Net revenues for the card game equipment maker increased 49% to $40.7 million. Operating income from continuing operations before taxes declined 3% to $11.3 million. Diluted net income from continuing operations dropped 8%, coming in at $7.4 million, or $0.20 per share. The GAAP earnings number was affected by acquisition costs related to Stargames and by an increase in the diluted share count because of convertible debt coming into play as a result of share price appreciation, among other elements.
As can be seen, it wasn't a spectacular quarter for Shuffle Master when it comes to income. The top-line aspect, however, did shine, obviously from the acquisition of Stargames. While it may not represent organic growth, it is growth, nevertheless. In fact, it helped the company expand its entertainment products segment by 107% in terms of revenues. Utility products saw a revenue jump of 13%.
Cash flows from operations for the nine-month period saw a modest decline of about 1.5% to $28.7 million. This statistic was affected favorably by the Stargames buy, since Shuffle Master is adding back a write-off it took for in-process research and development. Although the company isn't pressured by significant capital costs, the acquisition activity pretty much rendered any free cash flow a moot point. Shuffle Master, however, believes strongly in its current strategy -- so strongly, in fact, that it's still willing to buy back shares. The board approved an increase in the buyback protocol worth $30 million. Buybacks must be watched carefully, of course, since any buyback must make sense and add long-term value for shareholders.
My take on all this is that Shuffle Master's current strategy should indeed pay off down the line. As Rich Smith mentioned in his Foolish Forecast, the Asian market appears to be strong. In fact, it should be a nice source of growth in years ahead. Shuffle Master expects to grow revenues and earnings beyond 25% the next couple years. If these expectations are met or surpassed, then cash flows should rise, which hopefully will lead to a stronger balance sheet. Of course, the margins must be watched carefully; the operating margin this quarter was 32.5%, compared to 44% a year ago.
Overall, I think Shuffle Master is a worthy growth idea for the long term. The company may have lowered its guidance for the full year to between $0.97 and $1 per share (it was higher when I covered the first-quarter earnings), but I'm not ready to bear out just yet. Gambling is an industry that should open up to more people in the coming decades as states increase their receptiveness to such an income-driving diversion. The margin scenario may be down right now, but going forward, revenues should increase and shareholder value should reflect such positive tidings. Shuffle Master is part of a competitive landscape that includes companies such as International Game Technology
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