Empire Online investors dealt second profit warning in a week

Empire Online, which directs traffic to gambling businesses, unnerved the online-poker market yesterday when it issued its second profits warning in little more than a week. Its stock fell 4.5p, or 4.6 per cent, to 93.5p, dragging down other shares in the gambling industry such as PartyGaming, ukbetting and 888.

Empire warned it would miss analysts' profits forecasts for this year by 10 per cent after its biggest customer, PartyGaming, weakened its ties with the business. The market consensus was for profits to hit $60m (£34m) this year and $100m next year.

Empire and PartyGaming had always been strongly intertwined, with the EmpirePoker website driving customers to PartyGaming's online platform. But last week Empire suffered a blow when PartyGaming announced it was distancing itself from the company and other affiliate websites, known as skins, that run as a marketing front to deliver customers to its business. The move restricts the access skins have to PartyGaming's pool of customers and to some of its technology.

PartyGaming's announcement came on the same day that Empire warned growth in its market was flat in the three months to the end of September. Empire's shares, which were valued at 175p at its flotation in June, almost halved in value last week.

Yesterday, Empire said PartyGaming's move had led to a slowdown in the daily percentage of profits taken each time a customer wins. A spokesman said the company decided to put out another statement once the impact from the change became clear.

Empire's chief executive, Noam Lanir, sought to put a brave face on the performance of the business, saying: "The trend rate of growth at Empire remains strong and we'll continue to grow ahead of the industry."

Analysts took a knife to their forecasts after yesterday's profits warning. Richard Carter, at Numis Securities, slashed his 2005 estimate to $54.9m in pre-tax profits. Assuming a 40 per cent drop in gross poker profits in each of next year's quarters, he cut his profits forecast for next year to $68.1m from $103.3m.

Robin Chhabra, at Evolution Securities, said: "The churn rates are up, [Empire's] customers don't like the new arrangement with reduced liquidity and are moving away. It's not good for Empire but PartyGaming will see a net benefit."