BPTY.L Regulatory News (BPTY)

30 August 2013

bwin.party digital entertainment plc

Half year report for the six months ended 30 June 2013

Sustainable revenue base now forms a solid foundation for future growth

Nationally regulated and taxable markets represent approximately half of H1 2013 revenue

● On-track to deliver at least €70m of cost savings in the current year versus 2012 and up to €20m of additional savings in 2014

● All requisite documentation filed with New Jersey regulator; systems being installed in Borgata Casino ahead of planned launch in November

● New Director of Poker and Director of Product and Technology appointed; launch of all-new version of partypoker imminent

● Total revenue of €342.5m (2012: €410.0m) down 16% in line with previous guidance, reflecting the tactical shift from 'volume to value' and migration losses

● Clean EBITDA from Continuing operations of €60.7m down 34% reflecting the impact of a turnover tax on sports betting in Germany introduced on 1 July 2012, ISP blocking in Belgium and the closure of slots in Spain

● Clean EPS from Continuing operations of 4.3 € cents per share down 53% (2012: 9.2 € cents per share)

● Half year dividend increased by 5% to 1.80 pence per share (2012: 1.72 pence); proposed buy-back of up to €10m of shares during the next 12 months

● Full year revenue expected to be between 14% and 17% below 2012 with Clean EBITDA margins likely to be 2% lower than 2012 (excluding revenues and costs associated with a US launch)

● Launch of new products, improving productivity and lower costs means the Group is well-positioned to return to growth in 2014

Financial summary (unaudited)

~ Before the provision for costs associated with the Group's Non-Prosecution Agreement, reorganisation expenses, retroactive taxes and associated charges, completed merger and acquisition expenses, exchange differences and before non-cash charges relating to share-based payments and amortisation and impairments on acquisitions (see reconciliation of Clean EBITDA to operating loss below).

^ Discontinued operations refers to Ongame's B2B business as well as operations located physically outside of the US but which relate to US customers that were no longer accepted following the enactment of the UIGEA.

Earnings per share (unaudited)

~ EPS before the provision for costs associated with the Group's Non-Prosecution Agreement, reorganisation expenses, retroactive taxes and associated charges, merger and acquisition expenses, exchange differences and before non-cash charges relating to share-based payments and amortisation and impairments on acquisitions (see reconciliation of Clean EPS to Basic EPS in note 8 to the Financial Information).

Commenting on today's results announcement, Norbert Teufelberger, CEO of bwin.party said:

"The first half was always going to be a challenge as we set about optimising the shape and size of our business, with a much greater focus on nationally regulated and to-be-regulated markets. As predicted, this meant that revenues declined but it also meant that we could make further substantial reductions in our cost base. However, our performance and revenue is behind where we expected it to be at this point. This is partly due to external factors but also due to operational challenges associated with our dotcom migration in December 2012.

"Changing the way we work and in particular the way we develop and implement software using the 'Agile' methodology represents a key step in improving our operational performance. Having already been deployed by many of the major eCommerce companies around the world, our move to Agile is starting to produce benefits in terms of productivity, speed of development and implementation. Over the next twelve months we expect to double the number of software releases whilst continuing to improve product quality and platform stability. These are all important drivers for our long-term revenue performance.

"This change in our working practices has been instrumental in ensuring that our new partypoker product is ready for launch, firstly into the dotcom environment and then into our core nationally regulated markets. The launch will reposition the partypoker brand ahead of the opening of the US market and revitalise the product, ensuring that it more than meets the expectations of today's recreational digital consumer.

"Our focus on product innovation has not been limited to poker. We will be launching a new version of our partybingo product before the end of the year and are continuing to press ahead with our preparations for the opening of the market in New Jersey. Also to come in 2013 is a brand new mobile interface in sports; a new social sports betting app that we have developed with Nordeus; the launch of premium.com, a new service focused on high value customers; and partypoker's next phase of development when we will introduce additional features for the casual player."

On current trading and outlook he added:

"In the eight week period ended 25 August 2013, average net daily revenue was down 8% versus the second quarter of 2013 and down 21% versus the same period in 2012. An improving position in sports betting in August has been hampered by ISP blocking in Greece and a short delay in the launch of our new poker product. However, we expect to see further benefits from our cost reduction programme to come through by the end of the year and into 2014. We are planning to grow our presence in nationally regulated and taxed markets that in June 2013 represented approximately half of our net revenue.

"The loss of revenue following the dotcom migration has prompted several changes internally to ensure that we learn from our mistakes and that such losses are not repeated. Whilst an improving performance during August is encouraging, it is unlikely to mitigate the softer than expected first half revenue performance and so we now expect full year revenues, excluding the US, to be between 14% and 17% lower than 2012 with Clean EBITDA margins, again excluding the US, likely to be 2% lower than last year.

"However, as we look into next year, on the back of a suite of new products, the 2014 World Cup, the benefit of additional cost savings, as well as the prospect of a launch into the US, the Board remains confident about the Group's prospects. Accordingly, the Board has declared an interim dividend of 1.80 pence per share, representing a 5% increase over 2012. The Board has also announced that it will seek to buy-back up to €10m of the Company's issued share capital over the next 12 months, subject to prevailing market conditions, other investment opportunities, appropriate gearing levels and the overall financial position of the Group. Further announcements will be made as and when market purchases are made."

Contacts:

bwin.party digital entertainment plc 

Investors Media

Peter Reynolds +44 (0) 20 7337 0100 John Shepherd +44 (0) 20 7337 0100

Interviews with Norbert Teufelberger and Martin Weigold

Interviews with Norbert Teufelberger, Chief Executive Officer, and Martin Weigold, Chief Financial Officer, in video/audio and text will be available from 7.00am BST on 30 August 2013 on: http://www.bwinparty.com.

Analyst meeting, webcast, dial-in and conference call details: 30 August 2013

There will be an analyst meeting for invited UK-based analysts at Numis Securities, The London Stock Exchange Building, 10 Paternoster Square, London, EC4M 7LT starting at 9.30am BST. There will be a simultaneous webcast and dial-in broadcast of the meeting. To register for the live webcast, please pre-register for access by visiting the Group website (www.bwinparty.com). Details for the dial-in facility are given below. A copy of the webcast and slide presentation given at the meeting will be available on the Group's website later today.

Dial-in details to listen to the analyst presentation at 9.30am, 30 August 2013

A recording of the meeting will be available for a period of seven days from 30 August 2013. To access the recording please dial the following replay telephone number:

Conference call: 2.30pm, Friday 30 August 2013

For international analysts and investors there will be an opportunity to put questions to Norbert Teufelberger, Chief Executive Officer, and Martin Weigold, Chief Financial Officer, on a conference call using the following number:

A recording of the conference call will be available for seven days from 30 August 2013 on the following number:

All times are British Summer Time (BST).

About bwin.party

bwin.party digital entertainment plc is the world's largest listed online gaming company. The Company was formed from the merger of bwin Interactive Entertainment AG and PartyGaming Plc on 31 March 2011 ('the Merger'). Incorporated, licensed and regulated in Gibraltar, the Group has offices in Europe, India, Israel and the US and generated total revenue of €801.6m and Clean EBITDA of €164.9m in 2012. bwin.party is also licensed in Belgium, Denmark, France, Germany (Schleswig Holstein), Italy, Spain and Alderney, and commands leading market positions in each of its four key product verticals: online sports betting, poker, casino and bingo with some of the world's biggest online gaming brands includingbwin,partypoker, PartyCasinoand FoxyBingo. At the heart of our business, our proprietary software, online gaming platforms and a strong portfolio of games collectively differentiate our customer offer. Listed on the London Stock Exchange (ticker: BPTY), bwin.party is a constituent of the FTSE250 Index Series as well as the FTSE4Good Index Series.

Business Review

Results overview

Total revenue was €342.5m (2012: €410.0m) reflecting the shift from 'volume to value' announced at the full year results and the impact of reduced cross-sell volumes following the dotcom platform migration. The introduction of a 5% turnover tax on sports betting in Germany and the securing of a license in Belgium increased cost of sales[1] which, together with the drop in revenue, meant that Clean EBITDA declined to €60.7m (2012: €92.3m). Within Clean EBITDA from Continuing operations were charges of €1.5m related to our prospective US launch plans.

Amortisation fell by 31% to €35.7m (2012: €52.1m), partially offset by a small increase in depreciation charges, reflecting the acquisition of the business and assets of Orneon and Velasco Services that were acquired in May 2012. The reduced amortisation charge meant that the Group's Continuing operations reported a reduced loss before tax of €9.1m (2012: €15.3m).

Discontinued operations relate to the Ongame B2B poker business that was sold in October 2012 as well as on-going costs associated with the Company's Non-Prosecution Agreement ('NPA') that was reached with the United States Attorney's Office for the Southern District of New York (the 'USAO') on 6 April 2009. No further charges were incurred during the period. The loss before tax after taking Discontinued operations into account was €9.1 m (2012: loss before tax of €22.4m).

Retroactive taxes and associated charges incurred in the first half of 2012 as well as reduced amortisation charges meant that the basic loss per ordinary share from Continuing operations was 1.3 € cents (2012: loss per share 1.7 € cents). Clean EPS from Continuing operations fell by 53% to 4.3 € cents (2012: 9.2 € cents).

Taking into account Discontinued operations, Clean EPS of 4.3 € cents was down 49% (2012: 8.4 € cents) while basic loss per ordinary share was 1.3 € cents (2012: loss per share of 2.5 € cents).

The following table provides a reconciliation of the movements between Clean EBITDA and operating loss:

Reconciliation of Clean EBITDA to operating loss

During the first half there have been several operational, technology, strategic and regulatory developments that are covered in more detail below:

Operational developments

Increased focus on nationally regulated and to-be-regulated markets

During the first half we focused on putting in place the requisite measures to implement our shift from 'volume to value' with an increased focus on those customers that generate the most value for us and that are based in nationally regulated and to-be-regulated markets. By 30 June 2013, we had ceased player acquisition marketing in 18 markets and had also closed new player registrations in a total of 18 countries. This increased focus resulted in lower revenues but also a €31.9m reduction in marketing spend versus the same period last year, as well as lower transaction fees and third party content costs. It also meant that we were able to begin to streamline the supporting infrastructure in the form of overheads and outsourced services. A new organisational blueprint reflects changes to our technology set-up that are covered in more detail below.

Innovate our core gaming products

The complexity of integrating our platforms and back-office systems has meant that our customer-facing touchpoints have necessarily taken a back seat in terms of development resources. However, following the migration of 13 million bwin.com customers to our single technology platform in December 2012, we were able to start to implement several new product developments:

Relaunch of partypoker - This represents the fourth stage of our four-point plan to revitalise poker that we announced in August 2012. Our objective with the launch is to re-establish the brand as the undisputed home for recreational players - which was the foundation of partypoker when it first launched back in 2001. We want to reconnect with our target consumer through a much-improved product experience as well as through a step change in the quality of our player communications. All of our efforts have been focused on making the new product relevant and disruptive, so that it will not only challenge but will change current perceptions of both our brand and also of online poker generally - we are putting the fun back into poker.

The new product, which will launch within the next few weeks, will also be available on bwin.com. It has been completely redesigned from a player journey perspective with a complete overhaul in terms of look and feel. The new version includes several new features including one-click lobby, achievements and missions, player profiles and connecting to friends through social channels.

Having been in beta testing since the beginning of July, we have been processing the feedback from the external user group and burning through the issues identified ahead of launch. The process has been hugely positive ensuring that the product will now be even better when it launches to our dotcom customers in the next few weeks.

Development of new bingo product - The majority of our bingo revenue comes from a platform operated by a third party - something that has restricted our ability to innovate and differentiate our product. Meanwhile, the emergence of several new operators has meant that competition has intensified and the need for greater product differentiation and innovation has increased. Whilst Foxy Bingo and Cheeky Bingo remain contracted to run on the third party platform until July 2014, we have redeveloped and will soon relaunch our own bingo software using the partybingo label and believe that it will deliver a fresh and exciting alternative to what is available in the marketplace today. It will also serve as a valuable 'test-bed' should we decide to migrate the Foxy Bingo and Cheeky Bingo customers in 2014. As with our new version of partypoker, the all-new partybingo will offer several new features through an easy-to-access lobby and with a number of bingo variant games, as well as side-games and slots.

Sports betting - we have increased significantly the number of live events now offered through bwin.com and aim to hit 90,000 events this year and were up by 45% in the first half to 42,000 (2012: 29,000). This has been achieved through a marked increase in automation, the deployment of statistical trading models and improved analytics that has allowed us to increase coverage without any significant increase in costs.

Technology developments

Once we have all of our operations held on a single, fully-integrated technology platform we will be able to better manage the complexity of multiple jurisdictions, labels, regulations and channels. But we also want to significantly improve the experience for our customers and create market-leading technology. To achieve this we have been changing the way we work through the adoption of Agile software development techniques throughout our organisation. Led by Guy Duncan, our new Director of Product and Technology, this effort is already improving the alignment of our technology and business objectives by improving the quality of our software; reducing mistakes; fixing bugs faster; speeding up releases; increasing collaboration across disciplines; and driving innovation.

Within twelve months we aim to be implementing twice as many software releases as we do now. The ultimate goal is to reach a point where we can deploy software continuously, delivering improvements rapidly to our customers and the organisation as a whole. We don't want to just be a leader in our industry, we want to determine its course and drive its trajectory and intend to do that through rapid deployment of innovative product and platform solutions.

Strategic developments

New digital marketing approach

After six years as shirt sponsor of Real Madrid, we announced in May 2013 that bwin would be relinquishing its place on the shirt and would instead become Real Madrid's official digital partner in a new multi-year deal. This was in addition to our two other digital partnerships with Manchester United and Bayern Munich. Since the end of June and reflecting our focus on nationally regulated and to-be-regulated markets, we have also now entered into similar multi-year agreements with Juventus in Italy, Olympique Marseille in France and Anderlecht in Belgium. The rapid shifts in consumer behaviour in recent years and the increasing importance of new channels such as social media, alternative marketing platforms such as recommendation engines and the reach of viral marketing have all meant that conventional marketing techniques are no longer delivering the same returns on investment, requiring a fresh approach to the modern-day digital consumer. By deploying these assets across our existing database of over 13 million bwin and Party customers worldwide (excluding the US), we intend to reactivate them through access to unique promotions and content, supported by a much improved product suite and customer experience.

Social gaming

We announced and launched our social gaming strategy at the end of May 2012. Since then we have made good progress in executing our plans and are now starting to monetise the investment made to-date. Having launched Slots Craze, our first in-house slots application for mobile (iOS), in March 2013, we have also launched a full web version on Facebook and are achieving daily average revenue per user close to $0.10 and second day retention rates of over 40% - industry benchmarks for successful social gaming applications. Other products launched in 2013 include Cheeky Bingo and Stardust Casino, a social casino application developed in close partnership with Boyd Gaming. The next six months will see us continue to optimise these products as well as market them aggressively in key markets, and launch additional products to drive customer volumes and revenue.

Payments

We formally re-branded our in-house payments business as Kalixa on 10 April 2013 and it has continued to make solid progress in the first half. Kalixa Accept, which allows merchants to accept payments, is being used by Mastercard to drive their Repower programme that launched in Poland with three other countries to follow later this year. Kalixa Accept was also certified for full card-present processing, increasing the addressable base of transactions from 15% (online only) to 100%. Kalixa Pro is a full microbusiness payment solution that has been certified by both Mastercard and Visa; incorporating a business account, it connects to a corporate pre-paid card with a mobile application and dongle for accepting card payments. Finally Kalixa Pay, which is our own eWallet with an integrated contactless pre-paid card, launched a micro SD card and mobile application in the UK with other countries to follow in the second half.

Regulatory developments

The regulatory landscape has remained relatively stable during the first half although there has been substantial change versus the same period 12 months ago, the biggest change being in Germany following the introduction of a 5% turnover tax on sports betting that was introduced in July 2012. A summary of some of the key regulatory developments affecting our business is set out in the Appendix.

Dividend and share buy-back

In line with our dividend policy, the Board has declared a half year dividend of 1.80 pence per Ordinary share (2012: 1.72 pence) representing a 5% increase over the prior year. The half year dividend will be payable to shareholders and depositary interest holders on the register of shareholders and register of depositary interest holders respectively on 13 September 2013 (the 'Record Date'). It is expected that dividends will be paid on 11 October 2013. Shareholders wishing to receive dividends in Euros rather than Pounds Sterling will need to register a currency election with bwin.party's registrars on or before 20 September 2013. A separate announcement regarding the dividend payment has been issued today.

The Board renewed the authority to repurchase up to 10% of the Company's issued share capital at the Company's AGM on 19 June 2013 and intends to buy up to €10m of the Company's issued share capital over the next 12 months, subject to prevailing market conditions, other investment opportunities, appropriate gearing levels and the overall financial position of the Group. Any shares repurchased by the Company will be cancelled.

Plans for the rest of 2013 and 2014

Our shift from 'volume to value' will continue to feed through into our financial performance for the rest of 2013 and we are focused on achieving the following priorities:

1. Stabilise total revenue performance and drive growth in nationally regulated and to-be-regulated markets

Having already ceased all acquisition marketing initiatives in 18 countries, we continue to shift the allocation of our marketing spend into core nationally regulated and to-be-regulated markets. With the launch of several new products and mobile extensions during the second half and into next year, we are focused on driving revenue growth in our future core markets.

2. Deliver full benefit of streamlined cost base

Having optimised the shape and size of our business during the first six months of 2013, the full benefits of these measures will only start to be felt during the second half and as a result will result in further annualised savings in 2014. In addition to the marketing savings highlighted above, we expect there to be additional cost reductions in overheads, staff costs, and payment transaction costs. We are targeting incremental savings in 2014 of approximately €20m over and above those achieved in 2013.

3. Roll-out our new poker product to nationally regulated jurisdictions

Post-launch in the dotcom environment, we will make further changes as necessary before rolling out the new product into each of our ring-fenced, nationally regulated markets later this year and into 2014. We will also launch additional product features that will only be available after the initial launch. These additions will be supported by marketing campaigns in several territories in order to increase player traffic and drive revenue further.

4. Secure a leadership position in New Jersey

Awareness of the partypoker brand remains strong in the US having held an estimated 47% market share prior to exiting the market in 2006. We intend to leverage partypoker's pedigree and the strength of Borgata, the largest casino in Atlantic City with a 20% market share, to secure a leadership position in New Jersey. Whilst the exact timing of the opening of the market remains unclear, the target date is the end of November and that is when we are planning to be ready to launch. We have submitted all of the relevant licensing documentation and expect that our systems will be available for testing by the regulator shortly.

5. Complete technology integration and implementation of Agile

Having made substantial organisational changes within our technology set-up during the past six months, the shift to Agile methodologies will continue throughout our technology organisation for the rest of 2013. We will use this approach to help us improve productivity and deliver the integration of both the French and Italian technology platforms that have had to take a back-seat to the other priorities that we have been focused on addressing during 2013.

6. Grow revenues from our new business streams

As outlined above, we have continued to invest in payments and social gaming:

Payments - Having made good progress over the first six months of 2013, the rest of the year for Kalixa is all about growing revenue through each of its three business areas:

· Kalixa Pro will launch in the UK and prepare for further launches into other European markets, including Germany and Austria

· Kalixa Pay will launch in Ireland and Poland and will prepare to launch a white label service on behalf of large corporate customers before the end of the year

· Kalixa Accept will expand its sales team and look to enter Latin America and the US markets.

Social gaming - Having launched and refined several products over the past twelve months we are now in a position to start marketing these products for the first time while at the same time continuing to develop and release additional content, including our social sports betting product that we plan to launch before the end of the year.

Current trading and outlook

In the eight week period ended 25 August 2013, average net daily revenue was down 8% versus the second quarter of 2013 and down 21% versus the same period in 2012. An improving position in sports betting in August has been hampered by ISP blocking in Greece and a short delay in the launch of our new poker product. However, we expect to see further benefits from our cost reduction programme to come through by the end of the year and into 2014. We also plan to grow our presence in nationally regulated and taxed markets that in June 2013 represented approximately 50% of our net revenue.

A summary of the current trading performance in terms of net revenue (post bonus, pre-tax) relative to the same period in 2012 and also to Q2 13 is shown below:

The loss of revenue following the dotcom migration in December 2012 has prompted several changes internally to ensure that we learn from our mistakes so that such losses are not repeated. Whilst optimistic about the prospects for our new poker product and the possible opening of the US market, these are unlikely to mitigate the softer than expected first half result and current trading period and so we now expect full year revenues, excluding the US, to be between 14% and 17% lower than 2012 with Clean EBITDA margins, again excluding the US, likely to be 2% lower than last year.

However, as we look into next year, on the back of a suite of new products, the 2014 World Cup, the targeted €20m of additional cost savings as well as the prospect of a possible launch into the US, the Board remains confident about the Group's prospects.

SUMMARY OF RESULTS

The basis for the allocation of costs and resources for the latest reporting period has changed and is no longer comparable with the prior year. While total Clean EBITDA is directly comparable with the prior year, the Clean EBITDA generated by each vertical is not and so we have provided the figure on both the new as well as the previous basis, against which the prior year is directly comparable. It has not been possible to provide a comparable Clean EBITDA figure by vertical on the new basis for the prior year as the structure did not then exist.

The new basis aims to reflect more appropriately the fact that certain product verticals are dependent on the cross-sell of players from other product verticals and thus includes a re-allocation of marketing costs between these verticals in order to reflect more accurately the profitability of that segment on a standalone basis. Also, under the new basis a higher proportion of costs are allocated directly to each segment, and the remaining central costs are now allocated pro rata to gross profit.

Total revenue from Continuing operations fell by 16% to €342.5m (2012: €410.0m) reflecting the shift from 'volume to value', and the impact of reduced cross-sell volumes following the migration of dotcom customers. The drop in revenue fed through into Clean EBITDA margins that fell to 17.7% (2012: 22.5%). Clean EBITDA fell to €60.7m (2012: 92.3m), primarily driven by the drop in revenue but also by increased gaming taxes arising from the introduction of a 5% turnover tax on sports betting in Germany on 1 July 2012.

Discontinued operations in 2012 were composed mainly of the Ongame B2B business that was sold in October 2012 together with costs associated with US customers that were no longer accepted following the enactment of the UIGEA. No charges were incurred in the period.

Each of our consolidated key performance indicators, which are based on net revenue, is highlighted below.

Consolidated Key Performance Indicators

The shift in tactics to focus on fewer markets and fewer, but more valuable customers, affected all of the consolidated key performance indicators in the period. Active player days fell by 25% reflecting our decision to cease all acquisition marketing in 18 countries, the absence of the Euro 2012 Championship and the imposition of a 5% turnover tax that resulted in a marked reduction in live betting volumes in Germany, our largest market. Yield per active player day increased by 7% with increases in all product verticals except bingo, reflecting the shift from 'volume to value'. Yields in bingo were impacted by the weakening of Sterling versus the Euro as well as the addition of Spanish customers who are not permitted to play higher margin online slot games. Our decision to reduce marketing spend and block registrations in certain markets, along with the absence of the Euro 2012 Championship were the primary drivers behind a 40% drop in new player sign-ups and the combined effect of these movements was that average daily net revenue decreased by 19% to €1,760,200 (2012: €2,174,200).

A detailed review of the Continuing operations including each of the individual product segments is described below. Full details of all of the Group's historic quarterly key performance indicators can be downloaded from the Group's website at: www.bwinparty.com.

Sports betting

The imposition of a 5% turnover tax for German customers meant that short odds products became unviable in Germany, effectively restricting the volume of product available in our largest market where the amounts wagered fell by 53% to €269.3m (2012: €577.6m). A marked reduction in acquisition marketing as well as restrictions on new player registrations in several dotcom markets, along with the absence of the Euro 2012 Championship, meant that the total amounts wagered fell by 34% to €1.4 billion (2012: €2.2 billion). The drop in business volume was partially mitigated by an increase in gross win margin to 9.2% (2012: 7.2%). This was driven by a structural shift following the imposition of the new turnover tax in Germany that prompted an increase in wagering on higher odds singles and combination bets, as well as the withholding of 5% of winnings on bets placed by German customers, in lieu of the tax due. However, the overall increase in margin masks a poor run of results during April when the Bundesliga saw all of the favourites winning and June when the Confederations Cup results also went with the favourites. With an increased proportion of the overall pre-match book taken up by combination bets, such a poor run of results had a disproportionate impact on gross win margin and the net result was that gross revenue decreased by 16% to €130.0m (2012: €154.2m). The absence of the Euro 2012 Championship saw bonuses reduce to a more normalised level of 0.8% of bet amount and consequently net revenue of €118.3m was down by 8% (2012: €128.1m). Lower revenue and increased gaming taxes, primarily in Germany, resulted in Clean EBITDA of €25.8m on the new basis or €5.4m on the old basis (2012: €30.5m).

Under the previous basis of segmental reporting, costs that were not able to be directly allocated to a particular vertical were allocated pro rata to the net revenue generated by each vertical. Following the introduction of the turnover tax on sports betting in Germany, the sports betting segment was allocated a disproportionately high share of central costs under the old basis. Under the new basis of segmental reporting, a higher proportion of costs are allocated directly to each segment, and the remaining central costs are now allocated pro rata to gross profit. A summary of the key performance indicators for sports betting during the first half of 2013 is shown in the table below:

Sports betting - Key Performance Indicators

Whilst player volumes declined versus the prior year for the reasons outlined above, the prior year volumes (activity and new player sign-ups) were also flattered by the Euro 2012 Championship that had resulted in a higher than normal level of activity. Player yields were up strongly, despite higher gaming taxes reflecting our shift from 'volume to value' and a reduced number of casual players that were attracted by the Euro 2012 Championship. Yields would have been higher but for the poor run of sporting results during the second quarter.

The bwin brand remains strong across Europe and based on figures published by the respective regulators, we continue to command a significant share in each of the large, newly nationally regulated markets: France (19.0%), Italy (10.5%) and Spain (22.1%)[2]. With the benefit of a new mobile interface and new football sponsorships in France, Belgium and Italy, we hope to make further progress in the second half.

Casino & Games

Revenue in our casino & games business reduced in the period driven by several factors: the shift from 'volume to value', a reduction in cross-sell activity from bwin.com following the migration in December 2012, the removal of slots in Spain and ISP blocking in Belgium that remained in place until 20 May 2013. Notwithstanding this, we saw growth in Spain (ex-slots), as well as in Belgium once the ISP block was removed. The net result was that the amount wagered declined by 15% to €3,578.3m (2012: €4,207.5m) and the number of active player days declined by 27% to 3.8m (2012: 5.2m). A small dip in gross win margin to 3.8% (2012: 3.9%) reflected normal statistical variation while increased bonus costs were driven by competitive pressures in Germany following the introduction of the sports betting tax. These factors, together with the lower turnover meant that net revenue decreased by 21% to €110.8m (2012: 139.7m) and total revenue by 21% to €112.2m (2012: €141.8m). The increase in EBITDA margin reflected reduced marketing costs in certain dotcom markets, as well as a reduced allocation of central costs. This partially mitigated the impact of the drop in revenue on Clean EBITDA that was €24.5m on the new basis and €42.6m on the old basis, a 5% decline versus the previous year (2012: €45.0m).

A summary of the key performance indicators for the casino & games business during the first half of 2013 is shown in the table below:

Casino & Games - Key Performance Indicators

Active player days fell by 27% and the average number of daily players by 27% reflecting the shift from 'volume to value', a reduced level of cross-sell on bwin.com following the dotcom migration as well as the removal of Spanish slots following the regulation of the market in June 2012. The shift from 'volume to value' saw player yields improve 9% to €29.2 as we restricted registrations in a number of dotcom markets that is also reflected by the reduction in new player sign-ups that was down 57%. Taking all of these factors together, average daily revenue declined by 20% to €612,200 (2012: €767,600).

An improved mini games and mobile offering together with an increased number of third party games to be added over the coming weeks and months should each help to drive casino revenues in the second half.

Poker

The downward trends in poker continued during the first half, reflecting a decline in the value of certain ring-fenced regulated markets, continued competitive pressures, the shift from 'volume to value' that also saw us terminate a number of affiliate deals, and lower marketing spend that has been held back ahead of the relaunch of partypoker. Volumes on bwin poker also declined due to reduced cross-sell activity following the migration of dotcom players to the single technology platform in December. While many of these issues have since been rectified, the drop in revenue during the first half is unlikely to be made up during the second half.

With significant reductions in player sign-ups and activity levels, gross revenue fell by 35% to €78.5m (2012: €120.6m). With bonus rates relatively stable versus 2012, total poker revenue also fell by 35% to €63.9m (2012: €98.3m). Clean EBITDA was €7.2m on the new basis or €15.5m on the old basis, an increase of 55% (2012: €10.0m) due to reduced marketing expenses and a lower allocation of central costs.

A summary of the key performance indicators for poker is shown in the table below:

Poker - Key Performance Indicators

Our shift from 'volume to value' and the other factors outlined above meant that active player days declined by 38% in the period and new player sign-ups fell 54%. Player yields increased by 5%, reflecting an improved poker ecology ahead of the relaunch of partypoker. The overall impact was that average daily net revenue declined by 35% to €344,200 (2012: €529,700).

Through the execution of our four part plan we are determined to improve the performance of our poker business and return the segment to growth. Having already improved the poker ecology, integrated bwin and partypoker customers and launched FastForward Poker, the relaunch of partypoker is the final part of the plan that we announced 12 months ago. We believe that the new product should begin to change fundamentally the perception and financial performance of our poker business. As well as a new look and feel, we have endeavoured to differentiate the product by adopting a completely new approach to player journey, player management and we have also added a number of social features that are not available elsewhere. Whilst we expect that a turnaround in financial performance will take time as players spend time exploring the new features, we will provide an update on performance at the time of our Q3 KPIs and Interim Management Statement later this year as well as details of the next wave of additional features that will be added over the coming months.

Bingo

Competitive pressures in our two largest bingo markets, the UK and Italy, provided a challenging backdrop for our bingo business. The launch of casino products in Italy was an additional drag on performance there as bingo players were inevitably drawn to play casino games. While the newly regulated Spanish market is performing well, it remains relatively small as a proportion of the bingo segment.

Gross revenue declined by 9% due to the weakening of Sterling versus the Euro as well as aggressive competitor promotions in both the UK and Italy. The result was that net revenue fell by 14% to €27.2m (2012: €31.5m). Lower gross revenue in Italy meant that gaming taxes also fell to €2.0m (2012: €2.6m), helping to mitigate the impact on gross profit as well as Clean EBITDA that was €2.8m on the new basis or €6.8m on the old basis (2012: €9.0m).

A summary of the key performance indicators for bingo is shown in the table below:

Bingo - Key Performance Indicators

The market pressures outlined above meant that all of the KPIs showed declines in the period. Active player days declined by 6% to 3.4m (2012: 3.6m) while player yields also declined 9% to €8.0 per day (2012: €8.8). Aggressive marketing by competitors in the UK and Italy meant that sign-ups were also down resulting in a 13% decline in average daily net revenue to €150,300 (2012: €173,100).

Despite these challenging conditions, we continue to hold top three positions in terms of market share in the UK (21%), Italy (24%) and Spain (29%)[3] and have implemented a series of measures to improve performance in the second half. Foxy Bingo on mobile is proving popular in the UK since its soft launch in March 2013 and we hope to drive further growth during the second half. In Italy we expect the impact of the new government protocol for bingo to boost performance when it is introduced later this year as it will afford greater game variety and more flexible promotions. 

Other revenue

Other revenue that includes revenue from B2B, domain sales, InterTrader, Kalixa, network services, software services, Win Interactive, Winners, our Spanish retail franchise and WPT, was up 67% to €23.9m (2012: €14.3m), with growth across all categories year on year. The major constituents of other revenue are: WPT (€5.8m), profit on domain sales (€5.5m), Winners (€3.0m) and B2B (€2.6m).

Gaming taxes payable in nationally regulated and taxed markets make up the majority of cost of sales that also includes television production costs at WPT. While 2013 saw the addition of German taxes for the first time, the prior year was impacted by a retroactive tax payment and associated charges of €31.5m levied by the Spanish Authorities. As a result, total cost of sales declined by 36% to €44.1m (2012: €68.5m), of which gaming taxes totalled €40.5m (2012: €34.5m). As more markets regulate and tax online gaming, cost of sales as a proportion of total revenue can be expected to increase.

Other operating expenses

This increased from €2.2m to €5.0m primarily due to foreign currency movements, in particular the strengthening of the Euro, and aborted merger and acquisition charges.

Distribution expenses

Clean EBITDA Distribution expenses were reduced by €32.8m year-on-year. Our shift from 'volume to value' prompted a significant reduction in acquisition marketing in several countries resulting in declines in customer acquisition and retention expenses both in absolute terms as well as relative to total revenue - they represented 18.2% of total revenue in the first half, down from 20.2% the previous year. This reduction reflects lower spending in certain dotcom countries where player-acquisition had become marginally profitable. The termination of relationships with several affiliates during 2012 reduced affiliate costs to €18.7m, representing 5.5% of total revenue (2012: 7.3%). Customer bad debts increased from 0.7% of revenue to 1.2% of revenue following a change in the mix of how deposits were made following the platform migration in December 2012. However, this increase in chargebacks was more than offset by the associated reduction in transaction fees (see below). Third-party content costs fell to €14.8m reflecting lower casino volumes and were unchanged at 4.3% of revenue (2012: 4.3%). The continued expansion into newly regulated markets, specifically Belgium, meant that webhosting and technical services costs increased by 5% to €13.3m (2012: €12.7m) reflecting the cost of commissioning tailored requirements in nationally regulated markets.

Administrative expenses

Transaction fees fell both in absolute and relative terms due to synergies following the migration of bwin.com customers as well as lower transaction volumes following the shift from 'volume to value'. Staff costs increased by 9% to €69.8m (2012: €64.0m) and were in line with the second half of 2012 reflecting the addition of 350 technology staff associated with the acquisition of the trade and assets of Orneon and Velasco Services in May 2012 as well as increased headcount in Win, the social gaming unit. This is expected to fall during the second half of 2013 as the benefits of the cost reduction measures associated with our shift from 'volume to 'value' start to take effect once requisite notice periods and contractual obligations have been fulfilled. Outsourced services were reduced by 17% to €11.9m (2012: €14.4m) while other overheads were reduced by 22% as part of our synergy realisation programme. The net result was that Clean EBITDA administrative expenses were reduced by €10.8m to €124.2m (2012: €135.0m).

Depreciation increased in the period reflecting the fit-out of new office space, as well as investment in new technology infrastructure associated with nationally regulated and to-be-regulated markets. The amortisation charge relating to acquired intangibles that is non-cash in nature, continued to fall to 10.4% of total revenue (2012: 12.7%) as these assets are progressively written down. Reorganisation expenses of €1.6m (2012: €2.4m) were incurred in the period as part of our programme to deliver targeted merger synergies.

Taxation

The current tax charge for the period is €5.7m (2012: €5.1m). After allowing for deferred tax credits primarily relating to the unwinding of provisions set up on acquisitions, the total tax charge for the period is €2.5m (2012: credit of €1.1m). There is no tax associated with Discontinued operations and other comprehensive income.

Net cash

Despite generating positive net cashflow from operations during the period, a series of outflows, including certain one-off items meant that the net cash available to the Company (after deducting all customer liabilities but adding back net payment processor receivables) declined to €75.1m (31 December 2012: €96.7m).

Cashflow

Continuing operations

Operating cashflow from Continuing operations before Merger-related expenses, retroactive taxes and associated charges fell by €50.3m to €25.6m (2012: €75.9m) primarily due to the reduced level of Clean EBITDA, as well as a reduction in client liabilities as a direct consequence of our shift from 'volume to value'.

After dividend payments of €16.7m (2012: €15.9m), capital expenditure (including intangibles) of €17.6m (2012: €17.8m) and a reduction in short-term investments of €15.6m (2012: nil), the net cash inflow in the period was €2.9m (2012 outflow: €62.1m). This was significantly better than the prior year that was also impacted by substantial share repurchases and retroactive taxes and associated charges.

Discontinued operations

The net cash outflow arising from Discontinued operations in 2013 comprises the settlement of the Kentucky litigation for €11.5m (2012: nil) and contingent consideration due from the sale of Ongame of €0.7m (2012: nil). In 2012, the net cash outflow of €26.2m was driven primarily by the payments arising under the Non-Prosecution Agreement. The last repayment was made in September 2012. A summary of the Group's cashflow in the period is shown below:

Principal risks

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. To mitigate against these risks bwin.party conducts a continuous process of Group-wide assessments that examine whether any risk has increased, decreased or become obsolete; identify any new risks, especially from recent key business events; and the likelihood of a risk occurring and what level of impact it would have on the Group.

Many of the threats and challenges faced by online gaming companies are similar to those faced by other leisure and entertainment industries. They include competition, changes to consumer tastes, maintaining healthy financial ratios in compliance with banking covenants and loss of key personnel.

There are also certain risks that are more specific to bwin.party and to the online gaming industry. These risks and how we manage them are set out in the Group's 2012 Annual Report and are repeated below:

1. Technology

Technology is at the core of our business and undergoes a continuous process of development. The evolution of our eCommerce platform and the products and services we provide through it is a vital process to maintain our competitive edge as we address the ever-changing desires of consumers whilst upholding our reputation for responsible, safe and secure products and services. As with all technology, new versions of software can require additional enhancement before becoming fully effective. Delays in such enhancements can impact operational and financial performance. Most of our gaming technology is proprietary, which means that we should be better placed to manage risks associated with technological and regulatory change than competitors that rely on third-party software and systems. However, we do share the industry's general risks that arise from sourcing broadband and communications, data management and storage services as well as a raft of other services from external suppliers. Our aim is to offset these risks by not becoming overly reliant on any single supplier as well as having in place disaster recovery centres and business continuity plans.

The reduced level in technology risk reflects the near completion of our Merger integration having already migrated significant parts of our technology and customer base from the separate platforms and systems that were operated pre-Merger, to a single, centralised operating system that supports each of our gaming verticals across multiple brands and territories. Our Italian and French technology systems and customer bases have yet to be integrated, and a few remaining back-office functions have also still to be harmonised. As a result, some operational risk remains for the business but the potential impact on revenue is less significant. To mitigate this risk we have planned extensively and will run appropriate tests before switching to any new systems.

2. Regulation and compliance

Regulation is probably the most complex of our key risks and managing it effectively is a critical process for us, especially given the increasing number of countries that are introducing regulatory regimes, each of which have bespoke requirements. Our compliance obligations range from administration of our gaming licences in Gibraltar, Alderney, Denmark, France, Italy, Spain, Belgium and Schleswig-Holstein in Germany to assessing what impact country-specific and pan-regional rules and regulations might have on our business and the wider industry. Whilst political and cultural attitudes towards online gaming continue to evolve, there is always a risk that certain territories may seek to prohibit or restrict one or more of the products that we offer or online gaming entirely. We have a dedicated regulatory and compliance team that is closely supervised by the CEO and is supported by our legal and regional management teams. We submit ourselves to a series of external audits as required under our gaming licences and also perform our own compliance assessments to ensure that policies and procedures are being followed and working effectively.

3. Taxation

bwin.party operates in a very challenging tax environment due to the pace of change and the complexity of the business. Group companies operate for tax purposes only where they are incorporated, domiciled or registered. Revenues earned from customers located in a particular jurisdiction may give rise to further taxes in that jurisdiction. If such taxes are levied, either on the basis of existing law or the current practice of any tax authority, or by reason of a change in law or practice, then this may have a material adverse effect on the amount of tax payable by the Group. We manage these risks by considering tax as part of our overall business planning.

4. Integration

The complex process of integrating bwin and PartyGaming is almost complete, easing both the pressure on management and other resources. The Integration Management Office, which was set up at the time of the Merger to drive and monitor progress across each of the synergy streams as well as identify constraints and inter-dependencies, was wound-up in August 2012 and the responsibilities passed back to the business units. While there can be no guarantee that all elements of the integration will be successful, the significant investment in planning and preparation ahead of the Merger has proven worthwhile. The main risks in this category are achieving financial synergies and completing the migration to a single technology platform.

5. Poker

PokerStars remains the largest operator in most markets and a very strong competitor. We have not changed the risk level that was reduced to one of 'strong competition' in 2011, reflecting the closure of the US-facing activities of PokerStars. In 2012, PokerStars also acquired and relaunched Full Tilt, previously the second largest poker brand in the dotcom market, which strengthened its market position. The migration of bwin's dotcom poker players to our single platform was completed at the end of 2012, increasing our dotcom poker player liquidity pool. However, dotcom poker remains a challenging market and the pending relaunch of partypoker does carry risk. As a result Poker remains one of our key risks.

6. Country and Currency Risk

Whilst the continuing uncertainty in the global economic outlook inevitably increases the trading and balance sheet risks to which the Group is exposed, the diversified nature of the Group's business means that such risks are not disproportionately different from any other commercial enterprise of a similar scale and international reach. Conditions in the Eurozone remain challenging and reference has already been made in previous statements to the challenging economic backdrop in several European countries, reducing the spending power of customers particularly in Southern European countries, which the Group has attempted to reflect in its financial forecasts. The weaker European economies are also increasing the risk of currency volatility and the potential for significant currency devaluation and business disruption if one or more of these countries exits the euro currency. Accordingly, the Group's treasury processes and policies have been revised with the aim of minimising the Group's exposure to the Eurozone economic risk and to preserve our ability to operate if such events arise.

The functional reporting currency of the Group, the Company and a majority of the Company's subsidiaries is the euro. bwin.party's treasury policy dictates that all material transaction and currency liability exposures are fully hedged with financial derivatives or cash. Consequently, those bwin.party companies that have adopted the euro as their functional currency ensure their financial assets and liabilities in non-euro currencies are equal and that any residual balance is held in euros. With the so-called 'GIPSI' countries (Greece, Ireland, Portugal, Spain and Italy), if one or more of these countries exits the euro then the Group may be exposed to a currency devaluation of its financial assets to the extent that the financial assets located in the exiting jurisdiction exceed its financial liabilities. Accordingly, the treasury policy requires that wherever practical and subject to regulatory requirements, the financial assets located in each GIPSI country are limited so they do not exceed the financial liabilities associated with that jurisdiction.

By order of the Board of Directors

Martin Weigold

Chief Financial Officer

bwin.party digital entertainment plc

30 August 2013

Statement of Directors' responsibilities

This interim management report is the responsibility of, and has been approved by, the Directors of bwin.party digital entertainment plc. Accordingly, the Directors confirm that to the best of their knowledge:

• the unaudited condensed consolidated set of financial information has been prepared in accordance with IAS 34 - Interim Financial Reporting as issued by the IASB and endorsed and adopted by the European Union;

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the Annual Report for the year ended 31 December 2012.

The Directors of bwin.party digital entertainment plc are listed on the bwin.party website: www.bwinparty.com.

By order of the Board of Directors

Martin Weigold

Chief Financial Officer

bwin.party digital entertainment plc

30 August 2013

Financial information (unaudited)

Condensed consolidated statement of comprehensive income