For the third quarter in a row, Motley Fool Hidden Gems selection CryptoLogic (NASDAQ:CRYP) handily beat earnings estimates, reporting diluted earnings of $0.56 per share. Casino revenue grew 14% year over year, but poker revenue increased 74% and now constitutes 36% of total revenue, up from 27% a year ago. The popularity of poker just seems to keep on growing, not only online, but in land- and river-based casinos as well.
Not only did the company report excellent quarterly results, but also it reported a six-year extension to the contract with its biggest customer, Overseas Internet Gaming Entertainment NV, which operates the InterCasino and InterPoker sites. This cheered investors up, because there had been no news about current or future customers since the announcement last year about losing Betfair, a relatively significant customer. To further cheer investors, CryptoLogic also announced a new customer, Playboy (NYSE:PLA), for which it will develop a new casino site. And the company announced a 71% increase in the quarterly dividend, from $0.07 per share to $0.12. Finally, it offered earnings guidance above consensus estimates for next quarter.
I guess you could call that three aces and a king -- not too bad. But there are a few jokers in the deck.
First, CryptoLogic lost another customer, the Ritz Club of London. This client contributed less than 2% to revenue, so the company is downplaying the loss, but this is the second lost customer in a year. The lack of any announcement about the status of the company's contract with William Hill is also troubling.
Then there's an amendment to the 2002 options program from management and the board of directors, up for a vote at the annual meeting Thursday. Shareholders voted down the last two attempts to increase the number of options, but the company doesn't seem to be getting the message. I can't help but think that options are simply not the best way to keep or hire employees, given the potentially dilutive impact and prospective conflicts to shareholder interests (and the relatively liberal use at Cryptologic).
Third, there's board members' pathetic ownership of company shares. According to the last proxy statement, of the five non-management directors (CEO Lewis Rose is also a director), two owned 5,000 shares each, one owned 1,800 shares, one 1,600, and one owned none at all. Perhaps not surprisingly, they all owned healthy levels of options.
Given board members' position as the shareholders' representative to the company, I like to see them in an ownership position. For comparison, according to the proxy statement for Progressive Gaming (NASDAQ:PGIC), a competitor that's about the same size, directors hold anywhere from 8,198 to 470,250 shares each.
That said, as long as poker continues to remain popular, CryptoLogic is likely to do well. However, there are indications of a culture that fails to run the company in the best interest of shareholders, making this a higher-risk investment choice for those who decide to play along. The Foolish investor will keep an eagle eye on the company.
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Fool contributor Jim Mueller owns shares in CryptoLogic, but not any other company mentioned. The Fool is investors writing for investors.
