Final Results

Sportech PLC 31 March 2005 Sportech PLC ('Sportech' or the 'Group') Preliminary Results for the year ended 31 December 2004 Highlights * Turnover increased by 50% to a record £497.0m (2003 restated: £330.4m), due to significant growth in Betting products, particularly on-line casino and poker. * Operating profit before goodwill and exceptional restructuring costs was £16.7m (2003: £19.9m); after adjusting for the £3.2m one-off cost of a Football Pools marketing campaign, profit at this level was £19.9m, in line with last year. Operating profit was £6.3m (2003: £9.5m). * Profit before tax, goodwill and exceptionals of £9.6m (2003: £13.3m). Loss before tax was £0.8m (2003: £3.5m profit). * Net debt reduced by £1.9m to £112.8m. * Earnings per share before amortisation of goodwill of 1.00p (2003: 1.49p). Basic EPS was a loss of 0.56p (2003: loss of 0.04p). * Major business review completed in Q1 2005, which has refocused Group strategy and identified annualised employment cost savings of £2.4m, following one-off redundancy costs in 2005 of approximately £1.4m. * Group's growth strategy clearly focused on new media betting and gaming including the exclusive interactive gaming deal with ITV: -Important strategic position established in the new media betting and gaming market, delivering growth and continuous product development. -ITV and Sportech fully committed to further developing a joint vision for the future with current work focusing on several exciting opportunities including a night-time Poker and soft casino games offer. * Resilient Football Pools business continuing to deliver significant free cash flow. Roger Withers, Acting Managing Director, Sportech PLC said: 'We are confident that the review undertaken in early 2005 will focus the business on its core profit generating divisions and will deliver significant cost savings over the year. The 2004 results demonstrate that we have made good progress in the Betting division, which is on track to deliver profits in 2005, and the Football Pools business continues to deliver substantial cash flow. We remain optimistic about the long-term opportunities for growth in the interactive market which is underpinned by our continuing strong relationship with ITV.' - ends - Enquiries Sportech PLC Roger Withers, Acting Managing Director Gary Speakman, Finance Director 0151 288 3376 Bell Pottinger Corporate & Financial David Rydell / Charlotte Kirkham 020 7861 3232 OPERATING REVIEW The encouraging growth in Group revenue achieved in the first half of 2004 continued in the second half with full year revenues up 50% at £497.0m (2003: £330.4m). Group operating profit, before amortisation of goodwill, restructuring and the one-off impact of a Football Pools marketing campaign, was in line with last year at £19.9m. This reflects a good underlying performance from Soft Gaming and the progress made within our Betting business, where our key action plan is on track. The one-off impact of a Football Pools marketing campaign reduced Group operating profit, pre exceptional restructuring and goodwill, to £16.7m (2003: £19.9m). Turnover Operating Profit 2004 2003* 2004 2003 £m £m £m £m Soft Gaming Football Pools (pre one-off marketing campaign) 79.5 89.7 26.4 25.6 Net cost of one-off marketing campaign (3.2) - ------- ------- ------- ------- Football Pools 79.5 89.7 23.2 25.6 Games & Lotteries 7.5 8.6 1.1 0.4 ------- ------- ------- ------- Established Soft Gaming 87.0 98.3 24.3 26.0 Interactive Development 7.6 4.2 (5.5) (3.6) ------- ------- ------- ------- Total Soft Gaming 94.6 102.5 18.8 22.4 ------- ------- ------- ------- Betting Interactive 319.8 147.5 0.7 0.1 Telephone 82.6 80.4 (2.8) (2.6) ------- ------- ------- ------- Total Betting 402.4 227.9 (2.1) (2.5) ------- ------- ------- ------- Total pre exceptional restructuring and goodwill 497.0 330.4 16.7 19.9 ------- ------- ------- ------- Restructuring (1.2) (1.3) ------- ------- ------- ------- Total before amortisation of goodwill 497.0 330.4 15.5 18.6 ------- ------- ------- ------- *As restated - see note 2 of the accounts Soft Gaming Underlying profits from the core Football Pools business were 3% ahead of 2003 at £26.4m, reflecting an improving gross margin and the full year impact of operating efficiencies, which will also positively impact on 2005. The revenue attrition rate for Pools was 11%, in line with last year. The one-off marketing campaign, which commenced in August 2004, generated increased awareness of the Football Pools across the UK, however new customer recruitment levels were not as high as expected. The campaign was therefore expensed within the financial year at a net cost of £3.2m, reducing the Football Pools operating profits to £23.2m. The Football Pools remains a core part of the business going forward, providing substantial cash flow. The Group continues to examine game development and low cost initiatives to recruit new customers to the existing Football Pools game, whilst also seeking ways to capitalise on new media channel opportunities. Profits from other off-line Soft Gaming products increased to £1.1m, despite a £0.6m trading loss on scratchcards. The Company is on track to exit the scratchcard business by the end of the first half of 2005, enabling the Group to focus on core Soft Gaming activities - Football Pools, Spot the Ball and Lotto - to deliver profits and cashflow. Interactive soft gaming revenues increased by 81% to £7.6m, principally driven by internet growth. The 5 year exclusive deal with ITV commenced in March 2004 and this initiated an increase in the cost base, principally amortisation of development costs. In comparison, 2003 was a year of mainly development activity with costs capitalised as appropriate. The service has attracted over 25,000 customer registrations via ITVi red button access points to date, however, active customer numbers and average gross win levels per active customer have remained low during this initial phase of the contract. As a result, the operating loss increased to £5.5m (2003: £3.6m). Betting The Betting division, comprising sports betting, fixed odds games, casino and peer-to-peer poker products via the direct channels of telephone, internet and television, reduced its operating loss by 16% to £2.1m (2003: £2.5m). During the year we continued the roll-out of new fixed odds games across our channels with the full year benefit of these to be seen in 2005. We are pleased to report significant growth in both Betting turnover and gross win in the period, with increases of 77% and 68% respectively, reflecting increasing awareness of our betting brands, Bet Direct, Littlewoodscasino.com and Littlewoodspoker.com. Despite unfavourable sporting results, gross win of £9.4m in the second half was 2% higher than the first half and Sports-book margins for the full year were a pleasing 8.4%. Approximately 50% of the total gross win was derived from non sports-book activity including casino, poker and fixed odds games. This increasing trend is expected to continue which will improve further the Betting Division's overall performance during 2005 and increase future stability and resilience in the event of unfavourable sporting results. Operating profits from interactive betting increased sevenfold, albeit from a low base, to £0.7m. Our interactive offer enjoyed a significant boost in revenues, up 117%, with gross win at £10.5m, 119% ahead of 2003, due to very strong growth in on-line casino and poker products, and the introduction of fixed odds games. Recruitment of new interactive customers doubled to 80,000 in the year, 24,000 of them to our casino and poker offer. Active customers across our interactive offering were 18,900 by the end of the year, up 52% on 2003. The Company continues to develop its interactive product and distribution portfolio focusing on profit generation. Soon Bet Direct customers will be able to access a wide-ranging product offer on internet, television and mobile via a single electronic wallet. Importantly, future growth prospects will be further enhanced by the addition of a Bet Direct branded casino and peer-to-peer poker offer, which is on track to launch in mid April. Mobile phone sports betting products have been launched very recently which will be accompanied by casino style games in the near future. Telephone betting delivered a 3% growth in full year revenues, reflecting a stronger second half to the year once televised UK racing on Attheraces came back on air in June 2004. Most notably, gross win on telephone increased 29% to £8.1m. Operating losses from telephone at £2.8m were marginally higher than 2003, reflecting, in part, increased investment in sponsorship and marketing. Significant steps were taken during the second half of 2004 to improve the telephone-betting model. In October 2004, telephone handling was successfully moved in house and this action is on track to deliver annualised call handling cost savings in excess of £1m, offset by non-recurring exit costs in 2004 and 2005, relating to the previous outsourcing contract. The cost charged as an operating exceptional in 2004 was £0.3m and £0.6m will be charged in 2005. Interactive Television Gaming with ITV We have just completed the first year of the exclusive interactive betting and gaming partnership with ITV which has a minimum further 4 years to run. There is a joint vision for the future and current developments are focusing on several exciting opportunities, including the integration of betting and gaming propositions within ITV programming. These include night-time poker and soft casino games, gaming linked to a virtual Coronation Street and soft games linked to daytime programming. The full Littlewoods Game On service on ITVi, including sports betting, commenced in June 2004. To date the service has relied on red button interactivity only, with future developments expected to widen product appeal by encompassing other interactive return paths such as SMS. The ITVi Game On service has been further strengthened with the launch in early March 2005 of a full-screen 24:7 Game Zone. Whilst we are focusing on the recruitment of new customers and growing gross win levels, it is in a cost conscious framework. Specific action has been taken on the cost base to ensure that cash requirements for 2005 will be substantially lower than 2004 levels. Cashflow The Group again generated strong cashflow, although net cash inflow from operating activities at £14.3m was lower than the previous year (2003: £18.6m), mainly reflecting expenditure on the one-off Pools marketing campaign. Total capital expenditure during the year was £2.2m (2003: £3.0m), which included further investment in developing games and betting content for interactive television. Net debt reduced by £1.9m to £112.8m. Group Strategy and Structure A major review of the business was undertaken at the beginning of 2005 under the control of the acting Managing Director, Roger Withers. The business strategy is now clearly focused on the core revenue generating areas of the business, Football Pools and new media betting and gaming, and the future growth opportunity around the exclusive interactive deal with ITV. The consequential impact is to reduce annualised employment costs by £2.4m, £0.5m relating to the scratchcard closure. This is expected to result in an associated exceptional restructuring cost in H1 2005 of approximately £1.4m. Current Trading & Outlook The Soft Gaming business, underpinned by Football Pools, is trading in line with expectations and continues to provide strong cash flow. We expect the Betting division, which is being further enhanced by new product development, to deliver profits in 2005. Casino and poker gross win in the 11 week period ended 25th March 2005 is up 27% against the comparative period, however telephone betting margins have been much weaker than their strong 2004 comparators. We remain excited by the long-term opportunities for growth and are committed to developing the Group's interactive offering to increase its share of the interactive market. This confidence is reinforced by our continuing strong relationship with ITV. I look forward to updating you in the near future on the search for a new Chief Executive which is progressing well. A leading headhunter has been appointed and we will be shortly moving to the short-list stage in the process. We are seeking top quality candidates with relevant experience in the gaming sector. I am pleased with the positive start we have made in 2005 with significant steps being taken to refocus the Group. David Mathewson Chairman 31 March 2005 Consolidated Profit & Loss Account For the year ended 31 December 2004 Unaudited Audited (Restated) 2004 2003 Notes £m £m Group turnover 2, 3 497.0 330.4 Cost of sales (439.9) (275.5) --------- --------- Gross profit 57.1 54.9 Net operating expenses (50.8) (45.4) --------- --------- Operating profit before exceptional restructuring costs and amortisation of goodwill 16.7 19.9 Exceptional restructuring costs 4 (1.2) (1.3) --------- --------- Operating profit before amortisation of goodwill 15.5 18.6 Amortisation of goodwill (9.2) (9.1) --------- --------- Operating profit 6.3 9.5 Profit on sale of Technology Patents 5 - 0.6 (discontinued) Net interest payable and similar items (7.1) (6.6) --------- --------- (Loss)/profit on ordinary activities before taxation 3 (0.8) 3.5 Tax on (loss)/profit on ordinary activities 6 (2.5) (3.7) --------- --------- Retained (loss) for the financial year (3.3) (0.2) ========= ========= Earnings per share 7 Basic and diluted (0.56)p (0.04)p ========= ========= Pre amortisation of goodwill 1.00p 1.49p ========= ========= All operations are continuing. Reconciliation of Movement in Group Shareholders' Funds For the year ended 31 December 2004 Unaudited Audited 2004 2003 £m £m Shareholders' funds at 1 January 2004 31.3 31.5 (Loss) for the financial year (3.3) (0.2) --------- --------- Shareholders' funds at 31 December 2004 28.0 31.3 ========= ========= Consolidated Balance Sheet As at 31 December 2004 Note Unaudited Audited 2004 2003 £m £m Fixed assets Intangible assets 10 137.3 146.4 Tangible assets 10 9.0 9.1 ----------- ------------ 146.3 155.5 ----------- ------------ Current assets Debtors - due within one year 10 4.7 9.5 Debtors - due after more than one year 10 6.4 0.7 Cash at bank and in hand 2.4 4.1 ----------- ------------ 13.5 14.3 Creditors Amounts falling due within one year (30.2) (44.3) ----------- ------------ Net current liabilities (16.7) (30.0) ----------- ------------ Total assets less current liabilities 129.6 125.5 Creditors Amounts falling due after more than one year (101.6) (94.2) ----------- ------------ 28.0 31.3 =========== ============ Capital and reserves Called up share capital 29.6 29.6 Profit & loss account (1.6) 1.7 ----------- ------------ Total shareholders' funds 28.0 31.3 =========== ============ Consolidated Cash Flow Statement For the year ended 31 December 2004 Unaudited Audited Notes 2004 2003 £m £m £m £m Net cash inflow from operating activities 8 14.3 18.6 Returns on investments and servicing of finance: Interest received 0.5 0.2 Interest paid (7.3) (6.5) -------- -------- Net cash outflow from returns on investments and servicing of finance (6.8) (6.3) Taxation (2.7) (3.1) Capital expenditure and financial investment: Purchase of tangible fixed assets (1.9) (2.6) Purchase of intangible fixed assets (0.3) (0.4) Sale of tangible fixed assets 0.3 0.1 Sale of Technology Patents 5 - 0.6 -------- -------- Net cash outflow from capital expenditure and financial investment (1.9) (2.3) ------- -------- Cash inflow before financing 2.9 6.9 Financing: Net loans drawn/(repaid) 2.0 (10.0) -------- -------- Net cash inflow/(outflow) from financing 2.0 (10.0) ------- -------- Increase/(decrease) in net cash 9 4.9 (3.1) ======= ======== Notes to the Preliminary Statement For the year ended 31 December 2004 1. Basis of reporting a) The preliminary results have been prepared on the basis of the accounting policies set out in the Group's 2003 financial statements with the exception of the changes set out in note 2 below. The preliminary results have been drawn up for the 53 week period from 3 January 2004 to 7 January 2005 (2003: 52 week period). b) The preliminary results for the year ended 31 December 2004 are unaudited. The financial information on pages 7 to 16 does not amount to full financial statements within the meaning of Section 240 of the Companies Act 1985 (as amended). The comparative figures for the year ended 31 December 2003 do not constitute statutory accounts. These figures, apart from the restatement of turnover (see note 2), have been extracted from the audited accounts for that year which have been delivered to the Registrar of Companies and on which the auditors issued an unqualified report which did not contain a statement under either Section 237 (2) or (3) of the Companies Act 1985. 2. Changes in accounting policy During the year ended 31 December 2004, the Company has made changes to its accounting policies with respect to segmental reporting and to turnover. a) In prior periods, the Company's online casino has been reported within Soft Gaming. The Company has reviewed the playing patterns on its online casino and concluded that it would be more appropriate to report it within Betting. This change will only affect the segmental reporting note, and will not change the profit and loss account in aggregate. In respect of the prior year, the impact is to move £3.7m of turnover, which in 2003 was equivalent to gross win, from Soft Gaming to Betting. The impact for the current year is to move £8.8m of gross win from Soft Gaming to Betting. b) At the same time, the basis of turnover disclosure for the online casino business has been reviewed. Previously turnover for this business was defined as the gross win achieved; following a review of the rationale underlying this basis and to bring on-line casino turnover into line with other similar internet based games that the Company offers, as well as that for non-internet based products, the basis of reporting turnover is now believed to be best defined as the amounts customers spend with the business, rather than the amount of customer spend net of winnings returned to them. The impact for the prior year is to add £122.5m to both turnover and cost of sales. There is no impact on profit for the prior year. The impact for the current year is to add £277.5m to turnover and cost of sales. There is no impact on profit. The effect of these changes in accounting policy on the comparatives for the year ended 31 December 2003 is as follows: As Adjustment As originally restated stated £m £m £m Turnover Soft Gaming 106.2 (3.7) 102.5 Betting 101.7 126.2 227.9 --------- --------- --------- 207.9 122.5 330.4 ========= ========= ========= Cost of sales 153.0 122.5 275.5 ========= ========= ========= Operating profit before exceptional restructuring costs and amortisation of goodwill Soft Gaming 23.0 (0.6) 22.4 Betting (3.1) 0.6 (2.5) --------- --------- --------- 19.9 - 19.9 ========= ========= ========= Net assets Soft Gaming 45.5 (0.3) 45.2 Betting (14.2) 0.3 (13.9) --------- --------- --------- 31.3 - 31.3 ========= ========= ========= 3. Segmental reporting 2004 2003 £m £m Turnover Soft Gaming 94.6 102.5 Betting 402.4 227.9 --------- --------- 497.0 330.4 ========= ========= Profit/(loss) before taxation Soft Gaming 18.8 22.4 Betting (2.1) (2.5) --------- --------- Operating profit before restructuring costs and amortisation of goodwill 16.7 19.9 Exceptional restructuring costs ** (1.2) (1.3) Amortisation of goodwill ** (9.2) (9.1) --------- --------- Operating profit 6.3 9.5 Profit on sale of Technology Patents - 0.6 Net interest payable and similar items (7.1) (6.6) --------- --------- (0.8) 3.5 ========= ========= ** - mainly Soft Gaming 2004 2003 £m £m Net assets/(liabilities) Soft Gaming 43.7 45.5 Betting (15.7) (14.2) --------- --------- 28.0 31.3 ========= ========= 4. Exceptional restructuring costs 2004 2003 £m £m Exceptional restructuring costs - operating (1.2) (1.3) ========= ========= Restructuring costs in the year relate to the establishment of an in-house call centre operation within the Betting segment, further rationalisation of the football pools business operating cost base within the Soft Gaming segment, and the rationalisation of interactive developments teams consequent upon the transition from development stage to trading stage. Restructuring costs in the prior year related to the transfer of the Zetters football pools operation from London to Liverpool and also to costs incurred in respect of a reorganisation subsequent to the sale of the Technology Patents business. 5. Profit on sale of Technology Patents During the prior year the Group sold its portfolio of Technology Patents for $1.5m (£0.9m). Disposal costs of £0.3m resulted in a profit on sale of £0.6m. 6. Taxation 2004 2003 £m £m Current tax UK corporation tax at 30% (2003: 30%) 2.4 3.4 Adjustments in respect of prior periods (0.1) - --------- --------- Total current tax 2.3 3.4 --------- --------- Deferred tax Current year 0.2 0.3 --------- --------- 2.5 3.7 ========= ========= The tax for the period is higher than the standard rate of corporation tax in the UK of 30%. The differences are explained below: 2004 2003 £m £m (Loss)/profit on ordinary activities before tax (0.8) 3.5 ========= ========= (Loss)/profit on ordinary activities multiplied by the standard rate of corporation tax in the UK of 30% (2003: 30%) (0.2) 1.0 Effects of: Goodwill write-off not deductible for tax purposes 2.6 2.6 Other permanent differences 0.2 0.1 Origination and reversal of timing differences (0.2) (0.3) Adjustments to tax in respect of prior periods (0.1) - --------- --------- 2.3 3.4 ========= ========= 7. Earnings per share The calculations of earnings per share are based on the following profits and numbers of shares. 2004 2003 Earnings Weighted Per Earnings Weighted Per average share average share number of amount number of amount shares shares £m '000 pence £m '000 pence Basic and diluted EPS excluding goodwill amortisation 5.9 592,074 1.00p 8.9 592,074 1.49p Effect of goodwill amortisation (9.2) 592,074 (1.56)p (9.1) 592,074 (1.53)p -------- --------- ------- -------- --------- ------- Basic and diluted EPS (3.3) 592,074 (0.56)p (0.2) 592,074 (0.04)p ======== ========= ======= ======== ========= ======= 8. Reconciliation of operating profit to operating cash flows 2004 2003 £m £m Operating profit 6.3 9.5 Depreciation on tangible fixed assets 2.4 2.1 Amortisation of goodwill 9.2 9.1 Amortisation of intangible fixed assets 0.2 - Decrease in stocks - 0.1 Decrease in trade debtors - 0.4 Decrease in other debtors 0.6 - Increase in prepayments (2.0) (1.9) Increase/(decrease) in trade creditors 0.1 (1.0) Decrease in other taxes (0.5) (0.2) (Decrease)/increase in accruals and deferred income (2.0) 0.5 ---------- ---------- Net cash inflow from operating activities 14.3 18.6 ========== ========== 9. Analysis and reconciliation of net debt At 1 January Cash Other At 31 December 2004 flow movement 2004 £m £m £m £m Cash at bank and in hand excluding charity cash balances 2.3 (2.0) - 0.3 Bank overdrafts (6.9) 6.6 - (0.3) --------- -------- --------- --------- (4.6) 4.6 - - --------- -------- --------- --------- Debt due within one year (15.9) 1.0 4.0 (10.9) Debt due after one year (94.0) (3.0) (4.0) (101.0) Hire purchase contracts (0.2) - (0.7) (0.9) --------- -------- --------- --------- (110.1) (2.0) (0.7) (112.8) --------- -------- --------- --------- (114.7) 2.6 (0.7) (112.8) ========= ======== ========= ========= 2004 2003 £m £m Increase/(decrease) in cash in period 4.9 (3.1) Movement in charity cash (0.3) (0.1) ----------- --------- Change in net debt resulting from cash flows 4.6 (3.2) New hire purchase contracts (0.7) (0.2) Cash inflow from increase in loans (3.0) (6.0) Cash outflow from reduction in loans 1.0 16.0 ----------- --------- Movement in net debt for the period 1.9 6.6 At 1 January 2004 (114.7) (121.3) ----------- --------- At 31 December 2004 (112.8) (114.7) =========== ========= 10. Interactive television contracts Included in these financial statements are assets held in respect of interactive gaming television gaming products. The following costs were deferred and capitalised at the year-end. 2004 2003 £m £m Debtors - prepayments recoverable within one year 0.7 3.5 Debtors - prepayments recoverable in more than one year 5.9 - Tangible fixed assets 1.7 1.3 Intangible fixed assets - other 1.3 1.2 ---------- ---------- 9.6 6.0 ========== ========== Prepayments represent advanced payments of commission to television broadcasters and together with tangible and intangible assets will be recovered from cashflows to be generated over the life of the interactive television gaming contracts. The level and timings of these cashflows have been forecast by the directors' based on estimates of viewers' participation and expenditure on the Group's interactive television offering in the period of the agreement which runs until February 2009. This information is provided by RNS The company news service from the London Stock Exchange

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