Probability: Hard work starting to pay off for mobile gambling specialist
All the hard work is starting to pay off for mobile gambling specialist Probability (LON:PBTY), which is at the “inflection point”, according to chief executive Charles Cohen.the latest results show that sales are starting to take off, while the business came close to break even despite significant increases in marketing spend, particularly on TV.Cohen, meanwhile, believes his company has “cracked the code” for TV advertising.
“We have worked out how long it takes to recoup our investment, and what the likely payback will be,” he said.the company’s broker today lowered its earnings guidance for the year to take account of the cash costs of potential new LadyLucks ad campaigns later in the second half.
However a little short term pain should lead to long-term gains, Cohen said.“the payback period is six months but the cost is incurred up front,” he added.“there is no way to smooth this out in the accounts but it means a much greater revenue generating potential in the future.”
It has been a breakthrough 12-18 months for the group with a number of elements falling into place.Summer last year marked a watershed in terms of technology with the launch of a generation of smartphones and tablets sophisticated enough to support Probability’s slot machine, bingo and casino games.At the same time the company completed a major piece of platform development, which has led to a “significant fall in fixed costs”.That’s because a chunk of the company’s fixed overheads are for software developers, with a large number having been taken on for this specific project.the award of a Gibraltar remote gambling licence last October brought a further round of savings.and it promises additional operational gearing in future as the company consolidated customer support into a new call centre in British overseas territory.“For the first four or five years it was a real struggle,” said Cohen.“But the lights all turned on last summer. Since then growth has been almost exponential.”Probability is the market leader in low stakes, high volume gambling on mobile devices.and there are a number of barriers to entry that will hopefully help the company maintain its pre-eminent position.the first and most obvious is regulation, which is getting tighter all the time. the capital, the up-front costs and the due diligence required to hold a licence are huge obstacles to new entrants.and then there is the technology, marketing and relationship management needed to create a successful business.“It really does not take much brainpower to create a slot machine for a mobile phone,” Cohen explained.“It’s what goes in after that: the infrastructure for managing your customers and the money. and it’s a complicated business making it all work on a mobile.“Most of the online groups just don’t understand the mobile market the way we do.“We are of a near religious conviction that this is a different market and if you don’t understand and embrace this you will not succeed.”One company that does understand what makes Probability tick is William Hill, which earlier this year made an approach for the company.Unfortunately it came to nought. Rumour has it the deal was scuppered by Playtech, the bookmaker’s technology partner. Cohen won’t comment. the Probability chief executive is more interested in talking about the business. he reveals that only 20 per cent of its 1 million strong, predominantly female customers gamble regularly online.Ease of use and the prevalence of smartphones provide the foundations for a potentially huge market if it is exploited properly. “a total of 65pc of the population gambles on the lottery or off-line but don’t use online gambling services. That is my market – the missing 65pc,” Cohen said.What Probability is not trying to do is create a nation of delinquent gamblers. Customers mostly play for small stakes, spending far less in a year than might be wasted on an unused gym membership. “this is Margate not Monte Carlo,” Cohen added. “the average bet is less than a quid. You can’t even by a chip in a casino for that price. “this is very much pitched at the entertainment end of the market where the average play session is 10 minutes. “It is not about people playing for hours and losing their sense of time. “We are there to fill up the ad break or when you are making a cup of tea.”the share price, meanwhile, has bounced between 47 pence and 70 pence this year without ever breaking that ceiling.the current price of 49 pence equates to valuation of just £14 million, which seems paltry when you consider Probability’s potential.“Probability’s share price has stagnated over the past year despite a significant improvement in trading prospects, in our view,” said Numis analyst Ivor Jones, who initiated coverage of the stock this morning.“We believe another few quarters of very strong revenue growth will spark wider investor interest.”Jones rates the stock a ‘buy’ and values the shares at 150 pence each. the company’s broker, Daniel Stewart is also bullish, though its price target is a more conservative 81 pence a share.Daniel Stewart Analyst Mike Jeremy predicts 2012 sales will total £7.4 million, giving a modest pre-tax profit of £600,000, rising to £2.6 million the year after.this means it stock is trading on 23 times forward earnings, falling to a meagre 5.3 times in 2013.“ours is a robust market, it’s not recessions proof, but robust, and we are riding a wave of technology adoption which is a buffer against any shrinkage in the overall marketplace” Cohen said.“If we crack this market we are going to create huge value for shareholders.”