Shuffle Master Inc., F1Q08 (Qtr End 01/31/08) Earnings Call Transcript

| About: SHFL entertainment, (SHFL)

Shuffle Master Inc. (NASDAQ:SHFL)

Q1 2008 Earnings Call

March 17, 2008 5:00 pm ET

Executives

Gerry Smith – Sr. VP & General Counsel

Mark Yoseloff – CEO

Coreen Sawdon – Sr. VP & Acting CFO

Paul Meyer – President & COO

Analysts

Carlo Santarelli – Bear Stearns

Ryan Worst – Brean Murray Carret

Steven Wieczynski – Stifel Nicolaus

Todd Eilers – Roth Capital Partners

Ralph Schackart – William Blair

Operator

Welcome to the Shuffle Master Inc. first quarter earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Gerry Smith, Senior Vice President and General Counsel. Thank you Mr. Smith, you may begin.

Gerry Smith

Good afternoon and thank you all for joining us today for our first quarter 2008 earnings call. I am Gerry Smith, Senior Vice President and General Counsel of Shuffle Master. With me today are Mark Yoseloff, Chairman of the Board and CEO of Shuffle Master, Paul Meyer, President and Chief Operating Officer and Coreen Sawdon, Senior Vice President, Chief Accounting Officer and Acting Chief Financial Officer.

Today’s conference call is being simultaneously webcast through our website, www.shufflemaster.com and will also be archived for the next 30 days. Before we get started I would like to remind you that various remarks we make about future expectations, plans and prospects for the company constitute forward-looking statements for purposed of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these expectations. We will also be discussing certain financial measures such as adjusted EBITDA, which represent a non-GAAP financial measure. The importance of this measure to investors as well as reconciliation to the most directly comparable GAAP measures can be found in our most recent 10-Q which will be filed today as well as in our prior public filings and in today’s press release which was issued shortly before this conference call announcing our first quarter 2008 results.

Now I’ll turn the call over to our CEO, Mark Yoseloff.

Mark Yoseloff

Thanks Gerry. Before I get started I would like to comment briefly on our recent announcement regarding Coreen Sawdon. Affective March 1st, 2008 Coreen was appointed Acting Chief Financial Officer replacing Paul Meyer in that role. Paul will continue as the company’s President and Chief Operating Officer. Over the last two and one-half years, Coreen has excelled in all aspect of her job as Senior Vice President and Chief Accounting Officer and will retain these responsibilities in addition to her interim role. With her extensive accounting and finance background, we’re confident that Coreen has the necessary skills to lead our finance and accounting team.

At the same time we have initiated a search for a permanent CFO and hope to complete this task in a reasonably short time. In this effort we will consider both internal and external candidates taking into account experience in all aspects of the role, with particular emphasis on enterprise wide financial controls and strategies, befitting our sort of growth company.

Turning to the quarter let me address the bad news first. For the quarter we reported a loss of $1.8 million or $0.05 per share. There are several factors that led to this result which Coreen will outline for you in more detail. However the bottom line is that a loss is never good and we anticipate that our second quarter and the full year will be profitable. I will address this more specifically later in my remarks.

That said I would like to look at a few specifics in the quarter related to our continued focus on pursuing our strategic initiatives rolled out in fiscal year 2007. First quarter of fiscal 2008 marks the completion of our first full year of moving back to a great emphasis on leasing versus selling, particularly in North America. We have continued in the quarter to make excellent progress in that regard. Looking at each major segment, other than our Slot Machine business in Asia Pac, we have established new records for both leased units and recurring revenue in all segments.

Specifically looking at year over year increase in recurring revenue which includes Leases and Service, Utility Products grew from $7.2 million to $8.4 million, a 16% increase. Proprietary Table Games from $5.8 million to $8.1 million, a 39% increase and Electronic Table Game Systems grew from $1.2 million to $2.1 million, a 70% increase. This results in overall recurring revenue growth from $14.3 million to $18.6 million, a 30% increase.

During our last conference call I remarked that increases in recurring revenue would still not completely offset reduced sales in fiscal 2008. However management believes that if we continue to grow recurring revenue in fiscal 2008 as we did in fiscal 2007 then by fiscal 2009 we should have substantially; if not completely overcome this reduction.

Our first quarter does reflect reduced earnings resulting in part from reductions in sale revenue. However given the continued success in rebuilding our recurring revenue base, this will lead to continuing improvements in operating results throughout this fiscal year and continue to prepare us for a substantially better 2009.

Now let me turn the call over to Coreen to review the quarterly results in more detail.

Coreen Sawdon

Thank you Mark and good afternoon to everyone. To summarize our first quarter results revenue increased slightly by just over 1% to $38 million from the prior year period and decreased 27% from the prior sequential quarter despite strong underlying recurring revenue growth which was a record in all segments except for Electronic Gaming Machines. Adjusted EBITDA and GAAP earnings per share from continuing operations totaled $6 million and a loss of $0.05 respectively.

Typically GAAP EPS from continuing operations is lowest in our first fiscal quarter as customers’ purchasing trends tend to increase in our subsequent quarters. Operating expenses were up approximately 24% from the prior year period and increased 3% from the quarter ended October 31, 2007. Operating expenses were adversely affected by an employee severance payment and legal costs that resulted in a total impact of $1.2 million net of tax, or a loss of $0.04 per share.

Also putting pressure on operating expenses compared to the prior sequential period was the impact of our two trade shows, G2E in Las Vegas and ICE in London, which occur annually but due to timing were both expensed in the first quarter.

As mentioned revenues increased modestly from the prior year period. Total recurring revenues however increased 30% from the prior year period and 8% from the prior sequential quarter including increases for all product segments except the Electronic Gaming Machines. Now I’ll move into a product recap.

As compared to the prior year quarter Utility Product total revenue declined slightly over 1%. This decrease in total revenue for this segment was a result of a 27% decline in sale revenue from the prior year period due to our de-emphasis on selling, partially offset by a 16% increase in recurring revenue to $8.4 million. Total Shuffler Installed Base is now approximately 25,900 units, an over 3,000 unit increase from the prior year period.

For Proprietary Table Games, the shift to leasing continued with year over year recurring gains in many of our premium titles as well as Side Bets. Total revenues in the Proprietary Table Games segment improved compared to the prior year period by $700,000 or 9% and 10% from the prior sequential quarter. Propriety Table Game lease revenue reached a record $8.1 million, increasing 39% from the prior year quarter. As anticipated sales revenue declined by 67% due to our shift towards leasing.

Moving to the Electronic Table Systems revenues increased marginally from the prior year period to $5.5 million. However we saw sales revenue decrease in several of our game categories by as much as 40%, although leasing again was strong. In fact, we saw lease revenue for Table Master jump 100% year over year and Vegas Star increase by more than 160% in the same period indicating significant future growth potential in our e-Tables. Further contributing to the performance in this segment as the fact that the average lease price for Vegas Star and Rapid increased 14% from the prior sequential quarter.

Despite relatively flat total revenue the mix of recurring revenue versus sales revenue in the first quarter ’08 showed great improvement over the prior year period with recurring revenue accounting for 49% of total revenue compared to 38% in the prior period.

These numbers serve to highlight one of the key takeaways of today’s call; positive results in recurring revenue which aligns with the first of our five major strategic initiatives and gives us continued confidence for future trends.

On the margin side, our gross margin of 58% represented a 5% decrease compared to the prior year quarter and a 3% increase compared to the prior sequential quarter. Gross margins were impacted by several factors. These include the fact that our leases and royalty margins were lower due to a shift in product mix and the timing of lease installations as well as introductory pricing. Additionally, these margins were negatively impacted by upfront installation charges for newly placed e-Tables that are either on month-to-month operating leases or participation arrangements.

Gross margin was impacted by the fact that the cost of certain acquired intellectual property was amortization over a lower revenue base. Finally one of the biggest impacts to margin is the weakening US dollar. A number of our products are manufactured in Europe and Australia and paid for in local currency although they are often sold in the US dollars.

Operating expenses increased 24% or $4.5 million year over year to $23 million and were up 3% on a sequential basis. This increase in operating expenses is consistent with our comments during our year-end conference call. As we have said in the past in order to assure future growth we have had to make investments in infrastructure and R&D. Many of the infrastructure improvements are now complete and should not require much additional expense.

The quarter was also impacted by an unanticipated employee severance expense of approximately $600,000 and legal expenses which collectively had a $1.2 million impact net of tax or $0.04 per share. Additionally the first quarter was burdened by approximately $715,000 or over $0.01 related to two major trade shows, G2E and ICE.

We think it’s important to provide an update on our 150 million convertible notes. The note is puttable in April, 2009 and we anticipate that the put may be exercised at that time. We are currently exploring several options for refinancing of this debt and are comfortable communicating that secondary offering is not currently being considered as a refinancing alternative.

Strong cash flow allowed for a solid reduction in debt for the first quarter. We reduced net debt by $5 million from the prior sequential quarter and $900,000 from the prior year period to $225.7 million.

Moving on to the balance sheet, we anticipate that by April 30, 2008 the convertible debt will probably transfer to current liabilities. Cash and cash equivalents increased to $10.4 million from $3 million in the first quarter 2007 due to strong accounts receivable collections, more restrictions on providing extended payment terms and reductions in inventory levels. Moving forward we will remain aggressive in this area.

Note that our working capital requirements have increased due to our emphasis on leasing as well as the capital required to fund our e-Tables and Electronic Gaming Machines. That said we are looking for ways to get more efficient and think we can improve inventory turns over time. Lastly CapEx for the quarter was $4.8 million, split 91% between growth and 9% on maintenance.

With that I would like to turn the call over to Mark for wrap-up and closing remarks.

Mark Yoseloff

Thanks Coreen. As I have done on recent calls, I would like to review our progress in regard to our five strategic initiatives. First I’ll touch on the renewed emphasis of leasing versus selling. Total recurring revenue increased over the prior sequential quarter and prior year period by 8% and 30% respectively. Recurring revenue which includes leases and service, increased in all product segments excluding ETMs as compared to the previous quarter and prior year period. The reemphasis has not yet fully offset the reduction in sales revenue but we continue to believe that it will during fiscal 2009.

With CapEx being a prime concern due to uncertain economic conditions, many casino operators are more receptive to our leased model. This coupled with competitive pricing on leases gives us confidence for continued growth and recurring revenues for 2008 and beyond.

Our second strategic initiative is continued development of relevant technology. Our new ideal shuffler for example demonstrates our unmatched innovation and commitment to introduce and launch cutting edge gaming products. As another example I am pleased to announce that we have recently booked the largest e-Table order in the company’s history. This order from a leading club operator in Australia is for 500 e-Table seats based on prior performance with a total value of over $12 million. Deliveries have begun this month and thus far the performance of the units has been excellent. Accompanying this order is an order for 100 EGMs bringing the total value of the order to over $14 million.

Finally in regard to the development of relevant technology we have begun under confidentiality agreements demonstrations for leading casino operators of our newest product. This product which we anticipate unveiling publically later this year is the logical extension of our current suite of table game related technology products. It bridges several of our product segments and based on initial reactions may be our most important introduction in the last few years.

Third we’ve focused on increasing revenue from existing assets by upgrading or adding new value elements. We’re recognized the opportunity to create additional revenue through new features enhancements and are committed to rolling out these additions where appropriate. During our last call I discussed adding new wagers, particularly progressive side wagers to existing table games in the field. At that time we had installed or pending installations for about 135 additions. Today we have installed progressives and [inaudible] side wagers on 140 of our tables, have pending installs for 25 tables and will likely exceed 200 tables by the end of Q2.

Fourth I’ll reiterate what we said last quarter with regard to value engineering and our cost reduction strategy. These programs should start to positively impact gross profit starting in last fiscal 2008. In particular engineering changes to our shuffler designs should result in manufacturing costs savings of 10% to 15% in this product line with no impact on performance or reliability. Lastly we continue to thoroughly explore opportunities where we can monetize core assets.

Finally I’ll address our financial outlook for the balance of this fiscal year. We believe that our financial results for Q1 convey some positive trends despite being our historically weakest quarter. During Q4’s conference call we acknowledged that there would be some time required before the increase in recurring revenue overcame reductions in sale revenue. Also as discussed then we expect some normal sequential pressure on expenses as a result of our expanding product line as well as the impact of continued growth and infrastructure.

All of that being said, we do expect fiscal 2008 results to be an improvement over our 2007 results. In particular, notwithstanding the fact that product sales will be de-emphasized in favor of product leases we still expect revenue for the year to exceed our fiscal 2007 revenue. Given the generally better margins associated with recurring versus sale revenue we also anticipate that adjusted EBITDA and EBT will show marked improvement over fiscal 2007.

And with that I’ll now turn the call over to our operator for Q&A.

Question-and-Answer Session

Operator

Your first question comes from the line of Carlo Santarelli – Bear Stearns

Carlo Santarelli – Bear Stearns

I was just wondering if you could quantify a little bit more, maybe talk a little bit more in detail in terms of what the US dollar, the foreign currency translation did in terms of margins and maybe what they would have been in a different environment.

Mark Yoseloff

I think we can quantify that and I won’t go into a lot of detail only because you need to do a product by product analysis but I’ll give you an example and I think it’s a good example of what we’ve seen. We manufacture our one2six Continuous Shuffler in Europe and the price increased in US dollars with no price increase in euros, the cost increase in US dollars in the last year has been almost $700 a unit on a base cost of $2,500 to $3,000. And so we’re talking about a substantial increase in the US dollar cost. Now many of those shufflers end up either in the US or in Macau. And in both cases they’re either sold or leased in US dollars.

The only ray of good news in all of this is that in this case we’ve gone back to our primary vendor in Europe and have gotten a euro cost reduction which will mitigate much of this increase and so one of the strategies has to be that as the dollar continues to weaken against the euro, the Australian dollar and other currencies, I think it is reasonable for us where there’s a third party vendor involved, to go back to that vendor and ask that they share this apparent win fall by a reduction in local currency pricing to bring it more in line with a consistent US dollar price. So I don’t know exactly what percent of gross margin it represents but it is a truly measurable component and one that we’re working very hard on.

Carlo Santarelli – Bear Stearns

Okay that’s helpful and then some forward-looking I guess more modeling type questions, tax rate going forward is 34% still something we should be thinking about and maybe if you guys could help us out a little bit with some of the R&D and SG&A expenses going forward as you guys maybe think more about capital spending.

Coreen Sawdon

I can comment on the tax rate, we’re looking at a tax rate 35 ¼ to 35 ½ for the fiscal ’08 remainder year.

Mark Yoseloff

Hopefully we can do better but you know there’s a lot of…so many ins and outs now. As far as our operating expenses, I think we commented in the Q4 call that if one were to use our annualized, our Q4 SG&A number with a very, very modest sort of cost of living increase for all of fiscal ’08 that that would probably be a reasonable proxy in that category. As far as R&D spending its relatively consistent quarter by quarter, notice there’s not a lot of ups and downs in the category and so I think that the R&D spending across the year will probably be reasonably consistent with R&D spending in our Q1. All that being said, the one area we’re working hard obviously to tighten down on all expenses but as far as the use of money to fund relevant R&D it is the lifeblood of the future; it’s the one area where I want to be very careful that we’re not short-siding it all.

Carlo Santarelli – Bear Stearns

Okay great, thanks.

Operator

Your next question comes from the line of Ryan Worst – Brean Murray Carret

Ryan Worst – Brean Murray Carret

Mark, on this Australian order, could you talk a little bit about the timing and kind of the mix between obviously EGMs are all sales but on the ETS side the mix between sales and leasing?

Mark Yoseloff

I’d be happy to. First the timing is for deliveries over what looks like a ten to 12 month period beginning in March of this year. So this is steady deliveries from here until into our next fiscal year. Its an entirely sale order. So the $14 million plus in revenue that I quoted earlier, in this case is sale revenue with a club operator in Australia. And it is by far the largest order we’ve ever had I think not only in the ETS category but maybe the largest order all together even including the largest shuffler order we’ve ever had in the past. This is an interesting day because we did have a loss in this quarter, its not good news but I frankly would be doing cartwheels over this electronic seat order. This is an amazing order for us to have gotten and we got 100% of the commitment from this particular customer. So we’re very excited by this Ryan.

Ryan Worst – Brean Murray Carret

So Mark would you book revenues when those are delivered and what about margins, is that going to be like a typical margin for those products?

Mark Yoseloff

The answer is yes of course we book the revenue as we ship the units and as far as margins I think we’ve got reasonably good pricing. I don’t want to go into all the detail here, give away all our secrets, but yes, I think the margins will be reasonably good. In other words, we didn’t have to deep-discount this order in order to get this size piece of business. It simply really was on the quality of the units and hence the margin should be at least consistent with our existing sale margins for [ECs].

Ryan Worst – Brean Murray Carret

Okay and then a little bit more on Star Games, it looks like in this first quarter was really the lowest in terms of sales, unit sales for both ETS and EGMs since the acquisition so could you comment there on the trends besides the one club order?

Paul Meyer

I don’t know that it was anything the lowest in history, I think EGMs sales in Q1 of ’08 were relatively flat compared to Q1 of ’07. And I think on ETS sales, [Add Star] Games specifically yes, there’s probably a timing issue, the first quarter is not a strong quarter for them. And I think one of the reasons Mark provided the context he did for the club order is it’s all about timing. We actually have installed the first 20 seats of Vegas Star pursuant to that order and so far the performance is fine and the EGMs have already been delivered.

Mark Yoseloff

Let me just make one amplifying comment on that. Our first quarter is November, December and January. As a result of that in the US we have three major holidays; Thanksgiving, Christmas and New Year’s and around the world we have two major holidays; Christmas and New Year’s. On top of that November and December are typically months where our customers are out of capital. Their budget year starts in January. By the time they get to November, December they simply don’t have any capital and hence historically this has always been our absolutely weakest quarter. I think it’s actually a very positive sign that revenue was up albeit by a very small amount but revenue was up year over year even though our selling was down intentionally. So we have actually…this whole issue of can recurring revenue overcome a decrease in sales, in Q1 it did. Because our Q1 of ’08 exceeded in total dollars Q1 of ’07 again albeit only by a few hundred thousand dollars but that was with a substantial reduction in sales and a more than compensating substantial increase in recurring revenue. There’s a lot of positive signals coming from this quarter not…obviously EPS is not one of them but frankly when I look at the texture of the quarter and understand that it is our historically weakest and frankly look at how the rest of the year looks like it will play out, it looks pretty good.

Ryan Worst – Brean Murray Carret

Okay and then one last question for Coreen the stock compensation expense, is that a normal number we should use going forward?

Coreen Sawdon

It’s a little increased this quarter related to the severance package that we referred to but I would expect a slight down tick in that respectively.

Ryan Worst – Brean Murray Carret

Okay, thank you.

Operator

Your next question comes from the line of Steven Wieczynski – Stifel Nicolaus

Steven Wieczynski – Stifel Nicolaus

Just one question for you more of a big picture question, what are you seeing in terms of your customers and their spending patterns in this type of economic environment? Is it something the I think Mark you kind of touched on this in terms of is this something that could actually help you in the long term as these guys get a little bit more conservative and go more towards a lease model?

Mark Yoseloff

Absolutely, in fact we had a real life example or two of that very recently. We had a customer here in Las Vegas who apparently intended to purchase some shufflers and at the last minute told us that they didn’t want to make the capital commitment and it’s going to be a continuing lease of shufflers. And I think that…in past calls I’ve made a couple of comments about this. First of all I think from the perspective of those customers who’ve gone private that although the return on invested capital on a purchase say shuffler or table game is very good. On a lease it’s infinite. Now you combine that with the fact that just CapEx generally is becoming a more and more scarce commodity in the operator community and our offering leasing terms on pretty much everything we have, in fact on everything we have, I think is very timely. And look at the increases, we talk about them sort of matter-of-factly but recurring revenue is up 30% year over year and 8% sequentially. That’s pretty darn good. And I think all of these trends amongst our customers are really helping to drive this ability of us to get back to the recurring revenue model and so as I also said in the remarks, notwithstanding the fact that we will be selling a lot less and trying to lease a lot more, we anticipate revenues to exceed last year’s. I mean that says on the revenue side at least we can overcome the decrease in sales by the end of this year. These are very, very strong positives looking to ’09 and beyond when we’re now looking at year over year comparisons to a fully lease centered model. And in that regard we’re very positive right now.

Steven Wieczynski – Stifel Nicolaus

Okay thanks and it looks like in the Q you didn’t repurchase any shares during the quarter, is still debt reduction priority one at this point even with the stock at $8, $7 wherever it is?

Mark Yoseloff

We noticed that, and by the way its still accretive to pay down debt it appears, but…more accretive, but you can see that we’ve reduced debt both sequentially and year over year despite the fact we borrowed quite a bit of money to make the PGIC TGD acquisition which of course was very accretive from the first day. But again had we not made that acquisition our debt would be down significantly from a year ago and even sequentially.

Steven Wieczynski – Stifel Nicolaus

Okay great, thanks.

Operator

Your next question comes from the line of Todd Eilers – Roth Capital Partners

Todd Eilers – Roth Capital Partners

Just had one question regarding the i-Deal Shuffler, can you maybe update us on where you’re at with all the regulatory approvals for that, how many units you might have out right now and just in general how that’s being received by customers?

Paul Meyer

As you know the i-Deal has been approved, GLI approved, which of course opens it up to another number of jurisdictions including California Tribal, which is where the [inaudible] is. And there are other jurisdictions as you probably know where we operate where no formal approval is required because this is associated equipment. Malaysia for example, [Canting], Macau…that’s the case. But typically we have pretty standard roll out formula and approach from our core for shuffler approvals. Right now we have our total installed base of i-Deals looks like 71 leased and 35 sold so that would make it 106 total i-Deals which is up pretty substantially from where we were in Q4, which was 35.

Mark Yoseloff

Let me comment quickly on here, you asked about customer reactions…its an amazing product and the more that our customers either in some cases use it or in other cases have been looking at it, I think the more that these features become more and more relevant and frankly I alluded to a new product that we’re going to be showing later this year and because it integrates so well with the i-Deal Shuffler, I think it’ll be a great impetus for even more i-Deal placements.

Todd Eilers – Roth Capital Partners

Okay great, thanks.

Operator

Your next question is a follow-up from the line of Ryan Worst – Brean Murray Carret

Ryan Worst – Brean Murray Carret

Hey Mark just one more question, it looks like you sold almost 500 shufflers in the quarter, I mean are you still trying to, I mean is the objective here to lower that because…and get more of those customers to lease product or is that kind of like a number that you can’t really change at all to a leasing model?

Mark Yoseloff

It depends are where geographically this takes place. I think we’ve done an excellent job in the US of redirecting traffic into some very, very attractive leases for us. Nice gross margins, good profitable leases. When it comes to international placements, I think we’ve yet to lease the first shuffler in Macau even though we have a 1,000 shufflers in Macau and I think that trend will continue. We have I think chatted with one operator about a lease in Macau but that’s not come to pass yet. And so yes, we’re going to sell shufflers and I’ll tell you if you look at the outlook for new openings in Macau and you can start to peg when some of these larger quantities of shufflers are likely to be sold over there, there’s a couple of big openings coming up in the next 12 months and so those will be sales I’m quite sure. Fifty percent of the shuffler sale revenue in Q1 was international for example.

Ryan Worst – Brean Murray Carret

Okay great, thanks Mark.

Operator

Your next question comes from the line of Ralph Schackart – William Blair

Ralph Schackart – William Blair

I had a question for you, maybe you could give us a little bit more details on fiscal ’09 when we see the transition back to recurring revenue, is that a first half event, is that something exiting fiscal ’09 and then is that growth that you’re driving based upon your discussions with the customers or is that perhaps just a little bit more of a slowdown in the one-time sales model. I’m just trying to understand that a little bit better, thanks.

Mark Yoseloff

I think first, in Q1 the increase in recurring revenue did as I pointed out slightly overcome a substantial decrease in sale revenue. I hope that trend continues. Now in a couple of…some quarters we’re going to have some big international shuffler sale or something which will drive more revenue but by and large and I think hopefully closer to our entry point in ’09 we should much more consistently have overcome the decrease in sales which frankly started about a year ago. And so I’m not going to commit to that today and hence I said during ’09 but certainly I am hopeful that it may be even from the outset of the year. I am not committing to that however. And I think if we were to offer sales inducements to customers of the sort that we did in ’05, ’06 when there was severe pressure from customers on the sales side, we would still continue to be having more sales even with tightening CapEx because frankly a customer knows a bargain when they see it. Frankly what we’ve done instead is…we haven’t lowered lease prices, we’ve simply raised sale prices and we’re not offering concessions on sale prices and so we’re directing traffic. I think if we went back to…if there was enough pressure brought to bear, we’re a small company hopefully we could hold the line but I know in the past we were pushed into a sale mode. So it’s a mix of these two Ralph. And my belief right now is that our customers are happy to lease because capital is tight and we’re happy to lease because in the long run it’s more profitable for us and more predictable.

Ralph Schackart – William Blair

Great, that was helpful, thank you Mark.

Operator

There are no further questions in the queue at this time; I’d like to turn it over to Mr. Yoseloff for any closing comments.

Mark Yoseloff

I’d like to thank everyone for their understanding of our pursuit of our strategy and our continued pursuit and focused pursuit. I want to thank you all for joining us on the call and I look forward to speaking to everyone on our second quarter call. And with that I’m going to close the call, thank you.

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