PartyGaming shares fall 33% after announcement of slow growth

Despite PartyGaming Plc.'s announcement of a 70% jump in half-year earnings this past Tuesday, the company's shares fell by more than 30% when the probability of weaker future growth was revealed by chief executive Richard Segal.

Delivering its first report since its flotation on the London market this past June, PartyGaming announced that its pre-tax profit results for the first six months to the end of June were $257.7 million, taking into account the floatation-related expenses of $194.4 million.

These results came as no surprise to industry analysts, considering the company floated with an IPO (Initial Public Offering) of £4.6 billion, the largest IPO to hit the London Stock Exchange in five years.

However, what did send waves of shock rippling through the market was Segal's admission that PartyGaming's growth over the summer months of July and August fell short of expectations, and the company further expects its revenue growth to falter as the market moderates.

The announcement effectively wiped £2.1 billion off the company's market value, causing it to fall from £6.27 billion to £4.2 billion, a devaluation that brought it down to less than its IPO amount.

What's more, other Internet gambling companies saw hundreds of millions of pounds knocked off their stock, and speculation arose as to whether would go ahead with its anticipated IPO and if Sportingbet's £790 million bid for Empire Online is now in jeopardy.

Segal cautioned that the group is planning to focus its efforts on retaining existing customers and strengthening customer loyalty, since its economic losses are in large part due to the growth of the "casual" player, who, attracted by the burgeoning and rewarding appeal of the Internet poker craze, plays very part-time for smaller stakes with virtually no long-term interest and no loyalty.

This has resulted in a lack of player retention and lower player yields, signaling a plateau in growth and making it unlikely that the company will continue to grow at its staggering initial rate.

Furthermore, there remain considerable concerns among analysts on how profits could be affected by a site boasting a clientele almost entirely based in the United States. Figures released in its current report list a mere 15% of PartyGaming's player base to be located outside of the United States. And, despite the fact that numbers are up from last year's 9%, investors remain skeptical.

Indeed, PartyGaming says it will continue to focus advertising and expansion efforts on the American market. However, it is widely known that the United States Department of Justice deems online gaming to be illegal and may very well intensify the enforcement of anti-gaming laws, which may prohibit American gamers from placing bets online through American-based methods of payment (such as online American banks and credit card companies).

Nevertheless, despite recent events PartyGaming's market value continues to outweigh that of British Airways and Marks & Spencer. It remains confident of growing international revenues in the second half of this year, as it plans to launch an extensive program of international advertising campaigns as well as a multi-lingual, multi-currency option on its sites in an effort to increase its international appeal.

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