NET ENTERTAINMENT: NET ENTERTAINMENT HEREBY SUBMITS ITS INTERIM REPORT FOR THE PERIOD JANUARY – JUNE 2008
(NGM: NET B)
Second quarter report 2008
• Revenues for the first six months increased by 44% to SEK 90.5 (62.9) million
• Profit after tax rose by 47% to SEK 32.9 (22.3) million
• Earnings per share before and after dilution amounted to SEK 0.83 (0.56)
• Eight new license agreements for CasinoModule™ were signed
Second quarter 2008
• Revenues increased by 62% to SEK 48.0 (29.7) million
• Profit after tax rose by 61% to SEK 17.5 (10.9) million
• Earnings per share before and after dilution amounted to SEK 0.44 (0.27)
• Four new license agreements for CasinoModule™ were signed
Comments from Johan Öhman, CEO
“More progress in sales combined with strong sales growth marked the first half
of 2008 for Net Entertainment. A total of eight new license agreements for
CasinoModule™ were signed, with among others, bet-at-home.com, an influential
European online operator. Our efforts to address new market segments and Tier 1
operators has proven highly productive largely due to our strong, competitive
product portfolio. Predictions for the future are presented under the heading
The development of contracts in the Ukraine, which includes a downloadable
casino to supplement our product portfolio, was initiated during the period.
Development activities have progressed well and the product launch is scheduled
for the third quarter. A more generous product portfolio will enable the
company to target a broader market which is why we have also accelerated the
development of soft games, a product that is closely related to casino games.
Seven new employees joined our Development and Operations
Departments during the first six months. As the company lands more and larger
customers, we will need to continue to recruit staff to ensure a continuously
high rate of development, innovative games and excellent service.”
About Net Entertainment
Net Entertainment NE AB (Parent Company, corporate identification number
556532-6443) and its subsidiary Net Entertainment Malta Ltd (which together
form the Group) are leading suppliers of digitally distributed Internet gaming
software. The company was established in 1996 and has a customer base of close
to sixty international gaming companies. Revenues consist of royalties based on
the revenues generated by the Company’s products and setup fees when new
agreements are signed. Net Entertainment is a pure development company and thus
does not conduct any gaming operations of its own. The Company’s brand is
internationally recognised 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. As announced in the First quarter report 2008, Net
Entertainment’s Board of Directors decided to file an application to move its
exchange listing to the OMX Exchange Stockholm, Small Cap, in 2008.
Revenue for the most recent rolling 12 months is illustrated in the below
diagram (SEK million).
(for chart see attached file)
Developments during the quarter
Net sales for the quarter increased to SEK 48.0 (29.7) million, 61.7% higher
than the same period 2007.
Operating profit was SEK 18.3 (12.2) million, resulting in an operating margin
of 38.1% (41.0).
The year’s second quarter demonstrates sound growth as a result of continued
strong market advances. Two successful product releases with eight new games
were released during the period and five new customers’ casinos were taken into
operation, thereby boosting the company’s revenue base. Moreover, the company
signed four new agreements in Q2 which generated revenue in the form of setup
Revenue was favourably affected by the higher volumes reported for the second
quarter as compared with the equivalent period 2007. However, higher volumes
also mean a somewhat lower average price since customers adopt a pricing system
whereby a higher volume generates a lower price. The royalty levels per pricing
system remained stable throughout the quarter. Fluctuations in exchange rates
had a slightly positive effect on Net Entertainment’s revenue growth in Q2
compared with the same period last year.
Operating profit was up 50% compared with the second quarter 2008 and 8% over
the previous quarter. Operating expenses rose somewhat after the useful life
reassessment of intangible assets made at the turn of the year. Furthermore,
the company has accelerated its development pace to ensure a leading market
position and broaden its selection of products. This is facilitated with the
development of contracts in the Ukraine and external development resources in
Stockholm, and has resulted in higher capitalization of intangible assets. In
addition, the company incurred costs related to the planned OMX Nordic Exchange
At the end of the quarter, the Company had a backlog of 13 licensees whose
casinos will be ready to open in the autumn.
The dividend of SEK 0.75 per share adopted at the Annual General Meeting on 10
April 08 was carried out in April, resulting in outgoing payments of SEK 29.7
The market for online gaming has exhibited strong growth the past years 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% of total
gaming revenues and grow by 15-20% annually, making it by far the largest
Net Entertainment views the conditions for continued expansion in the casino
market as good. A more generous product portfolio will enable the company to
target a broader market. The market for online gaming is maturing and resulting
in consolidations and increased competition between operators. This means that
fewer players will dominate the market, 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
while simultaneously boosting 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 driven by the growth of such new gaming segments as
bingo and skill games. 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 continuously meet the customers’ demands.
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 open new possibilities for
the operators on 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
Source: 1) 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 broader product portfolio than Net
Net Entertainment has chosen to focus on casino gaming as a well-defined market
segment and therefore develops casino solutions of the highest class. The
company has started to expand its product portfolio in a bid to address a
broader market. However, the company focuses on closely affiliated products
which enables Net Entertainment to offer best-of-breed solutions since this has
proven to be a rewarding 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
In recent years, the royalty fees for casino solutions have risen in absolute
terms. This trend is driven by the operators’ increasing sales. The royalty
level has remained stable over the past quarters.
New assignments and customers
During the quarter, new agreements for delivery of CasinoModule™ were signed
with four operators: Happybet, Simbat, Starprice online and Intragame. In
addition the company renewed the agreement with NordicBet.
Cash and cash equivalents, financing and financial position
The Group’s cash flow from operating activities during the first six months
amounted to SEK 39.8 (15.5) million. Cash flow from investing activities was
negative in an amount of SEK 7.4 (negative 6.0) million. Cash flow from
financing activities amounted to SEK -29.7 (-9.9) million and relates in both
periods to dividends to shareholders. On 30 June 2008, consolidated cash and
cash equivalents stood at SEK 28.6 (12.9) million (SEK 2.8 million of which
refers to funds held on behalf of licensees). The Group’s strong liquidity is
attributed to the positive cash flow generated by operating activities. The
Group had an effective tax rate of 6% (9.9) for the first six months. The
Group’s effective tax rate is primarily affected by the distribution of profit
between Sweden and Malta. Since the profit in Sweden for the first six months
is lower than for the same period last year, the effective tax rate for the
Group is lower.
The Group’s capitalization of intangible assets during the period amounted to
SEK 6.8 (4.6) million, and property, plant, and equipment amounted to SEK 0.7
Personnel and organisation
The Group had 74 (59) active employees at the end of the period, of which women
comprised 26% (27). The total headcount at Net Entertainment, including
subcontractors, was 91 (73) at the end of the period. Personnel costs for the
period amounted to SEK 13.2 (7.5) million. At the end of the quarter, eight
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.
The parent company’s revenues for the quarter amounted to SEK 26.5 million
compared with SEK 21.3 million for Q2 2007. The corresponding numbers for the
six- month period is SEK 50.7 million, compared with SEK 41.2 million.
Operating profit amounted to SEK 0.0 (5.1) million and SEK 1.9 (11.8) million
for the first six months. Profit after tax for the quarter was SEK 0.0 (3.6)
million and SEK 1.1 (10.0) million for the first six months. Cash and cash
equivalents in the Parent Company amounted to SEK 9.1 (3.2) million on 30 June
2008. The year’s second quarter has been charged with higher personnel expenses
than in previous quarters due to provisions for an employee bonus scheme.
Events after the end of the period
Since the end of the quarter, five licensees have begun their casino
operations. In addition, the company signed six new CasinoModule™ delivery
agreements with such customers as king.com witch is one of the world’s largest
online operators, two Tier 1 operators that for the moment have chosen to be
anonymous (Tier 1 operator means that the operator belongs to the largest
operators in Europe) and with 21media, Chipleader and Bingo Las Vegas witch all
are small newly started alternatively under initiation.
So far, the trend for Q3 2008 is strong.
The outlook for Net Entertainment remains bright, and it is the Company’s
assessment that the trend will remain sound throughout the second half of 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 potential customers.
In 2008, Net Entertainment aims to grow more than the market and show strong
Preparation of the report
This interim report is prepared in accordance with IAS 34, Interim Financial
Reporting, which complies with Swedish legislation through the application of
the Swedish Financial Reporting Board’s recommendation RFR 1.1, Supplementary
Accounting Rules for Groups and RFR 2:1, Accounting for Legal Entities, in
respect to the Parent Company. The same accounting principles, definitions for
key ratio and calculation methods have been used as in the previous Annual
No new standards have come into effect that have an impact on Net
Entertainment’s position or result.
Changed accounting principles
The Group has previously recognised capitalized development expenses in the
income statement as a type of revenue. Effective 30 June 2008, these expenses
are instead recognised in net amounts and allocated to the type of costs from
which they stem, i.e. personnel expenses and/or other operating expenses.
Historical comparative figures have been recalculated according to this
principle. The change has no impact, not even historically, on the Group’s
revenue, operating profit, key ratio or financial position in general.
First- time adoption of accounting principles
To reduce risk exposure in terms of exchange rate fluctuations, Net
Entertainment will hedge parts of its future cash flow as of 1 April 2008. This
means that the Group’s financial instruments will also include derivatives as
of this date.
Financial assets will be derecognised from the balance sheets when the right to
receive cash flow from the instrument has matured or been transferred and the
Group has transferred basically all ownership-associated risks and benefits.
All derivatives are recognised at fair value in the balance sheets. For
derivative instruments qualifying as cash flow hedge, the effective portion of
the changes in the fair value is recognised in separate equity categories until
such time that the hedged item is recognised in the income statement. For
derivative instruments that do not meet the criteria for hedge accounting, and
for ineffective portions of derivatives qualifying for hedge accounting,
changes in fair value are recognised in the income statement as other interest
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 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 and
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
Other operational risks include the Company’s dependency on maintaining the
technical competence of its personnel, maintaining larger customer contracts,
and protecting internally developed products, intellectual property and
contracts. The company’s competitors and general market swings naturally also
affect the company’s situation.
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.
Net Entertainment hedges part of the risk for exchange rate fluctuations
through cash flow hedging.
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.
To date, the Group’s organisation on Malta has been exempt from VAT. 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. Net Entertainment makes regular provisions
in the event that parts of the company’s activities become subject to VAT.
The quarterly report for the period July-September 2008 will be published 3
The Board of Directors and CEO assure that the Q2 interim report gives a true
overview of the company and Group’s operations, position and result, as well as
describes significant risks and instability factors that the affect the company
and Group members.
Stockholm, 18 August 2008.
Rolf Blom Vigo Carlund Niclas Eriksson
Chairman of the Board
Mikael Gottschlich Fredrik Burvall.
Chief Executive Ofﬁcer/President
Questions may be directed to:
Chief Executive Officer
Phone: 08-556 967 00
I have reviewed the interim report for Net Entertainment AB (publ) for the
period 1 January to 30 June 2008. The Board of Directors and the CEO are
responsible for preparing and presenting a true account of the interim
financial information in accordance with IAS 34 and the Annual Accounts Act. My
responsibility is to express a conclusion about this interim financial
information based on my review.
I conducted my review in accordance with the Standard on Review Engagements SÖG
2410, Review of Interim Financial Information Performed by the Independent
Auditor of the Entity. A review consists of making enquiries, primarily of
persons responsible for financial and accounting matters, and applying
analytical and other review procedures. A review has a different emphasis and a
substantially smaller scope than an audit conducted in accordance with the
Swedish auditing standard, RS, and other generally accepted auditing practices.
The procedures performed in a review do not enable me to obtain a level of
assurance that would make me aware of all significant matters that might be
identified in an audit. Therefore, the conclusion expressed based on a review
does not give the same level of assurance as a conclusion expressed based on an
Based on my review, nothing has come to my attention that causes me to believe
that the accompanying interim financial information does not, in all material
respects, provide a true picture of the company’s financial position as of 30
June 2008 and of its financial results and cash flow for the six-month period
ending on this date in accordance with IAS 34 and the Annual Accounts Act.
Stockholm, 18 August 2008
Authorised Public Accountant
(for complete report see attached file)