Youbet.com reports results

WOODLAND HILLS, California -- (PRESS RELEASE) -- Youbet.com, Inc. (NASDAQ:UBET) announced flat earnings for the third quarter of 2007. Total handle for the three months ended September 30, 2007, declined 5.0% as compared to the third quarter of 2006, to $205.8 million. Total revenue for the quarter, however, improved 3% from the third quarter of 2006 to $38.1 million, as a result of an improved handle at Youbet Express, our online ADW platform. Handle for the three-month period ended September 30, 2007 at Youbet Express increased 12.6% with yield on this handle improving to 6.7% from 6.0% in the prior-year period. For the three months ended September 30, 2007, handle at IRG declined 26% with yield declining to 2.0% from 2.3% in the prior-year period. The decline in total handle was a result of the loss of racetrack content from TrackNet Media LLC, primarily affecting our IRG subsidiary. For the third quarter of 2007, the Company reported net income of $67,000, or $0.00 per diluted share compared to a loss of $0.01 per share in the prior-year quarter.

For the third quarter of 2007, totalizator service revenue at United Tote of $6.2 million was flat compared to the prior-year period Equipment sales improved slightly to $0.3 million from $0.1 million in the prior-year period.

For the three months ended September 30, 2007, the cost of revenue remained essentially flat at $25.8 million compared to the prior-year period. Gross profit for the three months ended September 30, 2007 improved 9% to $12.3 million versus $11.3 million in the prior-year period. Youbet CEO Chuck Champion commented: "So far, 2007 has been challenging for several reasons, but we are making progress despite some negative outside influences. Our initiatives at Youbet Express to redirect wagering activity to more profitable tracks, as well as drive volume through promotions and marketing programs, are reflected in the strong performance at this division. Our cost-cutting initiatives, some of which were reflected in our improved operating margins for the quarter, are beginning to take hold. Unfortunately, our IRG subsidiary has struggled with the loss of content, although it still showed a profit for the quarter."

Champion added, "Recent events outside of our control, including the federal investigation of several IRG customers and the ORC decision to stop taking wagers from the District of Columbia, both occurring subsequent to the end of the third quarter have again put the company in a less than ideal operating environment. Despite these distractions, we continue to move forward on our cost containment program and to grow our Youbet Express wagering platform. We continue to work within the industry to secure a level playing field for all ADW providers, and we believe recent positive events in California could be the beginning of a significant change in how the industry addresses the ADW distribution channel."

Operating expenses for the three months ended September 30, 2007 increased $0.4 million, or 4%, to $12.0 million from $11.6 million in the prior-year period. Research and development, as well as sales and marketing costs, remained relatively static with 2006. Total general and administrative expense, which includes payroll-related costs, transaction processing fees and professional consulting fees, decreased $1.1 million, or 17%, in the third quarter of 2007 compared to the third quarter of 2006. Youbet Express' general and administrative expense decreased $1.5 million, attributable to reduced payroll and incentive compensation, consulting costs and $0.8 million of nonrecurring legal expenses associated with the TVG arbitration and bank debt refinancing incurred in the third quarter of 2006. This was offset by a $0.4 million increase to IRG's bad debt reserve, in connection with the investigation of several customers by the U.S. Attorney's office. Accordingly, general and administrative expense declined, as a percentage of total revenue, to 13.4% in the third quarter of 2007 from 16.7% in the third quarter of 2006. Depreciation and amortization increased $1.0 million, or 45%, compared to the third quarter of 2006. This increase was primarily due to higher depreciation expense and intangible amortization expense at United Tote subsequent to the final purchase price allocation completed at year-end 2006 and the amortization of $0.5 million of capitalized software development costs associated with our King Contest product. The company also recorded a non-cash $0.4 million impairment of goodwill related to our Bruen operations as a result of our annual review of impairment in accordance with SFAS 142.

The company may be required to take a one-time charge of approximately $1.5 million in the fourth quarter of this year associated with the seizure of funds by federal agents in Nevada in connection with the investigation of several customers by the U.S. Attorney's office. The company also anticipates that other charges that are one-time and non-cash in nature may also have to be addressed in the fourth quarter. We expect these charges would be at the IRG operating subsidiary and related to the ongoing investigation.

Liquidity and Capital Resources

As of September 30, 2007, we had net working capital of $1.3 million, compared to $5.0 million at December 31, 2006 (including the current portion of our deferred tax assets). The decline in working capital primarily relates to a decline in year-over-year earnings, continued pay down of our term loan by $0.8 million, a one-time make-whole payment to the former owners of United Tote of $4.5 million and a $1.0 million increase in performance earn-out payment to the former owners of IRG. As of September 30, 2007, we had $11.1 million in cash and cash equivalents, $5.3 million in restricted cash and $16.2 million in debt. Net cash provided by operating activities for the nine months ended September 30, 2007 was $5.1 million. Net cash used in investing activities for the nine months ended September 30, 2007 was $9.8 million, of which $3.1 million was associated with the IRG acquisition earn-out. Net cash used in financing activities was $5.3 million, with most of this attributed to debt reduction and the repurchase of shares. During the quarter, we utilized $1.0 million to repurchase 586,766 shares of our common stock at a weighted average price of $1.71 per share under our share repurchase program (which allows the company to repurchase up to two million common shares by March 2009 at an aggregate price not to exceed $10 million).

Outlook

Given recent events surrounding the current investigation by the U.S. Attorney's Office concerning several IRG customers who may have used telephone rebate wagering services, including those offered by IRG, in an allegedly illegal manner, as well as the possible suspension of IRG's license by the ORC, we are suspending guidance.

Nine Month Operating Results

Total revenue for the nine months ended September 30, 2007 improved 6% to $110.4 million from $104.4 million in the year-ago period. Total handle for the nine months ended September 30, 2007 increased 2% to $594.9 million. Handle for the nine-month period ended September 30, 2007 at Youbet Express increased 8.9%, with yield on this handle improving to 7.1% from 6.6% in the prior-year period. For the nine months ended September 30, 2007, the handle at IRG declined 7%, with the yield at 2.3% as compared to the prior-year period of 2.4%.

Totalizator service revenue for the nine months ended September 30, 2007, improved 7.0% to $18.3 million from $17.1 million in the comparable prior-year period, largely due to including results for a full nine months, as United Tote was acquired in mid-February 2006.

For the nine months ended September 30, 2007, the cost of revenue increased by 4% compared to the prior-year period. For the nine months ended September 30, 2007, track fees, licensing fees and network operations recorded year-over-year percentage changes of 2%, 1% and -7%, respectively, versus the prior-year period. Contract costs for the nine months ended September 30, 2007 increased to $12.6 million from $9.9 million in the year-ago period, with most of the increase due to a full nine months worth of results for United Tote (acquired in mid-February 2006) in 2007. Gross profit for the nine months ended September 30, 2007 increased 8% to $36.7 million compared to $33.9 million in the year-ago period.