Motley Fool Stock Advisor co-editor Tom Gardner recommended Shuffle Master to his readers in May of 2004. It’s been one of his top performers, and he recently named it one of his Top 5 buys. He and David recently had the opportunity to sit down with Shuffle Master CEO Dr. Mark Yoseloff and talk about the keys to the company's success. Tom thinks most of that success is due to Yoseloff's superb management. He is a shrewd CEO with a humble personality, who also happens to hold a doctorate in finite mathematics, to top it all off!
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TOM: For the benefit of those who may not know much about your company, can you give us a thumbnail sketch on how you make your money and how Shuffle Master got its start?
YOSELOFF: Shuffle Master is in the gaming equipment supply business. We are the company that provides casinos with some of the products they use to entertain the public. In particular, we concentrate in table games and specifically we make utility products like automatic card shufflers and entertainment products such as the very popular table games Three-Card Poker and Let It Ride.
Shuffle Master was founded in 1982 by a truck driver named John Breening. John had read an article about the introduction of casinos in Atlantic City and thought to himself, "Gee, what they really need is an automatic card shuffler." Now, John is the quintessential creative mind, and at that time, he knew virtually nothing about casinos—and certainly nothing about automatic card shufflers. But he was convinced that casino customers would be eager to have a card shuffling machine.
DAVID: And he was right.
YOSELOFF: Well, as he will tell you, it took him 10 years to become an "overnight success" because that is how long it took to get the first shuffler actually up and running in a casino. John retired from the company about seven years ago.
TOM: Let's talk about a few of the products you mentioned. I want to start off with the automatic card shufflers.
YOSELOFF: The very first card shuffler went into Bally's Casino in Las Vegas in 1991. It took four years to place 500 shuffling machines, because they were really a curiosity at that stage. We now have roughly 15,000 shufflers in the market, and over 90% of the market share worldwide.
TOM: Next one I am going to give you is Easy Chipper. What is the Easy Chipper?
YOSELOFF: The Easy Chipper is a device to sort chips—casino chips—primarily used on roulette tables.
DAVID: And so with both of these products, we are talking about things that are more convenient to use and operate for the casino. But I think we are also talking about more games being played per hour now as a result, correct?
YOSELOFF: Yes. These are examples of what we refer to as our utility product category. Utility products are defined as products that provide more productivity, security or other cost savings for the casinos. As you can see, in each case, these typically provide more than one of those.
TOM: How about Bloodhound Software? How does that fit into the mix?
YOSELOFF: Bloodhound is a very interesting product and not at all well-known outside of the industry. Bloodhound is a product that is used to evaluate blackjack play. As the clever name implies, it is designed to sniff out card counters and other advantage players. It is also used to just generally evaluate the quality of play so the casinos can more accurately provide complimentaries and take care of their guests.
DAVID: What is the single biggest threat to Shuffle Master and your cash flow streams?
YOSELOFF: The biggest threat would be if there is a downturn in gambling itself, which seems unlikely right now because it is a great source of revenue for municipalities, particularly the U.S. but also in other parts of the world.
So, frankly, the biggest challenge that we face as a company—and I have seen this before in other businesses I have been involved with—is managing our own growth. Now, it doesn't necessarily sound all that hard, but what people need to understand, and I think our investors are very well-educated in this regard, is that the kind of growth that we have experienced—rapid growth—requires a lot of remaking of infrastructure on an almost ongoing basis. That is a tricky proposition. It gets into the people, the processes, everything about a company.
Less than five years ago, our revenue was probably one-quarter of what it is today. If you can imagine just the stream of data, the stream of just commerce that goes on, you begin to realize the magnitude of the growth issue. So there is really no single problem that I can envision that would really be a great cause for concern as far as our ability to continue to be a very successful, profitable business, but I certainly am concerned constantly with our ability to keep up with our own success.
TOM: Let's talk about SHFL stock. Recently, you carried out a three-for-two split. Was this a positive or neutral event?
YOSELOFF: I think it is typically viewed as slightly positive. I think from the point of view of the retail investor, splits are viewed extremely favorably. I think the institutional investors view splits as a slightly positive event because they provide, not so much the liquidity, but a finer gradation in the shares, and that allows investors to come in at precisely the size position they are looking for.
DAVID: How do you grade yourself as a CEO?
YOSELOFF: Well, I think I am at best a mediocre manager, but I think I am a very good CEO. I understand my job very well at this point, and that is part of it.
My job is to do really three things. One, create the strategy for the company. One must constantly be refreshing and looking at issues, strategic issues, in a company to keep it fresh.
Secondly, I have to make sure that we have the right people to do the job, and we have done a lot in this regard in recent times as far as either promoting from within or bringing in individuals capable of taking our business into the future, as far as the growth that I have discussed.
Finally, my third role as a CEO is sort of the head cheerleader role. It is that role that keeps everybody looking forward to future success, and so it is clearing obstacles and making sure that there is a success mentality that pervades our company. In fact, this is an important issue for us in hiring. We really like to hire people from other successful companies because they come in with a success mindset.
TOM: Is online gambling a threat to Shuffle Master?
YOSELOFF: Well, the last time I looked, which is all the time, online gambling is illegal in the U.S., other than some forms of horse race gambling and sports wagering that are permitted. So we certainly can't participate in it as a company, and we don't endorse it.
That being said, I don't think there is any question that online gambling is extremely popular. Because it is illegal doesn't mean it is not popular, and it is. So it is here to stay, and if they were to make it legal, Shuffle Master, along with a lot of other legitimate companies in the gaming industry, I think would very quickly be involved in it.
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