BPTY.L Regulatory News (BPTY)

28 August 2015

bwin.party digital entertainment plc

Unaudited results for the six months ended 30 June 2015

Norbert Teufelberger, Chief Executive Officer, said:

"Clean EBITDA increased by 2% year-on-year despite the introduction of VAT in a number of EU Member States and the new UK point of consumption tax. However, our progress on non-core asset disposals and other cost saving initiatives is running ahead of plan - excluding the impact of EU VAT and UK point of consumption tax ('POCT'), Clean EBITDA would have increased by 24%.

"Based upon our progress in the year-to-date and with the further roll-out of our latest mobile products, the introduction of new CRM tools and planned entry into two new nationally regulated markets later this year, we remain confident about the full year outlook."

Key points

● Total revenue was €296.5m (2014: €317.1m) reflecting the absence of the FIFA World Cup, lower margins in sports, market declines in poker and the impact of EU VAT in certain markets; nationally regulated and/or taxed markets represented 60% of total revenue (2014: 56%)

● Gross gaming revenue through mobile/touch grew by 50% and now represents 30% of overall GGR (2014: 19%) with growth across all verticals

● Clean EBITDA~ up by 2% to €47.3m (2014: €46.4m) despite being impacted by lower revenue and higher taxes. Excluding the impact of EU VAT and the POCT, Clean EBITDA would have increased by 24% to €57.7m (2014: €46.4m)

● On-track to meet or exceed €15m incremental cost saving target this year

● Total consideration received from the sale of non-core assets of €37.1m, in-line with previous guidance. Net cash* at 30 June 2015 of €58.1m (31 December 2014: €34.6m)

● Basic EPS of €0.4 cents (2014: loss of €11.4 cents)

● Current trading: absence of a major football tournament and EU VAT meant that in the 8 weeks to 25 August 2015 average daily net revenue was down 9% versus the same period in 2014; Board remains confident about full year outlook

● Whilst discussions with GVC are continuing, there has been no change to the Board's recommendation for 888's offer and the associated shareholder documents are expected to be sent to shareholders shortly

● Recommended half year dividend up 2% to 1.92 pence per share (2014: 1.89 pence)

Financial highlights

~EBITDA adjusted for exchange differences, reorganisation expenses, income or expenses that relate to exceptional items, and non-cash charges relating to impairments and share-based payments (see reconciliation of Clean EBITDA to operating profit/(loss) below and reconciliation of Clean EPS to Basic EPS in note 4 to the unaudited Financial Information).

* Net cash after deducting all customer liabilities and loan borrowings but adding back net payment processor receivables

Performance by business unit

*Austria, Belgium, Denmark, France, Germany (sports betting only), Italy, Spain, UK and USA (New Jersey)

^ Segment includes €14.3m of revenue relating to assets disposed of during the period

Performance by product

A segmental analysis by product of the Group's total revenue between markets that are nationally regulated and/or subject to local gaming taxes and those that are not is provided below:

*Austria, Belgium, Denmark, France, Germany (sports betting only), Italy, Spain, UK and USA (New Jersey)

A reconciliation between the revenue by business unit and by product is included within the Summary of Results.

Consolidated Key Performance Indicators

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.

Contacts:

bwin.party digital entertainment plc 

Investors Media

Peter Reynolds +44 (0) 20 7337 0177 Jay Dossetter +44 (0) 20 7337 0134

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 28 August 2015 on: http://www.bwinparty.com.

Analyst meeting, webcast, dial-in and conference call details: 28 August 2015

There will be an analyst meeting for invited UK-based analysts at Deutsche Bank AG,1 Great Winchester Street, London EC2N 2DB 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, 28 August 2015

A recording of the meeting will be available for a period of seven days from 28 August 2015. To access the recording please dial the following replay telephone number:

All times are British Summer Time (BST).

About bwin.party

bwin.party digital entertainment plc (LSE: BPTY) is a global online gaming company. The Company was formed from the merger of bwin Interactive Entertainment AG and PartyGaming Plc on 31 March 2011. Incorporated, licensed and regulated in Gibraltar, the Group also has licences in Alderney, Austria Belgium, France, Italy, Denmark, Germany (Schleswig-Holstein), Malta, Spain, the UK and the necessary approvals to operate in New Jersey. With offices in Europe, India, Israel and the US, the Group generated revenue of €611.9m and Clean EBITDA of €101.2m in 2014. bwin.party commands leading market positions in each of its four key product verticals: online sports betting, casino & games, poker and bingo with some of the world's biggest online gaming brands including bwin, partypoker, partycasino and FoxyBingo. The Group's scale, technology and strong portfolio of games collectively differentiate its customer offer from those of its competitors. bwin.party is a constituent member of the FTSE 250 Index and the FTSE4Good Index Series, which identifies companies that meet globally recognised corporate responsibility standards. For more information about bwin.party, visit www.bwinparty.com.

Chief Executive's review

Introduction

Clean EBITDA increased by 2% year-on-year despite the introduction of VAT in a number of EU Member States, a lower than expected sports margin and the UK point of consumption tax that was introduced on 1 December 2014. However, our progress on non-core asset disposals and other cost saving initiatives is running ahead of plan - excluding the impact of EU VAT and UK point of consumption tax, Clean EBITDA would have increased by 24%.

Total revenue declined by 6% to €296.5m (2014: €317.1m) with trading during the first half of 2015 largely as expected: revenue was impacted by the absence of a major football tournament and the introduction of VAT in a number of EU Member States while strong mobile growth helped to offset lower than expected sports betting margins.

Operationally our shift to a label-led structure is beginning to deliver the improvements expected with the removal of duplication, increased transparency and accountability that, coupled with the disposal of non-core assets, have contributed to a significant reduction in costs. We are now on-track to exceed the €15m of additional cost savings in 2015 that was originally targeted.

The regulatory and fiscal environment continues to evolve with several Member States moving to adopt nationally regulated frameworks, although questions remain for several of these countries on whether their new or proposed regimes are compliant with EU law. While Sweden has already been referred to the Court of Justice of the European Union ('CJEU'), the European Commission has also sent pilot letters to several countries, including Germany and Belgium signifying the first stage of an infringement process.

In Romania, emergency ordinance no 92_2014 was enacted on 12 June 2015 requiring all gaming operators that accepted online bets from players in Romania prior to being licensed to pay retroactive taxes. Whilst a joint complaint by the European Gaming and Betting Association, the Gibraltar Betting and Gaming Association and the Maltese Remote Gaming Council has been made to the European Commission in respect of this legislation, a provision of €7.9m has been made in the first half representing the Board's estimate of retroactive taxes that may be due in Romania.

New VAT rules came into force across the EU from 1 January 2015 impacting a number of areas of the digital economy, including online gaming. As previously announced, this could represent a c.€15m headwind for bwin.party in the current year while the POCT is expected to result in additional gaming taxes of between €10m and €11m in the current year.

Strategically, we have made excellent progress on selling-down non-core assets and have already reached our target range of between €30m-€50m of total proceeds. During the first half we completed the sale of World Poker Tour ('WPT'), Win, Gaming Realms, Winners and United Games and have now raised over €37m from the sale of non-core businesses. Additional proceeds of between approximately €3m and €5m are expected to be received in the second half of 2015.

On 17 July 2015 the Board announced the terms of a recommended offer from a wholly-owned subsidiary of 888 Holdings plc ('888') comprising a mixture of cash and new 888 shares (the '888 Offer'). Based on the value of 888 shares at yesterday's close, the 888 Offer values each bwin.party share at approximately 104.7p per share, representing a premium of 24.8% to the volume weighted average closing price for the three month period prior to 14 May 2015 (being the last business day prior to the Group's announcement on 15 May 2015 regarding its discussions with third parties in relation to a variety of possible business combinations).

Whilst discussions with GVC are continuing, there has been no change to the Board's recommendation for the 888 Offer and all shareholder documents relating to the 888 Offer are expected to be sent to shareholders shortly. Copies of all documents and further details of the offer including all terms and conditions will then be made available on the Group's corporate website: www.bwinparty.com.

H1 2015 - Operational developments

Our shift to a label-led rather than product led structure has continued to deliver operational improvements during the first half with improved system availability and greater accountability. As a result, we have made good progress on delivering against our tactical goals: growing our presence in nationally regulated and/or taxed markets; growing mobile; as well as continuing to enhance our products and systems.

Increased focus on regulated and to-be-regulated markets

Increasing the proportion of the Group's total revenue coming from nationally regulated and/or taxed markets remains a core strategic objective for the Group and during the first half of 2015 this increased to 60% of total revenues versus 56% in the same period in 2014. .

Mobile growth

bwin labels - the roll-out of our latest 'MS2' mobile sports betting application in Italy and Belgium, as well as our dotcom markets, has been a key driver behind the strong growth in mobile revenues. In the month of June, over 50% of bwin's sports betting gross gaming revenue came through the mobile and touch channel (2014: 37%). Across all products, the share of bwin's gross gaming revenue coming through mobile and touch devices grew to 37% in the first half (2014: 24%) and 38% in June 2015 (June 2014: 30%). As an indicator of the transition to mobile we are now seeing around 35% of our new player registrations come through mobile versus 14% in January 2014.

Games labels - during the first half we launched new applications for partycasino, GiocoDigitale and also Foxy Casino that are each proving popular. As a result, approximately 22% of Games labels' gross gaming revenue in the first half came through the mobile channel (2014: 14%). From a feature perspective we have incorporated new casino content from the likes of NetEntertainment, IGT, WMS and Amaya as well as from our own in-house studio, doubling the number of games on partycasino. In poker, we released multi-table tournaments on mobile in all markets which is already proving popular amongst our customers. As part of our effort to simplify our operations and further costs, all of our US B2C activities are now included within Games labels, whereas the US B2B activities are included in Studios.

Product development and operations

In addition to the delivery of the mobile developments outlined above, our Studios business unit remains focused on raising the quality and availability of our services across all platforms. Our continued investment in technology has delivered a marked reduction in system downtime and reduced significantly the time taken to restart our gaming platform following maintenance or systems upgrades. In April we completed the final piece of our technology integration with the successful migration of 900,000 Italian accounts onto a single unified platform, supporting both bwin.it and Giocodigitale.it.

Marketing

bwin labels - the launch of our 'Every Day is Match Day' campaign in March leveraged the Group's Real Madrid and Bayern Munich sponsorships with a fully integrated campaign across TV, print and radio as well as digital and social channels. The campaign drove new player sign-ups in our core markets and also increased brand awareness. Our CRM and digital marketing approach also took a further step forward with the implementation of a series of new segmentation and customer modelling tools. The shift towards these channels is being balanced with a reduction in our ongoing investment in sports sponsorships.

Games Labels - The shift into regulated markets continues with the UK defined as the key market for Games labels. Our decision to focus the allocation of marketing resources on a localised proposition has delivered growth across all products in the UK which now contributes nearly half of the segment's revenue.

Our UK 'Poker for the People' campaign continues to draw more players to the brand with a significant year-on-year increase in the number of average daily players from the UK.

Recent marketing activity in our casino business has focused on promoting our exclusive proprietary games, with a 19% uplift in average daily UK revenue compared with previous year.

Our Foxy Bingo 'Get Happy' campaign drove a record number of new depositing players during the first half which helped deliver a 27% increase in new player signups versus the same period in 2014.

Strategic developments

Industry consolidation

The wave of industry consolidation that we predicted a year ago is well under way with a number of deals in the sector already complete and several others at an advanced stage. On 17 July 2015, the Board announced the terms of a recommended offer by 888 to acquire all of the issued and to-be-issued share capital of bwin.party at a headline value of 104.09p per share. All shareholder documents associated with the 888 Offer are expected to be sent to shareholders shortly and will then be available on the Group's corporate website at www.bwinparty.com.

Sale of non-core businesses

We have made excellent progress during the first half on reducing losses and realising value from several non-core business interests including: WPT, a land-based poker tournament and TV production business; Win, a social gaming business; our investment in Gaming Realms, a listed social gaming business; Winners, a retail betting franchise in Spain; and United Games, a social gaming developer. Total consideration received from these and other non-core asset disposals was €37.1m as at 30 June 2015.

Regulatory developments

During the first half of 2015, the enactment of the emergency ordinance in Romania resulted in the Group recognising a provision of €7.9m representing the Board's estimate of retroactive taxes that may be due. Elsewhere, several jurisdictions around the world are continuing to explore the possible introduction of online gambling legislation and a summary of some of the other key regulatory developments affecting our ongoing business is set out in the Appendix.

Impairment of intangible assets

The Group regularly monitors the carrying value of its intangible assets. A review was undertaken at 30 June 2015 to assess whether there were any factors that would give rise to concerns on the carrying value of intangible assets. As a result of the review, it was concluded that no impairment charge was required. In the prior year, a non-cash impairment charge of €94.7m was recorded in the first half relating to intangible assets within poker and social gaming.

Dividend

In line with our dividend policy, the Board has declared a half year dividend of 1.92 pence per Ordinary share (2014: 1.89 pence) representing a 2% 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 11 September 2015 (the 'Record Date'). It is expected that dividends will be paid on 9 October 2015. 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 18 September 2015. A separate announcement regarding the dividend payment has been issued today.

Current trading and outlook

The absence of a major football tournament this year and the impact of the introduction of EU VAT from 1 January 2015 meant that average daily net revenue in the 8 weeks to 25 August 2015 was €1,325,700, down 9% versus the same period last year (2014: €1,451,300). With continued mobile growth and cost savings on-track, the Board remains confident about the full year outlook.

Norbert Teufelberger

Chief Executive Officer

SUMMARY OF RESULTS

Net revenue by product has been included in the table below to show the reconciliation of the results by segment to the results by product.

Clean EBITDA increased by 2% year-on-year despite the introduction of VAT in a number of EU Member States, a lower than expected sports margin and the UK point of consumption tax that was introduced on 1 December 2014. However, our progress on non-core asset disposals and other cost saving initiatives is running ahead of plan - excluding the impact of EU VAT and UK point of consumption tax, Clean EBITDA would have increased by 24%. 

bwin labels

Total revenue fell by 9% to €171.9m (2014: 188.9m) principally due to the absence of the FIFA World Cup that benefitted last year and the introduction of VAT. However, due to reduced operating costs, Clean EBITDA rose by 14% to €40.2m (2014: €35.4m).

Games labels

Total revenue fell by 14% to €92.6m (2014: €107.2m) primarily due to a decline in the poker market, reduced VIP activity and the introduction of VAT in certain European markets. Clean EBITDA fell by 39% to €20.5m (2014: €33.6m) due to lower revenue coupled with the introduction of the POCT in the UK, partially mitigated by reduced operating costs.

Studios

Total revenue in Studios fell by 11% to €38.6m (2014: €43.2m) with revenues from internal customers reducing in-line with the revenue reductions from bwin and Games labels, partially offset by higher B2B revenues from external customers, principally Borgata Hotel Casino and Spa in New Jersey. As a result oif the lower revenue, the Clean EBITDA loss increased by 11% to €10.7m (2014: €9.6m), partially mitigated by a reduction in operating costs.

Non-core

Total revenues grew by 44% to €34.7m (2014: €24.1m) primarily due to WPT, Kalixa and InterTrader. Growth at WPT was driven by a pan-Asian licensing deal with Ourgame, and subsequent to the period end, in July 2015 we announced a nine-year brand licensing deal for the use of 'bwin live' to Obiettivo2016, an Italian retail betting chain that is aiming to take a 15% share of Italian retail betting by the end of 2017. As well as leveraging the strength of our brands, these deals also enhance our live offering by driving new player sign-ups and offering customers new pay-out options.

Growth at Kalixa was driven by growth in third party processing volumes and the acquisition of PXP Solutions in May 2014. The growth at InterTrader was primarily driven by growth from its own licensed service, InterTrader Direct.

Clean EBITDA from non-core activities improved substantially to €2.1m which compares to an EBITDA loss of €8.4m in the same period last year. The primary drivers of this improvement were the Asian licensing deal referred to above, reduced operating losses in Win which was sold on 12 March 2015, and growth in third party revenues at Kalixa and InterTrader. The non-core disposals meant that this segment included non-recurring revenue of €14.3m and EBITDA of €2.0m in the first half of 2015.

Corporate

The loss at corporate increased marginally to €4.8m (2014: €4.6m) primarily due to reduced charges to other internal segments and foreign exchange movements.

Amortisation charges fell by 30% to €21.1m (2014: €30.0m), but the increased capital expenditure in our Studios business in 2014 meant that depreciation charges increased to €15.6m (2014: €11.4m). No impairment charges in the period (2014: €94.7m) together with a profit on disposal of assets held-for-sale of €5.0m, the release of a fair value liability created on completion of the merger between bwin and PartyGaming in 2011 of €4.9m and reduced reorganisation costs of €2.8m (2014: €3.5m), partially offset by a provision for retroactive taxes of €7.9m (2014: €nil), meant that the business overall returned to operating profit of €5.3m (2014: operating loss of €100.4m) and a reported profit after tax of €2.9m (2014: loss after tax of €94.0m).

Basic earnings per ordinary share was 0.4 € cents (2014: loss per share 11.4 € cents). Clean EPS was 2.3 € cents (2014: 3.0 € cents).

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

Reconciliation of Clean EBITDA to operating profit (loss)

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

Revenue by product

Consolidated Key Performance Indicators

Active player days fell by 22% reflecting the absence of a major football tournament versus the prior year and the continued decline in poker. Yield per active player day increased by 15% with increases in all verticals with the exception of casino that was impacted by a lower gross win margin. New player sign-ups fell by 24% with sports betting down 36% due to the absence of the FIFA World Cup, and further declines in poker. However, new player sign-ups increased by 9% and 27% in casino and bingo respectively. The net impact of these movements, together with the introduction of VAT on certain online games in a number of EU countries, was that average daily net revenue decreased by 11% from €1,634,300 to €1,457,500.

A detailed review of 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

*Austria, Belgium, France, Denmark, Germany, Italy, Spain and UK

Sports betting - Key Performance Indicators

Betting volumes were up 4% despite strong volumes in the prior year because of the FIFA World Cup with particularly strong growth in mobile where betting volumes were up by 29%. However, due to a poor run of sporting results in the period, the gross win margin fell by 1.8 percentage points to 8.5% (2014: 10.3%). The net effect was that gross revenue was down 14% and whilst bonus costs fell from 1.0% to 0.8% of amounts wagered, net revenue was down 13% to €108.8m (2014: €125.5m)

The roll-out of our latest MS2 mobile sports application across a number of markets helped to drive betting volumes as outlined above. This fed through into a 27% increase in gross gaming revenue through mobile and touch devices that reached 48% of total sports betting GGR (2014: 33%).

Key objectives for 2015/16:

We are continuing to drive our mobile offering that features prominently in all of our forthcoming marketing campaigns that are focused on nationally regulated and/or taxed markets. Having chosen not to renew a number of our sponsorship commitments, we are redeploying this marketing spend into a series of CRM and digital marketing initiatives that are already beginning to improve player yields and player retention. We plan to launch into Greece and Romania before the end of the year with the exact timings dependent upon licencing and completing the requisite modifications to our product offering to comply with local licensing regulations.

Having delivered a 21% increase in other revenue in the first half of 2015, we are making good progress on securing additional and significant B2B customers for the sports betting platform as well as looking at ways we may be able to drive additional revenues through licensing of the bwin brand in certain markets. We expect to be in a position to confirm significant progress on these initiatives in the second half of 2015.

Casino & games

*Austria, Belgium, Denmark, Italy, Spain, UK and US (New Jersey)

Casino & Games - Key Performance Indicators

Total stakes grew by 4% versus the prior year reflecting particularly strong growth through the mobile channel and further progress on driving the rates of cross-sell from sports betting. The roll-out of 45 new casino games on mobile, including our own Slider Blackjack and Slider Roulette games, prompted a 139% increase in betting turnover that increased gross gaming revenue through the mobile channel by 141%. Lower VIP activity coupled with an increase in the popularity of live dealer games, as well as higher cross-sell from sports whose players prefer lower hold games such as blackjack and roulette meant that the overall gross win margin for casino & games fell from 3.6% to 3.4%. The introduction of VAT on certain online gambling games in a number of EU countries from 1 January 2015 was also a factor in driving gross win margins lower with the result that gross gaming revenue fell by 4% to €119.3m (2014: €124.0m). Adjusting for the impact of VAT, net gaming revenue fell by 1% to €100.3m.

A focused marketing campaign in the UK meant that bonus costs increased but the result was a 9% increase in new player sign-ups and this should feed through into increased player activity in future periods. Our UK effort also helped to drive revenues from nationally regulated and/or taxed markets that increased by 3% in absolute terms while revenue from other markets fell by 7%, the result being that total net revenue fell by 5%. Other revenue benefited from a strong performance from our New Jersey partner's online casino that made good progress in the period. An 8% increase in cost of sales following the introduction of the point of consumption tax in the UK meant that gross profit fell by 6% to €91.8m (2014: €97.2m)

Key objectives for 2015/16:

We are continuing to expand our product portfolio that now has 291 games in total of which 49 are also on mobile. Having launched our online slots product in Spain in June, we hope to grow casino revenues there in the second half whilst continuing to grow our share of total casino revenue coming through mobile having reached 19% in the first six months of 2015 (2014: 8%).

Poker

*Austria, Belgium, Denmark, France, Italy, Spain, UK and US (New Jersey)

Poker - Key Performance Indicators

The challenges in European poker have continued with market declines in Italy, France and Spain that have each contributed to the continued decline in our own poker revenues. The introduction of VAT in a number of EU countries has also been a headwind since the start of 2015. However, we have started to see an improvement in the month-on-month trend, particularly in the UK where we grew new player sign-ups by 36% and active player days by 10% versus the same period in 2014.

Our presence on mobile is also improving and gross poker revenues through this channel have grown to approximately 9% of total poker revenue compared with 5% during the first six months of 2014.

Objectives for 2015/16:

We will continue to build upon partypoker's recent progress in the UK including focused promotional activity with a new partner and will also seek to slow the decline elsewhere with a series of mobile app push campaigns in conjunction with the usual step-up in targeted marketing initiatives at the start of the new football season.

Bingo

* Italy, Spain and UK

Bingo - Key Performance Indicators

Despite further declines in Italy and continued strong competition in the UK, we increased gross revenue by 5%, driven by a 10% increase in the UK that now represents over 90% of the total and which benefited from a favourable movement of Sterling against the Euro. The strength of our Foxy Bingo and Cheeky Bingo brands remain central to our success and were further supported during the period with a successful TV campaign in the UK resulting in a 27% increase in new player sign-ups. With a key area of focus being on more valuable players, overall active player days fell by 17% but average yield per active player day increased by 23%, resulting in a 2% increase in average daily revenue.

We have continued to make excellent progress on growing our mobile presence and gross gaming revenues through mobile increased to 33% of total bingo gross gaming revenue (2014: 21%). 

Objectives for 2015/16:

We are continuing to drive our mobile and touch volumes with a particular focus on the UK.

Other revenue

Other revenue grew by 68% to €26.2m (2014: €15.6m), with a particularly strong performance by WPT following a licencing agreement in Asia. WPT was subsequently sold to Ourgame on 24 June 2015 for €32.7m. Other disposals completed during the period included Win, Gaming Realms, United Games and the majority of our investment in Winners. Non-recurring revenue associated with these disposals within this segment was €14.3m in 2015. Following these disposals, other revenue now comprises Kalixa, B2B services, InterTrader, software services and domain sales. Revenues grew in all areas with the exception of software services as these resources are redeployed to internal projects.

Cost of sales

Total Clean EBITDA cost of sales increased by 5% to €49.6m, largely driven by the introduction of the POCT from 1 December 2014, increased programming costs at WPT, partially offset by declines in gaming taxes elsewhere. Gaming taxes payable in nationally regulated markets account for the majority of cost of sales and totalled €41.8m (2014: €42.4m). Included within total cost of sales but outside of Clean EBITDA is €7.9m relating to a provision for retroactive penalties that may be levied on gaming operators that accepted online bets from players in Romania prior to being licensed. A joint complaint by the European Gaming and Betting Association, the Gibraltar Betting and Gaming Association and the Maltese Remote Gaming Council has been made to the European Commission in respect of the legislation that was enacted giving rise to these potential obligations.

Other operating income/expenses

Other operating income included one-off items of €4.9m relating to the release of a fair value tax liability set-up at the time of the merger between bwin and PartyGaming and a profit of €5.0m recorded on the disposal of certain non-core investments. Foreign exchange gains of €2.7m compare to a loss of €0.9m in the same period in 2014. Other operating expenses comprise merger and acquisition costs of €2.4m which includes €1.7m of advisory costs incurred relating to potential consolidation discussions.

Distribution expenses

Customer acquisition and retention spend fell by 15% due to the absence of a major football tournament this year and the major marketing effort in the prior year around the FIFA World Cup. It also reflects a concerted effort to reduce marketing costs in New Jersey where despite an improvement in recent trends, the size of the market remains lower than previously expected. The marked reduction in affiliate costs reflects our continued focus on reducing our reliance on this channel, as well as lower poker revenue. Customer bad debts fell from 0.7% of revenue to 0.1% of revenue due to a reduction in the amount of chargebacks experienced during the period. Third-party content costs increased to 4.7% of revenue (2014: 4.4%) due to the addition of more third-party content to our casino offering that now includes games from WMS, IGT, Net Entertainment and Amaya.

Administrative expenses

We have continued to focus on reducing Clean EBITDA administration costs that have fallen across all categories in the period despite unfavourable foreign exchange movements. Transaction fees fell in line with reduced volumes across the Group, but increased as a percentage of revenue reflecting the additional third party processing volume of PXP. Staff costs were reduced by €0.9m on the back of our move to a label led structure, partially offset by foreign exchange movements, an increase in workforce performance-based incentive costs and the addition of the PXP workforce. Outsourced services and other overheads were reduced by €3.3m and €4.4m respectively reflecting the benefits of moving to a single technology platform in both France and Italy as well as our continued effort to reduce costs in these areas. The net result was that Clean EBITDA administrative expenses were reduced by €8.8m to €99.0m (2014: €107.8m).

The higher than normal capital expenditure in the Studios business in 2014 also meant that depreciation increased by €4.2m in the period to 5.3% of total revenue while the amortisation charge, that is almost entirely related to acquired intangibles, continued to fall to 7.1% of total revenue (2014: 9.5%). Comparable reorganisation expenses of €2.5m (2014: €2.5m) reflect the last significant expenditure on transitioning to our label-led set-up as the new structure is now largely complete.

Taxation

The current tax charge for the period is €3.7m (2014: €5.6m). After allowing for deferred tax credits primarily relating to the unwinding of provisions set up on acquisitions of €3.5m, the total tax charge for the period is €0.2m (2014: tax credit of €6.5m). There is no tax associated with other comprehensive income.

Net cash

Net cash (after deducting all customer liabilities but adding back net payment processor receivables) increased to €58.1m (31 December 2014: €34.6m) assisted by the disposal of non-core businesses and after payment of the final dividend of €21.7m.

Cashflow

Cash generated in the period improved substantially year-on-year from an outflow of €9.6m to an inflow of €35.1m. This was primarily due to the fact that last year was impacted by the acquisition of PXP Solutions in May 2014 (€22.7m) whereas the first half of 2015 benefitted from the sale of certain non-core assets that generated net cash proceeds of €34.9m. Operating cashflow increased by 14% to €53.5m (2014: €47.1m). Dividend payments of €21.7m (2014: €18.0m) reflected a higher payout on the previous year together with a weaker Euro whilst capital expenditure (including intangibles) rose to €29.0m (2014: €21.1m) due to increased investment in our Studios business.

Principal risks

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the course 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 seek to manage them are set out below:

1. Technology

The Group's customer offer includes products operated using different labels and gaming licences, the majority of which are driven by the Group's proprietary technology.

2013 saw the completion of the dotcom player migration project and during 2014 our customer base in France was migrated successfully onto our target technology platform. The migration of our Italian customers to the target platform represents the last of our integration projects following the Merger and was completed in March 2015.

The fact that with the exception of bingo, the vast majority of our customer base is already supported by our target platform, highlights how important our technology is to the Group. In an industry where service reliability and integrity are key differentiating factors, our continual commitment to providing a reliable, safe, secure, compliant and continuous service has been our focus this year.

A Group-wide initiative on achieving close to 100% system availability was introduced and we have made significant progress in ensuring our customer facing systems are available for 24 hours a day, 7 days a week. This is monitored and overseen by the IT Committee.

Other technology-related risks, such as our continuing operations in the event of a natural or man-made disaster, have been addressed with a substantial investment during 2014 and both the Group's disaster recovery and business continuity solutions have been updated and tested during the past 12 months.

With continuous shifts in how consumers choose and are able to access our services (via different devices and/or channels), the process of maintaining and improving our technology will become more complex. As mentioned elsewhere, the Group's key focus in 2015 is to improve our customer experience through an expanded mobile offer across all products as well as high levels of availability.

2. Regulation

Focusing on nationally regulated and/or taxed markets safeguards our gaming revenues from potential national legislation threatening to prohibit or restrict one or more of the products that we offer, or online gaming entirely. There are potential risks to the operations and financial position of the Group from all markets where regulation is not clearly defined or adopted, especially in relation to EU legislation and associated cases.

To manage this risk, the Group continues to engage (either directly or indirectly) with national governments and regulators on to-be regulated markets. The Group's Compliance and Regulatory Affairs team keeps abreast of the regulatory landscape and report to the Audit & Risk Committee on any developments. However, it should be noted that most of the risks in relation to the regulatory landscape are outside of our direct control.

Operating in nationally regulated and/or taxed markets necessitates that we comply with the required rules and protocols. Currently, the Group holds licences for and offers real money gambling in 11 different territories, each with their own unique licence obligations. The need to sometimes develop bespoke technological, operational and promotional offers in each market requires significant investment. The Group is committed to meeting its licence obligations and monitors its compliance with regulatory requirements by performing reviews of its licenced operations on a periodic basis with the results reported to the Audit and Risk Committee. The Group's licenced entities are subject to a series of external audits by regulators and industry specialists to ensure that policies and procedures are being followed as intended.

3. Taxation

As outlined above the Group's strategic focus is to operate in nationally regulated and/or taxed markets. 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.

Group companies operate only where they are incorporated, domiciled or registered. The multi-location set up of the Group gives rise to transfer pricing risk, mitigated by the fact that all intra-group transactions are documented and take place on commercial terms agreed with input from the Group's professional advisors.

During 2014, a detailed review on the transfer pricing arrangements was conducted on behalf of the Audit and Risk Committee. The Group Director of Tax routinely holds workshops with senior management and business unit leaders during the course of the year.

On 1 January 2015, new VAT rules came into force across the EU impacting several areas of the digital economy. Gambling has typically been exempt from VAT but falls within the rules for VAT on electronically supplied services. Under EU law, Member States have the ability to apply VAT to gambling subject to certain limitations and conditions, and tax may be due depending on where customers are located and how Member States implement any exemption. Whilst substantial uncertainty remains, in the light of the new rules the Group is now filing for, and paying VAT, in certain EU Member States. It is possible that VAT could be payable in other EU Member States.

4. Shift to a new label-led approach

In 2014, the Group announced a fundamental shift in its operations away from a product-led approach (sports betting, casino & games, poker and bingo) towards one driven by label (bwin labels, Games labels, Studios, Non-core and Corporate) effective from 1 January 2015.

Whilst this shift to a new approach created some uncertainty for employees, continuous support through regular communications via location-driven 'Town Halls', webinars through the Group's intranet and one-on-one 'question and answer' sessions with Human Resource teams have each helped to maintain a transparent and continuous channel of communication that has aided this transition.

Having business units and labels resourced across various locations does give rise to specific location risks as well as decentralisation risks; however this new approach has allowed the creation of teams dedicated to specific labels rather than products enabling faster decision-making, an improved customer offer and better service.

The Group's corporate functions continue to be administered from the corporate centre covering areas such as procurement, financial reporting, budgeting, legal and HR services, with appropriate service levels in place to provide each business unit with a benchmark of service quality. The 2015 Internal Audit Plan as approved by the Audit and Risk Committee ('ARC') reflects this new operational set-up and findings of all reviews will be communicated to the ARC during the year ahead.

5. 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 are designed with the aim of minimising the Group's exposure to the Eurozone economic risk and preserving our ability to operate if such events arise.

The functional currency of 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 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.

6. Transaction Risk

Whilst the Company remains in in discussions regarding industry consolidation, several additional areas of risk may affect the Group's financial performance. These risks relate primarily to the retention of key people, the ability to attract new talent, the need to continue to focus on day-to-day operational activities and the protection of company assets. Other risk factors may also become relevant should uncertainty over the outcome of such discussions continue for a lengthy period.

Any period of uncertainty regarding the future ownership of the Group may increase the likelihood that certain of the risks above have an impact on the Group's financial performance. However, management has taken several mitigating actions to reduce their impact and likelihood. The Audit and Risk Committee are fully aware of the risks as well as the mitigating actions in place and management have committed to work within the transaction framework to help reduce the potential impact of such risks.

By order of the Board of Directors

Martin Weigold

Chief Financial Officer

28 August 2015

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 2014.

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

28 August 2015

Financial information (unaudited)

Condensed consolidated statement of comprehensive income