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Howard Stutz

Shuffle Master's hand looks better

26 April 2007

LAS VEGAS, Nevada – Two months after taking it on the chin from Wall Street, gaming equipment provider Shuffle Master has regained a bit of its luster.

The Las Vegas-based company, which manufactures table game management products and distributes table games such as Three Card Poker and Let It Ride, completed a restatement of its first-quarter earnings on Monday in a filing with the U.S. Securities and Exchange Commission.

Shuffle Master had no change in its amended report from when it told investors on March 12 that its quarterly results for the period that ended Jan. 31 would come in far below expectations, with revenues of $37.3 million and earnings per share of 5 cents. The company blamed an accounting error for a $1.2 million overstatement of net income.

Meanwhile, Shuffle Master gave investors another piece of good news early this week: Gaming authorities in Nevada and Pennsylvania approved the company's Table Master product, an automated blackjack table game that uses an electronic dealer, for use in casinos in those states. Table Master is being used by the Delaware lottery.

Also, a multiple player electronic roulette game produced by Stargames, the company's Australian subsidiary, was approved by gaming authorities in Arizona, Oklahoma, Michigan and Wisconsin.

Shuffle Master executives have said electronic multiple player table games present one of the company's key growth opportunities.

"With these approvals and Table Master's solid performance in Delaware, we are confident that these platforms will rapidly become important components of the casino floor," Shuffle Master Chairman Mark Yoseloff said in a statement.

Wall Street analysts, while remaining cautious on Shuffle Master until after the company files its second-quarter earnings report, said they were happy some positive news was coming from the company. However, analysts are still concerned that Stargames, which Shuffle Master acquired in January 2006 for $108 million, continues to be a drag on the company's earnings.

Shares of Shuffle Master suffered a 12 percent decline in March, but have held steady since that time. On Wednesday, the company's stock price closed at $17.52, down 16 cents or 0.9 percent on the Nasdaq National Market.

"We would only recommend Shuffle Master shares to the investor that is looking for a possible turnaround story with a high risk reward." Stifel Nicolaus Capital Markets gaming analyst Steven Wieczynski said in a note to investors. "If (a big if) everything goes right for Shuffle Master, we believe it could eventually turn into a Bally Technologies or WMS Industries story where investor sentiment was at an all-time low due to accounting and operational issues and each company re-emerged stronger."

Morgan Joseph gaming analyst Adam Steinberg is unsure on the widespread appeal of the Table Master games. In Nevada, regulators approved some of Shuffle Master's automatic card shuffling machines and chip sorters designed for its electronic table games. Pennsylvania gaming authorities approved the blackjack version of Table Master while approvals are pending for Table Master versions of the company's Three Card Poker, Let It Ride Bonus and Ultimate Texas Hold-em.

"We remain unconvinced that these products will gain wide acceptance domestically outside of the racino markets," Steinberg said in a note to investors. "Commentary from our casino operator contacts suggests that the human interaction is too important a component of the table games experience. We remain concerned about the company's ability to correct its problems at Stargames and to hold off new competition in both its electronic table games business and in its core shuffler business."

Deutsche Bank gaming analyst Bill Lerner said Shuffle Master could back Wall Street with sold results in the second quarter, which ends Monday.

"We believe that second-quarter results could show significant sequential improvement," Lerner said in a note to investors. "The quarter will benefit from significant shuffler placements in Macau, a full quarter from Table Master placements in Delaware and likely continued debt paydown. While Shuffle Master could also announce a solid level of Table Master placements into Pennsylvania racinos during the quarter, we believe these games will likely be placed on a recurring revenue basis and therefore would have greater impacts in future quarters."