Optimal Group Announces First Quarter
2006 Results
---$0.27 per diluted share in Adjusted Earnings---
Montreal, Quebec, May 8, 2006 – Optimal Group Inc. (NASDAQ:OPMR) today announced its financial results for the first quarter ended March 31, 2006. All references are in U.S. dollars.
Revenues for the first quarter ended March 31, 2006 were $52.4 million compared to $25.1 million in the first quarter ended March 31, 2005.
Adjusted earnings for the first quarter were $7.1 million or $0.27 per diluted share compared to $3.4 million or $0.14 per diluted share for the comparable period in 2005.
Adjusted earnings is a non-GAAP (generally accepted accounting principles) financial measure that excludes foreign exchange gains and losses and related income tax effects, discontinued operations, restructuring costs and stock-based compensation. A reconciliation of Optimal's adjusted earnings is included in Annex A to the Company's consolidated financial statements attached below.
At the end of the first quarter, Optimal decided to divest of its hardware maintenance and services segment. The proposed divestiture ties into Optimal's strategy of identifying opportunities that can generate superior returns while divesting itself of assets that do not generate acceptable returns or do not fit into the Company's long-term business strategy. Therefore, the results of this segment, including all revenues and expenses that were previously included in the Company's consolidated Statement of Operations, are now presented as discontinued operations and the assets and liabilities of the segment are recorded as held for sale on the Company's financial statements. The amount for discontinued operations, which includes a restructuring charge in respect of facility closure costs, severance and inventory write-downs, was $2.7 million.
Net earnings in the first quarter ended March 31, 2006 were $4.4 million or $0.17 per diluted share compared to $0.0 million or $0.00 per diluted share for the quarter ended March 31, 2005.
Net earnings per diluted share from continuing operations were $0.27 compared to $0.06 per diluted share for the comparable period in 2005.
Optimal's consolidated balance sheet remains strong. At March 31, 2006, the Company had:
- cash, cash equivalents, short-term investments (including amounts held in reserve) and settlement assets net of customer reserves, security deposits and bank indebtedness of $110.7 million;
- working capital, excluding cash and short-term investments held as reserves, of $75.2 million; and
- shareholders' equity of $209.9 million.
Commenting on the announcement, Holden L. Ostrin, Co-Chairman of Optimal, said, "Optimal's financial results in the first quarter of 2006 were well ahead of both our original and subsequent increase in guidance for that period. We have continued to experience strong growth and we anticipate that 2006 will be an impressive operational year with superior financial results and strong cash flow."
Mr. Ostrin continued, "We believe that the balance of the year will continue to be very promising as we move to dispose of certain underperforming assets and maximize the opportunities associated with our payment processing businesses. Our FireOne subsidiary continues to outperform, and we believe, will continue to be a driver of shareholder value. As well, we are seeing strong progress in our higher-margin, card-not-present, processing business and have renewed our focus on this segment."
Financial Outlook for the Second Quarter of 2006
For the second quarter of 2006, Optimal anticipates adjusted earnings per diluted share of $0.27 to $0.29 based on fully diluted shares outstanding of approximately 26.0 million.
Use of Adjusted Earnings per Diluted Share
In addition to the financial measures prepared in accordance with GAAP, Optimal uses certain non-GAAP financial measures, including adjusted earnings per diluted share. Optimal believes that the inclusion of such measures helps investors to gain a better understanding of its core operating results and future prospects and is consistent with how management measures and forecasts the Company's operational and financial performance, especially when comparing such results to previous periods or forecasts.
Key assumptions and sensitivities
For the purposes of projecting our second quarter 2006 adjusted earnings per diluted share, we have made the following principal assumptions: there will be no events, such as the exercise or grant of stock options or restricted share units, which will significantly impact the number of fully diluted shares outstanding; second quarter growth in both the gaming and non-gaming payment processing industries, having account for seasonality factors, will approximate the growth experienced in recent quarters; we will be successful in the continuing integration of the business assets acquired by our payments business, and no unanticipated expenses will be incurred; bad debt expense will be consistent with our bad debt experience over recent quarters; and we will not suffer the loss, due to insolvency or otherwise, of any customer that accounts for a significant portion of the revenues of our payments business. Although we believe that the assumptions underlying our statement as to projected second quarter 2006 adjusted earnings per diluted share are reasonable, any of those assumptions could prove to be inaccurate and, therefore, there can be no assurance that such projection will prove to be accurate.
Our statement as to projected second quarter 2006 adjusted earnings per diluted share is forward looking, and does not take into account the potential impact of any future divestitures, acquisitions, mergers or other business combinations. Furthermore, our actual second quarter 2006 adjusted earnings per diluted share are subject to the risks and uncertainties summarized below under "Forward Looking Statements" and could differ materially from our projection. As well, the non-GAAP financial results of Optimal's results of operations are not meant to be considered superior to or a substitute for Optimal's results of operations prepared in accordance with GAAP.
Optimal's conference call will be held on Tuesday, May 9, 2006 at 10:00 am (EDT). It is the intent of Optimal's conference call to have the question and answer session limited to institutional analysts and investors. The call can be heard beginning at 10:00 am (EDT) as an audio webcast via Optimal's website at www.optimalgrp.com. As well, Optimal invites retail brokers and individual investors to hear the conference call replay by dialing 514-861-2272 / 1 800-408-3053 access code 3184659 #. The replay may be heard beginning at 11:00 am (EDT) on May 9, 2006 and will be available for five business days thereafter.
About Optimal Group Inc.
Optimal Group Inc. is a leading payments company with operations throughout North America, the United Kingdom and Ireland. Through Optimal Payments, we process credit card payments for Internet businesses, mail-order/telephone-order and retail point-of-sale merchants, and process electronic checks and direct debits online and by phone. Through FireOne Group (London/AIM: FPA.L) and its subsidiaries, we process online gaming transactions through the use of credit and debit cards, electronic debit and through FirePay (www.firepay.com), a leading stored-value, electronic wallet. FireOne Group offers FirePay for non-gaming purchases as well. Through Optimal Services Group, we provide repair depot and field services to retail, financial services and other third-party accounts.
For more information about Optimal, please visit the Company's website at www.optimalgrp.com.
Gary S. Wechsler
Chief Financial Officer
Optimal Group Inc.
(514) 738-8885
Forward-Looking Statements:
Statements in this release that are "forward-looking statements" are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors such as the following: o our business depends upon the services of key personnel; o we may be unable to find suitable acquisition candidates and we may not be able to successfully integrate businesses we acquire into our operations; o we are subject to the risk that a taxation authority could challenge certain filing positions we have taken, and that a successful challenge could require us to pay significant additional taxes; o our payments businesses are at risk of loss due to fraud, disputes and merchant insolvency; o we may not be able to safeguard against security and privacy breaches in our electronic transactions; o our payments systems might be used for illegal or improper purposes; o we must comply with credit card and check clearing association rules and practices, which could impose additional costs and burdens on our payments businesses; o we may not be able to develop new products that are accepted by our customers; o the failure of our systems, the systems of third parties or the Internet could negatively impact our business systems and harm our reputation for reliability; o increasing government regulation of Internet commerce could make it more costly or difficult to conduct our businesses; o if our relationships with our banking partners deteriorated, our ability to process transactions could be impaired or halted; o it may be difficult or costly to enforce our rights with respect to assets held in foreign jurisdictions; o our intellectual property rights may be infringed by unauthorized third parties; o we operate in a competitive market for our products and services; o we rely upon non-exclusive arrangements with independent sales agents to acquire and retain our customers; o our products and services are based on sophisticated technology, which may be negatively affected by technological defects and product development delays; o if our encryption technology fails to ensure secure electronic commerce transactions, we may become subject to liabilities and our customers may stop using our products and services; o we are subject to exchange rate fluctuations between the U.S. dollar and the Canadian dollar; o our businesses are subject to fluctuations in general business conditions; o the legal status of Internet gaming is uncertain. Future regulation may make it costly or impossible for us to continue processing transactions for gaming merchants, and reports of regulatory initiatives that are unfavorable to us may adversely affect the trading price of our common shares; o our status under certain financial services regulations is unclear; o we bear consumer risk in relation to our guaranteed FirePay wallet offering; o our contracts for our hardware services segment may not be renewed or may be reduced; o we rely upon two customers for a significant portion of our hardware services revenues; o our hardware services business is affected by computer industry trends; o our hardware services business operates in a market subject to rapid technological change; o the per incident revenues in our hardware services business are variable; o our hardware services business relies on single suppliers for some of our inventory; o we may not be able to accurately predict the inventory requirements of our hardware services business; o we may fail to price fixed fee contracts accurately; o we may be subject to additional litigation stemming from our operation of the U-scan self-checkout business.
For further information regarding risks and uncertainties associated with our business, please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Legal Proceedings" and "Forward Looking Statements" sections of our annual report on Form 10-K and quarterly reports on Form 10-Q, filed with the SEC.
All information in this release is as of May 8, 2006. We undertake no duty to update any forward-looking statement to conform the statement to actual results or changes in our expectations.
Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows follow:
OPTIMAL GROUP INC.
Consolidated Balance Sheets
(Unaudited)
March 31, 2006 and December 31, 2005
(expressed in thousands of U.S. dollars)
December
March 31, 31,
2006 2005
----------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $121,851 $ 98,236
Cash held as reserves 22,527 22,722
Short-term investments 62,538 82,361
Short-term investments held as reserves 3,010 3,014
Settlement assets 15,754 20,727
Accounts receivable 5,569 4,681
Income taxes receivable and refundable investment
tax credits 1,167 1,055
Inventory 314 122
Prepaid expenses and deposits 690 884
Future income taxes 2,063 2,016
Current assets related to discontinued operations
held for sale 10,192 10,944
----------------------------------------------------------------------
245,675 246,762
Long-term receivables 2,698 3,528
Property and equipment 2,740 2,660
Goodwill and other intangible assets 114,679 117,090
Future income taxes 448 333
Other asset 10,462 10,462
Long-term assets related to discontinued operations
held for sale 2,979 3,848
----------------------------------------------------------------------
$379,681 $384,683
----------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Bank indebtedness $ 7,898 $ 8,390
Customer reserves and security deposits 107,040 112,422
Accounts payable and accrued liabilities 15,774 21,796
Income taxes payable 6,678 9,003
Future income taxes 619 836
Current liabilities related to discontinued
operations held for sale 6,896 6,587
----------------------------------------------------------------------
144,905 159,034
Non-controlling interest 15,712 12,926
Future income taxes 8,757 8,958
Long-term liabilities related to discontinued
operations held for sale 431 475
Shareholders' equity:
Share capital 200,789 195,149
Additional paid-in capital 22,957 25,884
Deficit (12,386) (16,259)
Cumulative translation adjustment (1,484) (1,484)
----------------------------------------------------------------------
209,876 203,290
----------------------------------------------------------------------
$379,681 $384,683
----------------------------------------------------------------------
OPTIMAL GROUP INC.
Consolidated Statements of Operations
(Unaudited)
Three-month periods ended March 31, 2006 and 2005
(expressed in thousands of U.S. dollars, except per share amounts)
2006 2005
----------------------------------------------------------------------
Revenues $ 52,422 $ 25,079
Expenses:
Transaction processing 25,508 12,255
Selling, general and administrative 11,969 6,574
Amortization of intangibles pertaining to
transaction processing 3,015 711
Amortization of property and equipment 389 379
Stock-based compensation pertaining to
selling, general and administrative - 1,641
Research and development 805 618
Operating leases 368 162
----------------------------------------------------------------------
Earnings from continuing operations before
undernoted items 10,368 2,739
Investment income 1,282 337
----------------------------------------------------------------------
Earnings from continuing operations before
income tax provision and non-controlling
interest 11,650 3,076
Income tax provision 2,471 1,536
----------------------------------------------------------------------
Earnings from continuing operations before
non-controlling interest 9,179 1,540
Non-controlling interest 2,120 -
----------------------------------------------------------------------
Earnings from continuing operations 7,059 1,540
Loss from discontinued operations
(including restructuring of $1,572) (2,670) (1,509)
----------------------------------------------------------------------
Net earnings $ 4,389 $ 31
----------------------------------------------------------------------
Weighted average number of shares:
Basic 23,322,885 22,394,674
Plus impact of stock options and
warrants 2,659,005 1,917,251
----------------------------------------------------------------------
Diluted 25,981,890 24,311,925
----------------------------------------------------------------------
Earnings (loss) per share:
Continuing operations:
Basic $ 0.30 $ 0.07
Diluted 0.27 0.06
Discontinued operations:
Basic (0.11) (0.07)
Diluted (0.10) (0.06)
Net:
Basic 0.19 0.00
Diluted 0.17 0.00
OPTIMAL GROUP INC.
Consolidated Statements of Cash Flows
(Unaudited)
Three-month periods ended March 31, 2006 and 2005
(expressed in thousands of U.S. dollars)
2006 2005
----------------------------------------------------------------------
Cash flows from (used in) operating activities:
Net earnings $ 4,389 $ 31
Add: loss from discontinued operations 2,670 1,509
----------------------------------------------------------------------
Net earnings from continuing operations 7,059 1,540
Adjustments for items not affecting cash:
Non-controlling interest 2,120 -
Amortization 3,404 1,090
Future income taxes (553) 1,124
Stock-based compensation - 1,641
Foreign exchange (46) 190
Net change in operating assets and liabilities (9,507) (2,665)
----------------------------------------------------------------------
2,477 2,920
Cash flows from (used in) financing activities:
Proceeds from issuance of Class "A" shares 3,830 2,920
Proceeds from issuance of FireOne Group plc
ordinary shares 6 -
Decrease in bank indebtedness (531) (82)
Repayment of capital leases (48) (87)
Repurchase of Class "A" shares (973) -
----------------------------------------------------------------------
2,284 2,751
Cash flows from (used in) investing activities:
Purchase of property, equipment and intangible
assets (1,073) (483)
Proceeds from maturity of short-term
investments 19,823 36,264
Proceeds from note receivable 830 88
Decrease in cash held in escrow - 2,709
Acquisition of MCA, including acquisition
costs of $49 - (2,689)
Payment of balance of sale of NPS - (1,500)
Other - (165)
----------------------------------------------------------------------
19,580 34,224
Effect of exchange rate changes on cash and cash
equivalents during the period 58 (224)
Cash flows of discontinued operations
Operating cash flows (674) (958)
Financing cash flows (39) (96)
Investing cash flows (71) (712)
----------------------------------------------------------------------
(784) (1,766)
----------------------------------------------------------------------
Net increase in cash and cash equivalents 23,615 37,905
Cash and cash equivalents, beginning of period 98,236 62,937
----------------------------------------------------------------------
Cash and cash equivalents, end of period $121,851 $100,842
----------------------------------------------------------------------
Annex A
Use of Non-GAAP Financial Information
We supplement our reporting of net earnings (loss) determined in accordance with Canadian and U.S. GAAP by reporting "adjusted earnings (loss)" as a measure of earnings (loss) in this earnings release. In establishing this supplemental measure of earnings (loss), we exclude foreign exchange gains and losses and related income tax effects, discontinued operations, restructuring costs and stock-based compensation from net earnings (loss) as management believes that foreign exchange gains and losses are largely uncontrollable by management and discontinued operations and restructuring costs are not reflective of our core operations.
Management believes that adjusted earnings (loss) is useful to investors as a measure of our earnings (loss) because it is, for management, a primary measure of our performance, and provides a more meaningful reflection of our earnings potential.
Adjusted earnings (loss) does not have a standardized meaning under Canadian or U.S. GAAP and therefore should be considered in addition to, and not as a substitute for, net earnings (loss) or any other amount determined in accordance with Canadian and U.S. GAAP. Our measure of adjusted earnings (loss) reflects management's judgment in regard to the impact of foreign exchange gains and losses, discontinued operations and restructuring costs on our core operations, and may not be comparable to similarly titled measures reported by other companies.
OPTIMAL GROUP INC.
Reconciliation of Non-GAAP Financial Information
(expressed in thousands except per share amounts)
Three months
ended
March 31,
-------------------
2006 2005
unaudited unaudited
Net earnings 4,389 31
Add:
Loss from discontinued operations (including
restructuring costs of $1,572) 2,670 1,509
Foreign exchange 75 216
Stock-based compensation - 1,641
-------------------
Adjusted earnings 7,134 3,397
===================
Diluted shares 25,982 24,312
Adjusted earnings per diluted share $ 0.27 $ 0.14
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