1. Sportingbet maintains at all times available cash resources to cover its customer liabilities.
2. Sportingbet’s processes and systems are designed to minimise the risk of fraud or money laundering.
3. Sportingbet employs and retains qualified finance professionals to monitor and maintain a stringent financial control environment.
4. Sportingbet’s financial control environment facilitates informed decision making, allowing the Group to adapt quickly to market changes.