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Tuesday, September 29, 1998
Silicon Gaming
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Phone: (650) 798-7798
Website: www.silicongaming.com
Price (9/28/98): $4 1/4
HOW DID IT FIND TROUBLE?
After wooing investment bankers and individual investors alike with its next-generation slot machines, Silicon Gaming burst onto the gaming scene with much fanfare in 1996. Within a few months, the stock was trading above $20 a share. With a younger set of employees headquartered in Silicon Valley, a first in the gaming industry, the company developed an impressive product using next-generation technologies.
The problem is, despite what the Air Force would have us believe, you can aim too high. And that's exactly what the company did. While there is no doubt who sells the most dazzling machines in the industry, there is also no doubt whose machines are the most expensive.
The company also aimed far too high with its sales projections. As a new manufacturing facility came online, it was extensively underutilized while the overhead expenses continued to far outpace sales. Silicon Gaming proceeded to burn cash at an astonishing rate. Like the company's previously impressive war chest of cash, the value of the stock has gone up in smoke.
BUSINESS DESCRIPTION
Silicon Gaming develops advanced video gaming machines for use in casinos around the country. Unlike traditional machines that use hard-wired electronics to control their reels, Silicon's machines use a large video monitor that is powered by an imbedded personal computer. This allows the company to develop software for the machines using the latest multimedia technologies, including richly textured computer graphics, streaming video, and stereo sound.
The company's "Odyssey" machines are able to run multiple software titles on one machine. Silicon recently released the scaled-down "Quest" machine that has essentially the same hardware platform but is a dedicated machine only able to run a single game. The company's machines can be found in casinos in Nevada, Mississippi, and Missouri.
The company was founded in 1993, came public in mid-1996, and started shipping its games in volume in 1997.
FINANCIAL FACTS
Income Statement
12-month sales: $20.2 million
12-month income: ($24.6 million)
12-month EPS: ($2.01)
Profit Margin: N/A
Market Cap: $58.5 million
Balance Sheet
Cash: $6.8 million
Current Assets: $29.6 million
Current Liabilities: $12.0 million
Long-term Debt: $25.8 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 2.9
HOW COULD YOU HAVE SEEN IT COMING?
Swinging for the fences often gives you a homerun, but the sluggers in the league also are also the ones who strike out the most often.
When Silicon Gaming came public there was talk of the company occupying large chunks of casino floors everywhere with their fancy, high-tech machines. While the company has found a niche market and their machines are relatively widespread, the actual number of machines sold has been far less than initially expected. Strike One.
Investors should have been tipped off that the company may have been aiming a bit too high when, in 1997, the company started not only burning through its cash on hand but actually started borrowing money to produce its machines. Investors should have been concerned when the debt started to rise before sales started in any significant amount. Strike Two.
WHERE TO FROM HERE?
Shareholders of the company do have some events to look forward to. Silicon has yet to ship machines into some key casino markets. Some of the markets that the company has left to tap include Atlantic City, Illinois, Indiana, and Iowa. With these potentially lucrative markets to be penetrated in the next year, the company should see its trend of rising sales continue for at least the next several quarters.
Furthermore, the company has yet to see significant results from the sales of its "Quest" product line. One of the problems in the past in getting casinos to buy Silicon's machines has been the high up-front cost. The scaled down machines the company is now producing may appeal to more buyers with its lower price-point.
Finally, one of the company's major costs for the machines has been personal computers. Silicon, like many other companies, is set to benefit from the lower costs for its components.
While there are some bright spots ahead, it is hard to see Silicon recovering financially any time soon. During the first couple of quarters after coming public, a startup company can survive on "story" alone. At some point, however, investors expect to see profits, or at least the certainty of future profits. For Silicon, there is little hope for black ink anytime soon. The overhead costs of manufacturing and development are simply too high at the moment, and a sales boost large enough to cover these costs is not likely in the foreseeable future.
The company is also borrowing significant amounts of money at higher and higher interest rates. Even if it does make the long shot and posts an operating profit down the road, interest expenses are now a real concern for the company. Silicon can't afford to burn cash at its current rate for much longer; the debt may be too great for the company to overcome when (and if) its fortunes do turn around.
This year, 1998, is a year for Silicon Gaming to "put up or shut up." Thus far, the company hasn't put up any meaningful profit numbers, and it doesn't appear like it will any time soon. With the cash burn continuing and debt mounting, it appears that investing in the company would be one risky bet at this point. After all, one more strike and it's out.
-Paul Larson
([email protected])
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