Shuffle Master, Inc. (NASDAQ:SHFL)
F4Q2012 Earnings Call
December 17, 2012 5:00 p.m. EST
Julia Boguslawski – VP of IR and Corporate Communications
Gavin Isaacs – CEO
Lin Fox – CFO
Steven Wieczynski – Stifel Nicolaus
Kelly Knybel – Deutsche Bank
Bill Lerner – Union Gaming
Greetings and welcome to the Shuffle Entertainment fourth quarter 2012 earnings conference call.
[Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Julia Boguslawski, Vice President of Investor Relations and Corporate Communications. Thank you, Ms. Boguslawski, you may begin.
Thank you. Good afternoon and thank you all for joining us today for our fourth quarter and fiscal year ended2012 earnings call. I'm Julia Boguslawski, VP of Investor Relations and Corporate Communications for Entertainment. With me today are Gavin Isaacs, CEO, and Lin Fox, CFO.
Today's call is being simultaneously webcast through our website http://ir.shfl.com and will also be archived for the next 30 days. If you haven't done so already, please download the quarterly presentation accompanying the webcast as we'll be referring to specific slides throughout the call.
Before we get started, I would like to remind you that various remarks we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under federal securities laws. Actual results may differ materially from these anticipated results. Please see today's press release and our other SEC filings for a complete discussion of risks that may affect our results. The company assumes no obligation to update any forward-looking statements as a result of any new information or future events.
We will also be discussing certain financial measures such as adjusted EBITDA, which is a non-GAAP measure. A definition and reconciliation of this and other financial measures we use and discuss can be found in today's earnings release as well as on our most recent Form 10-Q.
Now I will turn the call over to Gavin Isaacs.
Thank you, Julia, and good afternoon. I'm very pleased to report our results on our first earnings call at Shuffle Entertainment. Our recent performance, as well as our plans for growth, indicates why we made the change to our name. Shuffle Entertainment pays homage to our roots while at the same time encompasses who we are today and where we're headed in the future. We are truly an entertainment company providing products that encourage and support a dynamic gaming experience for clients and innovative solutions for our customers.
Moving to the agenda for this afternoon's call, I will give some commentary about the highlights from the fourth quarter and walk through a scorecard for the year, then we'll go to the key metrics, then I will close by discussing our iGaming initiatives and various growth drivers for the future.
Overall we reported a great quarter and terrific year, even more so considering the environment is still challenging for many of our customers. Our results emphasize several consistent themes which are the foundation of our growth story, and those include delivering innovation, superior execution, recurring revenue growth, strong cash generation, and product and geographical diversity.
Slide four shows that revenue records were achieved for both the quarter and the year, up 12% year on year in Q4 and 14% in the fiscal year. Recurring revenue grew 14% in Q4 and 12% in the year, both hitting new records. The fourth quarter represented the 16th consecutive quarter of recurring revenue growth.
Not only did we report revenue records, but both quarterly and annual net income and adjusted EBITDA were also company records. Diluted earnings per share were up 6% year over year to $0.19 in the quarter. That includes in one-time rebranding expenses related to our name and set-up costs associated with establishing our new international operations in Gibraltar and Latin America.
The pace of growth across individual dimensions of our business may vary, but the breadth of our portfolio and our financial strength enables us to consistently deliver profitability and strong cash flows, as we did in the fourth quarter. There were many significant operational highlights for the quarter which is summarized on slide five. Our investments in our e-Table segment are starting to bear some fruit. Total revenue was up 37% year over year, driven by the sale of 160 Vegas Star widescreen upgrade in Australia in the quarter, as well as strong participation revenue from Table Master in Maryland and Vegas Star in New York.
Utility grew 5% year over year off a top comp from last year. The prior-year period included a significant sale to a customer in Macau. In the fourth quarter, sales were driven from shuffler placements in the UK, Asia and the US. As of yearend, the total installed base of MD3s is 1,742, of which 54% are on lease. Approximately 60% of these service replacements for MD1s and MD2s. MD3s have contributed almost $13 million in revenue this year, which highlights the impact and the power of our innovation.
Our specialty table -- game category had a standout quarter, up 23% year over year. Growth came from strong performance at all categories, premium games, side bets and progressives. As a result, there are approximately 1,200 progressives in the field as of yearend and 680 Ultimate Texas Hold 'Ems, which led our premium placements in the year. Coming off a strong G2E, our new House Money side bet is currently on 65 blackjack tables in both the US and the UK. That sort of positive response right out of the gate is unusual for a table game which typically takes time to cultivate. We're very encouraged by the initial feedback and are hopeful that it continues to resonate with both players and operators alike.
Our slot machine business was up 6% year over year and included 173 placements into Asia, consistent with our global expansion strategy, and as a result of our newer titles, especially 88 Fortunes. The feedback we've overwhelmingly received from operators in Macau is the Duo Fu Duo Cai, our Asian-themed progressive, is the top-performing game across the entire market. In Australia, our most recently reported [chip share] was 17%, and we are committed to growing this to our initial targeted goal of 20%. In the quarter we sold 376 of our newly-launched Flintstones machines and there are more orders in the pipeline.
Turning to slide six you'll see several goals that we outlined on our Q4/yearend 2011 earnings call and the scorecard of our progress in the year. The first commitment we made was to continue our focus on creating, leveraging and acquiring intellectual property. We successfully fulfilled this goal, acquiring the Fire Bet side bet, creating new IP such as House Money, and we leveraged our brand online with currently nine versions of our specialty table games.
Second, we believe that the MD3 update initiative would serve as a significant growth driver to the utilities segment. By contributing $13 million in revenue in the fiscal year, our results underscore the successful launch of the MD3, and we're still in the early innings of a long upgrade cycle.
Next, we explained that the e-Tables were in the midst of a turnaround and that we expected to see the segment make a comeback this year. We completed the critical first step by re-engineering and refreshing our current offerings. At G2E in October, we unveiled Rapid Fusion and widescreen for both Vegas Star and Rapid. In the fourth quarter we saw a nice pickup in business driven by Vegas Star widescreen upgrades in Australia. However, we still have work to do.
The fourth objective was that in 2012 we would see our first notable installs of slot machines in Latin America and Asia. In the fiscal year we placed 440 slot machines in Asia, split between the Philippines, Macau and Singapore. We also installed 170 machines into Latin America this year and we've made good progress establishing a presence in this region, which we'll continue to build on in 2013.
Next, we communicated our three-year target of achieving an operating profit margin of 25%. We're making good progress against this objective and getting closer to our goal. In 2011 this number was 20%. For 2012, excluding the due diligence expense from the terminated Ongame acquisition, our operating margin was at 22%.
Last, we stated our commitment to and focus on improving working capital. I'm proud of the team for achieving a new milestone. In the quarter, inventory turn was 4.3 times, the best in our company's history. Total inventory was down 2.4 million from the prior yearend on a 14% increase in sales.
The significance of the scorecard is that we are focused. We are making progress and we still have room for improvement as we enter 2013.
And now I'll ask Lin to review the key financials.
Thanks, Gavin; and good afternoon to everyone. On slides seven and eight, you'll see that total Q4 revenue was a record $73.6 million, and on slide nine you'll see that $259 million was an annual record. On an apples to apples basis without the effect of foreign exchange, Q4 revenue was up 14%. Diluted earnings per share were $0.19 as compared to $0.18 in the comparable quarter last year. Excluding due diligence expenses associated with the terminated Ongame acquisition, EPS was $0.71 for the fiscal year, up 25%. Both the $0.19 and $0.71 include approximately $1 million in one-time rebranding expenses and set-up costs associated with establishing new international operations in Gibraltar and Latin America.
Turning to slides 10 and 11, recurring revenue for the quarter and year was $31.5 million and $118.2 million, respectively.
Slide 12 is a map of our revenue distribution by geography. Fifty-six percent of revenue came from outside the United States in the fiscal year. Asia represented the greatest growth at 11% of total revenue, up from 9% in 2011. We attribute much of this growth to the caliber of the team in Asia and the new talent we've added there. We also added talent in Canada and engaged industry experts in Latin America, and we believe we will see the benefits of their leadership in the coming year. Gross profit in the fourth quarter was up $5.7 million year over year or $6.5 million without the effect of foreign exchange.
On slide 14 you'll see that continued strength from our slot machine segment drove nearly $25 million in revenue in the fourth quarter, up 6% year over year or 9% without foreign exchange. Total installations of 1,151 units dropped 8% year over year, largely the result of the prior year, including 157 ESTARs. For the year, we placed 4,124 machines, an increase of 22% from fiscal 2011.
Utilities segment performance on slide 15 shows recurring revenue growth of 8% year over year. Although our shuffler lease space reflects 40 net placements in the quarter, there were approximately 170 lease-to-lease upgrades of MD1s and MD2s to new MD3s. This number has no net effect but is an important to our strategy as we were able to maintain our lease space and upgrade customers to the new product. As of yearend, approximately 58% of the shuffler business was driven by recurring revenue.
Turning to slide 16, recurring revenue growth of 14% in our proprietary table games business underscores the exceptional performance from all categories, premium games, side bets and progressives. New additions to the segment such as Fire Bet and operator wide area progressives helped grow our footprint in the year.
Slide 17 -- excuse me -- slide 17 shows our e-Table segment which posted significant improvements in recurring revenue in the quarter, up 33% year over year. Strong participation revenue from our Table Masters in Maryland was a driving factor, in addition to Vegas Star performance in New York.
Turning to slide 18, fourth quarter gross margin grew 110 basis points year over year to approximately 64%, largely driven by better e-Table and PTG margins. Utility margin remained relatively flat at 62%. PTG gross margin grew by 220 basis points to 83% as a result of the $2.6 million increase in total revenue. At 57%, ETS gross margins grew substantially year over year from a very weak prior-year period that had included minimal sales revenues and removals of e-Tables from Mexico due to market changes.
Margins were dramatically improved in the fourth quarter due to the overall jump in total revenue. Because of the volatility that comes from product mix, geography and market changes, ETS margins can vary considerably quarter to quarter. We don't anticipate that 57% will be a typical margin for next year but we do feel confident it will be in line with fiscal year 2012.
Although average selling price of $19,800 for the quarter reflected an improvement of $925,000 year over year, EGM gross margin declined 800 basis points to 58%. The decline was caused by a number of factors such as an increasing manufacturing costs, outsourced installation expenses related to the company's expansion into new market segments in Australia, and to a lesser extent, royalties on theme games such as the Flintstones. Our margins in this segment are still very strong at 60% as of yearend.
Operating margin, as Gavin touched on, is a key metric on our operating statement and we are working towards our target of 25%. In the fourth quarter, operating margin remained relatively flat year over year at 22% and includes the one-time rebranding and new international operation set-up costs.
Slides 19 and 20 show our adjusted EBITDA and free cash flow performance. Fourth quarter and annual adjusted EBITDA set an all-time record of $23.9 million and $87 million, respectively. Free cash flow, or adjusted EBITDA less CapEx and less cash taxes, was $12.3 million in the fourth quarter, down 22% year over year. The decline was in large part from an increase in cash taxes paid from greater profitability as well as Australia's full utilization of net operating losses in fiscal 2011. Same story for the year, free cash flow was down 9% as a result of receiving a net refund of approximately $0.5 million in 2011, which again included the full utilization of net operating losses in Australia.
In fiscal 2012, we paid cash taxes as a result of greater profitability across all of our international subsidiaries. Our effective tax rate was 32% in the fourth quarter and 29% for the fiscal year. 2011 included the R&D tax credit which expired December 31, 2011. So, no credits were received in fiscal 2012. We expect our annual going forward rate to be in the range of 29% to 31%.
As to working capital, slide 21, shows Q4 inventory turns of 4.3 as a 23% improvement from yearend 2011. At 86 days, our global DSO for the fourth quarter increased 8 days from yearend 2011, reflecting the popularity of our extended payment sales model in Australia. US DSO went up 10 days to 48.
Operating cash flow for the fourth quarter was $15.2 million as compared to $27.3 million in the prior-year period. The decrease was mainly due to paying more cash taxes as previously discussed. Net income was a record for both the quarter and the year at $10.8 million and $38.6 million, respectively.
Moving to slide 22, $5 million in fourth quarter capital expenditures were $1.4 million lower year over year on greater revenue. Approximately half of Q4 CapEx was for products held for lease. CapEx for 2012 remained relatively flat year over year at $27 million and included $2.2 million in property plant and equipment related to the development of iGaming content delivery platform.
For fiscal 2013, we believe ongoing CapEx spend should be approximately $8 million to $10 million per quarter, which takes into consideration the progress payments for construction costs of our new consolidated facility. A major milestone for the quarter is that for the first time in eight years, the company has zero bank debt as a result of paying off the remaining balance on our revolver.
Turning now to operating expenses for the quarter, slide 23 shows our R&D investment grew $1 million year over year but remained relatively flat as a percentage of total revenue at 12%. The biggest driver of the increased R&D investment relates to the development of our online platform and versions of our table games for various iGaming applications. New product and content development in utility and EGM also contributed to the increase.
For the fiscal year, R&D grew $4.6 million. Platform and new game development related to our iGaming business drove $1.5 million of the increase. New title development for the Equinox and next-generation advancements in the utility segment were also contributing factors. Enhancements in our ETS category also contributed slightly to the year-over-year increase.
Fourth quarter SG&A increased $2.9 million year over year, driven by $1.1 million in legal costs relating to increases in litigation, patent and intellectual property expenses. Greater sales and profit-driven commissions also contributed to the increase, in addition to $1 million in one-time rebranding expenses and the set-up costs for our new international operations. Foreign exchange created approximately $400,000 less operating expense in the quarter.
For the fiscal year, SG&A increased $8.8 million. This year-over-year difference comes from a $4.1 million increase in compensation and related expenses due to higher sales and profit-driven comp, in addition to a full year of compensation for several executive-level positions that were filled in fiscal 2011. $2.2 million came from due diligence expenses related to the terminated Ongame acquisition. Approximately $1.5 million of the expenses were related to legal items, namely various litigation matters and regulatory and licensing expenses associated with our iGaming segment. Foreign exchange created approximately $500,000 less operating expense for the year. As a percentage of total revenue, SG&A remained flat, again year over year at 30%.
For fiscal 2013, we believe Q4 is a relatively reasonable run rate for operating expenses in the first half and will only scale up with sales growth in the second half. Further investments in iGaming which Gavin will review momentarily are a key driver of this increase and we approximate those to be $10 million for the year. We'll also be investing in our EGM business as we continue to push new market penetration. R&D, which will still be 12% of total revenue for our core businesses, will run between 13% and 14% when including iGaming expenses.
The strength of our core businesses allows us to invest in opportunities for growth while delivering consistent profitability. Our investments in fiscal 2013 are an important and critical component for meaningful growth in the future. And with that, I'll turn it back to Gavin.
Thank you, Lin. To better explain and clarify our iGaming strategy, I want to cover three points on the next three slides. Those points are, firstly, what opportunities we see; second, what we have invested in and accomplished so far; and finally, what our investments in 2013 will enable us to do and when.
If you look at slide 24, you will see two core areas where we believe we can capitalize on opportunities in this space. Those core areas are real money gambling and free-to-play, and I'll briefly provide some color on the distinction between them.
Real money gambling encompasses legal regulated for money online gambling such as European online market, the potential US online poker market, and other potential markets in places such as Asia. Our B2B strategy consists of supplying online versions of our games on our proprietary platform to online operators and revenue is typically recognized via participation.
Free-to-play includes online versions of our games embedded in operators' websites as well as our own site playshuffle.com. They will also be offered as standalone game apps or incorporated into social casino apps for mobile and social media. These games are free to play that players may opt to accelerate their ability to earn chips. Qualified players, namely those who are of legal age, can also earn rewards to be redeemed in live casinos. We believe free-to-play is a fast-growing, high-potential and relatively underestimated of the iGaming market.
Slide 25 shows what we've invested in iGaming so far and what we've accomplished. Excluding due diligence expenses associated with the terminated Ongame acquisition, we've spent approximately $3 million this year, creating the foundation for iGaming organically. By organically building the infrastructure and the team internally versus an expensive acquisition, we have been able to manage costs, incorporate state-of-the-art technology, and avoid any integration headaches.
Our investments include acquiring crucial licenses in Gibraltar, Albany and Nevada. We have built our own content delivery platform to serve our content effectively, which currently includes nine online versions of our leading specialty table games. Our proprietary solution is truly unique in its ability to deliver our games across multiple channels such as the web, social networks, on pads and on smartphones both in for-money and free-to-play environment.
We have set up remote gaming service to deploy our elastic cloud to our online customers and hide key personnel to oversee this operation. We've brought on a solid team of over 20 people comprised of industry experts in development, sales and R&D. We've structured several deals to license our content and we've completed critical patent work that has helped protect the integrity of our proprietary brands against online infringes. Those legal settlements and licensing alone have contributed $2.7 million in fiscal year 2012. In all, it has been a very productive year for iGaming and I commend the team for their progress.
Slide 26 shows the extent of our commitment, our objectives and our expectations for fiscal year 2013. One of our objectives is to seize strategic alliances and partnerships to maximize the global reach of our content. Our joint announcement with Amaya Gaming this morning is a great example of that. We are extremely pleased to not only partner with Amaya, a growing powerhouse in the online space, but to also have the opportunity to work with Ongame again whom we have always maintained is unmatched when it comes to online poker technology. This partnership enables us to leverage our strong brands onto their gaming platforms to create an expanded offering in free-to-play, social gaming, and soon some money online poker. In addition to Ongame, Amaya's investment in their backend, with acquisitions of Chartwell and CryptoLogic, creates a complete online poker offering and, serving as the exclusive distributor in the United States, we will have an ideal offering for our customers.
In fiscal 2013, we anticipate investing approximately $10 million to iGaming initiatives, more than half of which will fall on R&D and is mostly variable and in support of healthy revenue streams. This investment will go towards the completion of our iGaming infrastructure build-out which includes data set-up costs, additional licensing and compliance to further our reach, ongoing [LAD] certification cost, and hiring additional personnel. It also includes customer integration expenses that are necessary in order to embed our technology into operator sites, which is critical for both real money gambling and free-to-play.
As our iGaming offerings and operations become more sophisticated and more comprehensive, we believe the business will bring -- we will bring in will get us to breakeven for the fiscal year. Once these initial investments are made, incremental revenue is scalable. Existing business merely requires fresh content and support and new business costs mostly scale with revenue.
We are in the fortunate position of comfortably having the wherewithal to be able to make an investment in something that we strongly believe is a major lever for growth in the future. iGaming is currently estimated to be about 10% of global gaming revenue and the market is quickly evolving. As a result, we need to best position ourselves to capitalize on the many opportunities presented.
Perhaps most important of all, the revenue we anticipate to recognize from iGaming will be nearly all recurring and high margin. It is those kinds of qualities, recurring revenue creation and high-margin businesses stemming from IP, which Shuffle is known for and that provide real value for our shareholders. Therefore, we will aggressively pursue in investment areas that we believe we can secure meaningful revenue, and iGaming is no exception.
If you turn to slide 27, you'll see the four other product segments and their respective growth drivers for the fiscal year. We believe that growth will come from continuing to deliver results in the core businesses like we did this year. A huge part of our growth trajectory comes from growing the global footprint with one, some or all of our products. There is still so many markets where we have opportunities to grow such as Latin America, Asia and even in the US. Slide 28 shows those same product categories and what we believe are reasonable growth rate ranges for the year. I'll walk through how we'll get to those numbers.
In the utility segment, we expect to see many similar themes as 2012 to fuel growth. We're still in the early innings of our MD3 initiative and we believe we'll see similar progress in fiscal year '13. We anticipate somewhere between 1,000 and 1,400 placements of MD3s in the fiscal year. These include lease-to-lease, lease-to-sold and sold-to-sold conversions, in addition to growing the global shuffler footprint. The Deck Mate 2 is currently undergoing testing and we are busy adding the final touches to prepare it for its commercial launch. We anticipate a careful, measured rollout to begin in the second half of 2013, with lease-to-lease upgrade as the low-hanging fruit.
In addition to upgrades, we'll see some new table growth in Maryland and the Philippines, as well as growing shuffler acceptance and interest in Asia. As a result of these drivers, we anticipate 6% to 9% top-line growth in the fiscal year.
In our specialty table games category, we will continue to upgrade tables with progressives, driven by the growing appetite for greater excitement and volatility in the [pit]. [OAP] and the new Game Manager 2 that we debuted at G2E are great examples of our commitment to enhance technology in this area and create more customized solutions for customers. Like this year, we expect growth to come from all categories, including premium games and side bets, driven by greater penetration of Ultimate Texas Hold 'Em, Mississippi Stud, Fire Bet, Six-Card Bonus, House Money and Dragon Bonus. In 2013 we anticipate 12% to 14% top-line growth in line with what we accomplished this year.
For e-Tables, we are confident that 2013 will be a real improvement over last year, driven by our new and enhanced product offering. As we saw in the fourth quarter, there are upgrade opportunities in Australasia for our widescreen formats on Vegas Star and Rapid. We are seeing pockets of interest in Rapid Fusion in Asia and even a growing interest in the United States. Table Master 2 should launch midyear with an official unveiling at G2E Asia.
Coming off a successful showing at G2E in October, we've had some nice traction lately with our i-Table. Currently there are roughly 70 units in the field with locations such as Spain, India, Canada and the UK and the US. Promising future markets include Latin America and further market penetration into the US, Canada and Europe. With the significant investments in the e-Table category behind us, we anticipate 10% to 20% top-line growth in 2013.
And last but certainly not least, we're excited for the many growth opportunities for our slot machine business in 2013 and believe we can grow the top line by 18% to 22%. Powered by our strong and ever-growing portfolio, we will continue to take advantage of opportunities in Australia, growing our [chip share] number of 16% to 17%. We're in the midst of acquiring a content studio in China to economically develop geographical and graphical assets for our slot machine and to help us scale efficiently in order to support our growing global footprint.
Asia will continue to be a ripe market for our slot machines in fiscal 2013 given the strength of our current titles, particular 88 Fortunes and the Du Fuo Duo Cai link progressive, which continues to be a top performer in Macau and is slowly spreading into other Asian markets. We've engaged several renowned industry experts in Asia and Latin America to oversee key relationships and prioritize market opportunities. Our plan is to establish an ever-stronger presence in Latin America this year.
And finally, coming off a very successful G2E where we showcased 26 of our new and proven titles, we've determined that now is an opportune time to prudently bring our slot machines to select US markets. On slide 29 you'll see three key reasons that support our decision.
First, we will leverage our existing assets. Our content is as strong as it's ever been and has proven successful and sustainable in several very competitive markets. This is largely the result of our unique [math] models and from the delivery of content via -- sorry -- and from the delivery of content by the Equinox cabinet. We have a deep and varied content library that resonates with true slot machine players. Our success has come largely from locals market and we will target these kinds of markets where we believe we can be successful.
Next, we'll benefit from being able to adopt a low-cost approach. The Equinox operating platform is the same platform as Rapid and Vegas Star which are already GLI-approved. GLI standards are the most prevalent gaming standards currently in the United States. A major obstacle and expense typically comes from licensing. Shuffle already has approximately 280 various gaming and tribal licenses in the US. We have achieved low-cost successful market entry into Asia and Latin America, highlighting the team's ability to effectively and efficiently execute. We've demonstrated success in tailoring content to suit the needs and preferences of each market and we have a simple, single cabinet strategy. If we execute as planned, our total commitment is estimated at $3.4 million in year one, split evenly between R&D and SG&A. Costs mainly comprise of the hiring of additional personnel and content approval.
Finally, our targeted approach is designed to focus on 80% of the market. Our robust slot display at G2E in October generated serious interest from the US operators. There exists a constant chase by many manufacturers to release the next blockbuster, high-impact, theatrical slot title on a participation model. However, there is a real appetite for content in the for-sale slot market which has largely been underserved and accounts for approximately 80% of the total market.
We have a lot of expertise in this area. Besides our team in Australia, our head of R&D and senior vice president of sales have strong background in this business, as do I, and many of our sales teams have previously worked with slot manufacturers. We also have a large service network that can easily serve as the Equinox given that it is the same operating platform as many of our other ETS products.
The key message is that through a low-cost and select market strategy, we believe we can achieve success in the largest slot market in the world. Why wouldn't we take advantage of that opportunity?
I'm very excited by this growth initiative. The team put forth a very well-thought-out and detailed business plan. And the pros far outweigh the cons. We have the right team in place, a series of success stories under our belt, and many synergies in the current business that allow for an easy entry. We are looking at a niche approach initially targeting the kinds of markets where players appreciate good game math and fun games. Importantly, it will not distract our teams in the other business units.
The question is timing and we believe we can move rather quickly. Until the trial periods have passed so that we can gauge true performance, it would be too premature to discuss what kind of placements we believe we can achieve. Similarly, we will not start spending until we have substantial results from our trial. On our next call we look forward to providing more color on our progress.
As you can see, we are and have made substantial investments in our business for future growth. We anticipate the bulk of these investments will start to bear fruit in the second half of the year. As CEO, I have one overarching objective, and that is creating true value. That includes creating value for our customers with superior products, service, people and innovation. That's the whole reason we're in business, because of our customers, and they are our number one priority.
I also have the responsibility of creating value for our shareholders and for our people. To accomplish that, I need to be laser-focused on delivering meaningful, sustainable growth. This afternoon we discussed investing in our business and broadening our horizons, and these are necessary steps to secure future growth. Pursuing new recurring revenue opportunities like iGaming, consistent evaluation of M&A and cash uses, and building the infrastructure and the team to create bigger and better presence for Shuffle around the world are all strategic pursuits of value creation.
Innovation is what fuels the power of our portfolio. Our brands and our product categories along with our operations and our talent give us the necessary fuel to compete globally. And that diversity helps us win in the most important world markets. It allows Shuffle to leverage its strength in several areas of the business while making investments in other areas to drive sustainable profit growth over the long term.
I'll close by thanking our shareholders and the Board of Directors for their support, and a special thanks to the top-notch team at Shuffle who delivered an absolutely outstanding year. I'm having such a good time with Shuffle and I'm so encouraged by our future prospects that last week I enthusiastically accepted the Board's offer of a two-year extension to my contract.
We hope everyone has a safe and enjoyable holiday, and we will now take questions.
Thank you. We will now be conducting the question-and-answer session. [Operator Instructions].
Our first question comes from the line of Steven Wieczynski with Stifel Nicolaus. Please proceed with your question.
Steven Wieczynski – Stifel Nicolaus
Yeah, hey. Good afternoon, guys. So, on the EGM side of the business, in terms of the manufacturing cost and the increase there, I don’t know if you guys can break this down, but how much of that margin decrease was due to higher manufacturing cost versus the expansion into new markets?
Hi, Steve. This is Lin. I'd say that the -- we had higher freight and installation costs. That's probably the bulk of the performance in the quarter. And the, if I had to break it out of the change from the prior quarter year over year, the 800-basis-point change, I'd say that most of it was that, which really varies depending on geography and what kind of install we have, but there is some cost there. The royalty from the theme games, that will, as you know, with Flintstones and other offerings that we have, we've increased some of our royalty costs there. So I'd say about 100 basis points will be ongoing.
Steven Wieczynski – Stifel Nicolaus
Okay. But I guess the question then is, you do think you can get that back into the 60s at some point?
Yeah. Well, we did 60 last year and that still -- that certainly where we want to be. As I said, most, the bulk of that change was a unique set of circumstances for the quarter again based on the geography and where the installs were.
Steven Wieczynski – Stifel Nicolaus
Okay, got you. And then turning, I guess this might be for Gavin, turning to the guidance or the revenue guidance you guys gave, and that's very much appreciated, but I guess when you -- I guess if we, if I hear you correctly, I'm actually a little surprised that the revenue numbers are that high, but it sounds like obviously the costs will be probably much higher, I think most people in the Street are expecting. So you guys have basically been doing 20-plus bottom-line growth there for the last three years. Is that something that's achievable next year or you see that coming back in a little bit?
You know, we're fairly positive on the opportunities as we expressed in each of the sectors. But when it comes to cost, I think we've built in most of that cost now and I think Lin made mention that we anticipate, certainly for the first half of the year, the current run rate of cost as we exited Q4 to be fairly consistent.
What we tried to do this year by virtue of, I guess, the complexity and the comprehensiveness of our business, was to give some top-line ideas of growth so that people could go out there and possibly a little bit more accurately model. And they're consistent with the way we've been building our plans for the year coming.
Steven Wieczynski – Stifel Nicolaus
Okay, got you. And the last question, on the EGM segment actually, Gavin, is, is that 18% to 20% estimated growth rate, does that include anything going into North America?
Yes, it does. We believe, as I said, that we can enter quite quickly and, you know, we have a very strategic plan on how we're going to grow that business. And we anticipate getting some place, assuming that the trials go successfully, we do anticipate getting some placements during the course of the year.
Steven Wieczynski – Stifel Nicolaus
Okay, great. Thanks, guys.
Our next question comes from the line of Kelly Knybel with Deutsche Bank. Please proceed with your question.
Kelly Knybel – Deutsche Bank
Hey, guys. Thanks for taking my call. Just a quick question. I was a little surprised to see just the kind of the slow sequential growth in the shuffler installed base. I know you guys had, you know, call it roughly around 200 growth in the MD3 installed base, but can you kind of talk about some of the moving parts there and how we should think about that installed base on a go-forward basis?
On the shuffler lease space, yeah, for the net placements, Kelly, look to be about 40, which is a little lower than we typically do. But I think Lin went through the explanation about the lease upgrades, and that's a big part of what's driving leases right now, is the new MD3. So we'll expect to see further lease-to-lease upgrades. So the net effect on the base we don't really get to recognize that, so that's why we talked about it in the call. But it is important because over time we do get that incremental revenue that comes from the new products. We saw it with ACE to iDEAL, we're seeing it now with the MD3, and we'll see it with the Deck Mate 2. So this is good, it's important for us to still encourage our customers to lease.
And as for the rest of the shuffler placements in the quarter, you know, we had quite a few sales, and that had a lot to do just with the year. There were a lot of new openings actually in the US, and that can drive sales versus leases at times. And so -- and we're actually starting to make some really good strides in parts of Asia. And as you know, as we expand internationally, the preference have been to purchase. So we're still really pushing leases, but just depending on sort of geography and then things like new openings, it can shift that mix a bit.
Kelly Knybel – Deutsche Bank
Okay. That's it for me. Thanks, guys.
[Operator Instructions]. Our next question comes from the line of Bill Lerner with Union Gaming. Please proceed with your question.
Bill Lerner – Union Gaming
Thanks. Hey, guys.
Bill Lerner – Union Gaming
Hey. A question on the slot expansion strategy, Gavin. Just generally speaking, do you think there's applicability, I suspect so, but do you think there's applicability for your IP across, say, this electronic platform? You know, you talked about technology, important having applicability and your content, electronic content, is throughout your e-Table business. But what's your sense on slots?
Yeah, Bill. I think it -- I think we made some very good content, certainly in markets like Australia and Asia we've been proving it. Our strategy is very, very simple. We don't want to have multiple platforms. Our goal was to have one platform. And again, when it comes to efficiencies in producing content, which is really the value-add for our customers, we're trying to build everything now and moving towards having everything with our unity front-end so that whether it be our iGaming team, our teams in Australia, teams in America or even in China, they'll all build content which is easily transferable between either electronic tables, our slots or iGaming.
So, you're absolutely right, it's convergence of the platforms, but more importantly it's the ability to leverage the content, which we do believe -- and prior experience shows that great games and local markets work universally across the world.
Bill Lerner – Union Gaming
And just -- how about like poker derivative content, your historical, your legacy IP, Gavin?
Yes. Well, for the slot machines, we'll see. But initially it's taking advantage of the great titles that are operating outside of America. But clearly with that huge, huge portfolio of content in the poker field, we'll have to look and see whether there's any applicability to the slot machines.
Bill Lerner – Union Gaming
Okay. Thank you.
There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
Well, I mean as is custom with our yearend call, we've included -- or Julie has included, a rascally jib-jab holiday greeting on the last slide of our presentation which we hope you'll enjoy and have a laugh or two at us. Again, thank you for joining us on what we know is a longer-than-usual call, but we have tried to give a little bit more visibility and a lot more explanation as to our strategies for growth for the coming year.
It's been a great year. We wish everyone including ourselves success, health and happiness for the new year. Thank you.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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