Financial Review

Trading summary
Turnover for the year ended 31 July 2006 was £2,063.5m (2005: £1,526.2m), earning a gross margin of £303.3m (2005: £175.8m) at 14.7% of turnover (2005: 11.5%). Sports betting turnover was £1,869.8m (2005: £1,422.0m), earning a gross margin of £109.6m (2005: £71.6m) at a gross margin percentage of 5.9% (2005: 5.0%). Casino and gaming, poker and fee income contributed a further £65.8m, £117.2m and £10.7m respectively to both turnover and gross margin (2005: £45.2m, £49.5m and £9.5m). Of the £303.3m of gross margin generated, £89.6m (2005: £47.1m) was generated by customers residing in Europe, £196.7m (2005: £119.7m) by US based customers and £17.0m (2005: £9.0m) by the rest of the world.

Turnover and margin for the period are stated after deducting customer bonuses of £19.6m (2005: £12.5m). The sports gross margin percentage as reported was 5.9% (2005: 5.0%). Without the bonus deduction, sports margin percentage was 6.4% (2005: 5.5%).

Costs (excluding goodwill amortisation and share option charges) in the year of £200.3m (2005: £115.3m) represented 66.0% (2005: 65.6%) of gross profit. Costs comprised marketing £80.7m (2005: £40.8m), banking fees £42.5m (2005: £28.3m), information technology £18.9m (2005: £12.5m), employee costs £33.6m (2005: £21.9m), other administration costs £19.1m (2005: £8.8m) and depreciation £5.5m (2005: £3.0m).

Operating profit (before exceptional items, goodwill amortisation and share option charge) for the year was £103.0m (2005: £60.5m), representing a margin of 34.0% (2005: 34.4%) of gross profit.

Profit before tax was £71.5m (2005: £40.8m), after including share option charge of £6.4m (2005: £nil), goodwill amortisation of £22.1m (2005: £16.4m), net finance costs of £3.0m (2005: £4.6m), exceptional profit of £nil (2005: £1.0m), and adding the share of operating profit in associated undertakings of £nil (2005: £0.3m).

Finance costs
Finance costs comprised interest receivable on the Group’s cash balances of £1.8m (2005: £0.5m), interest payable on bank loans and overdrafts of £1.7m (2005: £3.4m), £1.0m (2005: £0.7m) relating to the amortisation of bank fees, other interest payable £nil (2005: £0.1m) and a non-cash charge of £2.1m (2005: £0.9m) arising from the discounting of future earnout liabilities back to current values in accordance with FRS 7.

Earnings per share
Basic earnings per share before exceptional items, share option charge and amortisation of goodwill was 24.9p (2005: 18.6p). Diluted earnings per share before exceptional items, share option charge and amortisation of goodwill was 23.8p (2005: 13.9p).

Cash flow
During the year ended 31 July 2006, the Group generated cash from operating activities of £118.8m (2005: £71.8m). As at 31 July 2006, the Group had £97.2m (2005: £67.0m) of cash and liquid resources on its balance sheet, of which £38.6m (2005: £32.0m) represented customer deposits.

Gross financial liabilities amounted to £47.5m (2005: £102.7m). This comprised a bank loan of £10.8m (2005: £63.6m), deferred consideration of £17.9m (due to the vendors of Paradise Poker) and contingent cash consideration of £18.8m (£12.6m due to the vendors of Paradise Poker, £2.9m due to the vendors of the business of ISC Entertainment Inc and £3.3m due to the vendors of the shareholding in Sportingbet Italia). Since the year end, the bank loan of £10.8m has been repaid.

Treasury management
The Group’s treasury function provides a centralised service for the provision of finance and the management and control of liquidity, foreign exchange and interest rates. The function operates as a cost centre and manages the Group’s treasury exposure to reduce risk in accordance with policies approved by the Board.

It is not the policy of the Group to trade in or enter into speculative transactions. Authorities, procedures and reporting responsibilities are documented and regularly reviewed.

Due to the international nature of its core activities, the Group’s reported profits, net assets and cash flows are all affected by foreign exchange rate movements, and in particular, the dollar/sterling exchange rate.

Operations are financed by a mixture of retained profits, bank borrowings and long term loans. In addition, various financial instruments, such as trade debtors and trade creditors, arise directly from the Group’s operations.

Accounting standards
The Group keeps up to date in respect of the work of the Accounting Standards Board and gives careful consideration to early application of the ASB’s Financial Reporting Standards.

Financial conduct
In addition to the financial probity obligations resulting from statutory, regulatory, and London Stock Exchange requirements, and the Customer Charter and Code of Conduct, the Group applies the following Financial Code:

Financial Code

1. Sportingbet maintains at all times available cash resources to cover its customer liabilities.
2. Sportingbet only deals with reputable, secure financial institutions.
3. Sportingbet’s processes and systems are designed to minimise the risk of fraud or money laundering.
4. Sportingbet employs and retains qualified finance professionals to monitor and maintain a stringent financial control environment.
5. Sportingbet’s financial control environment facilitates informed decision making, allowing the Group to adapt quickly to market changes.