SHFL entertainment, Inc. Reports Revenue Of $73.5 Million In Third Quarter, Up 16% Year-Over-Year

LAS VEGAS, Sept. 6, 2013 /PRNewswire/ -- SHFL entertainment, Inc. (NASDAQ Global Select Market:  SHFL) ("SHFL" or the "Company") today announced its results for the Third Quarter ended July 31, 2013.

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Third Quarter 2013 Financial Highlights

• Total revenue grew 16% to $73.5 million primarily due to a 79% year-over-year increase in Electronic Table Systems ("ETS") revenue. The Electronic Gaming Machine ("EGM"), Utility and Proprietary Table Games ("PTG") businesses also contributed to overall growth in the quarter.
• Recurring revenue increased to $31.4 million, a 5% year-over-year increase. The $1.1 million increase in PTG recurring revenue contributed to 68% of the overall increase in recurring revenue.
• Adjusted for one-time expenses of $3.6 million, or $0.05 per share, related to entering into a definitive agreement and plan of merger (the "Merger Agreement") with Bally Technologies, Inc. ("Bally"), non-GAAP earnings per share ("EPS") were $0.16 in the third quarter. Diluted earnings per share ("EPS") decreased $0.07 year-over-year to $0.11.
• Net income declined $4.0 million year-over-year to $6.4 million. Adjusted for one-time expenses related to the Merger Agreement with Bally, net income was $9.5 million in the third quarter.
• Gross margin decreased 80 basis points year-over-year to 62%, due to the mix of segment performance, primarily driven by increased revenue in the ETS segment. Gross margin was also impacted by an increase in headcount of the Company's service team that has expanded to service the growing product footprint globally. To a lesser extent, gross margin was affected this quarter by increased depreciation on old Table Master units in the ETS segment.
• Selling, general and administrative ("SG&A") expenses increased $8.3 million compared to the prior year period. Approximately $3.6 million of the increase was due to expenses related to the Merger Agreement with Bally. Also contributing to the increase were: $1.6 million in higher payroll and related expenses arising from increased headcount across various departments and higher stock based compensation and medical costs; a $1.1 million increase in costs associated with the establishment of the iGaming product management and sales teams and, to a lesser extent, litigation costs incurred to protect the Company's valuable intellectual property from online infringement; and $1.1 million split evenly between the Company's expanded participation in tradeshows to support new market growth and litigation expenses related primarily to the Company's ETS segment.
• Research and Development ("R&D") expenses increased $2.4 million year-over-year due to an increase in headcount and product approval expenses related to several initiatives across all product segments. Approximately $0.7 million of the increase was due to expansion of the iGaming department and platform development for the Company's online game content. Other initiatives included the creation of new EGM titles for the Equinox cabinet, development of next-generation Utility products, strengthening the Company's current PTG progressive offerings, and enhancements to next-generation ETS products including Table Master Fusion, SHFL FUSION Hybrid, and SHFL FUSION Virtual.
• Operating margin decreased year-over-year to 12% due to increased operating expenses discussed above. Adjusted for one-time expenses related to the Merger Agreement with Bally, operating margin was 16% in the quarter.
• Adjusted EBITDA declined 3% year-over-year to $20.5 million due to the previously mentioned increase in operating expenses, slightly offset by the increase in total Company revenue.
• Free Cash Flow ("FCF")¹, a non-GAAP financial measure, was down 57% year-over-year to $5.1 million. FCF was impacted by an increase of $6.3 million in capital expenditures related to the construction of the Company's new consolidated facility in Las Vegas. The decline in FCF was slightly offset by a $0.7 million decrease year-over-year in cash paid for taxes.

Third Quarter 2013 Business Segment Highlights

Utility

• Utility recurring revenue grew to $14.1 million compared to $13.7 million in the prior year period. The 3% increase was due primarily to a rise in the shuffler average lease price as customers continued to upgrade to newer shuffler models. New shuffler lease placements, in particular the MD3, also contributed to the increase.
• Total Utility revenue grew 5% year-over-year to $25.6 million. Shuffler sales increased 11% over the prior period driven by sales of approximately 270 MD3 shufflers in Asia and, to a lesser extent, sales in Australia and the U.S.
• Total shufflers on lease increased year-over-year to 8,287. Incremental MD3 placements and, to a lesser extent, iDeal and one2six placements drove increases in the lease installed base in the quarter.
• Gross margin fell 210 basis points year-over-year to 61% due mainly to the previously mentioned increase in headcount of the Company's service team to support shuffler growth in new table games markets in the U.S. and expansion into Asia.
• Total MD3 shufflers installed grew 1,896 units year-over-year to 3,277. Placements were driven by sales in Asia in addition to an increase in incremental lease placements over the prior year period. Approximately 45% of MD3 shufflers are currently on lease.

Proprietary Table Games²

• PTG recurring revenue increased 9% year-over-year to $13.4 million. Increased lease placements in premium table games (Ultimate Texas Hold'em, Mississippi Stud), side bets (6 Card Bonus, King's Bounty, House Money), and progressives (Ultimate Texas Hold'em Progressive, Three Card Poker Progressive) contributed to recurring revenue growth.
• Total PTG revenue increased 7% year-over-year to $13.8 million driven primarily by strong lease placements.
• Gross margin remained relatively flat year-over-year at 82%.
• Total progressive units installed grew 10% year-over-year to 1,258, driven by installations of Ultimate Texas Hold'em Progressive and Three Card Poker Progressive.

Electronic Table Systems

• Total ETS revenue grew 79% year-over-year to $10.8 million driven by increased sales of SHFL FUSION Hybrid in Asia and New Zealand, and sales of SHFL FUSION Virtual in Australia.
• ETS recurring revenue stayed relatively flat at $3.6 million compared to the prior year period. The removal of Table Master units in Maryland was offset by increased placements of SHFL FUSION Hybrid in New York and, to a lesser extent, greater i-Table recurring revenue.
• ETS gross margin increased to 46% compared to 34% in the prior year period. The previously discussed increase in total sales revenue, partially offset by increased depreciation of old Table Master units, drove the increase.

Electronic Gaming Machines

• Total EGM revenue grew 16% year-over-year to $23.2 million. The increase was driven primarily by greater placements in Asia over the prior year period and, to a lesser extent, higher average sales prices. Adjusted for foreign exchange, EGM revenue grew to $23.8 million in the quarter.
• Gross margin remained relatively flat year-over-year at 60%.
• There were 1,116 EGM units sold in the quarter compared to 1,021 in the year-ago quarter. The increase was due to approximately 250 placements into Asia in the quarter, driven by sales of the Duo Fu Duo Cai progressive jackpot link.

Further detail and analysis of the Company's financial results for the third quarter ended July 31, 2013, is included in its Form 10-Q, which the Company intends to file with the Securities and Exchange Commission today, September 6, 2013. No conference call will be held. On July 15, 2013, SHFL entered into a definitive agreement and plan of merger with Bally (NYSE: BYI), pursuant to which Bally has agreed to acquire the Company at a per share price of $23.25 in cash for total consideration of approximately $1.3 billion subject to the satisfaction of the conditions set forth therein.

About SHFL entertainment, Inc.
SHFL entertainment, Inc. is a leading global gaming supplier committed to making gaming more fun for players and more profitable for operators through product innovation, and superior quality and service. The Company operates in legalized gaming markets across the globe and provides state-of-the-art, value-add products in five distinct categories: Utility products, which include automatic card shufflers and roulette chip sorters; Proprietary Table Games, which includes live games, side bets and progressives; Electronic Table Systems, which include various e-Table game configurations; Electronic Gaming Machines, which include video slot machines; and newly introduced iGaming, which features online versions of SHFL entertainment, Inc.'s table games, social gaming and mobile applications. The Company is included in the S&P SmallCap 600 Index. Information about the Company and its products can be found on the Internet at www.shfl.com, or on Facebook and Twitter.

Forward-Looking Statements
This release contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this release other than statements that are purely historical are forward-looking statements. Forward-looking statements in this press release include without limitation: (1) the Company's belief that its innovation will continue to drive competition; (2) the Company's intention to continue to execute against our strategic initiatives; (3) the Company's belief that EPS, Adjusted EBITDA and FCF are useful, widely referenced performance measures in the Company's industry and the Company's belief that references to them are helpful to investors; (4) the Company's estimates of diluted EPS, Adjusted EBITDA and FCF and the assumptions upon which they are based; (5) the Company's belief that investing in its intellectual property is an important use of cash; (6) the Company's ability to develop products that achieve commercial success in the very competitive marketplace in which the Company operates; and (7) the fact that the Company competes in a single industry and is dependent on the success of its customers and the risks that impact the Company's customers, including a change in demand for gaming, a downturn in general worldwide economic conditions, or the gaming industry may adversely impact the Company or its results of operations. The Company's beliefs, expectations, forecasts, objectives, anticipations, intentions and strategies regarding the future, including without limitation those concerning expected operating results, revenues and earnings are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from results contemplated by the forward-looking statements, including but not limited to: (1) unexpected changes in demand for or increased competition with the Company's products; (2) unexpected factors that limit or eliminate the Company's ability to implement its strategic plan or undertake or complete any of its growth initiatives; (3) inaccuracies in the Company's assumptions as to the financial measures that investors use or the manner in which such financial measures may be used by such investors; (4) reduced demand for or increased competition with the Company's products that affects its EPS and Adjusted EBITDA; (5) unexpected changes to the Company's balance sheet or cash flows that would impede the Company's ability to pursue protection and pursuit of its intellectual property; (6) the Company's inability to accurately gauge the commercial appeal of its products; (7) unexpected changes in the market and economic conditions and reduced demand for or increased competition with the Company's products; (8) the risk that the conditions to the closing of the merger are not satisfied (including a failure of the shareholders of SHFL to approve, on a timely basis or otherwise, the merger and the risk that regulatory approvals required for the merger are not obtained, on a timely basis or otherwise, or are obtained subject to conditions that are not anticipated); (9) litigation relating to the merger; (10) uncertainties as to the timing of the consummation of the merger and the ability of each of SHFL and Bally to consummate the merger; (11) risks that the proposed transaction disrupts the current plans and operations of SHFL; (12) the ability of SHFL to retain and hire key personnel; (13) competitive responses to the proposed merger; (14) unexpected costs, charges or expenses resulting from the merger; (15) the failure by Bally to obtain the necessary debt financing arrangements set forth in the commitment letter received in connection with the merger; (16) potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger; and (17) legislative, regulatory and economic developments. Additional information on risk factors that could potentially affect the Company's financial results may be found in documents filed by the Company with the Securities and Exchange Commission, including the Company's current reports on Form 8-K, quarterly reports on Form 10-Q and its latest annual report on Form 10-K, and are based on information available to the Company on the date hereof. The Company does not intend, and assumes no obligation, to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this press release.

¹ Free Cash Flow is Adjusted EBITDA less capital expenditures and cash paid for taxes.

² As of FY 2013, revenues from the iGaming segment are being reported separately from the Proprietary Table Games segment. Please see page 13 for more details.

SOURCE SHFL entertainment, Inc.