NetEnt | Better Gaming



Q1 2007 – Q3 2007
· Net sales increased 39% percent to SEK 95.7 (68.8) million.
· Result after taxes increased by 75 percent to SEK 32.1 (18.3) million.
· Net profit margin was 33.5 (26.6) percent.
· Profit per share amounted to SEK 0.81 (0.46).
· 13 new license agreements for CasinoModule™ were signed.

Q3 2007
· Net sales during Q3 increased 36% percent to SEK 32.4 (23.8) million.
· Result after taxes increased by 73% percent to SEK 9,76 (5,64) million.
· Net profit margin was 30.1 (23.7) percent.
· Profit per share amounted to SEK 0.25 (0.14).
· 5 new license agreements for CasinoModule™ were signed.

Comments from Johan Öhman, CEO
“The online gaming market continues to show good growth. During the third
quarter, our sales increased nine percent compared to the previous quarter.
Adjusted for a change in the calculation principles for casino results (see
“Comments to the quarter’s development” below), the revenue increase was a
total of 14%. The growth is driven by a strong product that is well received by
the end user, combined with favourable external factors such as a relatively
early autumn, which has positively affected gaming activity. The operating
margin during the quarter was negatively affected by non-reoccurring costs and
somewhat higher consultancy costs compared to the previous quarter.

So far this year, 13 new licensing agreements have been signed, including five
during the third quarter. Two underlying reasons for continued impressive sales
growth are continual investments in product development and regular product
releases. Net Entertainment offers a wide variety of unique games, including
several specifically developed for local markets. This gives us an important
competitive advantage that is becoming more and more important as operators
increase their geographic coverage.

The market for online gaming is constantly changing, which is accentuated by
the rise of new market and player segments that will contribute to the
industry’s continued growth. Net Entertainment’s active, continuous product
development ensures that our products meet changes in demand. This will not
only further increase our competitive strength and the profitability of our
licensees, but also increase demand for Net Entertainment’s products.”

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) is a leading supplier of digitally distributed software. The company was
established in 1996 and has a customer base of about 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 therefore does not operate any gaming sites of its own.
The company is internationally recognized as a vendor of innovative, high
quality products and services.

The Group has its head office in Stockholm where all technical development is
undertaken, and an office in Malta where all commercial operations including
sales, marketing and product management is conducted.

The parent company has been listed on Nordic Growth Market (NGM) Equity since
April 5, 2007.
Comments to the quarter’s development
Net sales increased to SEK 32.4 (23.8) million, an increase of 36 percent
compared to Q3 2006. Operating margin amounted to 32.9 (38.9) percent, a
decrease resulting from of non-reoccurring costs, temporarily high expenses for
external services, and a change in calculation principles (see below). Five new
license agreements for CasinoModule™ were signed.

(for table see attached file)

Starting with the CasinoModule 3.8 release (July 26), the principle for
calculating the basis of the licensing fee (casino result) was changed.
Allocations for jackpots, which are made continually in a number of games, are
no longer included in the casino result. The basis for this change is a trend
toward larger and larger jackpots, which under the previous calculation
principle could strongly affect a casino’s result for an individual month. The
change eliminates this effect, resulting in a more stable revenue stream for
both Net Entertainment and our licensees. Compared to Q2 2007, this change
reduced licensing revenues by approximately 5 percent.

During the first half of the year, Net Entertainment launched a jackpot-based
game where several licensees contribute to the jackpot together. This
arrangement allows a significantly larger expected value for the jackpot, which
creates a more attractive offering. Net Entertainment manages the
administration of the jackpot allocations for this game, which is shown as cash
and cash equivalents and funds held for a licensee in the report.

The cost base increased somewhat during Q3, primarily from somewhat increased
consultancy costs intended to maintain a high production rate. During Q4 the
number of consultants has been significantly reduced as a result of successful
recruiting in Q3.

The company strengthened the organisation during the quarter with additional
employees – a necessity to ensure the company’s continued growth. The majority
of these began their employment near the end of the quarter. In September, the
company opened a new office on Malta. A total of 10 people were employed there
at the end of the quarter. In addition, the company received access to
additional office space to continue expansion of its head office in Stockholm.

During the quarter, four new casinos were launched. These casinos will generate
licensing revenues henceforth.

The legal situation in Turkey remains unchanged, which affected the previous
quarter’s result negatively. Revenues from gaming in Turkey were unchanged
during Q3 compared to Q2.

The market
The market for online gaming has displayed strong growth during the past five
years with an annual future expected growth rate of 20%. Total sales for online
gaming as a whole is expected to exceed USD 20 billion during 20071.

Net Entertainment views the conditions for continued market expansion as good.
The market for online gaming is maturing with clear indications of a
consolidation phase emerging. As a result, the market will, moving forward, be
dominated by a few increasingly large operators which will increase demand for
best-of-breed solutions. At the same time, online operators are gradually
extending their product range by adding new products, thereby turning into
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

The company’s customers consist primarily of sport betting sites whose average
end users are males, 25-35 years of age. At the same time, according to
eCogras’s report2 from January 2007, women form a growing player segment that
sport betting sites generally do not address. New operators emerging that
address new target groups (for instance bingo sites) therefore constitute an
interesting market segment. Net Entertainment actively works to develop games
that address the preferences of different types of players.

Legal developments within the EU give increasing opportunities for Net
Entertainment’s customers to conduct their business. 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 organisation G4.

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 significantly wider product portfolio than Net
Entertainment and many have focused on the poker market in recent years.

1) Christiansen Capital Advisor’s Global Internet Gambling Revenues Estimates
and Projections 2001-2010, 2005.
2) An Exploratory Investigation into the Attitudes and Behaviours of Internet
Casino and Poker Players, commissioned by eCOGRA (e-Commerce and Online Gaming
Regulation and Assurance), January, 2007.
Net Entertainment has chosen to focus on casino games 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 Net Entertainment as
supplier of casino games to around 10 of the 100 largest sport betting sites.

The license fees for casino solutions have risen in absolute terms during
recent years. This trend is driven by the operators’ increasing business
volumes. During the same period, the royalty level decreased somewhat but this
trend seems to have stabilised.

New agreements and customers
During the quarter, new agreements for delivery of CasinoModule™ were signed
with five operators: BetSafe, DanBook, VIX Casino, Europlay and BestGames.
Net sales and profit/loss for the first three quarters
The Group’s net sales for the first nine months amounted to SEK 95.7 (68.8)
million, an increase of 39 percent compared to the same period 2006. Operating
profit increased 25.6 percent to SEK 35.4 (28.2) million. Profit/loss after tax
amounted to SEK 32.1 (18.3) million, which corresponds to SEK 0.81 (0.46) per
Cash and cash equivalents, financing and financial position for
The Group’s cash flow from operating activities during the first nine months
amounted to SEK 32.4 (20.1) million. Cash flow from investing activities was
negative in an amount of SEK 12.6 (negative 9.4) million. Cash flow from
financing activities was negative in an amount of SEK 9.9 million. The Group’s
cash and cash equivalents amounted to SEK 23.1 (16.1) million at September 30,
Investments in January-September
The Group’s net investments in intangible assets during the first nine months
amounted to SEK 3.0 (4.7) million, and property, plant, and equipment amounted
to SEK 1.1 (1.55) million.
Personnel and organisation
At the end of the period, there were 65 (37) employees in active duty within
the Group. Women comprised 23 (24) percent. Including subcontractors, the total
head-count was 79 persons at the end of the period. Personnel costs during the
period amounted to SEK 11.45 (5.91) million.

At the end of the quarter, ten 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 revenues for Q3 amounted to SEK 21.3 million compared with
SEK 22.1 million for Q3 2006. Corresponding numbers for January-September 2007
are SEK 62.5 million, compared with SEK 65.5 million for the same period 2006.
Operating profit for Q3 amounted to SEK 1.9 (3.8) million, and for the first
nine months to SEK 8.4 (13.3) million. Profit after taxes for the quarter
amounted to SEK 1.3 (2.6) million and for the first nine months to SEK 6.0
(8.6) million. Cash and cash equivalents in the parent company amounted to SEK
3.0 million on September 30, 2007.

Decreased revenues in the parent company compared with the previous year result
from Net Entertainment currently having a higher share of revenues in Malta
where the company’s customers are located.
Events after the end of the quarter
CasinoModule release 3,9 was rolled out to the licensees on October 16th
comprising four new games and an entirely new bonus function. The response from
the end users has been very positive.
Outlook ahead
Net Entertainment view market developments as positive and it is the company’s
assessment that the current market situation will remain. The company has a
strong customer base that includes several leading operators. Having a
market-leading product and a strong service offering improves competitiveness
for existing customers whilst it also attracts new operators.

The fourth quarter is developing well and Net Entertainment believes that both
sales and EBIT will be higher than in the third quarter.

During the first quarter 2008 the company aims to initiate a production line in
Ukraine which will result in more cost efficient product development and
increased production capacity.
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. All figures are given
in SEK thousands if not indicated otherwise.

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 can not 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 benefit 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. To divide operations into geographical segments according to these
companies’ addresses would fail to provide relevant information. Even the Net
Entertainment Group’s operations are spread geographically in the same way for
primarily legal and market reasons.
Net Entertainment is exposed to certain risks in its operation that can affect
the result to a smaller or larger extent. These can be divided into
industry/operational risks, and financial risks.
The management’s general view of the risks that may 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 annual report 2006,
pages 10-11 and page 32.

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 casino game
supplier and its customers are dependent on the legal situation of the gaming
industry, and can be significantly affected by political decisions and legal
changes. Net Entertainment has a class 4 license in Malta, which means that the
company is permitted to operate hosting for its customers. It is crucial that
this license is maintained and extended. Net Entertainment since 2005 is also a
member of the organisation G4, which works to prevent gaming addiction (despite
the fact that the company itself does not have any gaming operations) and
CasinoModule™ has been adapted to follow the guidelines given.

Other operational risks include the company’s dependency on maintaining the
technical competence of their personnel, protecting internally developed
products, intellectual property and contracts and maintaining larger customer
contracts. The company’s competitors and general market swings naturally also
affect the company’s 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.
Net Entertainment does not currently hedge this portion.
Profit/loss and equity are also affected by changes in exchange rates when
foreign subsidiaries’ results as well as assets and liabilities are translated
to SEK (translation exposure). Foreign subsidiaries’ equity is not currently
hedged. The foreign companies are financed mainly through shareholders’ equity
and intra-group loans in the parent company’s national currency. The Group’s
operation in Malta has until now been exempted 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. If portions of the
company’s operations become subject to VAT, it will most likely affect the
result negatively.
Composition of nomination committee
In accordance with the decision by the Annual General Meeting on 21 May 2007,
the members of the Nomination Committee have been elected.
The members of the Nomination Committee for the AGM in 2008 are:
· Emil Sunvisson, Scandcap, representing Straumur Burdaras Investment Bank
· Per Hamberg, representing the Hamberg and Kling families
· Niclas Eriksson, representing Vasastaden Holding, the Lundström family and
the Knutsson family
· Pontus Lindwall, Chairman of the Board for Net Entertainment NE AB
The Nomination Committee is composed of representatives of the largest owners
of Net Entertainment NE AB, and represents more than 70 percent of the voting
rights in the company.
The Nomination Committee will prepare proposals for the coming 2008 AGM,
including proposals for auditor and the auditor’s fee, the number of board
members to be elected at the AGM, fees to Board members, the composition of the
Board, the Chairman of the Board, and the Chairman of the AGM. In addition, the
Nomination Committee will propose the composition of the Nomination Committee
for the AGM in 2009.
Shareholders who wish to submit proposals to the Nomination Committee should
send an email to:

Future reporting
The year-end report for 2007 will be published 18 February 2008.

Stockholm, November 2nd, 2007

Johan Öhman
Chief Executive Officer
Net Entertainment NE AB

I have reviewed the report for the period 1 January 2007 – 30 September 2007
for Net Entertainment AB (publ). The Board of Directors and CEO are responsible
for the preparation and presentation of this 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

I conducted our review in accordance with the Standard on Review Engagements
SÖG 2410, Review of Interim Financial Information Performed by the Independent
Auditor of the Entity issued by FAR. 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 audit.

Based on my review, nothing has come to our attention that causes us to believe
that the accompanying interim financial information is not, in all material
respects, prepared in accordance with IAS 34 and the Annual Accounts Act.

Stockholm, November 2nd, 2007

Gunnar Liljedahl
Authorized Public Accountant

Questions may be directed to:
Johan Öhman
Chief Executive Officer
Phone: 08-556 967 00


(for copmplete report see attached file)