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Best of Howard Stutz

Gaming Guru

Howard Stutz

Another blow for Shuffle Master

14 March 2007

Two weeks after telling Wall Street its quarterly results would be below expectations, Shuffle Master Gaming hit investors with a second piece of bad news -- the company's 2006 earnings need to be restated because of an error.

Because of an accounting error that led to a $1.2 million overstatement of net income from continuing operations, the company said late Monday it would delay its quarterly earnings for the period ended Jan. 31.

Las Vegas-based Shuffle Master, which supplies casinos with equipment to manage table games and also leases table game brands including Let It Ride and Three Card Poker, said it needs to amend its year-end annual report for 2006 before filing its first-quarter earnings for 2007.

The company said that, based on current information, it expects to report quarterly revenues of $37.3 million and earnings per share of 5 cents. Shuffle Master said its total shuffler installed base has grown 18 percent, while its table game business has jumped 16 percent.

"We are disappointed in our preliminary results for the first quarter and are working to address the various short-term issues that have adversely affected our financial performance," Shuffle Master Chairman Mark Yoseloff said in a statement. "In that regard, we continue to evaluate all of our business segments in an effort to maximize long-term revenue growth and improve operating margins."

The news did not sit well with analysts or investors.

Shuffle Master shares fell more than 12 percent in value when trading opened Tuesday on the Nasdaq National Market. The shares rallied some by the end of the day to close at $17.81, down $1.56 or 8.05 percent. More than 5.1 million shares were traded, five times the average daily volume.

Both Jefferies & Co. and Bear Stearns downgraded their ratings on Shuffle Master stock; Jefferies to a "hold" from "buy," Bear Stearns to "underperform" from "peer perform."

In a note to investors, Bear Stearns gaming analyst Joe Greff said: "While we have been cautious on the stock, we now believe there to be considerably more downside."

Jefferies gaming analyst Aimee Marcel Remey said in a note that Shuffle Master may be having trouble placing its electronic table games in Macau casinos.

"We believe it could take longer than originally anticipated for these games to gain acceptance," she said.

Stifel Nicolaus Capital Markets' Steven Wieczynski continued his belief that Shuffle Master could become a takeover target by a rival casino equipment manufacturer.

"After the company preannounced disappointing first quarter results, we assumed management was cleaning the table once and for all," Wieczynski said. "However, we grossly underestimated them. In our opinion, this is a management team that was hanging on by a thread as to its credibility with investors and now that credibility is almost certainly gone. The question now becomes, what else can go wrong with this company? Honestly, nothing would surprise us at this point."

Prudential Equity Group gaming analyst Joel Simkins blamed last year's acquisition of Australian slot maker Stargames for Shuffle Master's trouble. He said the company's shuffler and table game businesses are relatively healthy.

"Compared to several of the equipment companies which have reemerged from challenges in recent years, including WMS (Industries) and Bally Technologies, we think Shuffle Master is just as well positioned to reshuffle its decks and get its house in order, relative to its peers particularly given its strong market positions backed by intellectual property," Simkins said.

Shuffle Master's accounting error involved an overstatement of inventory by the company's Austrian subsidiary in timing when the products would arrive in the United States.

Bear Stearns gaming analyst Bill Lerner thought the announcement's timing, following the company's Feb. 27 earnings preannouncement, scared investors.

"Importantly we note that while the timing of the announcement was bad, it is just that, a timing issue," Lerner said.