In 1995, CryptoLogic was just an idea discussed between football tosses and
golf swings in an abandoned Toronto warehouse. As fresh graduates, Mark and
Andrew Rivkin knew they wanted to start a business but couldn't decide which way
to go. "One of the jokes was that we'd turn that warehouse into an indoor
golf dome," said Andrew, CryptoLogic President and CEO.
What they did was start what would become CryptoLogic Inc. Around the time
the fledgling business was moving from the now-subleased warehouse to the
Rivkin's parents' basement, Anatoly Plotkin joined the venture as Chief
Technical Officer. With Plotkin's 20 years experience in software development
and design -- including contracts for the Russian military -- the Rivkin's had
the critical mass they needed to launch what has proven to be an industry-wide
winner: the combination of Internet gaming software and secure online
transaction management.
In CryptoLogic's case the transaction management system -- called E-cash --
came first. After spending months searching unsuccessfully for investment
partners, they just happened to stumble onto the Internet gaming idea. This
combination -- online casino and E-cash -- snared them $500,000 in seed
money and they were in business. Development on the first version of their
gaming software began immediately. Then, in 1996, they inked their first
licensee, play-tested the new software for a few months and, finally, opened for
Real Money play. The response was instantaneous: real players gambling real
dollars had money dropping into CryptoLogic's bank account from day one.
It makes for a good story, but after four years of business the numbers make
it real:
- customers in 240 countries have performed more than 380 million online
transactions through CryptoLogic's E-cash system totaling more than US$4
billion.
- CryptoLogic has 18 licensees operating over 40 branded casinos for a total
user base in excess of 500,000, as of early 2000.
- revenue growth in 1999 topped 40% and is expected to be in the 30-40%
range for 2000.
- now listed on the Toronto Stock Exchange (CRY) and Nasdaq (CRYP),
CryptoLogic's market capitalization sits well above US$200 million with just
over 12 million common shares.
- CRYP (Nasdaq) is currently US$19.50 and CRY (TSE) is CDN$29.00 but
analysts expect it will go much higher: Sprott Securities (TO) gives CRY a
Y2000 target of CDN$95; Pacific Growth Equities (SF) estimates US$50; Sidoti
& Co. (NY) recently reiterated its target of US$37.
It's no exaggeration to say that CryptoLogic has been conspicuously
successful. Their licensees include the largest and most respected online
casinos including The
Sand of The Caribbean,? and the once-great Kenny Rogers Casino which
closed its doors to new customers earlier this year. (Nervous about U.S.
gambling laws, Kenny Rogers Casino never accepted bets from American gamblers
and as a result was not profitable.)
CryptoLogic's E-cash system -- capable of handling a wide range of secure
financial transactions as well as the buying and selling of merchandise, the
distribution of software and the transmission of information such as email -- is
currently being split off to a separate division and an IPO is expected this
fall. The wholly-owned direct licensing division, Intertainet Overseas Licensing
Limited (IOLL), works from its offices in Cyprus, far from the ongoing legal
questions in North America.
CryptoLogic's casino software is widely regarded as one of the best packages
available but the intricacies of the E-cash system have often frustrated casino
users. Deposits can be made freely, but first-time players cannot withdraw
winnings from a CryptoLogic-powered casino until they receive a PIN number,
which is sent through the regular postal service. The policy may discourage some
players, but the company believes the end justifies the means. "Our fraud
control measures have resulted in one of the lowest fraud rates, under 1%, well
below industry norm," said Nancy Chan-Palmateer, Director of
Communications, arguing that the system allows them to "detect unauthorized
transactions, verify physical address, limit access by minors, [and] assess
credit card history."
After the warm glow of CryptoLogic's growth and success, the company's
recently announced second quarter results might come as a bit of a shock. Total
revenue is almost flat compared to the same period last year and earnings per
share have dropped 39% from US$1.21 to US$0.74. All this at a time when
CryptoLogic's competitors are posting 20-40% increases in revenue. Curious
observers and investors alike may well be asking themselves "What's
up?"
Part of the explanation comes from CryptoLogic's ongoing development efforts.
Thus far in 2000 they've spent over US$6 million developing the latest version
of their software, Version 4.0, which features virtual game floors, dealer and
player avatars, multi-player games, tournaments and progressives, E-cash logs
and additional language support. CryptoLogic reports that licensing had slowed
while their new clients waited for the release which recently premiered at
InterCasino, CryptoLogic's flagship licensee.
In the bigger picture CryptoLogic is broadening its focus from signing online
licensees to aligning themselves with land-based gaming companies. "In late
1999, we were the first to sign a major brand name organization, William Hill.
So far in 2000, we have signed another five," said Chan-Palmateer.
Companies such as Jupiters Ltd in Australia, Christchurch Casinos Ltd of New
Zealand, International Thunderbird of Brazil and a yet-to-be-named gaming
company in Argentina with over 20 gaming facilities have joined William Hill in
extending CryptoLogic's gaming interests. "More than 97% of CryptoLogic's
total revenue is derived from ongoing licensing and support fees, creating a
solid recurring revenue stream. [The] one-time licensing fee represents a very
small percentage of our revenue," said Chan-Palmateer.
While the second quarter results may have less sparkle than they might have
hoped, the company is making no apologies. "We expect to return to stronger
growth rates in 2001 as our newest land-based licensees go live and our existing
licensees roll out CryptoLogic's next generation software," Chan-Palmateer
added.
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