Shuffle Master earnings strong, but stock falls

Friday, Aug. 22, 2003 | 11:46 a.m.

Shuffle Master Inc. expects to introduce a host of proprietary table games, a line of electronic-dealer table games and an electronic table game tracking system as part of a long-term strategy to diversify revenue from its core card shuffler business, the company's top executive said.

News of the new products, which will debut at the Global Gaming Expo in Las Vegas in September, came on the heels of a strong third fiscal quarter earnings performance.

Thursday, the company reported record profits and revenue for the quarter ended July 31 as casinos added more automatic card shufflers and novelty games such as "Let It Ride" and "Three Card Poker."

Still, shares fell more than 11 percent in early trading today, to about $28.40. Craig-Hallum Capital Group analyst Christian Schwab today downgraded the stock to "neutral" from "buy."

Shares already are fairly priced because they have increased about 17 percent over the past two weeks on expectations of strong earnings and future prospects, Schwab said.

Performance improved during the quarter despite a half a million dollars in legal fees to pursue patent infringement lawsuits against competitors.

The fees, expected to be an ongoing expense, involve recent lawsuits as well as existing cases, Shuffle Master Chief Executive Mark Yoseloff said.

"This has become a very expensive proposition," Yoseloff said of the lawsuits, which have so far taken place on three continents. Still, he said, the suits are necessary to protect company patents for shufflers and other products.

"We are giving up a bit of short term profit" to secure long-term financial stability, he said.

In the United States, the company has been involved in suits against major slot and gaming device makers such as International Game Technology, Alliance Gaming Corp. and WMS Industries Inc.

Deutsche Bank Securities casino analyst Marc Falcone said he expects Shuffle Master's legal costs to be a drag on earnings over the next few quarters.

"While legal costs were high during the quarter, we applaud management's tenacity in defending its patents, which have tremendous value and have helped to secure the company's significant market share in both shufflers and table games," Falcone wrote in a research note today.

Shuffle Master earnings rose 18 percent in the quarter ended July 31 compared to the same period a year ago, to $4.6 million from $3.9 million. On a per share basis, the company earned 27 cents compared to 22 cents -- meeting analysts' average estimates for the quarter.

The company also increased its earnings guidance for fiscal year 2003 to 97 through 99 cents from 95 cents to 98 cents. Yoseloff said the company expects to grow earnings per share by more than 20 percent in fiscal 2004 through increases in sales and leases of existing as well as new products.

Revenue increased 15 percent, to $17.4 million.

Cash flow increased 14 percent, to $8.8 million. Cash flow -- defined as earnings before interest, taxes, depreciation and amortization -- is a key indicator of performance in the gaming industry.

The company installed 5 percent more shufflers in the quarter than the second fiscal quarter of this year, totaling 10,586 shufflers in use. That represents a 16 percent increase from the previous year's quarter.

The company installed 64 table games in the quarter for a total base of 1,695 table games. The company is testing up to a dozen more including games called "Four Card Poker" and "Crazy For Poker," the company said. Shuffle Master develops the games and sells or leases them to casinos nationwide.

Shuffler revenue climbed 13 percent, to $8.6 million. Of that, $4.4 million was generated from leases and $4.2 million came from sales and service. Table game revenue totaled $6.7 million, a 23 percent increase. Of that, table game royalties totaled $5.4 million and table sales totaled $1.4 million.

Slot revenue rose 3 percent, to $2 million. The company sells and leases several slot machines with trademarked themes, including "The Three Stooges" and "The Honeymooners."

The expansion of tribal casinos such as Station Casinos Inc.'s Thunder Valley drove third-quarter growth in shufflers, Falcone said. The introduction of next-generation products will help future business, he said.

The company spent $2.3 million on research and development, a 32 percent increase from a year earlier.

The business forecast appears favorable because the casino industry continues to expand nationwide, Yoseloff said. On top of that, he said, more casinos are beginning to use automatic shufflers rather than shuffle cards by hand.

"There isn't a more opportune time in gaming than there is right now," he said. Arizona's tribal casinos, for example, have added multi-deck blackjack shufflers and other products, he said.

Other new products will include electronic-based table games that are based on systems developed by a gaming unit of Japanese video game maker Sega Corp. Shuffle Master bought certain assets from the Las Vegas-based subsidiary a few months ago.

Also on the horizon is a table gaming tracking system that can be used in conjunction with the company's card shufflers. The system will allow casinos to track table game play electronically.

Casinos typically lease table games for around $300 to $1,895 per month, while shufflers can go for about $500 to $600 per month, service included, the company said.

The company has also begun financing the sale of its shufflers, which can cost up to $15,000 each.