UPDATE 2-PartyGaming poker slowdown prompts downgrades

(Adds CEO, analyst comment, new share price)

LONDON, Aug 29 (Reuters) - Online gaming firm PartyGaming PRTY.L reported a drop in the number of people playing its poker games in the last two months, overshadowing first-half results and prompting downgrades to earnings forecasts.

PartyGaming, which runs the PartyPoker site, said on Friday its trading since June 30 had been in line with management’s expectations except for poker which continued to be slightly softer than expected.

In the 8 weeks to Aug. 25, PartyGaming said average gross daily revenue was $1.6 million per day. Average active poker players totalled 50,800 per day.

Chief Executive Jim Ryan, who joined the company at the end of June, said trading in poker since June 30 had been “slightly softer” than the company expected.

Ryan said the poker business was continuing to be held back by competition from sites which accept players from the United States.

“This represents a continuing competitive threat to listed businesses like PartyGaming that immediately stopped customers in the U.S. from playing or making deposits on any of the group’s real money sites following the enactment of the UIGEA (Unlawful Internet Gambling Enforcement Act),” Ryan said.

He added that, while PartyGaming believes such companies are being investigated by the Department of Justice, there can be no guarantee that any action will be taken against them.

PartyGaming said it remains in discussions with the DoJ in the hope of securing a deal to end the threat of prosecution for taking internet wagers in the United States prior to the UIGEA being enforced in October 2006.

Ryan told reporters the company is targeting a successful resolution the DoJ this year, but emphasised the timeline for resolution of the talks is not within PartyGaming’s control.

New non-executive Chairman Rod Perry, who was previously senior independent director, is overseeing the talks.

“To bring continuity to the DoJ discussions Rod Perry, our newly-appointed chairman, will be taking over the day-to-day management of the DoJ process freeing me up and allowing me to focus my efforts on daily operations,” Ryan said.

Disappointment with current trading led to some brokers downgrading their earnings forecasts for the company, sending its shares 0.6 percent lower to 210-3/4 pence at 1005 GMT.

In a research note, Deutsche Bank said PartyGaming’s gross revenue was down 9 percent in August compared with July, while the average number of active daily poker players in July and August was 19 percent lower than in the first half.

Deutsche Bank, which kept a ‘hold’ recommendation and 280 pence target price on the stock, reduced forecasts for 2008 EBITDA by 5 percent to $148 million and net revenue by 6 percent to $511 million.

Dresdner Kleinwort downgraded its 2008 EBITDA forecast by 5 percent to $152 million and its revenue estimate by 4 percent to $520 million. However, it kept a ‘buy’ recommendation and 550 pence price target on the stock, highlighting future prospects for sector consolidation.

PartyGaming said underlying EBITDA rose by 76 percent in the six months to June 30 to $64.9 million. The consensus forecast had been for EBITDA of $57.7 million, according to the company. (Reporting by Matthew Scuffham; Editing by Erica Billingham and Chris Wickham)