SHFL entertainment, Inc. (NASDAQ:SHFL)
Investor Day Conference
June 13, 2013 5:00 pm ET
Michael Gavin Isaacs - Chief Executive Officer and Director
Deron Hunsberger - Senior Vice President of Sales and Marketing Americas
Adrian Halpenny - President of Shuffle Master Australasia
Roger Snow - Chief Product Officer and Executive Vice President
Louis J. Castle - Chief Strategy Officer
Todd Eilers - Eilers Research, LLC
Michael Gavin Isaacs
I think if we start heading down, we can get on with the festivities. For those sitting down, we'll give you the official numbers for the next quarter. Okay, you got that right. Sorry you guys betting out in the South. There's a whole row at the front here if you'd like to sit down.
So thank you, all, for coming. This is our second Investor Day that I've been associated with and our first as SHFL entertainment. We've had a real fun afternoon. We got to close the bell. We all -- we're trading very heavily to keep the price up above the red mark and that worked, I think. So it really was exciting, and thank you for your support, and thank you, all, for coming. The purpose of today really, and that's the invocation, we'll pass on that today. The purpose of today is really not to either hear from me or Lin because most of of you hear from me or Lin most of the time. It's really to hear from the different people who run the businesses, and we've brought a lot of them here, and you're going to get that during the course of today. And then also afterwards, we'll go next door and have a look at the products. We'll point out all the people who run the different product lines, and feel free to ask them questions and try and get information, and we'll see how good they are, their regulatory training are holding off.
So a recap. I said downstairs in our little speech, but this is the first time I could officially say, we operate in 5 sectors. We have 5 segments to our business. Clearly, the old shufflers, the Utility business, [indiscernible] -- with our latest -- it doesn't work -- with our latest product, the DeckMate 2, being used now at the World Series of Poker in Las Vegas. Where I think we have 26 of them and that will be on the final tables, really excited by that. Obviously, the MD3 had a huge quarter last quarter in Asia, with Asia -- with markets starting to pick up on the shufflers, which is great. Our proprietary table games is solid as ever, some great games from the library. I think we've got some nice games out the back there, some different games to show you to play with. Our electronic tables, we were hoping to have the new table marketed here, but we can't. We have to pass the license on some parts and some other things, and this is very important. So we don't have that here, but the new product was fantastic, and it really is. The impact of the new Rapid Fusion line and the SHFL FUSION product line. You can see here all about that. It's really beginning to have an impact and Adrian can talk to you a little bit about what's happening in Australasia about that. Our slot machines, you could play them here, you can play them at Yonkers, you can play them to start by a bit more across the country. Hopefully this time next year, we're standing here, you'll play them and they'll be all over the place. So we've got some people to talk about that. He's Deron, he runs Australasia but I'll introduce everyone in a minute.
And of course, the reason I can actually say we're operating is yesterday or 2 years ago, I guess, our GameAccount network turned on our servers, and so our games are now taking live bets in Europe, and that's very exciting for us because as Lou will tell you when he gets up there and talks about this, the hard work is building the servers, getting the games up and running, interfacing into the site. Once that happens and then people could start betting, we've got not much else to do. Revenue starts, and so congratulations on your baby, Lou.
I mentioned we have a whole group of people here today, so before I start with the executive team, we're delighted we have 3 of our directors here. So I'm going to ask everyone to stand up when I call their names: John Bailey; Randy Thoman; Marlon Raimi [ph] are here from our board. So if you want to complain about me, they're the people to complain to. They're already been called that everybody says that I'm underpaid has been paid by me, they already know that. But thank you for your support and thanks for coming and representing the board.
From the executive team, Lin Fox, our CFO; Roger Snow, our wizard, runs our products, I think you met Roger; Katie Lever; with Katie, our General Counsel over there; Lou Castle runs all the technology and iGame is. We've got Adrian Halpenny all the way from Australia, he runs Australia and Asia; Deron Hunsberger runs North and South America sales. We've got the guys who actually really do the hard work who run the products, Colin Helsen in the back there, right; He runs a lot of shufflers, he's the head of the Shuffle business; John Hemberger, he is there and he is waving. He runs all the Proprietary Table Games; Brandon Knowles, [indiscernible] Brandon, hold electronic tables; Peter Wilkins, there he is. So all of you want to talk to him because he runs all slot machines around the world and, 6 months ago, moved over here to help launch our games. And then Kimo Akiona, Kimo, Chief Corporate Controller. Of course, everyone knows Julia, our superstar over there; John Strickland, the Head of Marketing. If you don't like any of our names or our brands, you talk to him; and Jiro -- I can't pronounce his surname, I'm sorry, Kawakami; also, Julia. So again, if you haven't met Julia, please do; and of course, Deron who runs all our social media and media at the back there. Get some Twitters out, everything that we do with social is Deron. So that's our team, they're all here. Please, any questions at any time for them, ask them. Tell them to say I'm not sure you're going to go check with Lin, Gavin or Julia but if it's a neutral question I'll be able to answer.
Very quickly, this is in our latest quarter, where we're getting our revenue from, and of course, you all know we operate pretty much all around the world and unlike other companies who you compare us to, we only have 45% of our revenue coming out of U.S. Where most other companies very heavily relying on that, we've been delighted to say that we've had Australia, like last year, 36%. Would you feel alliance from that a little bit, which is great in a bigger pie. They're still growing, but it is a bigger pie at 31%. Asia, huge growth we're experiencing there and Adrian will talk a little bit about that, up from 11% to 14%. Europe, again small numbers, but it's growing. And that doesn't include any iGaming revenue yet. Our iGaming is going to be run out of Gibraltar. We love the tax rate there, but it's also one of the homes of gaming. And also the highest regulatory stand is in iGaming in Europe. And of course, again, Deron will talk about this, we firmly believe, the amount in front of your customers, you're not going to do any business and they've really never been in front of that customers in South America nor have we in Canada. And we just opened our office in Buenos Aires, and we've got our Jillian, the lady who runs Canada, and Deron will talk about the success they're beginning to get.
So I'm very excited about all our offices all around the world and the growing revenues across the board. I'm not going to go into the numbers, I think you guys know them probably better than I do. And just to say that they shouldn't be in red, they should be in green. They've all been very good. The recurring revenue is growing. Total revenue grow. Our gross margin continues to grow. It continues to sit in that same range, which is good. CapEx, likewise. I think this year, the actually started spending a bit of money in our building. The last about, I think, it was Q3 or Q4 last year, we bought a block land on the 215 and Jones, just right on 215 [indiscernible]. And we turned soil in February, and we hope to move in August. And we think we've done a very smart thing for the company, a, financially luckily, but b, bringing everyone. We have 4 leases in Las Vegas and bringing everyone under the same roof. It's going to make such a big difference for communication purposes, just the unity of the company, the camaraderie, the control, all of those things are great, plus it does happen to be EPS favorable, so we're very excited about that as well. And of course, our debt position, net debt, is quite 0 or is it? Yes, it's 0.
Revenue has continued to tick up every quarter. Recurring revenue changes. You can see the last quarter, we had massive sales in Asia. We had 500 shufflers we sold in Asia alone. We had a large corporate convert from shufflers here. But our goal is to continue to focus on recurring revenue, obviously. iGaming will all be recurring revenue. The shuffler business we're trying with pricing, and you're going to hear more about that, on how we want to encourage our customers to lease. But if someone is game enough to pay a very high purchase price, we're not going to stop them. But again, it's all trending in the right direction.
And with that, as I said, it's really not to hear about from me or Lin, you hear that all the time. And we're going to start up with Deron. He's going to talk about his markets. At the end, we'll have lots of opportunity for Q&A.
Thank you, Gavin, and I want to thank all of you for giving me the opportunity to be up here today. As Gavin mentioned, I'm Senior Vice President of Sales for the Americas. The Americas includes Canada, the U.S., Mexico, Central America and South America. So obviously all of them have the same thing in common, except for Canada, they have America in their name, which keeps me on a streak now.
So I want to talk about a couple of things. First of all, market trends with our current customers in the U.S. We really look at dividing our customers into 3 different sections, one of which is our corporate customers, many of those operate in Las Vegas. They're often regional markets as well. But you're familiar with all of them, Caesars, MGM, we've got Pinnacle Penn, Ameristar, which will be part of Pinnacle, and Isle of Capri. So they also constitute some of our regionals. A lot of our regionals are smaller customers. They have one-off properties. we have properties in Colorado. We have card rooms in California. We have card rooms in Washington. So we have different segments that we really look at when we talk about regional customers. Tribal customers, we all know, the Native American market is quite large now across the U.S. They fared fairly well during the recession, and they still contribute a large amount of business for us.
As we look at our corporate customers, over the last 6 years, a lot of them has struggled with capital expenditures, as well as operating expenditures. Although we've seen recently is a desire by them to be more competitive in the marketplace. We're seeing them come to us looking for alternatives to drive their business through Proprietary Table Games. We're working with them on products that give them an advantage maybe over their competitors. We're doing that utilizing a lot of our existing IT and our existing games but we're also tweaking those paid tables, so now they can offer life-changing payout, they can offer progressives, in which they link most of their properties to one progressive amount. On the shuffler side, a lot of those customers are utilizing our shufflers now from a security standpoint. As we offer those type of products, security becomes more vital. When you're looking at million dollar jackpots or $150,000 jackpots, it's even more vital that we have security on those products. So as we add PTG, that going to drive business in our other segments, including our shuffler business.
And then as it pertains to e-Tables, we're seeing more interest from our customers in electronic table games. There's an impetus by lot of our customers to look at this is a different segment of their casino floor. They realize that this isn't a table player it's not a slot player, it's a different player that they can capture, and it's many that they can capture that they're not getting today.
So the sentiment that we're feeling out there now is that customers are beyond just cutting expenses. They're looking at top line growth. So they really want to look at opportunities to add games that increase their drop, increase in their hold, add excitement to the casino floor. We have regions where table games have exploded. In Pennsylvania, we've seen expansive growth there. [indiscernible] is doing extremely well. Maryland Live! has gone from an electronic table game market to a table game market. And we're seeing exceptional numbers out of them from a table game perspective. In tribal land, we're seeing markets like Florida, the [indiscernible], in which we didn't have great penetration. Again, they're looking at new opportunities to bring in table games to expand their customer base. Somebody is playing basketball upstairs.
And then the third area -- the second area to look at is Canada. One is -- as Gavin mentioned, Canada is an area that we didn't really have a lot of focus on. About a year ago, we hired a director of sales for Canada. I don't know how familiar you guys are with Canadian markets, but in Canada, everything is operated and owned by the provinces themselves. So all product decisions are made by the provinces. And so in Canada, we hired somebody that lives in Toronto, who has experience in the market, we put focus on it and we've opened up opportunities there. We also think that in that market, we now will have opportunities to grow our recurring revenue base. So that market previously was primarily a purchase market. So they come in, buy shufflers, table games didn't have a high priority to them, and even in some markets like Quebec, we didn't have opportunities to offer a lot of our games. Regulations have changed there, so now we can offer PTGs into that market. So we see growth opportunities on PTGs in that market. And in British Columbia, we've seen some aggressive nature on that part to add additional proprietary table games, as well as shufflers.
So as we go down through the opportunities, we feel that we still have great opportunity with shuffles -- shuffler penetration, not only in regional markets, but with corporates. We still have corporate that have not converted all their aces, believe it or not, MD1s, MD2s to MD3s. DeckMate is just being launched now. We have that out on test in some regional markets. So there's a big opportunity to replace 8,000-some DeckMates that are out in the market.
As I mentioned, e-Tables, we continue to expand that offering and we're seeing customers there putting a focus on e-Tables and a focus on developing an area at their casino that is dedicated to e-Table and e-Table customers. And then proprietary table games. We have a large installed base of games out there, all proprietary table games, that don't have side bets or progressives attached to them. So we still will focus on growing that space. And so we have a lot of growth opportunity in the proprietary table games space as well.
I know this is a big subject that we'll be talking about today, slots in North America and what our approach is. I've already had some questions previously about what are you guys doing? What's the status? What's your customers' acceptance? We have a very experienced slot team, obviously, from Australia. Gavin has an extensive experience in slots. My background is in the slots. I've been in the slot business since 1994. Started with Bally, was the first sales person associated with Konami. I was in charge of the rollout of Konami across North America. So I see a lot of things that we have advantages in that they didn't have. When a company like Konami comes into the marketplace, they have multiple licenses that they have to apply for and it's a huge expense and it's very time-consuming. It took years. I was there for 6 years and when I left, they still weren't approved in every market.
From a platform standpoint, you have to go through a laboratory, you have to go through an approval process that is quite extensive as well. We have the advantage of having a platform that's already been approved in the marketplace, and we now can use that platform to piggyback our slot product on to. We have a deep content library. We have a library of games that are proven in Australia and there's a history of Australian slot games working in North America, as well as other parts of the Americas. We got a huge service network. We have a network that's established bigger than any slot company today. We have 170 service technicians out in the field, so we're not going to have an expense that other manufacturers would require as you go into the slot business in North America.
As I mentioned, we already have licenses everywhere. So it should be a much smoother transition. Our approach is not to go do a blanket approach and try and enter every market at once. We're looking at markets specifically that we know have a propensity to play our style of games. So as you look, we've entered markets where other Australian slot mach models have worked. We entered Oregon, where there's a -- at one time, it's 100% video and still is close to that. We entered California that has a very high repeat customer base there. It's a locals market. So we feel that our product lends itself, we just have to perform extremely well there. We entered Minnesota, again 100% video market. So we feel that, that's an area we are we can increase our odds of performing well. And then recently, as Gavin alluded to, we've entered into an agreement here in New York and we've expanded across the VLT market here. We have 112 units installed. We offer that in Yonkers now, and that's a unique market and, again, that is a high repeat customer base. There's limited competition, and it gives us an opportunity to display our product in the format that we feel is the best opportunity to perform well.
The other thing that we look at as we launch product instead of strategy is we have several different categories that we look at. We have a high denom category that fill the needs for our customers. We have a standalone progressive category that provides another need for our customers. Customers typically segment their products on the floor. If you walk the casino floor, you'll see they bank their dollars together, they bank their standalone progressives together, they bank their standard games together. We already have that segmentation, thanks to the work that we've done in Australia. So it gives you the opportunity to expand your floor presence as you add these different segments.
Currently we have 10 titles. These are the first 10 titles that we have approved in the market. We have 14 more that we plan to release before the end of this year. We've hired 2 dedicated slot sales people for the U.S. market to start. We have plans to expand into other markets as we choose to enter those markets and as we see performance. We brought Peter over from Australia as the General Manager of Slots, and Peter's setting the plan on how we want to launch products in this market. Peter's brought on a product manager that will assist him in that manner or 2. We have a content studio, I know you have some questions already about content. We have a content studio in China that is developing games specifically for China but also have the ability to develop games that are going to be specific for the U.S. market. And then we're also considering a studio here because, long-term, we really have to look at developing games that are defined specifically for the U.S. market. If we want to expand our reach into other segments on the casino floor, we have to be able to offer a wide variety of content.
South America, a lot of people aren't really familiar with the size of that market. If you look at South America, it really is a slot market. You can see by this slide, there's thousands and thousands of slots. You look at Mexico, it's got 90,000 slots alone. So we have set a strategy, in which we've opened an office in Buenos Aires. We hired a gentleman, Juan Pablo Irarrazaval. And so Juan Pablo was the Director of South America for Aristocrat for 10 years, so we are fortunate to get him on our team. We've now executed agreements with distributors in Chile, Peru, Colombia, Panama, and then we have an office in Mexico and we're going direct in Mexico.
We really look at some great opportunities in South America. When you look at Mexico alone, they have 90,000 slots. We have 300-some slots installed in that market. There's been some opening of the regulations there, where we're getting electronic table games back in. As well, some of the permit holders are now allowed to use table games, so we anticipate, down the road, having an opportunity to enter with our utility and table products as well. Argentina is probably the best performing market in terms of casinos, and that's why we launched our office there in that market. There's some challenges in that market, but we think that we have the personnel there to overcome that. And then Peru, Chile, Colombia and Uruguay are also strong markets. The primary slot markets, but because of now having a focus in that market and having personnel in that market, it's opening opportunities across all of our product lines, not just slots.
So our strategy in South America really was to build infrastructure. We've been in and out of that market for years. We now have an established presence. People have -- other people, they can recognize within SHFL as those other shuffler guys. We have somebody we can go to. We think those are going to create great opportunities for us and we see that happening in the near future.
So with that, I will turn it over to Adrian to cover Australasia.
[indiscernible] 2 feet tall and then they run off. Good morning, my name is Adrian Halpenny and it's a pleasure to be here today. As you know, I'm the President of Australasia, which covers Australia and Asia. So I thought I'd start out by answering the obvious questions, the question that I get asked most, and it is, basically, can this Australian slot business be maintained in Australia? So I brought up frequency [ph] slide and we start with a bit of a history lesson. As you can see, the slot business in Australia started in 1986 with a company called Vidco. And that company was purchased by a private [indiscernible] and is listed on Australian Stock Exchange in year 2000 as Stargames. In 2006, Stargames was purchased by Shuffle Master, and today in its present form is SHFL entertainment.
I guess the key take away from this slide is this, that there is a business arm, SHFL entertainment, that has been involved in designing and selling slot machines for over 27 years.
So continuing my history story with a few facts. It mainly relates to new games released into the market. Since 1986, the business division has released 510 new titles into the markets, 302 in the last 10 years. And in this financial year we're targeting to release 44 games worldwide. Next year, we're looking at increasing that to 61 games and that is purely due to leveraging the content studio that we purchased early this year.
So what do I take away from this? I take away the following: I get confident that we have the team in place. I get confident we've got the infrastructure in place. But more importantly, we have the know-how. And it's because of these 3 factors, I'm fairly confident that not only can we maintain the business in Australia, but we can continue the momentum in Asia and assist with the penetration into the U.S.
When you look at the Australian slot market, it's a fairly diverse market. A few observations. It's over 200,000 machines, which probably puts us outside U.S., one of the local -- largest local gaming market in terms of slot machines. Our uniqueness at the market is the diversity across the states. You can see Queensland with the regulation and even the local player in those markets is different to those in New South Wales, but operate under different regulations and has different plays. But one of the most attractive things about this market is it's a consistent market. It turns at about 10%, it has done so for the last 3 or 4 years. I'm really expecting that to remain unchanged. So such market does attract global players. It does have IGT, Bally, Konami, Aristocrat. But in this competitive environment, we are very competitive.
So what sets us apart? And I think the key point here is the first point, saying that innovative models that we bring to the table. Associated in our game models is there is a whole level of regional relevancy, and when I say that, it means there's an understanding of local regulations, there's understanding of the local market, there's understanding of the local player, all of which is important to design a good game model. When you combine that with our cutting-edge hardware, evident through our Equinox box, which is all set [indiscernible] in Australia. It was designed for globalization. There was an intent at that time to be able to future proof it and to push it worldwide.
The next point we got is entertaining content. This is probably the biggest area of improvement as a company over the last 2 or 3 years, is making our games more entertaining. The quality of our graphics have improved, but most importantly, the creativity of the features and the adjuncts in our games has been -- has drastically improved.
So now it puts you to our next point, and the next point being is how have we managed improvement? It's through our people. And, yes, we take pride in the fact that our recruitment process has been about internal development. We knew that we have to bring fresh ideas to the table, and we knew that we needed that fresh approach. So we've taken a long-sustained recruiting view in internal development, and it's going to pay dividends over the last few years.
Our final point is effective process. And I'll refer to our product called the Flintstones that was launched in September last year -- it's going to be September 2012. That product from concept to delivery of that product was 9 months. And in that, you've got a fantastic product, a representation of the Flintstones characters and the whole theme. So from our perspective, within 9 months, we commercialized a license and then maximizing to its fullest.
So a bit of a recap on Australia and New Zealand, we have had really strong game performance in the last 2 or 3 years. Even today, that continues. For example, in New South Wales, we are the top 1 and 2 games in the market at the moment, those being 5 treasures and 98 fortunes. We continue having a regional content game. That's something that the company's commune to as it grows into whole markets, whether it be Asia and into the U.S. I'll touch on Q2 and our chip [ph] share, which was 18%, and that 18% is right across the Australian market. There has been some mixed strength in some jurisdictions, but we have a short term goal to a least about 20% in all jurisdictions. So that's a goal that I'm fairly confident that we can achieve.
In terms of the EPS market, we are clearly #1 in Australia. We have the 85% of the market, and we have an in-store base of 3,800 units. It's an installed base that was aging. It was probably about 7 to 9 years old, a lot of the cabinets, which is the reason why we introduced the FUSION product in September 2012. The target there was to turn those cabinets out. From an EPS perspective, I'm very confident that we can keep that market position, that dominance. Why? Because we have a quality product and the additional [indiscernible] that's coming in the pipeline, I'm fairly convinced that operators will see us continually being a leading edge product in that category and I hope we could maintain that market leadership.
Asia. I guess this is probably where the most exciting part of our story is. I think Gavin mentioned it earlier. 14% of the company's revenues came from Asia. If you went back 2 or 3 years ago, it's leaped quite drastically. Asia is an exciting region. Like in Macau, there's about 6 properties opening up over the next 3 or 4 years. There's properties opening up in the Philippines, about 3 properties opening up there. There's properties opening up in Vietnam, Taiwan. So it's a place where there's a lot of property development, a lot of action and it's exciting times. But we've been able to grow our revenues over the last 12 to 18 months, and it comes down to probably 2 main reasons. The first one is we made an investment in the property expertise. Up until about 8 months ago, we didn't have product experts on the ground in our Asian office. But simply doing this, we are able to improve the way that we position our market -- position our products and markets and, ultimately, your product performance improves. The second thing we did, which combines with the first point, is we strengthened our distributor network. That really improved our sales reach. So those 2 points that have result in, number one, it drives us, in established markets like Macau, it really drove our revenues on the back of full slot performance. But most importantly, in emerging markets like the Philippines, we're getting bigger people to play as those markets develop. So there's 2 -- there are 2 continual themes that I'm expecting to continue over as properties open over the next 3 or 4 years.
So I guess the theme for Asia is our product is performing in all segments. We had a deeds [ph] ratio in May. Our stand was sensational. The reaction from the market was very positive. [indiscernible] times. The utility expansion, Gavin mentioned this, back in the first half, we sold 600 shufflers into the region. Yes, a lot of that was driven on the introduction of MD3, but the most pleasing aspect from my perspective as to why we've been able to break into markets like Cambodia, Vietnam, Philippines, Laos, these are markets that historically were resistant to accepting a shuffler, and they relied on hand shuffling techniques. So they really now understand the value and the benefits of a shuffler and has gone to invest.
Our slots [indiscernible] at the moment is second to none in Asia. The DUO FU DUO CAI is the clean #1 slot product in Asia. And as Gavin mentioned, I think he mentioned earlier today, at the recent trade show, it got the #1 award as the Best Progressive Product from Inside Gaming. So we have been, I think and my view is this, the regional content strategy is going to pay dividends and DUO FU DUO CAI was the first hit to show that if we have focus, we will get results. I also believe this product is single-handedly starting to change operator views of that and kind of looked at us as the emerging slots player in the region. So we're keen to take advantage of that opportunity, take up that opportunity and drive that it home and continue our regional content strategy with good positioning.
PTG, our footprint has steadily grown over the last 12 months. [indiscernible] like even in Macau, like Casino War and Three Card Poker, they're doing some special numbers in a market that's nominated as a background market. One of the obstacles in today's established markets is the length of approval to introducing new titles. Sometimes it can take up to 2 years. The most exciting thing is we have some [indiscernible] orders like Ultimate Texas Hold 'Em and Dragon Bonus and some other baccarat side bets, that and near the end of that process, so they could be our drivers over the next 12 months as we roll those out into Macau and rest of Asia.
And I guess the final point is ETS. We have a significant footprint outside of Macau. We have paying stores in Singapore, in MBS in Resorts World; in Cambodia, [indiscernible] World; in Korea. So we do have a strong footprint in Asia. But the [indiscernible] still remains Macau. And we see there's a lot of growth in that area over the next 2 or 3 years, in fact on top of a strong market of 4,500 units that's there at the moment.
I guess the final point here is what I call my sleep act. [ph] It's a table -- introduction of table market fusion into the market. It was officially launched G2E in Asia. And this is going to be an ETS product. But, for example, in Macau it will be recognized as a slot. That could be the perfect platform that's going to allow us to introduce proprietary table content and really allow us to start carving our niche -- the niche segment of the market. So it's a product that we will be putting a lot of energy into in trying to get traction over the next 12 months. So I guess that's it for me. I'll hand it over to the wizard better known as Roger Snow.
Thanks, Adrian. I'm having lunch with one of the guys at work, and we're talking about the new shuffler that just came out. So basking a bit in its glory, how great it is, how innovative it is, how it's going to make us a lot of money, how it's going to drive up the stock price. And sometime before the check arrives, the other guy has this epiphany. "Oh my God," he says, "Shuffler's too good. How are we ever going to improve upon this?" And I had that feeling -- get that feeling inside, an empty cold wind inside your chest. I thought to myself, "Jesus, he's right. This really is the shuffler to end all shufflers."
That conversation happened 13 years ago, my first week on the job. And that machine that we were talking about, that shuffler to end all shufflers has since been obsoleted; and not only that, the shuffler that obsoleted it is now targeted for obsolescence. And by the way, the man who'd made that comment, he also has been obsoleted.
I tell the story because it really underscores the fundamental nature of this company: innovation. And following the credo of our founder that good enough is never good enough. I've been here a long time. This is not the biggest company in gaming. This is not the most successful company in gaming. It sure as hell ain't the best looking company in gaming. Look at these mugs up front. But I will say this and I believe this with my entire heart: This is the most innovative company in the history of gaming. Slots, table games, electronic table games, Internet, shufflers, nobody does what we do, and nobody does it as well.
Now you've heard about slots, and you're going to hear about iGaming. So I'm going to tell you about the other 3, and I'm going to start with shufflers. Now you cannot talk about innovation without talking about innovators, the people behind this. And I wish some of them could be here today. We have 3 shuffle design teams: one in Vienna, Austria, one in Las Vegas, and one where the company was founded, Eden Prairie, Minnesota. These 3 teams work tirelessly to constantly innovate in this sector. Why? We do it to align ourselves with our customers and align ourselves with our shareholders. There is a theme in this business. It's this continuum of development. Every time we put a new machine into the marketplace, it has an expiration date on it. It might be 5 years, it might be 7 years, it might be 10 years, but eventually it will be obsoleted for better technology. That is the fundamental underlying principle of this business. Everything eventually gets replaced.
The overall macro market is very good for shufflers and has been, tremendous upside in the United States and overseas, so tremendous tailwinds at our backs. And in this business, one thing you always see is a greater definition of what our customers want. You know it's funny, the company started off, the name Shuffle Master referred to the first product this company had, the Shuffle Master. Now we have 5 different shuffler models and more on the way. One of the reasons we do this is to invigorate the lease space. We're constantly innovating so that our customers, the casino, have reasons to trade out what they have on the floor to something new. Or if they bought something years ago that the new machine gives them a reason to either buy again or to lease another product. All of this feeds into the lease machine. Over the last 3 years, we have grown our lease space by 11%. And it is, again, a hallmark of this business, recurring revenue. This is what will happen in shufflers. Yes, there are times that we're going to have to sell, but we sell at the right price. For our customers overseas, especially, that insist on selling, they will not lease. We will accommodate them, but we will accommodate them at the right price. Dirty little secret about this. We control a lot of the selling and leasing that occurs by controlling that ratio between lease payments and sales price. Obviously, if you could buy a shuffler for 24 lease payments upfront, you buy it. If it were 72, you'd probably think twice. So we exert tremendous control over this, and we have said it publicly, and we continue to say it, it is our goal to increase our lease space over the years.
When we go out into the other room, you're going to see some of our shufflers. And we have shufflers for every type of casino game there is. We have shufflers for proprietary table games like Three Card Poker and Ultimate Texas Hold'em. We have shufflers for Blackjack, shufflers for poker. One of our newest innovations is something that we call shuffle flex, which is flexible pricing. Where our casinos that operate games part-time, maybe you've gone to a casino, you see a pit that's closed, maybe it's only open on swing shift during the weekend, and the ROI, the return on investment, for the casino doesn't change a lot on a new shuffler. We're going to change that. We're going to change that by essentially charging them per shuffle, a participation model for our shufflers. That is going to open up a big segment of opportunity for us in the United States that will roll out on beta test later this year, and eventually it will be something inside each of our shuffling products. Again that continuum of innovation and action.
We're going to switch now to proprietary table games. Now a lot of people are under the gross misconception that the main reason our table games business does so well is because of me. Now I take partial blame for that because I've been saying for the last 13 years that the reason our table games business does so well is because of me. But it is a remarkable business. We've got by far the best businessman for proprietary table games in the world, John Hemberger back there. We've got the best progressive designers in the world, the best trainers, the best product management, the best at everything in this business. There are other companies that are in this sector. We would not trade them our worst player for their best player. This is a tremendous business and a tremendous team driving it. Enormous opportunities for growth. A lot of people look at us in this segment and say, "Gee, you guys control 75% of the market. What's the upside?" Well, the upside is, most of the games being played on the floors of casinos are still generic public domain games. Only about 30% of the games on the floor at a casino are proprietary. And if you went back 10 years, it's probably 15%. If you went back 20 years, it's probably 0% because the business was just getting started. So much like cable television or anything where you give consumers choices, they want more choices. So the trend line on this business from a macro standpoint is terrific.
Something else: For the longest time, this business was a complete North American story. Even today, about 86% of our revenue in Proprietary Table Games comes from North America. But that is slowly changing. Europe, Australia, Asia, these markets are starting to adapt to the products that we offer. So that's something to keep an eye on in the future as, from a geographical standpoint, we diversify our revenue base.
We've got a lot of content, and it comes from a lot of places. From a pure revenue standpoint, about 55% of the money we make in this business comes from games that we developed internally: Ultimate Texas Hold'em, Let It Ride, Crazy 4 poker. And 45% comes from games that we picked up from the outside: Three Card Poker, Fortune Pai Gow, Blackjack Switch. And it's the same thing going forward. We always have a tremendous number of games, fully completed, mathematically viable, operationally viable, ready to go at a moment's notice. So underneath those games that I mentioned, Three Card, Ultimate, Mississippi Stud, you have games like Free Bet blackjack, House Money, Straight Edge Poker, Dealer Bluff, games that are out there maybe in 5, 10, 15 casinos being tested, and all we're doing is to try to find the next one.
Something else people don't know about us: When it comes to Proprietary Table Games, we're not playing baseball. We're playing home run derby. That's all that matters. Singles and doubles don't count. We're always going for a game that could be $1 million a year, $5 million a year, $10 million a year. And also a game that will require a shuffling machine and open up opportunities for ourself and progressives upgrades. So you look at a game like Ultimate Texas Hold'em and you see it out there, it's not just a game. It's the shuffler and the upgrade that drive revenue for this company. So we always have a fully stocked wine cellar. So if a game dies, we drag it outback, and we bring out a new one. And our batting average is pretty good. Once every 2 years on average we hit a home run. And we expect that to continue in the future.
You talk about the innovation in shufflers, and it's been dramatic. We talked about the innovation of Proprietary Table Games. It's been dramatic. Nothing in the past 12 months has changed, has innovated as much as our Electronic Table Systems business.
To be honest, it had to. We took our eyes off the ball a few years ago and our products got old, and they got stale, and the performance of the business proved that out. Right now, and I've seen these things myself, I was at the a show in Macau a few weeks ago and our e-Tables were the star of the stand, Table Master, The New Vegas Star, the Widescreens, Rapid, i-Table. We have never innovated so much in any product line, and you will start seeing the fruits of this labor in the upcoming quarters.
These pictures are a little small, so they're not quite worth a thousand words, but about 500. This is our ETS product line. We have 2 types of products: Hybrid and Fully Electronic. Hybrid is where you have a live dealer, a live gambling apparatus, could be a roulette wheel, could be cards, and electronic wagering. Fully electronic, there's no dealer, there's no apparatus, it is purely electronic. In some cases, we have virtual dealers behind the tables. It's like a slot machine. You plug it in, and you play.
Our new Table Master is one of the most exciting products I've ever come across in my 13 years with this company. We showed it in Macau. People loved it. It goes live next month in Florida, and we are currently compiling approvals, and we'll spend a great part of the third and fourth quarter getting this product out into the field.
I have a quick closing story before I get off the stage here. I've had the opportunity recently to take a look at the newest shuffler our company is working on. It's been in development for about 1.5 years. These things are like airplanes. They take forever to make. And I've got the chance to see what essentially is a prototype. And I swore to God, I saw this thing and I almost cried. It was an absolute thing of beauty, an engineering marvel so meticulous in its design. I was absolutely blown away with what I was seeing. This is a product that will be out towards the tail end of 2014, and it truly is the shuffler to end all shufflers, at least until the new one comes along. Thank you.
Louis J. Castle
Okay, just want to make sure I was coming up at the right time here. Hi, I'm Lou Castle, the Chief Strategy Officer here at SHFL, and I actually joined the board of Shuffle Master back in 2005. So some of you actually met me over other kinds of events over the years, and since being the Strategy Officer, I've seen, since last year's event, I've met a lot of you before..
I'm here to talk about our iGaming segment. As the Chief Strategy Officer, I actually run all of R&D as well, so we're going to talk about some of the other things we do as well, but learn to focus on iGaming to give you an idea of what this particular opportunity is for SHFL. And really iGaming and -- I don't want to take anything away from all of Roger's products and all the hard work our R&D team is do in those things as well because the EGMs have an enormous opportunity to grow in the company. Our shufflers are just -- continue to be an amazing staple. And of course, our ETS is [indiscernible] deliver out here under new products and then -- amazing stuff. And segment after segment after segment, PTGs as well. We've got really great solid hitting things. iGaming is completely new for this company, but it's not a new concept. Games have been played for many in Europe for 15-plus years. And in fact, when I joined the company back in 2005, it was one of the things I was really on the board. So sort of having anxiety about is why aren't we in this space? Since that time its grown quite a bit. Even back then, it was -- it measured in billions in the early days. Now we'll get to [indiscernible] about market share or the size of the market, but it's one of the fastest-growing segments in gambling. And in fact, there's actually 2 sides of it. There's the real-money side as well as the free-to-play. And shuffles opportunity is really simple. We have, thanks to Roger's team, some of the best unique products in the world. And you'll see some slides later about how much slots take up as far as the market goes. But remember there are so many competitors in slots. And although we do extremely well, we're still in a market with a lot of other companies.
In this particular segment, when it comes to Proprietary Table Games, it simply does not exist in great numbers online at all. In fact the only way it did exist in the past was people [indiscernible] our content and we put an end to that largely. And I'm happy to say, Gab stole our thunder a little bit, but we are live. So we're on GameAccount Network right now. It is [indiscernible]. We've been working really hard. Since I joined, we've been saying it could be any day, any day. And really this is a very significant thing. The revenues today are not -- this is a demo site basically by GameAccount Network to real-money side seeking real bets and we are making money, but it's really for their customers. And if you look at our press release, you'll see that they serve some of the largest iGaming customers in the world.
I've been asked, "But what does it mean once it's been live on this site? Is it very difficult for these other customers? Is is going to be a really long time before they sign it up?" And the answer is no. It's actually really simple. For the vast majority of the customers on the GameAccount Network, they simply have to get an email and they're up and running. So we expect to making announcement soon as the marketing department is getting in place, and we will launch our project to product on this platform, and follow up with the Amaya platform.
Just back [indiscernible], I'm a little out of the time zones here so -- it's true, actually, yes. Not that way. Global online gambling -- it's Roger. The global online gambling market is an enormous market. $28 billion last year, projected to be about $32 billion this year. And this gives you sort of breakdown of how it comes out. And you can see that of the casino game markets, which is roughly 1/4 of the global market, it's actually about half [ph] with hundreds of competitors. When it comes out of table games, there's really blackjack roulette, which take up a lot of the space. But then there is shuffle. We really own this space, and we haven't been there yet. So when people ask about the market that we're trying to build models about this, the difficult thing I have to tell you is as we rolled out proprietary table content around the world on land-based casinos, to a large extent, it has not cannibalized other businesses on the floor. It's taken very little from blackjack, very little from craps. It's a new kind of player, the younger players, a different demographic. And these kind of games have a real stickiness to them and longevity to them. Three Card Poker is 12 years old, one of our young ones. Mississippi Stud is 7. And these are really long-selling games. So slot market, lots and lots of turnover of titles online. You really have to be some of the best titles out there. So in the future, when we bring ours online, that would be great for us, but by and large, really competitive. Table game market, it's just open field for us.
I said earlier that iGaming is really broken down into 2 segments. Although we will amalgamate all of these into one segment when we report, it will all be under iGaming, but that's going to include money we get from doing live dealer, as well as our own efforts for our [indiscernible] games into other operators. So that really comes down to 2 types of ways of doing that. The one that's easiest to understand as a business model is real-money gambling. Real-money gambling is straightforward participation model, recurring revenue. So what I was showing before about that GAN slide, GAN comes up, they start making some money, players are playing. And because of the longevity of our titles, because of the strength of our brand, we just keep clicking away. And as we add another operator, add another operator, we keep building that audience. And that money continues to be recurring. We don't do any of the marketing for those products. We're a B2B business in real-money gambling, and therefore, our margins are extremely high. It's even added by the fact that we built the platform, a very unique platform, and I'm not going to get into technology here because I'll put you all to sleep, but the technology of the platform is such that it gives us great efficiencies. We designed the platform to be able to serve real-money gaming securely, more securely, if anything else, very innovative, but also to be able to scale and do it efficiently, so we can serve free-to-play markets as well.
Which brings me to free-to-play. Free-to-play is a little harder to understand because a lot of people are saying, "Well, if it's free, then how do you make money? "And in fact, in a real-money space in Europe, [indiscernible] per offerings didn't make money. They would put their games up there and they'd say, "Here come and play them. We have big chips." There was so much excitement there. Even on the best games, they just -- people don't always stay because there was just -- all you really had was the chip count, and the chips were free anyways. I just came from Zynga, the Vice President of studio before joining SHFL, and I can tell you there's a lot of money in free. It's just not what we think of is free. It's free to try, it's free to play, but if you really want to get the best experience, if you really want to be the top of the chart, if you really want to be the best in your social group, you have to pay or you're allowed to pay some amount of money. And so what free-to-play really does, it monetizes off of people's desire to have more fun in a shorter period of time. And I can explain it more in person, but basically both of these models are participation. It's just that in the case of free-to-play, you have to serve 100 customers to get one of them to pay you or 2 of them to pay you. In the case of real-money gambling, you're making money on every single one. So the cost of being able to serve real-money gambling for the same cost structure that we serve free-to-play makes our real-money gambling some of the most efficient, highest profit Real-money gambling servers in the world. And then our free-to-play gives us an entirely new opportunity to take our operators brand and put them into social and mobile markets, the fastest-growing markets when it comes to casino gaming. It's just called social casino, meaning it's not for real money. So I'll talk to you guys about more in person if you want, but how it works on the slide pretty much covers all of this and what I've said.
Our approach. The first thing we wanted to do is make sure that this beautiful platform we built is going to be available for gaining the widest possible market. So we built our offices in Gibraltar, one of the hardest game regulations to get license in, and of course, our games are licensed.
In Alderney, we built a server bank in Alderney as well because Alderney allows us to reach a lot of other markets more efficiently. Again, our whole idea is build this really efficient platform that we can deliver our content through. And to do that we need to be where our operators are, where our customers are. And they are in Gibraltar. They are in Alderney. We're moving into our [indiscernible] service into Italy and then to Spain and other markets as quickly as possible, so we can be there for all these operators. So as we move along, we keep adding new markets, new operators and growing our market step-by-step by step with each new operator comes a new stream of revenue, with each stream revenue recurring revenues that builds to the bottom line.
The technology gives us iGaming content to again free to play, as well as real-money gambling, through our elastic cloud. You guys probably heard the word cloud. We talked about the cloud. Really, most people just mean that means a server somewhere. We truly use elastic cloud architecture, even elastic database technology. I'll get into that if you want in person. Afterward I'll tell you all about it. But what it allows us to do is it allows us to do a promotion on a social space, where we have 1 million people come to play the game, literally 1 million people because we're doing this great promotion. And then the next minute or 2, drops back down to say 100,000 or 10,000 depending on the game. The ability to grow your server infrastructure on demand and then shrink it back again automatically is elasticity. And that elasticity is what gives you efficiency to be able to operate in social spaces. It's also what allows, to a great degree, us to be able to put our services close to all of our operator customers as possible and get great efficiencies from them as well. Because if our servers are sitting in the same data center as an operator, the cost of transmission between those 2 systems is exactly 0. It's all part of the same data center, so we drop our cost down dramatically.
The team are some of the people that I had at IC when I did all my game streaming in Las Vegas and some folks from Electronic Arts, as well as from Zynga. We put together a really top-notch team. In fact, one of the reasons that our financials show that our cost are so far behind is because simply it is really hard to meet the measure to join our team. We have an extremely talented group of people, and we have really, really high standards. I wish I could find them faster. And I think as we get out there live, and we start showing more and more success, we'll be able to attract them, because honestly when it comes to top engineers, they want to be doing really cool stuff, and we're doing really cool stuff.
The agreements we have right now that we've made public, GameAccount Network, which serves well over 20 of the top publishers in the world -- operators in the world, excuse me. And Amaya, which is almost 100 gaming operators in the world. We expect to go live very soon on Amaya. And then we've made an agreement with Evolution, which is the best or the top live dealer gaming supplier in all of Europe. And that's the ability for people to play with the live dealers streamed over the Internet and play our proprietary table games, and we interface with them at various levels from the technology point of view as well. So these are 3 things we've announced. Then you're going to see a steady drumbeat of partners as we go on, not just signing up though these customers, but also going direct to some of the largest ones in Europe.
And I think with our unique positioning, which is really about our brands, if it wasn't for the table games that were invented by the PTG group, we wouldn't be in the enviable position we are to be able to step in front of the line when it comes to integrations for some of the biggest operators in the world. If it wasn't for the history of our group of our talented people, we wouldn't be able to offer these incredibly efficiently driven games to a market that already exists out there. And obviously with our experience with the ETSs and EGMs, we understand the technology both from a hardware and software point of view. The synergies on these businesses is amazing.
I think that's it for me. So if you have anymore questions, please, come up and see me afterwards. Thank you.
Michael Gavin Isaacs
Okay. So to finish off and before we have questions, you can see now, hopefully, that I have one of the easiest jobs in the world because I'm surrounded by people who are firstly great people; secondly, experts in what they do; and thirdly, passionate gaming people. So one of the things that sets up the path as a team is the people, obviously. And I think that having worked in many companies, we do have that culture going now, where everyone works together, cooperates, but passionate about what they do and unafraid to do it. So we are -- I think what sets us apart, you can read all that, but in an essence, we're after the long-term sustainable growth. The hardest thing for our company like us is the 90-day sprint. It's the hardest thing for any gaming equipment manufacturer because customers know where your soft spot is so that's when they pressure you to buy. But we are -- we try and disregard the 90-day sprint and go for long-term sustainable growth. We have clear strategies for all of our products, and we have clear goals for all of our products. I'm delighted to say that we're hitting most of those goals, and that we're continuously improving our execution to ensure that we do hit those targets.
Clearly, our IP is a huge advantage to us. We have 2,600 filings, be they trademarks, patents, any kinds of other applications out there in the world. And it does give us that protection that enables us to do something that is unique to us. No one else in the world invented the shuffler. I founded it. From that comes the original patents. I think our business model, we are focused on recurring revenue. But again, it's a balance. Certain markets in the world, Asia, other such markets, Australia are not interested in recurring revenue. They want to sell. Frankly, certain of our products I want to sell. We will price, as Roger said, it's in our hands what we do with that. And of course, our balance sheet. We have a great balance sheet now. It's very strong. And clearly one of the things you always ask is what are we going to do with that money? And I'll say it again. The first priority for the board and for myself is to invest in our business. We are after long-term sustainable growth. Short term, quick hits with the share market are great, but that's not what we're all about. Long-term sustainable growth. M&A is a very important part of what we want to do. We constantly look at different strategic alternatives, and we have a very good funnel. First of all, does it fit our strategy? Secondly, does it make financial sense? And finally, is it going to be a good cultural fit? Because if it doesn't pass all 3, we're not interested. And we do spend a lot of time and money and we have different people, as well as their day jobs between the other time flying around the world looking at different things, which can add value to you our shareholders. And finally, if we can't work out or even if we do work out acquisitions and things that we have surplus, we'll look at the best way to return it to our shareholders.
An ad. For those who got iPads, we have an app, and it's free: the Shuffle app. [indiscernible]. What it is, it's in our IR site and -- but it's a great little tool. So please Julia, Jiro, Dan also worked on that. It's a great little application and it's directly -- it's designed for you guys. It's designed for our investors. With that, are there any questions? Anyone wants to ask in this formal setting? Yes, Todd?
Todd Eilers - Eilers Research, LLC
Louis J. Castle
So the question is what percentage of the market could we address our table games. Well, because we offer side bets for even games like blackjack, and of course, we have a huge library of products, eventually we can participate meaningfully in the majority of that market. You've got to remember there's great standing revenue from taking percentage of that participation. The issue is, are we technologically developed to do that? Yes. It takes a lot of time. And the reason it takes time is because the actual operators themselves only have so many windows per year that they can do direct integrations on to that platform, and that's why they first went with the the strategy going with the Amaya, GAN, and we're sort of looking at other aggregators. If you can get 2 of the top 6 aggregators, you can get to about 70% of the market. And then the rest of the market you have to go direct for a few of them that just don't use aggregators or wouldn't want to do that. For our self as a company, it's an advantage to go direct to the operator because we have great reputations with our operators, and we're able to build. And I also want to mention that this is -- today, and this has no accounting at all for the U.S. market, so the New Jerseys of the world that allow for casino gaming, Delaware, those markets are wide open markets that are not even in most people's estimates. It's a big really big opportunity, but it's going to take a lot of time to get there.
Michael Gavin Isaacs
Any other questions or should we go and have a look at some products and have a beverage and something to eat? Thank you all again for coming, and we appreciate your support. Please come and have a look at the products, meet some of the other people you see that -- not only people you heard from up and on that thing. And again thank you all for your support. And thank you, online.
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