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Best of Liz Benston

Gaming Guru

Liz Benston

Shuffle Master Plans to Sell Slot Assets

12 December 2003

LAS VEGAS -- Just a few years after entering the intensely competitive slot machine business, a growing casino supply company in Las Vegas is exiting slots to focus on its core enterprise of making card shufflers, table games and related equipment.

During a conference call Thursday to discuss the company's fourth-quarter earnings, Shuffle Master Inc. said it expects to sell off its slot assets -- which include games based on vintage sitcoms and game shows including "The Three Stooges," "Press Your Luck" and "The Honeymooners" -- over the next several months and has already executed several letters of intent to consummate a deal. Several other new slots had been in the pipeline, including a new version of video poker and a machine based on the movie "Chicago."

Profit rose 14 percent to $5 million, or 29 cents per share, in the fiscal fourth quarter ended Oct. 31 -- the best quarter in company history, executives said. That was a penny per share above analysts' expectations and compares to profit of $4.4 million or 25 cents per share in the fourth quarter of last year. The company said it expected to grow earnings by more than 20 percent in fiscal 2004.

Shuffle Master stock rose more than 4 percent on news of the sale Thursday, to $30.55. Shares rose another 68 cents to $31.23 in early trading this morning.

Shuffle Master Chief Executive Mark Yoseloff said the company may use the cash to make an acquisition in the second half of next year. The company also expects to more aggressively roll out new products in the coming year including an improved multi-deck card shuffler as well as several new table games.

"Our new product pipeline is better than at any time in the company's history," Yoseloff said.

Yoseloff acknowledged Thursday that the company's slot unit had been barely breaking even. The decision to sell the business was mainly due to a reorganization of the company's activities into two primary categories, however, he said.

One category, which includes shufflers as well as recently crafted table game tracking equipment, will focus on products that "provide improved productivity, security or operating cost savings for casinos," he said.

Last year Shuffle Master introduced the "Intelligent Table System," software that uses optical recognition technology to allow pit bosses to track via computer each card played on each table. Another component of the system tracks cards in the shuffler. To date, most casinos have tracked bets visually, while back-office accounting systems track money flow after gambling activity occurs.

A second category includes table-game related products such as the company's "Let It Ride," "Three Card Poker" and "Crazy for Poker." The games have become popular with casinos seeking table games with higher jackpots and more interesting side bets than traditional games, executives say.

That category also will include electronic versions of its table games that will be sold under the "Table Master" brand. Shuffle Master bought the electronic systems from the gambling subsidiary of Japanese video game maker Sega Corp. this year with the intention of installing its own games on the systems. The games allow gamblers to play card games by punching buttons and watching video screens similar to slot machines. The company expects to introduce an electronic version of blackjack and "Three Card Poker," followed by "Let It Ride" and "Four Card Poker," next year.

"Given the strategic repositioning of the business under these two broad product categories, it was evident to management that our slot machine operations were no longer a strategic fit," Yoseloff said.

Shuffle Master stock fell more than 10 percent in August after the company released third quarter earnings showing weaker than expected slot sales.

While casinos generally snap up new generations of card shufflers as soon as the company releases them, the table tracking systems will be slower to take hold, Yoseloff said.

"We're asking our customers to make fundamental changes in the way they operate their pit games and this will take time," he said.

Components of the system will likely be tested in spring for sale in late 2004, he said.

Shuffle Master said it expects to continue spending at least half a million dollars per quarter -- about 2 cents per share in earnings -- on legal fees. The fees stem from lawsuits filed against various gaming companies for potential violations of Shuffle Master patents. Legal fees swelled in the fourth quarter, where they accounted for about 3 to 4 cents per share in earnings, Yoseloff said.

"If we don't spend the money we can't get the value out of our patents," he said.

This week, a U.S. District Court judge in Reno issued a preliminary injunction against an Austrian casino company's equipment subsidiary to prevent the company from selling, leasing, importing or otherwise using a particular card shuffler in the United States. Shuffle Master had sued Casinos Austria Research and Development in September for patent infringement.

Shuffle Master reported a 25 percent increase in revenue to $19.6 million in the fourth quarter. Cash flow rose 13 percent to $9.5 million. Revenue from shuffler sales, service and leases climbed 31 percent to $9.9 million. Table sales more than doubled to $2 million. Slot sales and leases rose 16 percent to $2.4 million.

Slots accounted for only 16.5 percent of the company's total revenue in 2003, up from 13.2 percent in 2002 and 9.8 percent in 2001.

Year over year, profit rose 21 percent and revenue rose 20 percent, the company said.

Jefferies & Co. gaming analyst Maria Rickert, who rates shares a "hold," welcomed news of the sale. Shuffle Master's slot machine unit will likely continue to generate negative cash flow for at least another year, she said.

"We believe the time and resources the company would need to spend to grow the slot product installed base to such a level as to produce positive (cash flow) will be better spent focusing on (the company's core shuffler and table business," Rickert wrote in a research note today.