For the half-year results to 31 December 2014, the company announced a net profit after tax of $ 34.6 million which is a decrease of 3% over the previous year while the profit before tax was $ 45.5 million which was the same as the previous year. On the basis of these results, the Board of Directors declared an interim fully franked dividend of 5 cents per ordinary share with no Conduit Foreign income. The executive chairman L H Ainsworth said that the dividend represents a payout ratio of 47% of after-tax profits in line with the objective of returning profits for shareholders and the previously declared dividend policy. All the tax losses accumulated from the inception have now been utilised which is why shareholders are being rewarded with a fully franked dividend.
Revenues were down 8% over the previous year to $ 111.8 million while EBITDA grew by 2% to $ 50.3 million and EPS at $ .11 per share was the same as the previous year. Mr Ainsworth pointed out that the results emphasise the investment and growth potential of the company from international markets which now represents more than half of the total revenue. International revenue at $ 58.4 million was 52% of the total revenue which is an increase of 45% of the previous year when the figure was 33% of total revenue. North America reported revenues of $ 30.2 million which is a 47% increase over the previous year. Game brands such as Sweet Zone consistently perform at better than 150% of the house average. Increased contributions from Oklahoma, Canada, Michigan and momentum in California saw volumes grew by 39%. Latin America generated revenues of $ 22.5 million which is 63% more than the previous year. Strong product performance generated extra revenues from both existing and new customers. CEO Danny Gladstone noted that at the end of the half year, 2286 machines were on participation, lease or rental and an additional 400 machines were on trial with the potential of conversion to sales or leases in the second half of FY 2015.
Domestic revenue came to $ 53.5 million accounting for 48% of total revenues which is a reduction of 34% over the previous year. The transition and progression of new hardware and software approvals had an impact on sales opportunities for the half-year. Product submissions for approval and support by gaming regulators are expected to increase revenues in the second half of the year. The establishment of the online business continues to generate movement and the recent Playtech agreement to supply content to operators is expected to expand the distribution to other operators in the UK and Europe.
The gross margin achieved was 63% compared to 64% in the previous period and the company explained that margins were affected by the introduction of new hardware configurations and a diversify of products both of which are expected to encourage outright sales as well as recurring revenues. The increased revenues from the international markets, particularly in Latin America, produced lower margins than the other markets. Operating costs excluding costs of sales and financing came $ 41 million which is an increase of 12.1% over the previous period. This was primarily because increased selling costs, higher depreciation on a larger installed base and one off costs associated with the evaluation of strategic investments. Research and development costs, which are a significant driver in this type of business, were 11% of total revenue at $ 11.9 million which is about the same as the $ 12.1 million for the previous year. Continued investment in research and development is expected to result in an enhanced library of innovative games.
Historical financial performance (Source: Company Reports)
The balance sheet position continues to be strong with a net cash position of $ 54.4 million as at 31 December 2014 and a minimal level of debt. Receivables at $ 127.4 million grew by 11% over the previous year on account of the timing of sales and the balance sheet translation at the end of the half-year. The increase in PPE was due to the growth of of the base of installed participation machines in the Americas and the net tangible asset backing per share is now up from $ 0.63 to $ 0.71. The cash flow statement reflects dividends paid of $ 16.1 million and net cash generated from operating activities was down by $ 17 million over the previous year because of the reduction in domestic sales, the increases in inventory because of port disruptions in the Americas and the ramp up of deliveries as well as one-off payments on licence fees and business investment.
Gaming products
In the domestic market, single and multi-game multi-denomination packages included Double Shot, Ultimate Gold Series and Frontier Series. Upcoming releases in the North American market include a variety of new games as well as recurring revenue games. The first A560SL licensed titles "Showgirls" and "Sound of Music" will be launched in this half.
Gaming Products (Source - Company Reports)
Regulatory update
There were 23 new license approvals in the United States consisting of 21 US Tribe licenses and 2 US state licenses which were in Arizona and California. The Arizona State license which is a permanent license was approved in October 2014 and the new tribal jurisdictions included Kansas and Wyoming. Five US state applications including Delaware, Kansas, Louisiana, Massachusetts and New Mexico are awaiting determination. Other pending applications include Canada And a Software Operating License in the UK. As at February 2015, the group has a total of 181 jurisdiction licenses. The company has also been selected as a prequalified vendor in the online market for the British: Columbia Lottery Corporation.
NPAT (Source - company Reports)
The share price slipped in early June after the company warned of flat net profits after tax and warned that the headwinds experienced in the first half have continued into the second half belying investor expectations of an improvement. However, we find it encouraging to note that the weakness in the domestic market is expected to be largely offset by the improved performance in the international markets. We are bullish about the future growth prospects and consider the share price correction to be a good opportunity for buying. Accordingly, we put a BUY recommendation on the stock at the current price of $2.63.
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