NetEnt | Better Gaming



• Net sales increased by 27% to SEK 42.8 (33.7) million.
• Operating profit increased by 35.1% to SEK 16.9 (12.5) million.
• Profit after tax increased by 34.4% to SEK 15.4 (11.5) million.
• Net profit margin was 36.1 % (34.1).
• Operating margin was 39.6 % (37.2).
• Earnings per share amounted to SEK 0.39 (0.29).
• 4 new license agreements for CasinoModule™ were signed.
• Pilot order for CasinoCafé™

Comments from Johan Öhman, CEO
“Net Entertainment achieved strong development in the first quarter, with a
27.0 percent increase in net sales over the same period in 2007 and a 17.7
percent increase over the previous quarter. Profitability continues at a
healthy level and the operating margin rose to 39.6 percent for the quarter.
Growth is being driven by the generally strong growth in the market, successful
new games and new customers opening a number of casinos in the quarter. Net
Entertainment continues to make good sales progress and four new licence
agreements for CasinoModule™ were entered into during the quarter. One of the
agreements is with leading operator, In addition, a pilot
order for CasinoCafé™ was secured.

During the quarter, Net Entertainment has pursued its recruitment process in
order to strengthen the organisation and reduce its dependence on consultants.
The Company has also begun with the development of contracts in the Ukraine in
a bid to accelerate the pace of development and to increase the cost
efficiency. Net Entertainment’s continuing focus on product development offers
excellent opportunities for the Company to consolidate its position in the
market and gain additional market share.

Net Entertainment’s Board of Directors has decided to file an application to
move its exchange listing to the OMX Exchange Stockholm, Small Cap, in 2008.
The work is ongoing this and the aim is that the transfer will take place in
the third quarter of 2008. The transition to a different exchange will increase
the knowledge about Net Entertainment and likely also the liquidity in the

The online gaming market is predicted to continue experiencing positive growth,
which benefits us through the organic growth of our current licensees. Our
highly competitive product portfolio and continuing focus on the development of
new, innovative games also present us with excellent opportunities for entering
into agreements with new customers. I am convinced that our healthy order book,
strong product portfolio and brisk pace of development provide us with
excellent opportunities for continued profitable growth.

The second quarter is off to a strong start which in combination with strong
development of our sales pipeline indicates continued positive development for
the company.”

1) Global Betting and Gaming Consultants, 15 Jan 2008

About Net Entertainment
Net Entertainment NE AB (Parent Company with corporate identification number
556532-6443) and its subsidiary Net Entertainment Malta Ltd (together, the
Group) are leading suppliers of digitally distributed software for Internet
gaming. The Company was established in 1996 and has a customer base of just
over 50 international gaming companies. Revenues consist of royalties based on
the revenues generated by the Company’s products and other sales revenues. Net
Entertainment is a pure development company and thus does not conduct any
gaming operations of its own. The Company is internationally known and
associated with innovation, service and quality.

The Group has offices in Stockholm, where all of the Company’s technical
development activities take place, and on Malta where all commercial
operations, including sales, marketing and product management, are conducted.

The Parent Company has been listed on the Nordic Growth Market (NGM) Equity
since April 5, 2007. Net Entertainment’s Board of Directors has decided to file
an application to move its exchange listing to the OMX Exchange Stockholm,
Small Cap, in 2008.

Consolidated net sales have risen steadily over the past five years and stood
at SEK 132.0 million for the year ending December 31, 2007.

(For table see attached file.)

Developments during the quarter
Net sales for the quarter increased to SEK 42.8 (33.7) million, a 27.0 percent
increase over the same period a year ago. Operating profit amounted to SEK 16.9
(12.5) million, which resulted in an operating margin of 39.6 (37.2) percent.
During the quarter, four new CasinoModule™ license agreements were signed.

(For table see attached file.)

The license revenues for the first quarter increased due to good basic market
growth, a successful new game release and the addition of several new customers
who launched their casino operations. Our ongoing focus on games with high
entertainment value continues to be reflected in the license revenues. The
Company signed four new agreements in Q1 that generated revenues in the form of
setup fees.

Operating profit was up 35.1 percent over the first quarter of 2007 and 11.2
percent over the previous quarter. This trend is due to continued strong growth
in sales combined with cost control.

As previously announced, the management team has evaluated the financial length
of life for the gaming platforms. Against the background of the existing and
expected market and the competitive situation, it has determined that it is
difficult to motivate a 5-year depreciation period. It has therefore been
decided to shorten the depreciation period to 3 years with effect from January
1, 2008. The new assessment does not cause a write-down requirement for
existing platforms in addition to the regular planned depreciation.

During the quarter, six new casinos were launched. These casinos will generate
licensing revenues henceforth. At the end of the quarter, the Company had a
backlog of 12 casinos ready to be opened in the next few months.

The market
The market for online gaming continues to grow strongly and global sales for
Internet gaming are expected to exceed USD 16 billion in 2008. In the next few
years, Europe is expected to represent more than 50 percent of total gaming
revenues and grow by 15-20 percent annually, making it by far the largest
online gaming market.2

Net Entertainment views the conditions for continued market expansion as good.
The market for online gaming is maturing and resulting in consolidations and
increased competition between operators. This means that the long-term market
will be dominated by fewer players, which will increase demand for
“best-of-breed” solutions. Online operators continue to add new products,
making them more and more like gaming portals. This helps attract new players
and increasing revenues from existing customers through cross-sales. All in
all, this development benefits Net Entertainment and the Company means to take
an active role in the market restructuring.

The market continues to expand as online gaming attracts new categories of
operators and players. Market surveys show, for example, an increasing
percentage of women, partly due to the growth of the bingo segment. The
traditional image of a typical player, a man aged between 25 and 35, is thus
much less predominant than before. At the same time, we are observing how
gaming activities are becoming increasingly popular among older age groups.
Mature players are sometimes collectively referred to as “Silver Surfers”. The
younger generation of players, with their experience of playing TV games and
easy familiarity with computer technology, are demanding more sophisticated
games and features. As a games development company, it is vital to concentrate
on the demands from the market and ensure that new products meet the changing

Legal developments in the EU are gradually giving more manoeuvring space for
Net Entertainment’s customers. The European Court of Justice continues to act
against state gaming monopolies, and in the long term the Company believes
there will be a regulated gaming market. This will eventually open new
possibilities for the operators in the market while introducing new
requirements. Net Entertainment is well equipped for this development. For
instance, CasinoModule™ already supports the standards for player protection
set by the organisation G4.

2) Global Betting and Gaming Consultants, 15 Jan 2008

Even if the market for online gaming is large and growing, the supplier side is
dominated by a small number of players. Net Entertainment has six primary
competitors: Boss Media, Chartwell, Cryptologic, Playtech, Microgaming and Real
Time Gaming. All of these have a wider product portfolio than Net Entertainment
and many have focused on the poker market in recent years. The process of
supplier consolidation has continued and during the quarter a number of
competitors were acquired from other suppliers.

In the past, Net Entertainment has focused on casino gaming as a well-defined
market segment and therefore develops casino solutions of the highest class.
This has proved to be a very successful strategy. The management’s assessment
is that the Company has a market share of about 10%, based on the fact that Net
Entertainment delivers casino games to around 10 of the 100 largest sport
betting sites. The Company intends to expand its product portfolio over time.

Price trend
In recent years, the licensing fees for casino solutions have risen in absolute
terms. This trend is driven by the operators’ increasing sales. During the same
period, the royalty level decreased slightly but this trend seems to have
stabilised now.

New assignments and customers
During the quarter, new agreements for delivery of CasinoModule™ were signed
with four operators:, Smart TV Broadcasting Ltd and two bingo
operators who wish to remain anonymous at the time of writing.

Cash and cash equivalents, financing and financial position
The Group’s cash flow from operating activities during 2007 amounted to SEK
14.3 (-7.8) million. Cash flow from investing activities was negative in an
amount of SEK -3.2 (negative 3.9) million. Cash flow from financing activities
amounted to SEK 0.0 (0.0) million. On March 31, 2008, consolidated cash and
cash equivalents stood at SEK 36.9 (1.5) million, including SEK 2.3 million of
funds held on behalf of licensees.

During the period, the Group’s net investments in intangible assets amounted to
SEK 3.2 (2.2) million, and property, plant, and equipment amounted to SEK 0.1
(1.7) million.

Personnel and organisation
There were 71 (55) active employees in the Group at the end of the quarter.
Women comprised 30 (29) percent. The total headcount at Net Entertainment,
including subcontractors, was 85 (63) at the end of the period. Personnel costs
during the period amounted to SEK 14.7 (11.2) million.

At the end of the quarter, 9 (6) persons were employed by the subsidiary Net
Entertainment Malta Ltd. The Maltese company is responsible for sales, account
management, business development, product management, and marketing.

Parent Company
The Parent Company’s earnings for the quarter totalled SEK 24.2 million,
compared with SEK 20.0 million for the same period in 2007. Operating profit
amounted to SEK 1.9 (1.4) million and the profit after tax reached SEK 1.0
(1.0) million. Cash and cash equivalents in the Parent Company amounted to SEK
29.2 (0.4) million at March 31, 2008. This significant increase can be
attributed to the fact that all consolidated cash and cash equivalents from
January 1, 2008, are concentrated in the Parent Company.

Events after the end of the period
Since the end of the quarter, four licensees have begun their casino

Outlook ahead
Net Entertainment predicts a bright future, and it is the Company’s assessment
that the market will develop well during 2008. As well as a strong, expanding
customer base that includes several leading operators, the Company has a solid
sales pipeline. By offering a range of market-leading products and services,
the Company improves the competitive strength of its existing customers and
attracts new operators.

In 2008, Net Entertainment aims to grow more than the market and show strong

Accounting principles
Preparation of the report
This Interim Report has been prepared in accordance with IAS 34, Interim
Financial Reporting and follows the provisions of the Swedish Financial
Accounting Standards Council’s recommendation RR31, Interim Financial Reporting
for Groups. The Parent Company’s report has been prepared in accordance with
the Swedish Annual Accounts Act and RR 32 Accounting for Legal Entities. The
same accounting principles and definitions for key ratio and calculation
methods have been used as in the previous Annual Report. Unless otherwise
stated, all amounts are expressed in thousands of Swedish kronor (SEK).

No new standards have come into effect that have an impact on Net
Entertainment’s position or result.

Segment reporting
The Company’s core product, CasinoModule™, represented the majority of revenues
during the period. Geographically, Net Entertainment’s partners (the operators)
offer gaming to their customers in many different countries. Net Entertainment
does not have access to information about the end customer (the player) and
therefore cannot determine where gaming revenues originate geographically. Net
Entertainment’s direct customer’s domicile is governed by other reasons than
proximity to the local market, for instance suitable gaming legislation,
taxation reasons, or other reasons. The advantage of the Internet is that it is
a global, cross-border distribution form where gaming site owners can be
domiciled anywhere in the world and still serve many local markets around the
world. Dividing operations into geographical segments according to these
companies’ legal domicile would not provide relevant information. Similarly,
the operations of the Net Entertainment Group are also spread geographically,
primarily for legal and market reasons.

Risks and uncertainties
Net Entertainment’s operations are exposed to certain risks that could have a
varying impact on earnings. These can be divided into industry/operational
risks, and financial risks. The management’s general view of the risks that
could affect operations has not changed significantly compared with the
description given in the most recently published Annual Report. The description
below is a summary. For a detailed description of the risk profile, see Net
Entertainment’s 2007 Annual Report, pages 27-28 and page 47.

Industry and operational risks
As specific industry-related operational risks it is noted that since gaming is
regulated by law on most national markets, Net Entertainment, as a supplier of
casino games, and its customers are dependent on the legal situation of the
gaming industry, and can be significantly affected by political decisions and
changes in legislation. Net Entertainment has a class 4 license on Malta, which
means that the Company is permitted to operate hosting for its customers. It is
crucial that this license is maintained and extended. Since 2005, Net
Entertainment is a member of the organisation G4, which works to prevent gaming
addiction (this membership is despite the fact that the Company itself does not
have any gaming operations). CasinoModule™ has been adapted to follow the
organisation’s guidelines.

Other operational risks include the Company’s dependency on maintaining the
technical competence of its personnel, protecting internally developed
products, intellectual property and contracts and maintaining larger customer
contracts. The Company’s competitors and general fluctuations in the market
naturally also affect its situation.

Financial risks
The Group’s results are exposed to changes in exchange rates as the majority of
its sales are in Euro, and costs (transaction exposure) are in Swedish kronor.
Some of Net Entertainment’s sales are currently hedged.

Profit/loss and equity are also affected by changes in exchange rates when the
foreign subsidiaries’ profits, assets and liabilities are translated to SEK
(translation exposure). Foreign subsidiaries’ equity is not currently hedged.
The Group’s operations on Malta have been exempt from VAT to date.

The Maltese authorities are currently reviewing their regulations on foreign
gaming companies, but it is not currently possible to gain a definite
understanding of possible pending regulatory changes. If some areas of the
Company’s operations become subject to VAT, it will most likely have a negative
impact on Company profitability.
Future reporting
The Interim Report for the period April-June 2008 will be published on August
18, 2008.

Net Entertainment NE AB is required to publicly disclose the information in
this report under the Securities Market Act and/or Financial Instruments
Trading Act. The information was submitted for publication on May 5, 2008, at
08:30 CET.

Stockholm, May 5th, 2008.

Johan Öhman
Chief Executive Officer

This Interim Report has not been subject to review by the Company’s auditor.

Questions may be directed to:
Johan Öhman
Chief Executive Officer
Phone: +46 (0)8-556 967 00


(For full report see attached file.)