SHFL entertainment's CEO Hosts Annual Shareholders Meeting (Transcript)

Mar.14.13 | About: SHFL entertainment, (SHFL)

SHFL entertainment, Inc. (NASDAQ:SHFL)

Annual Shareholders Meeting

March 14, 2013 1:00 pm ET


Michael Gavin Isaacs - Chief Executive Officer and Director

Linster W. Fox - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Secretary

Peter Wilkins


Greetings, and welcome to the SHFL entertainment Annual Shareholders Meeting. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Gavin Isaacs, Chief Executive Officer for SHFL entertainment. Thank you. Mr. Isaacs, you may begin.

Michael Gavin Isaacs

Thank you very much. Before I call the meeting to order, there are a lot of formalities that we need to go through, and so I will do that first. I'll read the script for that because I have to be precise legally, otherwise, our General Counsels in here will get into trouble. And then after that, I'll give you a bit of a rundown on the business side here, a little bit of an update on what we're doing and answer any questions that you may have.

So first, we thank you for coming. It is now 10:05 a.m., and this meeting will please come to order. Welcome to the 2013 Annual Meeting of Shareholders of SHFL entertainment, Inc. It's also our first Annual Shareholders Meeting of SHFL entertainment, Inc. Isn't that amazing [ph] ? We are pleased that you're with us. I'm Gavin Isaacs, Chief Executive Officer and a Director of the company. I will act as the formal Chairman of this Annual Meeting. I would also like to introduce Lin Fox, our Executive Vice President, Chief Financial Officer and Secretary; Lou Castle, our Chief Strategy Officer; Katie Lever, our Executive Vice President and General Counsel, whose act is inspector of election of this Annual Meeting; and Roger Snow, our Executive Vice President and Chief Product Officer.

Now I would like to introduce the other directors of the company who are in attendance. Garry Saunders, our Chairman of the Board, is joining us by telephone and we just spoke to him, so we know he's there. And in person, we have joining us John Bailey, Daniel Wade, Eileen Raney and Randall Thoman.

Unknown Executive

I read [ph] that in script.

Michael Gavin Isaacs

Katie's got the idea. At this time, I'd also like to introduce our audit partner, John Page of PwC, PricewaterhouseCoopers, who's here today and who will be available to respond to appropriate questions later in the meeting.

Sure that you can appreciate that there are legal formalities that we need to fulfill at this meeting, I ask you to bear with me as I go through a prepared script so that we meet the legal requirements and include everything we are required to cover.

The purposes of this meeting are to elect 6 directors to hold office until the 2014 Annual Meeting of Shareholders or until their successors are elected and qualified; to ratify the appointment of PricewaterhouseCoopers LLP as the independent registered public accounting firm to the company for the fiscal year ending October 31, 2013; to approve SHFL entertainment, Inc. 2012's stock incentive plan; and to approve in an advisory and nonbinding vote SHFL entertainment, Inc.'s executive compensation as disclosed in the proxy statement for this annual meeting.

If there's anyone present who has not sent in his or her proxy and who now wishes to do so, please raise your hand so that we may pick up the proxy for inclusion in the count. Are there any proxies? Mr. Collin [ph] ?

Thank you. If you do not turn in a proxy or you want to change your previous vote, please raise your hand and a ballot will be distributed to you so that you may vote in person today. Great.

Each of you have received a copy of the notice of meeting and the proxy statement to this annual meeting, which were mailed on or about February 1, 2013, to all shareholders of record at the close of business on January 18, 2013. I will ask the Secretary to file a copy of the notice of meeting and an affidavit that this has been duly mailed to all the shareholders with the minutes of the meeting. I will also ask the Secretary to file the list of shareholders with the minutes of the meeting.

In voting of the matters presented at this meeting, no one except the shareholder of the company of record as of January 18, 2013, or a person holding a duly executed proxy of such a shareholder may vote on matters presented at the meeting.

Will the Secretary please report the percentage of votes of shareholders presented at this annual meeting in person and by proxy?

Linster W. Fox

There are present at the meeting, in person or by proxy, holders of common stock representing 89.1% of 56,174,235 shares of common stock entitled to vote at this meeting. A quorum, which is a majority of the outstanding shares entitled to vote, is present.

Michael Gavin Isaacs

Thanks, Lin, Mr. Secretary. Since notice was duly given and a quorum is present, the meeting is ready for business.

The first thing we'll do is appoint the inspector of election of preliminary matters. Our Executive Vice President and General Counsel, Katie Lever, has been appointed to act as inspector of election. Ms. Lever has signed an oath of office promising to execute faithfully the duties of inspector of election. The oath will be filed with the minutes of this meeting and at the White House. Sorry.

After we have voted on all matters subject to a vote, Ms. Lever will tabulate the votes and determine the results of the voting.

Any shareholder desiring to address the meeting today on the matters before the meeting will be given an opportunity to do so. After we have voted on the various proposals and concluded the formal portion of the meeting, we will have a presentation followed by a general question-and-answer session, at which time shareholders may ask questions to the company's directors, management or auditors. If you have a question, I ask that you stand, state your name and affiliation and your question.

First proposal to be voted on today's meeting is the election of 6 directors for a 1-year term. The Board of Directors nominees are: Garry W. Saunders, John R. Bailey, Daniel M. Wade, Eileen F. Raney, A. Randall Thoman and Michael Gavin Isaacs. The nominees receiving the greatest number of votes will be elected as directors. If there are any questions or comments specifically relating to the matters that have bearing on this proposal, this is an opportunity -- time to raise them. No questions.

The second proposal to be voted on today's meeting is the ratification of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ended October 31, 2013. If there are any questions or comments specifically relating to matters that have bearing on this proposal whether for management or the representatives of PricewaterhouseCoopers, this is an appropriate time to raise them.

The third proposal to be voted on at today's meeting is the approval of SHFL entertainment, Inc.'s 2012 stock incentive plan. If there are any questions or comments specifically relating to the matters that have not -- that have bearing on this proposal, this is an appropriate time to raise them.

The fourth proposal to be voted on in today's meeting is the advisory and nonbinding approval of SHFL entertainment, Inc.'s executive compensation as disclosed in the proxy statement at this annual meeting. If there are any questions or comments specifically relating to matters that have bearing on this proposal, this is an appropriate time to raise them.

If there's no further discussion on the proposals that have been presented, we will proceed with the vote on these matters.

Most of the shareholders' assigned proxy cards indicating their wishes regarding these proposals, shareholders who have already sent in their proxies need not vote in person. The polls are now open to voting. The proxy holders or anyone voting in person on these proposals are requested to mark their ballots, and when finished, to return their ballots to the inspector.

Is there anyone who has not had the opportunity to vote? It's with the ballot paper. There it is.


Michael Gavin Isaacs

All right. Thank you very much. The polls are now closed. I will now ask the inspector of elections to count the votes. Will the Secretary please report on the results of the voting?

Linster W. Fox

The 6 candidates that received the greatest number of affirmative votes cast for the election of directors are the director nominees listed in the proxy statement.

Michael Gavin Isaacs

I declare that Garry W. Saunders, John R. Bailey, Daniel M. Wade, Eileen F. Raney, A. Randall Thoman and Michael Gavin Isaacs have been elected directors to serve a 1-year term until the 2014 Annual Meeting of Shareholders or until such time as directors' respective resignations, removals or their successors are elected or appointed.

Will the Secretary please report on the results of the vote to ratify the appointment of the independent registered public accounting firm?

Linster W. Fox

The votes cast in favor of ratifying the appointment of PricewaterhouseCoopers as the company's independent registered public accounting firm for fiscal year ending on October 31, 2013, represent the majority of the shares present in person or by proxy at this meeting.

Michael Gavin Isaacs

I declare that the appointment of PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for the fiscal year ending October 31, 2013, is hereby ratified.

Will the Secretary please report on the results of the vote on the approval of the SHFL entertainment, Inc. 2012 stock incentive plan?

Linster W. Fox

The votes cast in favor of approving the SHFL entertainment, Inc. 2012 stock incentive plan represent the majority of the shares present in person or by proxy at this meeting.

Michael Gavin Isaacs

I declare that the shareholders have approved the SHFL entertainment, Inc. 2012 stock incentive plan.

Will the Secretary please report on the results of the advisory vote on executive compensation?

Linster W. Fox

The votes cast in favor of approving executive compensation represent a majority of the shares present in person or by proxy at the meeting.

Michael Gavin Isaacs

I declare that the shareholders have been -- have approved on an advisory and nonbinding basis SHFL entertainment, Inc.'s executive compensation as disclosed in the proxy statements for this annual meeting.

I will order that the original proxies, ballots and the report of the inspector of election be filed with the Secretary as part of the minutes of the meeting.

There being no other business properly brought before the meeting, I will entertain a motion for adjournment.

Unknown Attendee

I salute.

Michael Gavin Isaacs

Is there a second?

Unknown Attendee

I second the motion.

Michael Gavin Isaacs

All right, it has been moved and seconded that the meeting be adjourned. All in favor, signify by saying aye.


Michael Gavin Isaacs

I hereby declare this meeting adjourned. I'd like to thank you for attending today's meeting. I'd now like to take a few minutes to discuss the state of the company and its year and an update on the Q1 and financial results. After which time, I will have -- you will have the opportunity to ask any questions you want of the auditors, the directors, management or anyone else. Thank you.

So I need to file this with the Secretary of the reporting and the...

Unknown Attendee

[indiscernible] submitted.

Michael Gavin Isaacs

Thank you. So first of all, thank you all for your support. We all love coming to work. We love coming to work and understand our responsibilities, and I think the most -- one of our major responsibilities, obviously, is to keep our business healthy and ensure that our shareholders get good value and a good return. So we do thank you for your support.

And to those on the phone, you should come here. We have some wonderful pastries and coffees and things. But we'll talk about that later.

So obviously, our forward-looking statement has to accompany anything we do because of SEC rules. So I'll bring that as -- that will be part of any record of this presentation, I'll deem that as read.

I thought to those of you here, here's a little picture of the team who run the company. There's a couple of others who aren't on this slide, but these are extracts from slides that we use when we present to institutional investors and a couple that we use internally as well. So you can see, and a lot of these people are here. The ones who are here -- this fellow here, Adrian Halpenny, runs the Australasian business. So he's based on Sydney. And he's -- I guess, asleep right now. But he's been on the job for us over the past -- about 2 years, as being -- the last year, obviously, the Australasian market is phenomenal.

This young man, Deron Hunsberger is actually sitting at the back and he runs all the sales for the Americas, so the Canada; the U.S.; Mexico; Caribbean, where you can usually find him; and South America, of course.

Ken Jolly, I know he hates hearing this but he's clearly our gaming industry veteran. I worked with Ken at Aristocrat. He runs Asia for us, where we're having some fantastic growth at the moment. And we're very lucky some of -- with his expertise and experience will help drive our business forward in that region. I'll share with you some of the great results he's getting.

And Axel Grohs, some of you may remember Ernst Blaha. Ernst has gone to a part-time role now, and Axel has replaced him. And he's managing the European and Middle Eastern markets and doing a great job for us as well. So here are some of our key team, and I just thought I'd share that with you.

This is a bit of a summary of last year. But as all of you know, we had 4 -- sorry, last year, we had 4 unique profit centers. This year, we have 5. We'll talk a little bit about that. But last year, our utility product segment, which is where we do our shufflers and, obviously, our other products in that category, which are all in the showroom. We had a record $94 million in revenue with a great gross margin of over 61% and had about 60% profitability in margin, which is great, great business.

The highlight last year for us, obviously, with the launch -- well, not the launch, but really the kick-off of the MD3 product, and you'll see our new product for this year, our slide there, the DeckMate 2, which has the same technology. In essence, it's better, it's faster and it recognizes the cards. So if someone tries to slip out a ace -- 4 for example, and slip in an ace, this machine will actually tell the dealer, "Whoa, whoa, we've got an extra ace. We have a problem." Likewise, if you bring in another foreign card from a different deck, it will recognize that. So after the meeting, watch the demonstrations outside. We have some of our great product managers and other people who can show you this stuff.

Proprietary Table Games, another fantastic year with over $52 million in revenue and over 80% gross margin and a high gross profit, obviously. Some fantastic games, Ultimate Texas Hold'em is slowly but surely catching up with Three Card Poker, and those 2 games are by far and away the leading proprietary titles in the world.

But some of the other board [ph] games we added last year, you may recall, we bought Fire Bet and we added that to our portfolio as a side bet to the craps. And that's really been expanded. And I think when we bought it, there were 230 installs and in about 8 months, we added another 120, which is a great deal for us because we can then take that intellectual property and we can add it to our other games like electronic games and our online business.

The Proprietary Table is where we take a lot of trademarks and we have a lot of patents, and that's what we're going to use for our iGaming business, which I will mention at the end. That's our new section.

Electronic tables, you know about this one. Last year, I told you how disappointed we were and we were spending money on revamping that part of the product line. And if you go outside, you'll see what we've done. I'm very proud of the new product. We're starting to get placements around the world. And obviously, it's very strong in Australasia. That's where the product's derived from.

And this is the Rapid and the Vegas Star, and you'll see what's driving that new momentum. We're starting -- our show [ph] was very successful in Europe for us last month and we're beginning to see some traction. My deepest desire is this time next year -- you all had a chance to play it at some property on the strip. So that's a real goal for us. It's a smaller segment. It's very lumpy. A lot of it's sold [ph] . It's not what we normally do but we're a table -- we're a leading -- we are the leading table company and to not be an electronic table business does not make sense. Our takeaway [ph] this year, we're going to launch a Table Master, which we're excited about. You'll see pictures of this in a minute.

And finally, our electronic gaming machines or our slots. We talked about that before and we've always been a table company. But the same platform in electronic table forms the slot machine, so we can leverage the great strength of the licenses that we have, the costs we've already invested in getting the platform approved and the phenomenally great teams that are building this fantastic slots for us. In Australia, we've gone from -- in 2 years, 4% or 5% maybe being generous in the markets, still got 16% or 17%. We have a higher ship share down there than the IGT, WMS, Bally, all those guys.

Asia, this game here, DUO FU DUO CAI, #1 game in Asia at the moment in Macau, which is fantastic. So for the first time, Aristocrat don't have the #1 game in Asia, we do. And so very proud of that.

So what we're doing now is we're just beginning to trial those slots in certain American markets, seeing which titles may work well with our American patrons. And as we discover what works well, we'll move into this market and we'll leverage the costs that we've already expended.

Peter Wilkins, who's out there somewhere. Peter runs that business and he has run it from Australia. We -- many thanks to him. He's moved in with his family over here to help drive that initiative. So our slots have just been around the corner here, so please take time to have a look at them, and then make sure you tell all your friends to play them when they see them.

So that was our second largest revenue market, $81 million -- or $81.6 million. Again, incredibly strong gross margin of 60%.

So great year last year. And you can see the results speak for themselves on this slide with total revenue up 14%; recurring revenue, one of the key drivers of our investment, up 12%; margin, up over 1.1% to 63.7%. It was funny, I haven't told this little story. Last week, we were in a meeting with some investors and we were saying that we're a little disappointed in the margins that we're getting in our electronic table business. And this investor, she manages $1.3 trillion worth of equity. She said 95% of the companies that I speak to would die to have businesses with margins like that. And so put it into perspective, we really do have a great business.

CapEx, down. I will talk a little bit more about that. EBITDA, obviously, up 17%; earnings up almost 20%, 19%. And we're delighted to report that we have 0 debt. So we think that was a great year, and I think there you can see how our revenue's grown over the past few years.

For those at the back, the yellows are slot machines; the blue, the electronic tables; the white are the proprietary tables; and the red our are shufflers and utility products. So it's a nice graph, and I think that, well, our goal is to keep growing -- accelerate that.

So moving on to Q1 we just had because we're now almost -- we are exactly, tomorrow, halfway through Q2. Revenue was up 5%. Now last year, we had a big settlement. If you pull that big settlement out, we're up about 9%, I believe, the number is. Recurring revenue is still up 12%. Margin was still up. CapEx was down. EBITDA was down because last year, we invested in our business. We brought on a whole iGaming team, lots of R&D expertise. We've added different salespeople, et cetera, so we've invested in the business. So although revenue was maybe a little bit bigger, our costs were more, but that's an investment for the future, and we manage to stay in the 0 debt.

Overall, a good quarter. We would have liked to see a bit more revenue. But overall, everything else was great, and the business was still in good shape. Four years recurring revenue growth; That's very important for us. Our goal is always to have about half our revenue recurring. That means instead of having to go out there and kill suite [ph] if you did [ph] , we have some stuff coming each day that we don't need to have to try and cultivate it and that we continue to cultivate. That's why we innovate because the reason why people lease our good products is they know that soon we'll come out with a better one, so why buy the old one when you can take the new.

This is a great story. And if you see the U.S. here, last year and the year before, less than half our revenue, 44% of our revenues came out of the U.S. against the companies we get compared to. I don't think anyone else has that profile. Most of them are way over half, some of them are as high as 80%.

Our second biggest region was Australia and New Zealand with 36%, and that's because both our slot machine business is down there and electronic tables. But obviously -- they only have, I think, it's 11%, maybe you can see that in -- 16% in Australia and New Zealand, I think, Peter? And obviously, we have shufflers and all our utility and table products, Mississippi Stud, Calgara stud [ph], much is installed in Melbourne. So that's a great market for us, and we have a lot of our R&D down there. That's a great place for the business.

Asia, our star. From starting that business, I don't know, probably 4 or 5 years ago, Roger, I'm not sure, a bit longer? It's now 11% of our revenues and growing, continues to grow. It's the only region -- well, now that we're bringing slots to America, I can't totally say that. But last year, it was the only region where all of our products were sold. So in America, we didn't sell slots. In Australia, we're obviously weaker on the tables and things. Asia, they sell everything. And obviously, it's the biggest boom market in the world. So for us to be growing there, is very encouraging.

And then Europe shrunk a little bit last year. But Europe has had lots of financial woes that we read about. We hope they do get out of that and reinvest in their properties.

And of course, South America, we all started many times down there. It's a very good market in certain countries. And Deron is driving some growth into that region because that's a big opportunity for us, as is Canada. Canada, the provinces up there, the government is a great customer. Lots of talk in the papers about privatization of casinos and things. And frankly, we never had anyone up there that -- we have a young lady up there now who runs that business for us. And by having someone focusing on the market, we're getting great results. In fact, we -- last quarter, we replaced a competitive complete installation of table games in the province of British Columbia. So just by having someone up there, you focus on it, which is a great result.

So just to give you an idea where we get our money from. Our strategic focus hasn't changed, really, from last year. Obviously, we want sustainable long-term growth. We don't want to just hit -- like to hit some, falsify whatever greatness is in our company. We want to make sure that the long-term sustainable growth, focusing on leasing, we invest in our R&D. We're a technology company. Technology companies that don't invest in their R&D die because someone else is. We're capitalizing on the online opportunities. I mentioned to you, and I'll come back to that at the end. This year, we have a fifth segment. That's the online segment. I told you about the global opportunities. And of course, the reason why we are in this wonderful position is that we have very strong intellectual property. But you don't have any intellectual property unless you're prepared to enforce it. And unfortunately, as much as we don't like it, people infringe on our intellectual property and we have to take actions, and that costs money. And I know our legal department are constantly harassed by people like me and Lin about the costs. But if you don't protect it, people walk all over you. And we have, probably within our ranks, 4 of the world's leading experts in table gaming -- the 4 leading experts in table gaming intellectual property. So we have a great team that are protecting our assets.

Execution can always get better. We can always do things better than we've done them before. We're going to continue focusing on that.

Internal efficiencies. We've got to make sure that we really do get fine-tuned and everyone works well together.

And of course, the e-Table business. It ultimately is a great thing for the future, and that's moving more to an international world. We have a vision that any piece of software that we build irrespective of being the slot business, the iGaming business or the e-Table business, should be able to be played on any kind of platform, and so do our customers. So it's an area that we need to strengthen and work on, but it's also very competitive, price-driven area. So it's a balance.

And of course, balance sheet management. I think our objective, we've stated it publicly, we believe that we want to grow our business. So we invest in our business. We add R&D resources. We look at the regions, where can we put salespeople into those regions. We look at iGaming. We invest in that because we believe -- we're seeing clearly product of the future. We want to be the predominant table game supplier to the iGaming.

So we continue to be well conditioned -- well positioned for M&A. But I think we showed last year, we're stewards of the -- of your company's assets and capital. We're not going to throw our money away. We will do our homework. We will -- we won't spend money unless we believe it's a good idea. And the good idea is one that strategically fits us, culturally will fit us and should financially fit us, and then we'll do our homework. We'll get our lawyers, our accounting partners, whoever else is involved, and we'll look into the deals. And if we find anything that's not in our best interest, we're not afraid of stopping. We would love some of these deals to come as they've been presented to us. This is a great company that does A, B and C. When we fall, we say, "Yes, that will be good for our company." Then when we go and do our homework, we go, "They do A. They don't do B and C." So it's not what we thought. To the extent of exercise, it's well worth it for the future.

And of course, if we can utilize money; we're not a bank. We're not going to be sitting here storing loads of money. We'll look at ways of returning that to our shareholders.

Our new products, new markets. You could see there some nice pictures of -- sorry, on the phone, you can't but I think they're on the website. The slot machines we've mentioned, the DeckMate 2 is outside. I haven't really spent any time talking about the iGaming but there's a demonstration outside, so you'd have a look at as well. We've taken our Proprietary Table content and Lou and his team have developed servers, which we believe are cutting edge in relation to technology because they're brand new and we built it from scratch. Rather than go and buy a company, we've built them ourselves. You can play at the moment. We tested up to 200,000 players at any one time. And our goal is to have our content available to any legal online operator in the world. So obviously, in Europe at the moment, they are now monitoring the online gaming. We're trying now to link up our servers so that if you go onto a legalized European site and you want to play Three Card Poker, Casino War, Ultimate Texas, you click on it, and you don't know if you're actually playing it off our server, and we get a little clip on the way through our product.

That's the goal. That business is going to grow. It's going to start next month, and then it's going to continue to grow and it's going to be a great source of revenue for our company, particularly when Americas start to adopt. And what happened in New Jersey 2 weeks ago was fantastic news for our company because Nevada said, "Yes, we're going to go into online poker." Of course, we have a relationship now with Ongame to provide online poker, but it's probably not as lucrative. But New Jersey said, "Let's go with a whole lot. So now you can play the casino games." They can be offered in New Jersey. And Delaware are doing the same. Pennsylvania are doing the same. Well I'd put a villain [ph] to do the same, as has Illinois. So this is very encouraging for us because to have only poker doesn't make us a lot of money. But to be able to offer our games -- the work is done, all the development is done, and we're just -- we're going to be a supplier of content, a B2B provider. So it excites us a lot, and we hope to report on that this year as our fifth business segment.

And then you can see some of the great games there. There's our new Table Master. Some of these new titles that we have down here, Roger and John and a few of the other people inside will demonstrate some of the new games, I would [ph] if you'd like to play them, and the electronic tables.

So our growth plans for this year in the utility segment, obviously, we want to continue to push out the MD3. That's the message this year. We want to upgrade as much of that product as possible. We're going to launch the DeckMate next month. And of course, we want to try and push into the other markets and continue to get leverage in Europe and places like that.

Proprietary Tables, progressives. I want to put more progressives out there. We want our house bets. We've got great momentum. We want side bets. We want to keep them going.

Electronic tables. I mentioned, we need to make sure the electronic table business really keeps this year. And it's hard work but that's one of our goals to make sure that we can do that. And we have our iTable out there, and we really start to see some opportunities for that.

Slots. Well, the big message is really global. Keep Australia growing at a slow steady rate. Asia continue to boom, Latin America and North America, opportunities. That's worth the second half and the late second half of this year, if we start working and getting some sales. It's fantastic for us, very low-cost entry and great upside.

I should also mention that we bought a studio in China, which is now -- it was called ProTec. It's now called SHFL Qingdao because we're not supposed to call it China. We have developers there. What they do is they take certain load of our Australian mass models and games and they might put Chinese graphics to them or we may get there to do some work on the games that's suitable for the American market. It's a great source of being able to leverage lower costs to R&D, still very highly skilled and leverage that and take that -- advantage of those opportunities.

And of course, iGaming. the big goal there is, again, let's start the revenues. We've done the work. Now let's capitalize on our great content and get some revenue starting. Again, it's a second half back-end deal that -- it's very exciting and it positions us very well with the U.S.

So finally, we've seen this slide before but we still have great growth. The message -- the great message about our company is that we have growth in everything we do, even businesses that they say, "Yes, but you're only growing 10%."

We have great opportunities in market in South America, in Canada, for example, to grow internationally, likewise Asia. We have new products. We have the iGaming and we have the slots into Americas. So we really do have some great growth opportunities as a company.

Continue to work on improving our margins, which are incredibly good as it is. But we still have to do that. Watching our expenses, seeing what we can do at the supply chain. And of course, as I mentioned, the cash flow, using that appropriately or working out the best way to return.

So with that, I'll take any questions.

Question-and-Answer Session

Michael Gavin Isaacs

Yes, please?

Unknown Attendee

As I saw on the bottom, there's some negative scale [ph] -- your -- as I saw on the bottom, your balance base [ph] is buybacks. Are you able to significantly do that this year? And also are you [indiscernible] on dividends?

Michael Gavin Isaacs

Sure. The question for those on the phone was whether we're looking at buybacks or dividends. I think it's fair to say that at the board level, we talk about this almost every meeting. And at the executive level, we talk about this a lot more often. Yet, clearly, I mentioned that we are not intending to sit on a huge pile of cash. Our #1 preference is to invest in our business, which we're doing. Our #2 priority would be to grow our business to fill with the appropriate acquisition. Bit by bit, we're going through all the different candidate to see if that fit. I would say that the next -- by the end of this year, at least at the latest, we would have worked out whether there's anything to do there. And at that stage, the board would consider the best method for our company in giving that money back, and that may be a buyback or it may be a dividend. But at this stage, we'd rather make sure that we evaluate all those things. And if there are opportunities, there's approvals in place to do buybacks, that's not the goal at the moment. We really want to grow the business rather than buying back, which shrinks the business.

Unknown Attendee

What does the term CapEx mean?

Michael Gavin Isaacs

Capital expenditures. Yes?

Unknown Attendee

I'm just curious about the China, the studio you mentioned. Is that studio devoted entirely for SHFL?

Michael Gavin Isaacs

Yes, it's 100% owned by us.

Unknown Attendee

And is it strictly Chinese personnel?

Michael Gavin Isaacs

Yes. Although it's run by a Chinese-Australian. So in fact, a great opportunity. One of the things that we treasure here is we have a great culture. And those of you who read the paper 2 weeks ago, you would have seen that we were the only gaming manufacturer to be voted one of the best places to work by our employees. And part of that is we give opportunities where appropriate. Brandon Yue [ph] , or Pimbo [ph] or Yue King Bo [ph] as his Chinese name is, was our General Counsel in the Australian business. And we needed someone to go out and manage that business, and he volunteered. So he's moved up there and the -- so the personnel there would -- are all Chinese.

Unknown Attendee

Where is it located?

Michael Gavin Isaacs

Qingdao. And for those who ever go to a Chinese restaurant and have a beer, that's where the beer comes from. But that's not the main reason.

Unknown Attendee

It's a small rural place.

Michael Gavin Isaacs

It's a small little city. They call it a small city. It's actually -- if you look in the Beijing Olympics, it's where the sailing was. It's on the coast and it's a small little city of about 10 million people. Great news there is one of the people we brought [ph] is the professor of optical engineering, I believe, is the exact title, at the Ocean University there. So by keeping an association with them, we keep an association with the university, which is great. This whole business is about getting great young people, great skills into it and what a great source.

Unknown Shareholder

James Johnson [ph]. Aren't you getting solicitations from a New York law firm considering the lawsuit? And the thing -- and I was hoping to -- I left all my stuff at the hotel room, executive compensation, stock incentive plan. I've been very positive about this, my position as a stockholder. But then the stock is low [ph] .

Michael Gavin Isaacs

So I might be very careful on what I say about this. But it's fair to say that there's a patent that's involved where any company that files a proxy gets served in America with a lawsuit saying that you haven't disclosed enough information. We believe we have and we believe we did. However, we did file a supplementary proxy, at great expense to shareholders as company and satisfied the desires and needs of that lawsuit. So it's fair to say that we -- that no longer is a applicable and is being dealt with. And I'm not allowed to say anything else. Is that right?

Unknown Attendee

Can you give us any sense -- can you give us any guidance on the online segment? I realized you're acquiring maybe not so much 2013 but maybe a little more.

Michael Gavin Isaacs

Sure. I'll give you the full financial run now because we disclosed that -- our results. Last year, we spent from scratch. That includes buying servers, putting, getting licenses, bringing on about 22 people. I think we ended the year with $3.5 million. This year, the run rate of those people plus the additional heads we want to add will come in around 8-ish -- $8 million. And we hope by the end of the year to have about $8 million in revenue to breakeven. And that revenue then takes off like that because whatever we believe -- with our exit rate the last month should go forward to 12 months, plus everything we add from that period on is incremental. So it's a great business. It's just -- you got to start it. We could have gone out there and spent a large amount of money on a small social media company or something and taken that off the balance -- or put it on the balance sheet, not on the P&L. But we thought the right things for our business were the skill for people like Lou and also the team that we built around it and the strong intellectual property that we have to leverage off, that's enabling us to invest in ourselves. So that's the numbers.

Unknown Attendee

So the sky -- the sky is the top?

Michael Gavin Isaacs

One day. This year, breakeven. Were there any other questions? Yes?

Unknown Attendee

Slot machines, there you're going up against IGT and Bally and what are we going to see your [indiscernible] ?

Michael Gavin Isaacs

Absolutely. I mean, we do that in wholly-owned markets that we currently have our slot machines. And I think when you talk to Peter, he'll tell you that in Australia, we actually outperformed all those companies. Our content is video only. We don't do all the participation machines, although we do have one machine in Australia called the Flintstones. But we actually just sell that as a premium game. So we only do sale. We only do video. And in that category, we are incredibly strong in what's -- one of the local -- strongest local markets in the world, and we've seen that we've been able to export that by virtue of the great results we're starting to get in Asia. So yes, we're going to compete with them. We're being very careful and selective in the target markets. We really want local play. That's what we're going to go for. But please, spend some time with Peter and he'll run you through, do the demo of the games for you and show you how they are, and hopefully, encourage you, as I said, spread the good word. Yes?

Unknown Attendee

On the same line that I asked before, you do have that in-house [indiscernible]

Michael Gavin Isaacs

Oh, yes, absolutely. I mean, we have -- we've been doing this -- part of the heritage of SHFL entertainment is a company called Stargames, and Stargames was called Vidco and Vidco is a 26 or 27 years, had been producing video slots in Australia. And in about, I guess, 10 years ago, they changed their name to Stargames and they brought out the Rapid roulette game but they were a slot company. So there's a lot of great skills and some great title in our heritage. So yes, we have a strong team of developers down in Australia. Interestingly, about 70% of them are Chinese. Correct, Pete?

Peter Wilkins

I couldn't hear [indiscernible]

Michael Gavin Isaacs

With that, thank you, all, for coming. Please stay around, ask some questions. Thank you, again, for your ongoing support, and I will close the meeting. Thank you, operator.


Thank you. Ladies and gentlemen, this does conclude today's meeting. You may disconnect your lines at this time. Thank you for your participation.

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