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WIKI ANALYSIS
Shuffle Master, Inc. (NYSE: SHFL) is a developer, manufacturer, and marketer of technology and entertainment-based products for placement on the casino floor. Products are made to increase profitability, productivity, and security for licensed casinos. The goal is to continually develop technology to drive new products across all product lines.
Business Overview
In 1982, John Breeding came up with the idea to create a device that could shuffle cards, as well as prevent card counting. He then produced a wooden prototype, which he would perfect over the years, and in 1992 the first shuffler, the BG-1, was placed on field trial. The company has since grown its product line to include four types of products: utility, proprietary table games, electronic table systems, and electronic gaming machines. Shuffle Master is continually looking to expand its customer base and in March 2009, Shuffle Master purchased the intellectual property rights of Elixir Gaming Technologies for $2.4 million. Included were products, such as the Deck Checker, that are important to the Asian market.[1]
Strategy
Shuffle Master's strategy is to:
- Develop a "strategic partner" relationship with its customers
- Emphasize leasing vs. selling
- Continually develop technology to produce new products
- Value engineering to reduce manufacturing costs across all product lines
- Continued commitment to reduce expenses without reducing the quality of products and services
Two of the main sources of revenue are leasing and selling. Leasing involves either negotiating a month-to-month operating lease/license, or the casino pays a fee based on a percentage of net win. Selling allows for a long-term sales-type lease or other financing arrangement. Both options allow the customer to enter into an equipment servicing agreement for the continual maintenance of the product. The company primarily focuses on leasing, as opposed to selling, because it produces better margins.
Business Segment
Shuffle Master's operations are separated into four segments:
- Utility
- Proprietary Table Games
- Electronic Table Systems
- Electronic Gaming Machines
Product Portfolio
Utility
- Automatic Card Shufflers
- Chip Sorting Machines
- i-Shoe Auto
- i-Score
- Deck Checker
The utility products are meant to increase profitability, speed of play, productivity, and security. The first product that shuffle master marketed was the automatic card shuffler, and to this day it remains their primary product. Shuffle Master has created a continuous card shuffling machine (CSM), known as "The King", which eliminates a player's ability to count cards, speeds up the game by eliminating shuffle time, and reduces the amount of decks needed which then translates into reduced costs. "The King" operates by using cards recently discarded and continually shuffling them back into the deck in a non-linear pattern, as opposed to other competitor's CSMs which use a linear pattern. Continuous shuffling machines have become popular for casinos worldwide as a cost-effective method to increase the House's odds.[2]
Proprietary Table Games
The table games consist of traditional and non-traditional card games with the player is pitted against the dealer. As of October 31, 2010, eleven of the top fifteen most popular proprietary titles in the world were produced by Shuffle Master. The games are split into four categories:
- Premium Titles
- Side Bets
- Add-ons
- Progressives
Electronic Table Systems
- Table Master
- Vegas Star
- Rapid Table Games
- i-Table platforms
The Table Master, as well as some of the Vegas Star products, feature a virtual dealer. Live table games are not allowed in all markets, having a virtual dealer allows for gaming in racinos, video lottery and arcade markets.
The Rapid Table Games offer automation of components from traditional games, such as: bet placement, data collection, and bet collection, while still using a live dealer. Automation promotes faster play and increased security.
Electronic Gaming Machines
- Rise of the Dragons
- Lucky Panda
- Ninja
- Equinox
The electronic gaming machines (EGM) are PC-based video slot machines delivered into select markets, primarily in Australia, as well as Asia and Latin America. Existing terminals can be converted into other games, as long as the platforms are the same. The ability to reuse terminals, and only having to purchase the software, helps reduce customer costs.
Industry Overview
Shuffle Master is part of the gaming industry, but more specifically, the gaming manufacturing sector. Competition in the industry is high, with performance being determined by developing new technologies and protecting the intellectual property rights associated with all products. Companies in the gaming manufacturing sector supply casinos with state-of-the-art entertainment equipment including table games, slot machines, servicing the sold products, etc.
- In 2009, the gaming manufacturing sector (GMS) produced $12.1 billion in total revenue
- The are over 30,000 employees in the GMS
- In 2009, the gaming industry realized total revenues of $30.74 billion
Factors
Gaming Regulation
The gaming industry is highly regulated. It is a requirement for businesses to acquire and maintain licenses allowing them to legally operate certain locations. Shuffle Master is subject to the decisions of the Nevada Gaming Commission, and may have its licenses revoked if found to not be in accordance with the laws and regulations. Licenses also cost a fee and must be renewed when specified.
Economy
Over the past several years, the economy has taken a turn for the worst and businesses of all types have felt the effects. The economic downturn has been bad for the industry, especially hotel casinos. Individuals now have lower disposable incomes and cannot afford to travel, let alone risk it all on a slot machine. Success is dependent on the success of the customer, which in this case are casinos. If casinos are losing money, they will not be able to afford to purchase newer equipment and services from the manufacturers.
Gambling Addiction
Problem gambling is an urge to to gamble despite harmful negative consequences or a desire to stop.[8] Gambling addicts can affect the bottom line of casinos by gambling away their life savings, in hopes of becoming rich. In 2008, a study published in Psychological Medicine estimated that 2.3% of the population can be considered to be problem gamblers.[9] A Responsible Gaming initiative has been started by the American Gaming Association, with the purpose to educate both gamblers and employees on the dangers and risks of gambling. In 2005, the Keep It Fun campaign was started and involves the distribution of brochures that include the odds of winning certain games, knowing when to walk away, and overall responsible gaming behavior.[10]
Financial and Operating Metrics
[1] * Figures calculated from fiscal year 2010
SHFL = Shuffle Master, Inc
BYI = Bally Technologies
MGAM =Multimedia Games
IGT = International Game Technology
WMS = WMS Industries
When compared other prominent companies in their industry Shuffle Master, Inc has not preformed as well as it should be given it relatively large market cap, which is evidenced in the relatively low ROA, ROE, and ROIC ratios as well as the company's revenue being far below other participants in the same industry. The relatively low values for the aforementioned ratios suggests that the company could be managing its resources much more effectively.
A very important metric to note in analyzing Shuffle Master, Inc is the Cash Conversion Cycle, or CCC. Dependent on three other operational metrics (Days Payable Outstanding - DPO, Days Sales Outstanding- DSO, and Days Sales of Inventory- DSI), the Cash Conversion Cycle measures the length of time it takes for a firm to convert a dollar of inputs into a dollar of cash flow through sales of a product or service to a consumer. The CCC measures encompasses production time, the time it takes for inventory to be sold, and the time it takes to collect the cash flows associated with a sale of product. It is important to note that the CCC is not just a metric that solely measures the time it takes to recover the monetary outlay of producing a product, but also represents both an opportunity cost to the company for pursuing a specific product but also represents a potential deadwieght loss to the company.
Shuffle Master, Inc saw an increase of over 10% in its Revenue from Fiscal 2009 to Fiscal 2010. Given the circumstances of the economy, when taken alone, this would be a very impressive feat. However, coupled with the company's increased revenues are increases in the Cost of Sales. The net effect of the increase in Revenues and Cost of Sales only netted little more than a 3% increase in the firm's profit margin. The company credits the increases in its Revenue, Net Income, and Profit Margin to the broad offering of products and the company's global presence.
Competitors
Bally Technologies, Inc.
Bally Technologies, Inc. , originally founded in 1932 is one of the longest lived gaming companies in the United States. Although the company was originally concentrated on the production of pin-ball machines, the company began making gambling equipment in the 1930s and proved to be quite successful in the fledgling gaming industry. Throughout the 1960s Bally Technologies dominated the mechanical slot a machine market and possessed over 90% of the world market for slot machines. Through out the 70s, 80s, 90s, and early 2000s Bally Techonologies, Inc. went through various mergers and divestitures as well as changes in their main market. While transforming from the original company to the contemporary company of today, Bally Technologies shifted it's main product focus several times. Among the industries included in Bally Technologies' historical product focus are: commercial and personal gaming systems (including gambling, arcade systems, and video games), casinos and hotels, and health and fitness equipment.
WMS Industries, Inc.
WMS Industries, Inc. Was incorporated in 1974 and serves the legalized gaming industry by designing, manufacturing and distributing games. They are in the consumer goods section in the recreational goods industry. and have ~1800 employees. The companies product line includes video gaming machines, mechanical reel gaming machines and video lottery terminals. The companies primary manufacturing facility is located in the United States with development or distribution offices in the U.S, Argentina, Australia, Austria, Canada, China, India, Italy, Mexico, South Africa and Spain. It creates wide-area progressive participation games (WAP) using its brands and also licensed brands such as MONOPOLY, THE WIZARD OF OZ, THE PRICE IS RIGHT, TIME MACHINE,TOP GUN and JOHN WAYNE. When its consumers want a product they most likely will lease it for either a fixed daily fee or a percentage of the machines winnings. WMS also derives its revenue from licensing its games and intellectual property to third parties.
Porter's 5 -Forces Analysis
Porter’s Five Forces is a framework for Industry analysis. As every company is not expected to receive the same returns from a particular industry, it allows a company to determine the attractiveness of a particular industry. To judge the appeal of an industry, the Five Forces Model looks at the following: Bargaining Power of Customers, Bargaining Power of Suppliers, Threat of New Entrants, Threat of Substitute Products, and Competitive Rivalry within an Industry.
Bargaining Power of Consumers
Buying Power is the ability of customers to put the firm under pressure. In Shuffle Master case, there is not too much risk of Buyer's Power. With the Macau Casino boom, the fastest growing casino market in the world, Shuffle Master is getting massive penetration rates because of the huge demand. Table games are also starting to make a comeback, especially overseas, putting shuffle master in a very good position.
Bargaining Power of Suppliers
Suppliers of raw materials, components, labor, and services to the firm can be a source of power over the firm, when there are few substitutes. Shuffle Master is in a good spot, all of their R&D is done in-house and the raw materials to make their products are very readily available [11].
Threat of New Entrants
With 90% market share, enviable intellectual property, a very strong portfolio of gaming titles, and first mover advantage, Shuffle Master Is in a very good position within their market [12]. Although Shuffle Master is in such a good spot, a better capitalized player could enter the market and cause alarm for Shuffle Master. A large company, with the same drive as Shuffle Master, is the only cause for worry in Shuffle Masters case. Overall, there is not a huge threat of New Entrants, as the company holds such a high amount of market share and has dominated the market for an extensive amount of time.
Rivalry Amongst Existing Competitors
As mentioned above, Shuffle Master is currently controlling the market with a 90% market share. There is rivalry in this industry, but Shuffle Master has dominated by being the first mover and continually bringing innovations to the market. With over 22,000 units currently installed, the Company's EGM game library features an extensive range of high performance titles companies cannot compete against.
Threat of Substitutes
Shuffle Master, being a first mover, has gained a large amount of loyalty from their consumers. As the casino business is in the business of making money, Shuffle Master has shown a good track record of making casinos very profitable very securely [13].
SWOT Analysis
Strengths
- One of the few leaders in gaming software technology
- Core business of card shufflers and specialty-table games are a major area of growth within the gaming industry and produces gross margins of between 70%-80%
- Heavily invested in R&D for proprietary table games and electronic gaming machines and in 2010 both saw a 24% and 33.7% increase in revenue respectively
- Is a strategic partner with International Game Technology (IGT), the largest U.S. slot machine manufacturer, and together they generate revenues using IGT's brands and licenses and Shuffle Master's advanced slot machine software
- Has obtained regulatory approval for their slot machine operating system
- Electronic table games are growing increasingly popular with casinos as they reduce labor cost, increase game speed and reduce human error
- Has a strong cash position with outstanding debt, an unused $15 million line of credit, and $23 million in cash
Weaknesses
- Experiences high R&D expenses in order to keep up with competitors and the continuously changing gaming industry
- Dependent on the approval of state gaming agencies for new products to be successful
- Most equipment is leased, so there is a risk of default with struggling casinos
Opportunities
- Developing proprietary slot games using with Shuffle Master’s own titles and brands, rather than partner with other manufacturers and revenue sharing
- Releasing the iTable soon, which will increase games per hour by 30% while reducing theft, eliminating dealer error and reducing necessary pit boss supervision
- New table software that tracks gains and losses can help casinos prevent money laundering
- Developing markets abroad
Threats
- iTable has not been approved by all regulatory agencies and its release could be delayed
- Strong competition from WMS
- Difficult to remain at the forefront of a changing industry where patents and licenses can greatly restrict new product development
Marketing Strategies
Product
The product that Shuffle Master sells technology and entertainment based products for the gaming industry to be placed on the casino floor. Their product offereing is divided into four segments: Utility, Proprietary Table Games (PTG), Electronic Table Systems (ETS) and Electronic Gaming Machines (EGM). All of the products they sell are aimed to make the casino more profitable and efficient and give the player a better gaming experience. they market a range of shufflers including single deck, batch and continuous shufflers. Shuffle Master not only sells but also leases its products to customers.
Price
Shuffle Master is constantly working to lower costs in both development and manufacturing their priducts which in turn translates to more attractive prices to its customers because that savings would get passed down to them to keep Shuffle Master competitive in the gaming and entertainment industry. Price is based on what features the customer is looking for weather its the single deck or a continuous shuffler. We want to emphasize the leasing of our products and in this case we generally negotiate a month- to - month operating lease or licensed for our product for a fixed fee. Sometimes we also come to an agreement for a casino to pay a fee of the net win if the product is in fact purchased and not leased.
Promotion
Shuffle Master markets its products to casinos and other legal gaming establishments around the world with a direct domestic and international sales team. They also market their e-table products to some gaming venues that are not permitted to offer live tables for example racinos. they have work with distributors worldwide.
Place
The products Shuffle Master sells and the locations they sell in vary based on the licensing and and laws of that particular area. Currently our customer base includes the leading casino operators on all six continents that allow casino gaming including the United States, Canada, Latin America, Singapore, Malaysia, Australia, Europe, and Africa.
References
- ↑ Shuffle Master, Inc. - Elixir Gaming Technologies
- ↑ Blackjack Continuous Shuffling Machines
- ↑ Shuffle Master, Inc. 2010 Annual Report
- ↑ Shuffle Master, Inc. 2010 Annual Report
- ↑ Shuffle Master, Inc. 2010 Annual Report
- ↑ American Gaming Association
- ↑ Association of Gaming Equipment Manufacturers
- ↑ Problem Gambling
- ↑ Gambling Disorders
- ↑ American Gaming Association Facts
- ↑ Catablast! Media Group
- ↑ Catablast! Media Group
- ↑ Shuffle Master
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