Shuffle Master, Inc. today announced its results from continuing operations for the third quarter ended July 31, 2008.
“We are pleased with Shuffle Master’s ability to generate solid revenue growth with revenues at $49.5 million, a record for the third quarter, due to continued and increasing product leases and demand for our suite of innovative products,” said Mark L. Yoseloff, Ph.D., Chairman and Chief Executive Officer.
"The quarter's diluted earnings per share were reduced to $0.08 as they were negatively impacted by approximately three cents per share as a result of an impairment write-down related to our investment in Sona Mobile, Inc. ($0.02) and the settlement of a distributor lawsuit ($0.005),” Yoseloff continued.
Third Quarter Financial Summary
• Revenue increased by 10% to $49.5 million from the prior year period and 1% from the prior sequential quarter.
• Diluted earnings per share (“EPS”) from continuing operations totaled $0.08 as compared to $0.08 for the prior year period and $0.09 for the prior sequential quarter. Factors that impacted EPS include:
• Impairment charges of $1.1 million, or ($0.02), net of tax, related to the Company’s investment in Sona Mobile, Inc.
• Expense of $0.2 million, or ($0.005), net of tax, related to the settlement of a distributor lawsuit.
• Adjusted EBITDA¹ totaled $14.1 million, down slightly from $14.8 million in the prior sequential quarter and up from $12.3 million in the prior year quarter.
• Total lease and service revenue was $20.3 million, an all-time Company record, and up 23% from the prior year period
• The lease and service to sale revenue mix improved with lease and service revenue accounting for 41% of total revenue as compared to 39% in the prior sequential quarter, and 36% in the prior year period.
• Net debt (total debt, less cash and cash equivalents) totaled $127.6 million compared to $212.3 million as of April 30, 2008 and $230.6 million as of October 31, 2007.
• Net cash provided by operating activities totaled $16.8 million, a quarterly record, as compared to $15.2 million in the prior sequential quarter and $15.4 million in the prior year period.
• Operating expenses were $22.1 million in the third quarter of 2008, or 45% of revenues, compared to $19.8 million, or 44% of revenues, in the prior year period.
• Gross margins were 59% as compared to 57% in the third quarter of fiscal 2007.
Third Quarter Highlights
Refinancing:
• Sold $86.2 million of equity, including the underwriter’s over-allotment option.
• Added a $65.0 million term loan component to the Company’s existing revolving credit facility.
• Retired $89.3 million of the Company’s $150 million contingent convertible senior notes at a 2.75% discount to par.
• Paid down the Company’s existing revolving credit facility to $6.0 million.
Operating:
• Total lease and service revenue for Utility reached a record high of $8.9 million.
• Total royalties and service revenue for Proprietary Table Games (“PTG”) reached a record high of $8.9 million.
• Total lease and service revenue for Electronic Table Systems (“ETS”) of $2.4 million exceeded the prior year period by $0.7 million.
Comparative information for each of the Company’s four segments: Utility; Proprietary Table Games; Electronic Table Systems and Electronic Gaming Machines are provided below.
“We’re pleased with the effective execution of our refinancing strategy including the sale of equity, securing a new term loan facility and retirement of a significant portion of our contingent convertible senior notes,” stated Coreen Sawdon, Chief Accounting Officer and Acting Chief Financial Officer. “As a result, we have significantly de-levered our balance sheet and improved the company's financial flexibility.”
Utility
The Utility segment includes revenues derived primarily from the Company’s Shufflers, Chippers and Intelligent Shoes. Revenue from Utility totaled $19.9 million in the third quarter 2008, an increase of 6% from the comparable prior year quarter and a decrease of 9% from the prior sequential quarter. The decline of $1.9 million in the current quarter as compared to the prior sequential quarter is attributable to a decline in sales revenue. Utility lease and service revenue of $8.9 million set a Company record and was predominantly due to increased leased units of the Company’s iDeal™, MD2® and DeckMate® shufflers as well as an increase in the Utility average monthly lease price from the prior year period. The installed base of leased shufflers reached a record high of 5,419 units, an increase of 575 units from the prior year period and 65 units from the prior sequential quarter, and the total shuffler installed base increased to approximately 27,500 units. Additionally, a year-over-year net increase of 132 units in the Company’s ITS category was predominantly attributable to sales of the iShoe™ and iScore™ products.
Proprietary Table Games
The Proprietary Table Games (“PTG”) segment includes revenue from the license and sale of the Company’s intellectual property protected titles including Premium Games, Side Bets, Progressive add-ons and includes revenues from the acquisition of Progressive Gaming International Corporation’s (“PGIC”) Table Game Division (“TGD”). Revenue from PTG increased 9% to $9.7 million versus $8.9 million in the same prior year period, and decreased by just under 1% from the prior sequential period. The year-over-year increase was primarily due to a 28% increase in royalty and lease revenue over the prior year quarter from $7.0 million to a record $8.9 million. Approximately 92% of all PTG revenue was from royalty and service revenue, compared to 78% and 84% in the prior year period and prior sequential period, respectively. The increase in royalty revenue was the result of an increase in the average monthly lease price per table game from the prior year period, driven in part by the addition of game bonusing options to our existing tables, and the leased units acquired from PGIC in the fourth quarter of 2007. Approximately $0.6 million in royalties were related to license fees for the use of several of the Company’s proprietary table game titles on certain legalized internet gaming sites. The total installed base of table games increased 19% over the prior year quarter to 5,640 units.
Electronic Table Systems
The Electronic Table Systems (“ETS”) segment includes Table Master™, Rapid Table Games® products, Vegas Star® products, Lightning Poker® and wireless gaming. Total revenue for the third quarter 2008 grew 2% from the prior year period to $8.0 million, and 20% from the prior sequential quarter. Substantial lease and service revenue growth of 39% was offset by declining sales volume which fell 16% from the prior year period. Lease and service revenue was down just under 3% from the prior sequential quarter as a result of some conversions to sales of the Company’s Table Master product under a pre-existing sales option. The year-over-year increase in lease and service revenue was mainly attributable to a 38% increase of e-Table seats on lease and, to a lesser extent, a slight increase in the average monthly lease price per seat. The total installed base of seats increased 21% over the prior year quarter to approximately 6,980 seats.
Electronic Gaming Machines
The Electronic Gaming Machines (“EGM”) segment represents the slot machine business which was part of the Stargames acquisition. For the third quarter 2008, EGM revenue was $11.8 million, up 25% from $9.4 million in the prior year period and an increase of 10% from $10.7 million in the prior sequential quarter. The significant year-over-year revenue growth is mainly due to a 53% increase in the Company’s average sales price. This increase is driven primarily by the success of some of the Company’s more popular titles and an increase in the sales of new versus used boxes.
Operating Expenses
Operating expenses for the third quarter 2008 increased 12% over the prior year period and 4% from the prior sequential quarter. Approximately half of the year-over-year increase in operating expenses is attributable to the weakened U.S. dollar and its impact on expenses at the Company’s foreign subsidiaries as reported in U.S. dollars. Research and Development (“R&D”) expenses, a component of Operating expenses, increased just slightly by 4% to $4.5 million compared to the prior year period.
Other Expense
Other expense for the third quarter 2008 remained relatively flat at approximately $1.8 million compared to the prior year quarter. Other expense includes interest income predominately from the Company’s invested cash and capital lease portfolio, interest expense on the senior secured revolving credit facility and convertible debentures as well as gains or losses on foreign currency. The Company recognized foreign currency losses of $0.4 million for the third quarter 2008 as compared to a loss of $0.2 million in the same prior year period and a $1.2 million loss in the prior sequential quarter.
Balance Sheet, Cash Flows & Capital Deployment
Cash and cash equivalents totaled $89.2 million as of July 31, 2008, compared to $4.4 million as of October 31, 2007 due to $70.0 million in net proceeds from the Company’s equity offering. Operating cash flow for the quarter was strong at $16.8 million as compared to $15.4 million in the prior year period. This improvement was due predominantly to focused collection efforts on the Company’s various forms of receivables as well as reductions in inventory balances. The inventory reductions are attributable to a formal emphasis on inventory management and improved forecasting. As of July 31, 2008, the Company reduced accounts receivable and inventory by $6.4 million and $7.6 million, respectively, as compared to October 31, 2007. Capital expenditures decreased by approximately 9%, or $0.5 million, for the third quarter 2008 compared to $5.6 million in the prior year period. As of July 31, 2008, the Company had $62.2 million outstanding on the senior secured revolving credit facility (“Revolver”) compared to $75.7 million as of October 31, 2007. Amounts available under the Revolver will be used as needed for working capital, capital expenditures, general corporate purposes and the pay-down for the remaining convertible notes.
Further detail and analysis of the Company’s financial results for the third quarter ended July 31, 2008, is included in its Form 10-Q, which has been filed with the Securities and Exchange Commission.
"We have made some notable progress during the third quarter. In three months time we committed to a refinancing solution and successfully executed it thereby strengthening the balance sheet. We have driven up overall revenue in addition to reporting record lease and service revenue,” Yoseloff concluded. “With our five point strategic plan well underway, we will now turn our attention to a second phase which revolves around cost control and expense reduction."