Shuffle Master (Nasdaq: SHFL), the maker of card shufflers that, drats, make fancy shuffling skills obsolete, learned about a financial outcome many gambling patrons know all too well: losing money.
The Las Vegas company reported a first-quarter loss of $0.05 per share on Monday, down from a $0.06-per-share profit a year ago and an about-face from analysts' estimate of an $0.08-per-share gain. Note that the results would have been $0.04 better if one-time severance and legal costs were excluded. Revenue for the quarter gained little ground over the same period last year, growing a little more than 1% to $37.9 million.
Two factors contributed to the unexpected fall in earnings. Shuffle Master's operating expenses ballooned 20% because customers now prefer leases instead of outright purchases. The increase in expenses far outstripped the meager rise in revenue, leading to lower margins.
The continued decline of the U.S. dollar, which now stands at multiyear lows versus the yen and the euro, further extended the pinch. Many Shuffle Master products are manufactured in Europe and Australia, accruing costs in local currencies, then are sold in the United States with the weakening dollar.
One major bright spot in Shuffle Master's operations continued to be its proprietary table games, which include versions of Pai Gow Poker and Caribbean Stud. Revenue for the division climbed 9% to $9.2 million, thanks to a 39% increase in royalty and lease revenue.
One sore spot investors may want to pay close attention to is the massive debt load Shuffle Master carries on its balance sheet. While total cash more than doubled in the quarter to $10.4 million, the $235 million in long-term debt could crimp expansion possibilities, especially with bankers reluctant to loan money amid the credit crunch.
With their shares off more than 60%, gaming companies like Shuffle Master and rival Elixir Gaming (AMEX: EGT) are looking to rebound, in contrast with competitors focused on video games, like WMS Industries (NYSE: WMS) and Bally Technologies (NYSE: BYI), whose shares have surged. Despite Shuffle Master's current discount, investors are wise to wait and see whether this quarter's poor performance is a blip or a trend.
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