Business Review

Overview
In the year ended 31 July 2006, Sportingbet saw a further increase in the scale of its business. The Group’s strategy of providing a broad range of online gaming experiences to a global customer base exhibited significant benefits. The Group consolidated its position in a number of its core markets whilst the number of active customers rose by 318,992 to 971,361. It operated in over 200 countries, serving customers in 24 languages.

The number of sports bets placed grew by 25.6m (52.6%) to 74.3m (2005: 48.7m). Casino and gaming bets grew by 141.3m (40.2%) to 492.6m (2005: 351.3m). Poker volumes also increased significantly over the levels experienced in 2005, with the average number of games played per day on Paradise Poker Business Review doubling over the year to 2.0m (2005: 1.0m).

However, on 29 September 2006 the United States Congress passed the Unlawful internet Gambling Enforcement Act (‘the Act’). The Act makes it illegal for anyone involved in the business of betting and wagering to knowingly accept payments, wire transfers or any other bank instrument from US customers in connection with ‘unlawful internet gambling’. Having taken extensive legal advice, the Board concluded that it had no option but to cease offering its services to US citizens prior to the Act becoming law.

As the US-resident customers made up approximately 56% of the Group’s active customer database, the actions taken with regard to the US-facing operations will have a material impact on the Group’s business going forward.


Americas
In the year ended 31 July 2006, the number of customers who bet on the region’s sports betting websites rose by 65.2% to 312,022 (2005: 188,856). The number of sports bets placed by those customers rose by 35.6% to 34.5m (2005: 25.4m) averaging 110 bets per active customer per annum (2005: 135 bets). The average sports bet size was relatively constant at $54 (2005: $58). Following strong performance in the second half of the year, the sports margin percentage was above historical levels at 6.7% (2005: 6.1%).

The number of customers who bet on the region’s gaming websites rose by 47.1% to 164,630 (2005: 111,919). The number of gaming bets placed by those customers rose by 27.0% to 328.0m (2005: 258.2m) at an average bet size of $11 (2005: $11). In addition, 45,299 sports customers, representing 18.3% of the region’s active customer base, also played poker at Paradise Poker.

As a result of the post year end disposal, the US-facing sports and casino operations is now discontinued.

Paradise Poker
Paradise Poker performed strongly during the year, exceeding the Board’s expectations in all of its key performance indicators. As a result, earnout targets were met during the year realising $50m of contingent consideration. This amount, payable as £17.9m in cash and the issue of 9.8m shares, is due to be paid in November 2006.

In June 2006, Paradise Poker added a full casino suite to its download unit to complement the highly successful blackjack product launched in March 2005. The initial response from players to this addition was positive.

During the year, the number of active customers who have contributed to rake at Paradise Poker rose by 63.0% to 345,575 (2005: 212,000). The average daily revenue increased by 81.1% to $513,995 (2005: $283,824) representing a yield per active player of $543 (2005: $489). During the year, 58,190 (19.4%) active real money poker customers also bet on the Group’s US-facing sports or casino websites.

Non US-resident customers generated 19% of the Paradise Poker rake.

Australia
The Australian region has continued to reap the benefits of the management actions undertaken in 2005 to realign the business. The move away from a primarily telephone based betting operation to one in which internet betting is increasingly important has been successful, and there has been a significant increase in profitability. This move, resulting in lower turnover and smaller bet size but with a broader customer base and higher margin, continues to benefit the Group. This trend was particularly notable during the FIFA World Cup.

Sport bet volumes by region

During the year, the percentage of total bets taken over the internet has risen further to 66.0% (2005: 60.1%). These actions, together with good sports results, have increased sports gross margin to 3.8% (2005: 2.3%). In accordance with Australian licensing regulations, no casino or poker products are offered within Australia.

The number of customers who bet with Sportingbet Australia during the year rose by 181.6% to 17,732 (2005: 6,298). The number of sports bets placed by these customers rose by 51.4% to 4.6m (2005: 3.0m) averaging 259 bets per active customer per annum (2005: 482 bets). The average sports bet size was lower at AUS$181 (2005: AUS$301), reflecting the increased activity on the more leisure-orientated internet platform.

New active customers increased by 4,862 (122.1%) to 8,843 (2005: 3,981). The cost of acquiring a new active customer fell to AUS$521 (2005: AUS$917), yielding a cash payback of under three months.

Europe
The European business continued to demonstrate the strong growth levels experienced in the previous year, with significant progress in all product areas: sports, casino and poker.

The number of active customers who bet on the region’s sports betting websites rose by 55.9% to 382,160 (2005: 245,215). The number of sports bets placed by these customers rose by 74.3% to 35.3m (2005: 20.2m) averaging 92 bets per active customer per annum (2005: 83 bets). The average sports bet size increased marginally to £13.8 (2005: £13.3). The overall sports margin percentage, after betting tax, was 7.5% (2005: 7.9%), impacted in part, by lower margins in European soccer and low margins across the World Cup.

• Sportingbet Plc picked up five awards at the 2006 IR Magazine Awards
• A global 24/7 business

The number of customers who bet on the region’s gaming websites rose by 161.1% to 155,596 (2005: 59,596) at an average bet size of £5.1 (2005: £5.0). The gaming margin percentage was constant at 3.8% (2005: 3.8%). In addition, the European business generated £14.7m of poker rake (2005: £5.2m).

New active customers increased by 131,004 (79.6%) to 295,532 (2005: 164,528). The cost of acquiring new active customers continues to be cost effective at £158 (2005: £137), yielding a cash payback period of less than six months. This includes launch costs into new markets.

Post balance sheet events
Following the passing of the Unlawful internet Gambling Enforcement Act of 2006 (the ‘Act’) by US Congress on 29 September, the Board concluded that a disposal of the Group’s US-facing sports betting and casino operations together with the closure of its US-facing poker operations was in the best interest of all its stakeholders.

As a result, on 12 October 2006, Sportingbet sold its US-facing sports betting and casino business to Jazette Enterprises Limited for a cash consideration of $1 and has discharged excess liabilities amounting to approximately $13.2m.

Sportingbet will retain the Paradise Poker business, but now prevents US resident customers from making deposits. To allow for an orderly wind down of the US-facing Paradise Poker business, Paradise Poker will remain open to US customers for real money poker play utilising their existing account balances for one month, following which all US resident customers will be blocked from playing real money poker. In addition, the Board has taken immediate steps to prevent customers from 10 US States, with laws prohibiting internet gambling, from playing real money poker at Paradise Poker.

The continuing operations of Sportingbet will consist of the Group’s existing European sports, casino and poker business, the Australian sports business and the non US-facing business of Paradise Poker.

Trading outlook
During the first 10 weeks of the current financial year, trading across the Group was strong. Following the Board’s decision to sell the US-facing sports and casino betting operations and close its US-facing poker operations, the Group must now focus on its European and Australian operations.

Sportingbet Plc head office

In Europe sports bets are 62% ahead of the same period last year and gross margin is more than 50% ahead of the previous year, following strong sports margins in recent weeks. In addition, poker rake from the European Boss Media platform is 75% ahead of last year.

The Australian business, with an ever greater focus on the leisure customer, is generating more stable margins. Internet customers now represent 81% of the bets made compared to 67% in the prior year. In addition, volume to date is strong with sports bets up 80% compared to the same period last year and promising sports margin performance.

Following the closure of its US-facing business, Paradise Poker will now focus primarily on Europe as we continue to exploit the high growth in this market. The European Paradise Poker platform will roll out multi-language and multi-currency sites over the coming months to complement Sportingbet’s localised sports and casino offering. 19% of rake generated in 2006 was from non-US customers. However, following the significant fall in total customers now able to play at Paradise Poker, this revenue may potentially be at risk if significant numbers of these customers now seek larger, more liquid ‘black market’ poker rooms. The Group will have a better idea of whether this will have a material impact or not as the year unfolds.

The sale of the US-facing sports and casino business and the closure of the US-facing poker operations will result in significant exceptional costs in the current financial year. These will include an impairment of the goodwill relating to the investment in the US-facing sports and casino business and Paradise Poker amounting to approximately £200.0m, as well as a restructuring of overheads and related costs amounting to approximately £10m. These are detailed further in the Notes to the accounts.