Final Results

Paddy Power plc 05 March 2007 RNS Number: Paddy Power plc 5 March 2007 Paddy Power plc 2006 Preliminary Results Announcement Paddy Power plc today announces its preliminary results for the year ended 31 December 2006. Financial highlights included: Turnover up 31% to almost Euro1.8 billion with growth across all channels. Gross win up 36% to Euro219m boosted by 64% increase in win from online gaming and FOBTs. Operating profit up 51% to Euro45.5m and profit before tax up 52% to Euro47.6m, both before inclusion of a once off property gain. Total dividend for the year up 56% reflecting proposed increase in dividend payout ratio to 40%. Share buyback programme planned for this year, whilst maintaining flexibility for substantial growth opportunities. Business highlights included: Continued enhancement of our online businesses which has propelled paddypower.com to be the third largest online sportsbook in the UK measured by the number of visitors. Launch of more new online businesses, such as a German language sportsbook and bingo, and increased resources for further business development. Continued strong growth in Irish retail driven by investment in the estate and the positive external backdrop. Commenting on the results Patrick Kennedy, Chief Executive, Paddy Power plc said: '2006 has been an exceptional year for Paddy Power, with very strong growth in each of our businesses. Notably the results also reflect substantial investment to exploit future growth opportunities, which position us well for continued success in 2007 and beyond.' ENDS 5 March 2007 Issued on behalf of Paddy Power plc by Drury Communications Ltd For reference: Patrick Kennedy Jack Massey Chief Executive Finance Director Paddy Power plc Paddy Power plc Tel: + 353 1 404 5912 Tel: + 353 1 404 5912 Billy Murphy / Oonagh Daly Trevor Phillips Drury Communications Ltd Holborn PR Tel: + 353 1 260 5000 Tel: + 44 20 7929 5599 Mobile: + 353 87 855 4406 (OD) Mobile: + 44 7889 153 628 Chairman's Statement Dear Shareholder, I am pleased to report on an exceptional year of growth and profitability for Paddy Power. 2006 % Change Turnover €1,795m +31% Pre tax profit €47.6m +52% Adjusted basic EPS 78.6 cent +45% Dividend 32.2 cent +56% Cash balances €87.1m +66% (Results above and throughout this statement exclude the exceptional property gain of €2.1m in 2006) (Turnover or amounts staked represents amounts placed on sporting events and net winnings on gaming activities) These record profits were driven by strong turnover growth across the Group. The ongoing investment in business development that I reported on last year has come through strongly in the 2006 results. In addition, Irish retail turnover received a boost from the introduction of tax-free betting, while all channels benefited from the World Cup. Our online business continues to grow strongly in both sportsbook and gaming and I am pleased to confirm that the results also reflect a significant level of investment for future growth. We also benefited from an improved run of sporting results compared to 2005, but the overall run of results, while good, was not exceptionally favourable to bookmakers. As always there were plenty of fraught moments with patriotic punters rubbing their hands following a record haul of ten Irish winners at Cheltenham, an Irish winner at the Grand National, Ireland winning the Triple Crown and last but certainly not least, Munster finally fulfilling their destiny to win the Heineken Cup! However a fine showing by a range of outsiders in late December raised the Group's overall sportsbook gross win percentage margin broadly in line with expected levels. 2006 also marked the 18th anniversary of Paddy Power's formation through the merger of three Irish retail bookmakers. The evolution of the business since is evidenced by the fact that, while the Irish retail business has gone from strength to strength, it now accounts for just under half of our operating profit. Since its inception our non retail business has similarly evolved with over 50% of its turnover in 2006 coming from the UK and over 30% of its gross win generated from online gaming rather than sports betting. Many other things have changed during that period but the core ethos of Paddy Power to remain the most punter-friendly, innovative and entertainment based bookmaker lives on throughout our entire business. Regulation 2006 saw some significant regulatory developments. The passing of the Unlawful Internet Gambling Enforcement Bill in the US in September effectively outlawed online gambling by US residents and the facilitation of related money transfers by banks. Overnight this resulted in billions of euro being wiped off the stock market valuation of companies which had targeted US gamblers and the creation of legal uncertainty for their executives. Paddy Power has never targeted the US market so our market value was not impacted in any material way. The Group has never sought players from the US and has for years had measures in place to proactively prevent any play from the US including: Prominent graphics, statements and terms and conditions at customer registration stating that we do not accept US customers; Payment controls to block deposits from bank cards issued in the US, transfers from US bank accounts or payments from US residents via e-wallet payment methods; Never targeting any advertising or promotional activity at US residents. Closer to home, there was media coverage during the year in relation to the possibility of certain bookmakers, not including Paddy Power, introducing Fixed Odds Betting Terminals ('FOBT's) into Irish betting shops. While such machines are an established part of the UK betting environment and culture, our view was that neither the Government nor the punter in Ireland were likely to be in favour of their introduction. This view of the Government's position appears confirmed by the Government statement in December 2006 that they 'wished to warn those in the industry, in the strongest possible terms, that the Government was opposed to the introduction of such machines'. The Minister for Justice, Equality and Law Reform also announced, in August 2006, the possible regulation of land based casinos in Ireland. Given our knowledge and experience of the Irish market place and the strength of our brand, we would consider participation in land based casino developments in Ireland. We would hope to see clarification and implementation of the Government's position in the next number of months. In continental Europe, the regulatory landscape continues to be far from uniform, with periodic swings towards increased liberalisation and restriction within individual member states. Overall however we are encouraged by our prospects in the medium term for online expansion, both as a result of countries that have already moved towards liberalisation and by ongoing action by the European Commission to ensure that any restrictions on the provision of services within the European Union are necessary, proportionate and non-discriminatory and therefore consistent with EU Law. The Board As noted in the 2005 Annual Report, Tom Grace and Jack Massey were appointed to the Board in January 2006 and April 2006 respectively. Both appointments have brought valuable experience and new perspectives to the Group. More recently, we have announced the appointment of David Johnston as Company Secretary. We welcome David from O2 Ireland where he had been Chief Legal Counsel and Company Secretary. We also express our sincere gratitude and best wishes to the former Company Secretary, Nuala Hunt, who is leaving the Group. Dividends and Capital Structure As announced in our Interim Report for 2006, the Board is committed to a progressive dividend policy and is recommending an increase in the dividend payout ratio to 40% in the current year. A final dividend of 22.77 cent per share is therefore proposed, payable to shareholders on the register at 16 March 2007. This brings the total dividend for the year to €16.5m or 32.2 cent per share, an increase of 56% on the 20.59 cent paid in 2005. In the six years since flotation in 2000, Paddy Power will have therefore grown dividends per share at an average annual rate of 42%, a growth rate ahead of the already significant increase in average earnings per share growth of 29%. The Group has historically retained a positive cash balance in order to be in a strong position to exploit the many development opportunities available to it. Given the very strong growth in the business in the last number of years, its very strong cash generative abilities and the significant growth in the Group's cash balances, maintaining flexibility for future growth and returning additional cash to shareholders are no longer mutually exclusive objectives. The Board obtains shareholder approval annually to buy back up to 10% of the company's issued share capital, and we will seek that approval again at this year's AGM. It is the Board's current intention to conduct share buybacks this year. The timing and amount of shares bought back will depend on the Group's pipeline of development opportunities as well as equity market conditions. Outlook 2007 promises to be another exciting year for Paddy Power as we continue to expand across the Group. Trading for the year to date has been satisfactory and I look forward to updating you on progress at our AGM in May. Fintan Drury Chairman 2 March 2007 Chief Executive's Statement Introduction Paddy Power is a growth company. In the six years since flotation in 2000, we have increased turnover from €363m to almost €1.8 billion, an average annual growth rate of 31%, and earnings per share at an average annual growth rate of 29%. A particular feature of this very strong growth is that it has been achieved almost entirely organically, without recourse to acquisition. More importantly, looking forward, the Group today has a strong portfolio of businesses, each of which is well positioned to drive further turnover and profit growth. Our Existing Businesses These businesses are at varying stages of their life cycles; indeed, one of the particular attributes of Paddy Power is the excellent balance of activities that we have at different stages of development. Some are long established, substantial businesses; others are more recently launched, emerging businesses; whilst others are very recent investments which, although unlikely to contribute materially in the short-term, have excellent medium term prospects. It is worthwhile considering our businesses in each of these three stages of development in greater detail: (i) Our longer established, substantial businesses include our Irish retail and our telephone businesses. Both benefit from positions of leadership in the Irish market, from our unique brand, from the Group's innovative product range, and from the fantastic customer service for which Paddy Power is renowned. Both are also benefiting from significant recent investment: in the last five years, we have newly opened, refitted, extended or relocated over 85% of the 160 shops in our Irish estate, whilst our telephone business moved to a new state-of-the-art call centre in May 2006. Finally, both benefit from a positive external backdrop: continued population and economic growth, particularly in Ireland, and the continuing growth in live televised sport. The move to tax-free betting for punters, which Paddy Power introduced in December 2005, is a further positive for our Irish retail business. These positive market conditions attract increased competition every year, and the migration of customers from the telephone to the online channel is continuing. Nonetheless, our businesses have continued to grow strongly, with amounts staked increasing by 23% and 18% in the telephone and Irish retail businesses respectively last year. (ii) Our recently launched emerging businesses include our online sportsbook, online casino, online games and online poker, as well as our UK retail business. The online businesses are expanding rapidly, with amounts staked and gross win increasing by 60% and 57% respectively last year. Some people hold the view that products and services sold online can only be differentiated on the basis of price. We disagree with this; we differentiate ourselves versus our competition just as strongly in the online world as in our retail markets. This takes a number of different forms: - Trading Product and Specials: our broader range of product as well as our Money-Back Specials, early payouts, double result payouts and the many other imaginative refunds that we regularly offer are highly valued by our online customers, and the centre piece of the paddypower.com home page is always dedicated to our latest such offering; - Brand: the strength of our brand, as well as our retail presence in both the UK and Ireland, differentiates us against the myriad online-only players. We also employ a team of journalists to ensure that our websites and customer emails reflect the fun, and occasionally irreverent, side to our brand. For example, as a result of the polls introduced on our website last year, we now know 'what's the most painful?' between 'a fractured skull' (12% of votes), 'a kick in the nuts' (43%), 'childbirth' (11%) and 'watching Bolton' (34%); - Customer Service: great customer service, an absolute throughout our businesses, is a particular feature of our online channel. Many of our online competitors outsource customer service; we on the other hand insist on it remaining in-house, and regard it as a recruitment ground for the rest of our businesses, with a substantial proportion of our customer service staff being third level students or graduates; - Technology: our development team continues to use technology very effectively to tailor our websites to provide better and more accessible information, improve customer service and increase cross-selling opportunities. As well as holding the leading market position in online betting and gaming in Ireland, this focus on differentiation has propelled paddypower.com to be the third largest online sportsbook in the UK (measured by number of visitors in the second half of 2006), ahead of many more substantial rivals. This is an enormous achievement, from a standing start a number of years ago. Many of our online competitors have big international brands with very substantial budgets and indeed competition has increased even further in the last five months since the US market was effectively closed down. Nonetheless, the prospects for all of our online businesses are strong, as betting and gaming continue to increase in popularity, as the economies and also broadband penetration in our key markets continue to grow, and as we focus relentlessly on differentiating our proposition against the competition. Another emerging business is our UK retail business. A great job has been done since 2003 developing our UK retail estate, and at the end of 2006 we had a substantial footprint of 58 shops within the M25. The 2005 Gaming Act which takes effect later this year in the UK will allow for extended shop opening hours, the installation of higher payout gaming machines and improved shop opening opportunities. Our priority now is to optimise our proposition in anticipation of this deregulated market and, in this regard, our overriding focus for 2007 is to continue to improve the performance of the existing estate rather than open a substantial number of additional new shops. We remain optimistic about the prospects of our UK retail estate for several reasons, referred to in greater detail in the Operating & Financial Review, including: - Our gross win continues to grow strongly, on both a total and like-for-like basis; - Our brand recognition continues to grow strongly; - Our market research indicates that our customers rate us much more highly than those of our competitors, and are more loyal and less likely to switch, whilst competitor customers are most likely to switch to us. (iii) Our very recent investments include our online German language sportsbook and our online bingo business. These businesses rely less on cross selling to existing customers, but rather bring Paddy Power to entirely new customer groups. As such, they may take longer to have a material impact on the business than other online businesses launched in the last number of years, but we are confident about their medium-term prospects. Business Development In addition to the strong prospects of our existing businesses, we have increased the focus on new business development in 2006. Breon Corcoran's new role as managing director of non retail and development enables him to dedicate a substantial part of his time to seeking new opportunities for the Group, and through a number of senior hires he has built a top class development team to find the next set of new businesses for Paddy Power. These opportunities fall into a number of categories: - Accessing other segments of the betting market, as we did last year with our online bingo business; - Expanding our presence in existing geographies, for example potentially opening Paddy Power casinos in Ireland; - Deeper use of existing Group resources, such as our risk capabilities; - Further geographic expansion, as we commenced in the last 12 months with our German language website; - Stretching our brand into new areas, as we did last year with our online reverse auctions business. Summary As a result of these substantial opportunities, both in existing and potential new businesses, along with the quality of our people and our brand, we look forward to 2007 and beyond with confidence. Patrick Kennedy Chief Executive 2 March 2007 Operating & Financial Review Paddy Power is a multi-channel, multi-national betting and gaming company. It operates through two main divisions: the retail division, which operates bookmaking shops in Ireland and the UK, and the non retail division, which provides telephone betting services to customers in Ireland and the UK together with an online channel that provides both betting and gaming services to English and German speaking customers in the UK, Ireland and continental Europe. 2006 was a year of spectacular growth in turnover, gross win and operating profits in both divisions. Our brand, the quality of our people and our innovative product range drove this growth, as they do every year. In addition, results last year benefited from the largest betting event in history, the 2006 football World Cup, which generated €4.0m of gross win for us directly, as well as a significant number of new customers. The Retail Division 2006 2005 % Change Amounts staked €963m €794m +21% Sportsbook gross win percentage 12.54% 11.92% +5% The amounts staked over-the-counter ('OTC'), that is excluding FOBT gross win, in the combined Irish and UK estate grew by 21% to €956m. The average stake per slip increased by 9% to €20.82, while the number of slips grew by 10% to 45.9m. The OTC gross win percentage in the retail sportsbook was 12.5% as compared to 11.9% last year. This strong performance reflected a number of factors specific to the retail division. These included an increase in multiples within the mix, higher than average racing margins, as well as the anticipated positive impact of our Electronic Point of Sale ('EPOS') system. EPOS was rolled out across the entire estate in 2006, bar a handful of shops scheduled for redevelopment, at a total capital cost of €10.4m which was under the budget we set out last year. The deployment was supported by a significant training investment and has met with a positive response from both customers and staff. Our priority has been to use the system to improve customer service by increasing the speed and accuracy of customer payouts, extending the product range and freeing up staff to devote more time to enhancing the special buzz and atmosphere that so differentiates Paddy Power shops. The system has also enabled us to measure more accurately customer demand for new offerings, as well as the effectiveness of accompanying point of sale, screen, audio and other promotions. We have also leveraged the intranet communications infrastructure of EPOS to provide in-shop customer information terminals and in-shop printing of marketing materials and coupons thereby reducing distribution costs. Further benefits also accrue in relation to risk management and security. Overall, we are confident of recouping an attractive return on our investment in EPOS. Our trademark product innovation continues to give more choice to the retail customer. In horse racing, we now provide early prices for every UK and Irish horse race and lead the market in betting-without-the-favourite, match betting and distance betting. We have also expanded our sports betting, adding for example 15 extra soccer leagues from a range of countries including Poland, Japan, Romania, Hungary and Russia. To complete the package, we even provide Paddy Power soccer coupons in Polish, which involves more than just adding on '- ski' to the end of every team name! (i) Irish Retail €m 2006 2005 % Change Amounts staked 833.1 703.8 +18% Gross win 104.4 83.6 +25% Gross profit 91.5 74.0 +24% Operating costs (69.5) (59.9) +16% Operating profit 22.0 14.1 +56% The amounts staked within Irish retail grew by 18% to €833m. Strong shop opening opportunities existed in 2006 and we opened 10 new shops, bringing our total number to 160. In addition, we grew like-for-like amounts staked by 14% as compared to 9% in 2005. This strong growth is driven by the factors common to all our businesses, our brand, our product innovation and our customer service, but also by the following factors specific to our Irish retail estate: - The very significant investment we have made in the estate in the last five years; - The continuing positive economic and demographic backdrop in Ireland; - The move to 'tax-free' betting in December 2005 which boosted growth in 2006. When the Irish Government announced in the December 2005 budget that it was eliminating the 2% customer based betting tax and replacing it with a 1% tax levied on the bookmaker from 1 July 2006, we decided not to wait; instead we offered our customers a discount equal to the tax from the morning after the budget. During 2006, this resulted in an average cost to Paddy Power, as a percentage of amounts staked, of 1.5% or €12.5m based on a 2% cost in the first half of the year and a 1% cost in the second half. This compares with a cost of €8.3m in 2005 when discounts to cover the 2% tax were offered within parts rather than all of the estate. In 2007 onwards, a full year at the lower tax rate of 1% should save the Group approximately €4m as compared to 2006. In addition to the 10 shops newly opened during 2006, a further five shops were relocated, 10 refitted and three extended. Such shop developments incorporate our high quality interior furnishings and state-of-the-art technology infrastructure. This features 24 information screens, a dedicated sports gantry, customised audio and large screen televisions, all controlled via infrared technology from a central production studio. This enables us to co-ordinate and tailor information and coverage to local preferences, greatly improving the in-shop experience for customers. This substantial investment in our estate has contributed significantly to the growth in Irish retail by retaining existing retail punters and also attracting new footfall. During the year, the Group made an exceptional profit of €2.1m on the sale of an Irish shop property. The Group acquired the property in 2006 under a purchase option within its lease and at the same time entered into an arms-length sale and lease back of the property. This is in line with the Group's policy in recent years to operate shops under leases rather than owning and managing property, giving us more flexibility in locating shops and ensuring we can react swiftly to any market changes. The Group currently owns 13 of its shops and has no current plans to sell any of these properties. In-house valuations of these premises indicate a market value of approximately €13m. These properties are carried on the balance sheet at a net book value based on their historical cost of €5m. (ii) UK Retail We have continued to make substantial progress in our UK retail estate: - We operated 58 outlets as at the end of December, an increase of 13 since December 2005; - Our gross win grew by 59%, and by 15% on a like-for-like basis; - The group of shops opened before 2006 generated positive EBITDA in 2006; - Our brand continues to grow strongly, with recognition of 21% amongst all adults in London, up from 16% in 2005; - Market research indicates that our customers rate us more highly, on all key attributes, than those of our two largest competitors, and are more loyal and less likely to switch. It also indicates that customers of local competitors who would consider switching are, by a distance, most likely to switch to Paddy Power. Thus while the overall estate continues to be loss making, due to the opening of new loss making shops and the necessary investment in the central infrastructure, the underlying trend is positive and the more mature outlets are cash positive. We expect this positive trajectory to continue as further shops reach maturity and we continue to focus on realising the benefits of the reasonable scale now achieved. €m 2006 2005 % Change Amounts staked 123.0 86.3 +43% Gross win 23.6 14.8 +59% Gross profit 18.0 11.0 +64% Operating costs (24.0) (15.7) +53% Operating profit (6.0) (4.7) +29% (2006 FOBT gross win above and throughout this review is shown inclusive of VAT of €1.2m for consistency with 2005) In 2006, the amounts staked grew by 43% to €123m. Gross win growth of 59% to €23.6m was comprised of 88% growth in FOBT gross win to €8.1m, and 47% growth in OTC gross win to €15.5m. Like-for-like gross win grew by 15%, with OTC growth of 7% and FOBT growth of 38%. The OTC growth was impacted by the very strong FOBT growth with some punters switching their stakes between these products. There were 226 machines installed as at the end of the year, an increase of 31% compared to the end of 2005. The average gross win per machine per month increased 44% to €3,600 compared to €2,500 in 2005. During 2006 we conducted an extensive review of our UK business, and its potential opportunities. We also strengthened its management team. We have as a result identified a number of valuable initiatives to improve the performance of the existing estate and implemented a number of these in late 2006, with more to come in 2007. We are pleased with progress to date. We expect just a few shop openings in 2007 as compared to the 15 or so in previous years as we continue to prioritise improving the performance of the existing estate in the run up to deregulation. We also increased our FOBT profitability during 2006 by holding a competitive tender to improve our commercial terms, leveraging the growth in the estate and our increased turnover per machine, while also maintaining a first class product and service. The dual screen 'Rainmaker' machines we selected were installed across the estate in late 2006. We have also commenced a range of FOBT promotion initiatives and have recruited a dedicated FOBT manager. FOBT performance improvement is needed to offset the impact of the introduction of Amusement Machine License Duty ('AMLD') and the possible impact of the UK smoking ban. AMLD was introduced from August 2006 at a cost of €0.2m in 2006 and an expected cost of €0.7m in 2007. A smoking ban is scheduled to come into force in the UK in July 2007 and, while the introduction of the smoking ban in Ireland had no significant effect on retail turnover, the experience may be somewhat different in the UK due to the presence of FOBTs. We welcome the implementation of the Gambling Act effective from September 2007 which will feature extended shop opening hours, the installation of higher payout gaming machines and improved shop opening opportunities. The removal of the 'demand test' for openings also gives us more flexibility in the format and size of our new shops. The Group is currently progressing the related license applications and is well prepared for the new requirements. The Non Retail Division The non retail division comprises telephone betting and online betting and gaming. Operating profit from the division increased by 43% to €29.4m, comprising €6.0m from the telephone channel, an increase of 65%, and €23.4m from the online channel, an increase of 38%. Betting on soccer represents a greater proportion of turnover in the non retail division as compared to retail, hence both non retail channels benefited particularly from the World Cup in 2006. The guided range for non retail gross win percentages in 2006 was 8.0% to 9.0%. The actual gross win percentage was at the bottom of the guided range in the telephone channel at 8.0% and slightly outside the range in the online sportsbook at 7.9%. Nonetheless, the absolute amount of sportsbook gross win within the non retail division grew strongly by 41% in 2006, driven by exceptional turnover growth of 43%. This compares with growth in gross win of 14% and turnover of 19% in 2005. There were a number of reasons for the margin performance including some unfavourable results for bookmakers in sports such as rugby where non retail derives a greater proportion of its turnover as compared to retail. However the key factor behind this margin reduction were changes in the mix of business driven by a greater propensity of punters to bet on 'odds on' selections and the popularity of certain new products. For example, we experienced particularly strong growth in the year in financial markets betting and betting-in-running in a range of sports including soccer, tennis and snooker. These products tend to be single bet selections and have a bias towards 'odds on' selections resulting in lower than average margins. Nonetheless they are innovative, differentiating and popular new products, attracting good incremental turnover as evidenced by the 41% growth in non retail absolute gross win and we will continue to make new product decisions on the basis of such criteria. We would expect non retail margins to be approximately 50 basis points lower in the 7.5% to 8.5% range going forward. (i) The Telephone Channel €m 2006 2005 % Change Amounts staked 306.6 249.9 +23% Gross win 24.5 19.5 +26% Gross profit 22.4 17.2 +30% Operating costs (16.4) (13.6) +21% Operating profit 6.0 3.6 +65% The amounts staked within the telephone channel grew by 23% to €307m. Within this, bet volumes grew 9% to 3.0m while the average stake per bet increased 12% to €102.98. We prioritise profitability ahead of such metrics as customer numbers or market share and achieved growth in operating profit of 65% in 2006 despite a small reduction in active customers at the end of 2006. Telephone Channel Active Customers 2006 2005 % Change Ireland and Rest Of World 11,048 10,783 +2% UK 8,923 10,148 -12% Total 19,971 20,931 -5% (Active customers are defined as those who have bet in the last three months) If you can't stand the sound of an unanswered phone, you'd be in good company with our dedicated Dial-A-Bet team that answered in excess of 2.5m calls in 2006, over 90% in less than 10 seconds. We continue to invest and refine our use of technology to improve our customer service and the volume of calls we can handle. For example, in 2006 we adapted and expanded the operators' on screen information to enhance our management of customer calls. The successful growth of this business, together with Paddy Power as a whole, necessitated the relocation of our call centre to a new building beside our existing headquarters in Dublin in May 2006. The new building increased the call centre capacity by an initial 25% and also offers additional capacity as needed over the next few years. Operating costs within the telephone channel increased by 21% to €16m reflecting volume growth and the investment in the new call centre location, partially offset by savings from operational efficiencies and reductions negotiated on third party charges. (ii) The Online Channel €m 2006 2005 % Change Amounts staked 525.4 327.5 +60% Gross win 67.4 42.9 +57% Gross profit 51.7 33.4 +55% Operating costs (28.3) (16.4) +72% Operating profit 23.4 17.0 +38% The online channel had another strong year with 38% growth in operating profits, while at the same time making a number of important investments for future growth. These investments were reflected in the increase in operating costs by €11.9m to €28.3m. The major drivers of this increase were: - The launch of new businesses and expansion of businesses recently launched; - Volume driven promotional spend and marketing spend; - Growth in variable costs due to increased activity levels. Customer numbers in the online channel continue to grow strongly in both the more mature sportsbook and the newer gaming products. The growing customer base has also demonstrated a developing propensity towards multi product usage. Online Channel Active Customers 2006 2005 % Change Ireland and Rest Of World 42,735 25,646 +67% UK 67,380 48,015 +40% Total 110,115 73,661 +49% Online Customers Product Usage 2006 2005 % Change Sportsbook only 60,811 48,137 +26% Gaming only 25,885 11,277 +130% Multi product customers 23,419 14,247 +64% Total 110,115 73,661 +49% (Active customers are defined as those who have bet in the last three months) (a) Sportsbook The amounts staked online on the sportsbook increased by 60% to €497m. Within this, bet volumes grew 70% to 16.2m while the average bet value decreased 6% to €30.74. Gross win in the sportsbook increased by 52% to €39.1m. Product innovation continues to be a key driver of this level of growth. During 2006 we introduced a range of new products to cater for the different time horizons and risk preferences of our customers. For those with less time available, we expanded our betting-in-running options, introducing 'next game' betting in tennis, 'next frame' betting in snooker and substantially expanded our successful financial indices betting. For the more risk adverse, we created race insurance, unique to Paddy Power, with the punter being refunded if his horse is placed. We are also the only bookmaker offering place-only betting on all UK races each day and most Irish races. For those with varying risk preferences, we even provide the 'bet randomiser' which generates a proposed bet for punters who submit their current state of luckiness! We upgraded our sportsbook web site in 2006 to reflect the major growth in our events, markets and channels as well as changing customer preferences and tastes. The enhanced site includes easier navigation, better cross promotion of channels and a superior betting-in-running interface. We have also expanded our value added content and services comprising WAP and Java mobile phone services, 'bet-and-watch' racing, historical horse racing and soccer statistics as well as live score updates. The German language online sportsbook launched in April incurred a small loss in 2006, in line with our expectations. It has been progressing satisfactorily, although our growth has been restricted by the German regulatory environment which has in particular constrained our promotional activity. Nonetheless we are encouraged by the EU Commission's strong position on freedom of choice for consumers. We have also expanded our product range to meet continental European preferences with the inclusion of ice-hockey, basketball and additional soccer leagues. Payment options were expanded to include Neteller and Moneybookers, both popular on the continent. We have also introduced the German speaking punter to our novelty bets with good media interest in our market on which person mentioned in former Chancellor Schroder's memoirs would take legal action against him - no winners as yet but the wife would always seem a good bet in this context, particularly at 33/1! (b) Gaming The online channel generates gaming revenues from casino, games, poker and bingo. Revenue from these sources, representing the operator's 'hold' or commission income, increased by 65% to €28.3m, with growth achieved across all four product categories. Our commitment to poker and to the ongoing promotion of our brand led to our sponsorship of the 2006 Irish Open poker tournament. The Irish Open is the longest running poker tournament in Europe, but its 25th anniversary set new landmarks for the tournament as Ireland's first ever guaranteed €1m event and Ireland's largest ever poker event. The final was broadcast live across Europe on Sky Sports and was hailed as a tremendous success by commentators, the poker media and players alike. Paddy Power will guarantee the 2007 event for €2m, reflecting both the growth of our own poker business and the poker market overall. The first half of 2007 involves an important operational challenge for poker as we tackle the migration of our customers from the software of our existing network supplier to that of another operator that acquired them. Product expansion in the gaming area also continued with the launch of online bingo, 'Live Games' with a studio presenter and an online version of the popular TV game show 'Deal Or No Deal'. These products encapsulate the Paddy Power brand values of fun, fair and friendly and give us particular potential to attract new types of customers. Trading & Risk Management Trading and risk management is at the heart of bookmaking and the function at Paddy Power is at the forefront of industry practice. The core responsibility of the function is the creation and pricing of all markets and the trading of those markets through their life. The function employs a mix of traditional bookmaking approaches married with risk management techniques from other industries and the extensive use of mathematical models and information technology. The quality of the function provides a powerful resource for product innovation and differentiation. For instance, in a typical match during the football World Cup finals we offered 70 markets as compared to 46 by our nearest UK or Irish competitor. Offering this range of markets directly addresses feedback from customer surveys but it also differentiates us, promotes loyalty, spreads our trading risk, and of course drives turnover! In October 2006, the Starting Price Regulatory Commission ('SPRC') chaired by Lord Donoughue set out recommendations to strengthen the Starting Price ('SP') compilation process. The principal changes implemented were to increase the number of bookmakers included in the sample and to give priority to bookmakers offering each-way prices. Paddy Power believes the changes will contribute to a fairer and more accurate representation of the on-course market. However we would not expect the increase in the bookmakers sampled to have a dramatic impact on our margins given that intense competition between bookmakers, particularly amongst prices on the more favoured selections where the vast majority of turnover arises, ensures that prices on these selections are within a narrow range. Marketing Marketing has been a consistent strength at Paddy Power enabling us to develop a brand not only highly recognised, but recognised for what it stands for. We continue to strive to apply our fun, fair and friendly values consistently and throughout all aspects of our business. The World Cup gave us a stage to demonstrate these values, particularly to potentially new customers to Paddy Power. For example, we not only offered different Money-Back Specials on every match day, we also refunded punters if their team was knocked out in penalty shoot outs, thereby bailing out unfortunate supporters of England, Argentina, France and Switzerland. In addition, we offered our English and other customers the best price amongst all bookmakers on England in the quarter finals. We also followed our punters into the pub for the match with our pub kits, including wee-goals (don't ask!) and pint glasses branded with pertinent bets including '10/1 Her Place; 5/4 The Chipper'! We also continue to put marketing investment into local events to build relationships and interact on a more personal basis with our customers. During 2006 these events included the Paddy Power London '5-a-side' tournament, which attracted over 400 teams, and the Irish Karaoke Championships, where the ultimate winner from the 88 participating pubs went on to become World Champion. At Paddy Power we pride ourselves on our range of novel and innovative betting markets, which both generate turnover and media coverage. During 2006 we tapped into the dominant topic of Irish conversation and national obsession of the last 15 years, property prices. Punters can now put their money where their mouth is as regards their views on the property market without recourse to the services of solicitors, estate agents or removal men! When the many betting markets we offer do nonetheless come up short relative to the needs of our punters, we are happy to try and oblige. Such was the case when Adrian Hayward approached us to have a bet on Liverpool's Xabi Alonso to score a goal from inside his own half, following a dream he'd had about it. In January 2006 he won £25,000 on the £200 he had at 125-1! Crucially, we also always want to be fair to our customers. Living up to this principle manifests itself in many practical low profile ways such as responsible customer care and transparency on charges and terms. However, it is in our approach to certain official results that probably demonstrates the difference most prominently. As we put it when explaining the decision to refund backers of the Pakistan cricket team when they were deemed to have forfeited the fourth Test against England following an alleged ball tampering incident: 'In these circumstances we don't look at our rules but we ask ourselves what would we consider to be a fair result if we were the punter'. For the record, we also refunded losing bets on the draw - ensuring that nobody betting on this event ended up out of pocket. In addition to being the right thing to do, we believe that the differentiation, loyalty and turnover that this approach generates more than covers any short term cost. People Our people are critical to everything we do and we are fortunate to have some of the most dedicated, skilled and creative people working in the industry. As we continue to grow, we have a significant need for more people and new skills, and we are committed to developing staff internally for new or expanded roles, as well as recruiting externally. Accordingly, we invest substantially in training and development courses through our own human resources team and utilising external specialists as required. We also focus heavily on bringing new talent into the organisation. In 2006, we ran targeted graduate recruitment campaigns in both the UK and Ireland. We also expanded the net globally to track down the best people and have benefited from the diversity of experience and skills that recruits from as far afield as South Africa, India, Russia and Poland have brought to us during 2006, particularly in areas such as information technology. While high calibre people continue to be a scarce resource for many parts of our business, especially e-commerce, we have been successfully attracting, developing and retaining such people. Some positions are certainly easier to fill than others. We teamed up with RTE, the Irish national TV channel, to offer a dream job as a Paddy Power sports trader in the documentary 'No Experience Required'. Julian Canny came out the winner out of over 100 hopefuls and continues to trade soccer betting-in-running with us. The average number of employees in the Group during 2006 was 1,414 (2005: 1,255). At the year end, the total number of employees was 1,468 (2005: 1,374). Taxes The corporation tax charge for the year was €8.5m. Excluding adjustments relating to prior years, the underlying effective tax rate for 2006 was 16.4% as compared to 14.7% for 2005. As highlighted in our Interim Report, the Group's effective tax rate increased from July 2006 as a result of the non-deductibility of the revised 1% turnover based tax on amounts staked within Irish retail. Given the amount staked within Irish retail, this change added €0.5m to the tax charge for the second half of 2006. Excluding the impact of the higher corporation tax applicable to the Irish retail property disposal, the underlying effective tax rate for the second half of 2006 was approximately 17%. No corporation tax is currently payable in the UK due to tax losses. The Group's effective tax rate is above the Irish statutory rate due to the impact of a number of non-deductible expenses. Cash Flow, Cash Balances and Foreign Exchange Risk Cash balances at 31 December were €87.1m compared to €52.3m at 31 December 2005, an increase of €34.8m. This includes cash balances held on behalf of customers of €13.4m compared to €10.0m at 31 December 2005. Net cashflow from operating activities was €67.7m in 2006 compared to €41.4m in 2005, an increase of 64%. This was driven by operating profit growth of 51% combined with the net cash inflow into customers' accounts of €3.4m. Capital expenditure on tangible and intangible assets of €25.8m primarily comprised the fit out of new and the upgrading of existing retail outlets, and the roll out of EPOS. The Group has no borrowings. Exposures from interest rate changes are therefore limited to the direct impact on interest income on deposits and the indirect impact from any resulting changes in consumer spending. Cash balances are invested in accordance with defined treasury policies approved by the Board. These policies limit the risk rating of institutions that can be used, the concentration of risk with any one institution or within any category of institutions and the term of deposits. Cash balances are substantially invested in short-term bank deposits with maturities of 120 days or less. Foreign exchange risk in the business is small. The Group generates sterling inflows from UK based customers of the online and telephone channels, partially offset by the Group's need for sterling as it expands in the UK. Group policy allows the Group to hedge foreign exchange exposure for up to six months. At the year end, no foreign exchange contracts were open. The Group's presentation currency is the euro and translation risk exists with its sterling subsidiaries. Patrick Kennedy Jack Massey Chief Executive Finance Director 2 March 2007 CONSOLIDATED INCOME STATEMENT Year ended 31 December 2006 Before Exceptional exceptional item Note item (Note 5) Total Total 2006 2006 2006 2005 (restated) €'000 €'000 €'000 €'000 Amounts staked by customers 1,795,090 1,371,710 Continuing Operations Revenue 218,706 - 218,706 160,848 Direct betting costs 4 (35,090) - (35,090) (25,278) Gross profit 183,616 - 183,616 135,570 Employee expenses (64,227) - (64,227) (51,076) Property expenses (21,174) - (21,174) (17,398) Marketing expenses (17,309) - (17,309) (11,346) Technology and communications (11,537) - (11,537) (8,171) Depreciation and amortisation (15,512) - (15,512) (11,295) Other expenses, net (8,395) 2,098 (6,297) (6,166) Total operating expenses (138,154) 2,098 (136,056) (105,452) Operating profit 45,462 2,098 47,560 30,118 Financial income 2,149 - 2,149 1,226 Financial expense (10) - (10) - Profit before tax 47,601 2,098 49,699 31,344 Income tax expense 6 (8,033) (421) (8,454) (4,390) Profit for the year from continuing operations 39,568 1,677 41,245 26,954 Earnings per Share Basic 7 €0.819 €0.541 Diluted 7 €0.811 €0.529 The profit for the year is entirely attributable to equity holders of the Company. Notes 1 to 9 form part of these consolidated financial statements. On behalf of the Board Patrick Kennedy Jack Massey 2 March 2007 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Year ended 31 December 2006 2006 2005 €'000 €'000 Profit for the year 41,245 26,954 Foreign exchange translation difference 1 (1) Total recognised income and expense 41,246 26,953 The total recognised income and expense for the year is entirely attributable to equity holders of the Company. Notes 1 to 9 form part of these consolidated financial statements. On behalf of the Board Patrick Kennedy Jack Massey 2 March 2007 CONSOLIDATED BALANCE SHEET As at 31 December 2006 31 December 2006 31 December 2005 €'000 €'000 Assets Property, plant and equipment 76,240 72,400 Intangible assets 9,260 3,615 Goodwill 1,880 1,880 Deferred tax assets 195 167 Total non current assets 87,575 78,062 Trade and other receivables 4,203 2,134 Cash and cash equivalents 87,061 52,318 Total current assets 91,264 54,452 Total assets 178,839 132,514 Equity Issued capital 5,124 5,040 Share premium 10,163 7,548 Shares held by long term incentive plan trust (8,137) (4,929) Other reserves 6,536 4,142 Retained earnings 114,445 84,250 Total equity 128,131 96,051 Liabilities Deferred tax liabilities - 843 Total non current liabilities - 843 Trade and other payables 49,140 34,873 Current tax payable 1,568 747 Total current liabilities 50,708 35,620 Total liabilities 50,708 36,463 Total equity and liabilities 178,839 132,514 Notes 1 to 9 form part of these consolidated financial statements. On behalf of the Board Patrick Kennedy Jack Massey 2 March 2007 CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2006 2006 2005 €'000 €'000 Cash flows from operating activities Profit before taxation 49,699 31,344 Financial income (2,149) (1,226) Depreciation and amortisation 15,512 11,295 Cost of employee share-based payments 3,184 2,289 (Gain) / loss on disposal of property, plant and equipment (1,183) 267 Cash from operations before changes in working capital 65,063 43,969 (Increase) / decrease in trade and other receivables (2,013) 222 Increase in trade and other payables 13,209 3,320 Cash generated from operations 76,259 47,511 Income taxes paid (8,526) (6,101) Net cash from operating activities 67,733 41,410 Cash flows from investing activities Purchase of property, plant and equipment (17,855) (23,925) Purchase of intangible assets (7,921) (2,068) Proceeds from disposal of property, plant and equipment 3,028 329 Interest received 2,094 1,254 Net cash used in investing activities (20,654) (24,410) Cash flows from financing activities Proceeds from the issue of new shares 2,699 903 Purchase of shares by employee trust (3,742) (2,623) Dividends paid (11,293) (10,168) Net cash used in financing activities (12,336) (11,888) Net increase in cash and cash equivalents 34,743 5,112 Cash and cash equivalents at start of year 52,318 47,206 Cash and cash equivalents at end of year 87,061 52,318 Notes 1 to 9 form part of these consolidated financial statements. On behalf of the Board Patrick Kennedy Jack Massey 2 March 2007 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. General information Paddy Power plc (the 'Company') and its subsidiaries (together referred to as the 'Group') provide sports betting services through a chain of licensed betting offices ('Paddy Power Bookmaker') together with telephone betting ('Dial-a-Bet') and online interactive betting services ('paddypower.com'). The Group also provides online gaming services through 'paddypower.com', 'paddypowerpoker.com', 'paddypowercasino.com' and 'paddypowerbingo.com'. It provides these services principally in Ireland and the United Kingdom. The Company is a public limited company incorporated and domiciled in the Republic of Ireland and has its primary listing on the Irish Stock Exchange. The consolidated financial statements of the Group for the year ended 31 December 2006 comprise the financial statements of the Company and its subsidiary undertakings and were authorised for issue by the Board of Directors on 2 March 2007. 2. Basis of preparation and summary of significant accounting policies The consolidated financial statements are prepared on the historical cost basis except for betting transactions, which are recorded as financial instruments, and share-based payments, both of which are stated at fair value. The consolidated financial statements are presented in euro, rounded to the nearest thousand. Further to IAS Regulation (EC1606/2002) ('Accounting standards adopted for use in the EU'), EU law requires that the annual consolidated financial statements of the Group be prepared in accordance with International Financial Reporting Standards ('IFRSs') adopted by the European Union ('EU'). The consolidated financial statements have been prepared on the basis of IFRSs adopted by the EU and effective at 31 December 2006. The accounting policies set out below have been applied consistently by Group entities. The accounting policies applied in the preparation of these consolidated financial statements are consistent with those set out in the Annual Report for the year ended 31 December 2005 except for a change in the Group's revenue recognition policy which is outlined below. Restatement of revenue presentation and recognition of ante post bets accrual at fair value In 2006, as a result of a change in industry practice, the Group has concluded that a sportsbook bet is a financial instrument. As a result, the Group now accounts for betting transactions as trading financial instruments in accordance with IAS 39 'Financial Instruments: Recognition and Measurement'. The implications of classifying betting transactions as trading financial instruments are twofold: 1. In relation to sports betting activities, revenue now represents the net gain/ (loss) on betting transactions (stake less payout) from customers, whereas previously revenue represented amounts staked by customers and the payout was shown separately in cost of winning bets. In the 2005 Annual Report this gain/ (loss) on betting transactions was reported by the Group as ' Gross Win'. 2. Under IAS 39, amounts received from customers on sporting and other events that have not occurred by year end are measured at fair value. Thus at year end, sports betting open positions (included in trade and other payables) are carried at fair market value and gains and losses arising on this valuation are recognised in revenue, together with the gains and losses realised on positions that have closed. In previous financial statements, amounts received from customers on events that had not occurred by period end were treated as deferred income. There was no material adjustment from the revaluation of sports betting open positions at either 31 December 2006 or 2005. The consolidated income statement for the year ended 31 December 2005 has been restated to reflect the change in reported revenue and direct betting costs as follows: Cost of winning Direct betting bets costs Gross revenue Revenue Gross profit €'000 €'000 €'000 €'000 €'000 As previously reported 1,371,710 (1,236,140) - ** - ** 135,570 Adjustment (1,371,710) 1,236,140 160,848 (25,278) - Restated -* -* 160,848 (25,278) 135,570 * Does not form part of the 2006 income statement presentation ** Did not form part of the 2005 income statement presentation The consolidated income statement of the Group will continue to show amounts staked by customers but this is for information purposes only. Amounts staked represent amounts received in respect of bets placed on sporting events in the period and net winnings from gaming. This is consistent with the presentation of gross revenue in the year ended 31 December 2005. Recent accounting pronouncements The IFRSs adopted by the EU applied by the Company and Group in the preparation of these financial statements are those that were effective at 31 December 2006. The following provides a brief outline of the likely impact on future financial statements of relevant IFRSs adopted by the EU which are not yet effective and have not been adopted early in these financial statements: • Amendment to IAS 1, 'Capital Disclosures': This amendment will require additional disclosures regarding the capital structure of the Group. The impact is not expected to be material in terms of Group reporting. • IFRS 7, 'Financial Instruments: Disclosures': This standard updates and extends the existing disclosure requirements of IAS 32 and will require additional disclosures relating to risk management policies and processes. The impact of IFRS 7 is not expected to be material in terms of Group reporting. • IFRIC 8, 'Scope of IFRS 2 Share-based Payment' addresses the accounting for share-based payment transactions in which some or all goods or services received cannot be specifically identified. IFRIC 8 will become mandatory for the Group's 2007 financial statements, with retrospective application required. This IFRIC is not expected to have a material impact on the Group. Basis of consolidation The Group's financial statements consolidate the financial statements of Paddy Power plc and its subsidiary undertakings based on accounts made up to the end of the financial year. A subsidiary is an entity controlled by the Company. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated on consolidation except to the extent that unrealised losses provide evidence of impairment. Judgements and estimates The preparation of financial statements in conformity with IFRS adopted by the EU requires certain critical accounting estimates. It also requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses. The estimates and underlying assumptions are based on historical experience and various other factors, including expectations of future events that are believed to be reasonable and appropriate under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are continually reviewed and evaluated to reflect the Group's view of current conditions. New events or additional information may result in a revision of these estimates over time. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. It is possible that actual results may differ from these estimates. Judgements made by management in the application of IFRSs that have a high degree of complexity or a significant effect on the financial statements, and estimates with a significant risk of material adjustment in the forthcoming year are discussed in Note 9. Revenue The services provided by the Group comprise sports betting, fixed odds games betting, online casino and games and peer to peer games, including online poker and bingo. Revenue is stated exclusive of value-added taxes and certain free bets, promotions and bonuses. Retail, telephone and online sportsbook betting activities are classified as financial instruments. Revenue from these activities represents the net gain or loss from betting activities in the period plus the gain or loss on the revaluation of open positions at period end. Revenue from fixed odds games and online casino represents net winnings (' customer drop'), being amounts staked net of customer winnings. Revenue from peer to peer games represents commission income ('rake') and tournament fees earned from games completed by the period end. Interest income is recognised on an accruals basis by reference to the principal outstanding and the effective rate of interest. 3. Segment reporting The revenue, operating profit and net assets of the Group relate to the provision of betting and gaming activities, substantially all of which are conducted in the Republic of Ireland and the UK. (a) By business segment The Group considers its primary business segments to be 'retail' and 'non retail'. The retail business segment comprises the Group's Irish and UK licensed bookmaking shop estates. The non retail business segment comprises the Group's online and telephone sports betting businesses and its online gaming businesses, primarily casino, games, poker and bingo. Business segment information for the year ended 31 December 2006: Retail Non retail Other unallocated Total 31/12/06 31/12/06 31/12/06 31/12/06 €'000 €'000 €'000 €'000 Revenue 126,783 91,923 - 218,706 Direct betting costs (17,250) (17,840) - (35,090) Gross profit 109,533 74,083 - 183,616 Depreciation and amortisation (12,035) (3,449) (28) (15,512) Other operating costs (79,258) (36,911) (6,473) (122,642) Operating profit before property gain 18,240 33,723 (6,501) 45,462 Property gain 2,098 - - 2,098 Operating profit 20,338 33,723 (6,501) 47,560 Financial income - - 2,149 2,149 Financial expense - - (10) (10) Profit before tax 20,338 33,723 (4,362) 49,699 Total assets 87,970 12,350 78,519 178,839 Segment liabilities 14,559 22,466 13,683 50,708 Capital expenditure 22,422 4,421 2 26,845 Business segment information for the year ended 31 December 2005: Retail Non retail Other unallocated Total 31/12/05 31/12/05 31/12/05 31/12/05 (restated) (restated) (restated) (restated) €'000 €'000 €'000 €'000 Revenue 98,460 62,388 - 160,848 Direct betting costs (13,484) (11,794) - (25,278) Gross profit 84,976 50,594 - 135,570 Depreciation and amortisation (8,481) (2,814) - (11,295) Other operating costs (64,348) (23,737) (6,072) (94,157) Operating profit 12,147 24,043 (6,072) 30,118 Financial income - - 1,226 1,226 Profit before tax 12,147 24,043 (4,846) 31,344 Total assets 67,346 9,141 56,027 132,514 Segment liabilities 10,432 12,165 13,866 36,463 Capital expenditure 24,302 3,166 - 27,468 The amounts shown in the 'other unallocated' category above, representing items that cannot be allocated to either the retail or non retail segments, are primarily in respect of management costs relating to the Group as a whole, cash deposits held centrally and certain accounts payable, tax and accrual balances. (b) By geographic segment The Group considers that its primary geographic segments are 'Ireland & other' and 'UK'. The Ireland & other geographic segment is composed of the Irish retail bookmaking business, online and telephone sports betting from non-UK customers (principally in Ireland), and online gaming from non-UK customers. The UK geographic segment consists of the UK retail bookmaking business, online and telephone sports betting from UK customers, and online gaming from UK customers. Ireland & Ireland & other other UK UK Total Total 31/12/06 31/12/05 31/12/06 31/12/05 31/12/06 31/12/05 (restated) (restated) (restated) €'000 €'000 €'000 €'000 €'000 €'000 Revenue 148,462 112,338 70,244 48,510 218,706 160,848 Segment assets 131,269 106,623 47,570 25,891 178,839 132,514 Capital expenditure 14,369 18,598 12,476 8,870 26,845 27,468 Further analysis of the business segments by channel is as follows: 2006 2005 (restated) €'000 €'000 Amounts staked Retail - Ireland 833,125 703,780 Retail - UK 129,936 90,541 Retail 963,061 794,321 Telephone 306,604 249,871 Online 525,425 327,518 1,795,090 1,371,710 Revenue Retail - Ireland 104,385 83,642 Retail - UK 22,398 14,818 Retail 126,783 98,460 Telephone 24,519 19,454 Online 67,404 42,934 218,706 160,848 Gross profit Retail - Ireland 91,510 73,970 Retail - UK 18,023 11,006 Retail 109,533 84,976 Telephone 22,352 17,151 Online 51,731 33,443 183,616 135,570 Operating profit before exceptional item Retail - Ireland 22,025 14,136 Retail - UK (5,995) (4,656) Retail 16,030 9,480 Telephone 6,004 3,649 Online 23,428 16,989 45,462 30,118 In December 2005, the tax regime for fixed odds betting terminals ('FOBTs') in the UK retail estate was changed and gross profits tax was replaced by value added tax ('VAT'). While the amount of tax levied is broadly unchanged, accounting practice requires that income is included within revenue net of VAT, whereas previously the income was included gross with the gross profits tax being deducted in arriving at gross profit. The VAT charged on FOBT income in 2006 was €1.2m. The equivalent gross profits tax in 2005 was €0.6m. 4. Direct betting costs Direct betting costs comprise: 2006 2005 (restated) €'000 €'000 Betting taxes 12,895 6,549 Software supplier costs 7,487 4,651 Data rights 2,411 3,603 Other direct betting costs 12,297 10,475 35,090 25,278 Betting taxes comprise taxes levied on gross win and tax levied on Irish retail amounts staked generated in the period 1 July 2006 to 31 December 2006. On 1 July 2006, the Irish government replaced the previous 2% customer based betting tax with a 1% tax levied on the bookmaker. Software supplier costs comprise direct costs incurred under supplier agreements in the provision of online casino and fixed odds gaming services and FOBTs. Data rights mainly comprise costs incurred in respect of British Horseracing Board and UK statutory levies. Other direct betting costs comprise discounts on bets granted in the Irish retail estate prior to 1 July 2006, payments to third parties for new online customers acquired, prize and tournament costs and other miscellaneous direct betting costs. 5. Exceptional item 2006 2005 €'000 €'000 Gain on disposal of Irish retail shop property 2,098 - During the 2006 financial year, the Group disposed of a shop property. This property, which forms part of the Group's Irish retail licensed bookmaking operations, was originally held under an operating lease. The Group exercised a purchase option contained in the lease and subsequently sold the property at arms-length to a third party, simultaneously entering into a leaseback agreement at arms-length with that third party. 6. Income tax expense 2006 2005 €'000 €'000 Recognised in the income statement: Current tax charge 8,535 4,249 Prior year under / (over) provision 789 (211) 9,324 4,038 Deferred tax (credit) / charge (402) 352 Prior year over provision (468) - (Decrease) / increase in deferred tax (870) 352 Total income tax expense in income statement 8,454 4,390 The difference between the total income tax expense shown above and the amount calculated by applying the standard rate of corporation tax to the profit before tax is as follows: 2006 2005 €'000 €'000 Profit before tax 49,699 31,344 Tax on Group profit on ordinary activities at the standard Irish corporation tax rate of 12.5% (2005: 12.5%) 12.5% 6,212 12.5% 3,918 Depreciation on non-qualifying property, plant and 0.6% 285 2.7% 837 equipment Betting duty 1.1% 528 - - Expenses deductible for tax purposes 0.0% (4) (1.4%) (432) Other differences 0.4% 225 (0.0%) (2) Chargeable gains 0.3% 159 - - Interest income taxable at the higher rates 0.5% 260 0.9% 280 Under / (over) provision in prior year 1.6% 789 (0.7%) (211) Total income tax charge 17.0% 8,454 14.0% 4,390 No corporation tax is payable in the UK due to the availability of tax losses. A deferred tax asset of €2,842,000 (2005: €2,760,000) relating to these losses forward has not been recognised in accordance with the Group's accounting policy for deferred tax. There is no expiry date in respect of these losses. No significant changes are expected to statutory tax rates in the future. 7. Earnings per share Earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year as follows: 2006 2005 Numerator in respect of basic and diluted earnings per share (€ '000): Profit attributable to equity holders of the Company 41,245 26,954 Numerator in respect of adjusted earnings per share (€'000): Profit attributable to equity holders of the Company 41,245 26,954 Less: Property gain after taxation (1,677) - Profit for adjusted earnings per share calculation 39,568 26,954 Denominator in respect of basic earnings per share: Ordinary shares in issue at beginning of year 50,397,168 50,045,581 Adjustments for - ordinary shares issued during year 494,991 152,251 - ordinary shares held by long term incentive plan trust (547,905) (357,952) Weighted average number of ordinary shares 50,344,254 49,839,880 Basic earnings per share €0.819 €0.541 Adjusted earnings per share €0.786 €0.541 Denominator in respect of diluted earnings per share: Basic weighted average number of ordinary shares in issue during 50,344,254 49,839,880 year Adjustments for dilutive effect of share option schemes, sharesave scheme, shares held by long term incentive plan trust and long term incentive plan 501,021 1,127,252 Weighted average number of ordinary shares 50,845,275 50,967,132 Diluted earnings per share €0.811 €0.529 Adjusted diluted earnings per share €0.778 €0.529 8. Events after the balance sheet date In respect of the current year, the directors propose that a final dividend of 22.77c per share (2005: 12.84c per share) will be paid to shareholders on 25 May 2007. This dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. The proposed dividend is payable to all shareholders on the Register of Members on 16 March 2007. The total estimated dividend to be paid amounts to €11,665,000 (2005: €6,476,000). 9. Accounting estimates and judgements Key sources of estimation uncertainty and critical accounting judgements in applying the Group's accounting policies Goodwill of €1.9m (2005: €1.9m) continues to be carried in the Group balance sheet as the directors believe that there has been no impairment in the fair value of the net identifiable assets of the acquired businesses. The share based payment reserve, which includes amounts in relation to the Long Term Incentive Plan and various share option schemes, amounted to €5,613,000 at 31 December 2006 (2005: €3,220,000). The fair value of share options granted after 7 November 2002 has been determined using a Black Scholes valuation model. The significant inputs into the model include certain management assumptions with regard to the standard deviation of expected share price returns, expected option life and annual risk free rates. The fair value of the Group's sports betting open positions financial liability amounted to €2,877,000 (2005: €2,077,000) at 31 December 2006. The Group performs a revaluation of sports betting open positions at each balance sheet date. The revaluation takes into account the expected probability of such open positions resulting in a gain or loss to the Group in the future, and is dependent on factors that cannot always be reliably predicted. The majority of the Group's retail premises are held under operating leases. Under accounting standards there is a requirement for management to examine the buildings element within such operating leases to determine if the lease meets the definition of a finance lease, and, if so, it should be accounted as such. This review involves determining the fair value of each property at the inception of the lease and analysing the minimum lease payments between their ' land' and 'buildings' elements. Based on management's review of operating leases for the years ended 31 December 2006 and 2005, all retail premises leases qualify as operating leases. This information is provided by RNS The company news service from the London Stock Exchange

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