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A few years ago Shuffle Master made a disastrous turn away from its pure lease model. The company began selling “lifetime licenses” for its shufflers and proprietary table games (PTGs) and converting existing leased product to one time sales. SHFL dominated these two segments and was foolish to sacrifice its pricing power. Unfortunately, it’s a long, painful journey back. Short term profits must be sacrificed for long-term recurring revenues, profits, and predictability. As can be seen in the chart, it appeared for awhile that SHFL was willing to make the sacrifice. YoY units sold declined for both shufflers and PTGs for 2 straight quarters last year. A bad inflection point occurred in the January 2008 quarter that carried into last quarter.

Some will make the replacement cycle argument that SHFL can obsolete its own products, thus forcing a more recurring revenue source. However, the health of the business is sometimes masked by quarterly unit sales that pull future earnings forward. I prefer the predictability and transparency of a pure lease model.

This stock will be interesting when the rate of change in shuffler and PTG units sold starts to decline again. This stock will be really interesting when units decline and SHFL meets and beats earnings expectations.