TableTrac (TBTC)
OTC Nano-Cap, highly illiquid, but a fantastic risk reward with 75% upside
TLDR:
30% founder/CEO ownership.
Reopening play also boosted by COVID
Sticky SaaS component to product with churn < 5%.
Best in class product for their target customer
Ability to expand with a number of growth opportunities.
Business:
TableTrac (TBTC) is a provider of casino management software, the focal point for day to day management of casino operations. A CMS can offer many solutions including player tracking for table/slot games, rewards/loyalty program interfaces, and back office IT/accounting solutions. TableTrac was started in 1995 by Chad Hoehne with a single patented solution for managing table games based on placing the player casino tracker on the dealer side. Since then, the company has implemented their solutions into more than 200 casinos domestically and internationally. However, they remain small with only 24 employees and a 10$ million market cap.
Sources of Revenue and industry: system sales, maintenance fees, and other(includes financing operations and licensing business). TableTrac sells their system to casinos for an upfront fee and has an ongoing maintenance contract(a recurring source of revenue). The ‘other’ line item contains any deferred revenues and licensing contracts (started in 2019 with a security company in Japan looking to create a secure CMS system). Their CMS system is allowed in 14 states and they are looking to expand with an application to get a license in California. Getting a license to operate a CMS in new states is difficult, thus TableTrac has a regulatory moat against any new entrants. In addition, casinos hate replacing their CMS system because of the downtime, thus churn is extremely low. They operate in a space where their system is necessary, but not an extravagant cost so switching costs are high. In fact, they have lost only 3 casinos in the past 2 years making churn ~2%. Of those three, one burned down and another switched to a larger competitor who built a new wing for the casino.
Competition: Their primary competitors are larger companies with casino management subsidiaries rather than pure play casino management software providers. The four competitors cited in their 10k are Aristocrat Leisure, Scientific Games, Konami, and IGT all offering CMS systems in addition the rest of their gaming business. Even though these companies are larger, TableTrac targets a niche segment of the market distinct from the huge Vegas casinos targeted by competition: Tribal Casinos and smaller casinos. TableTrac's offering is half the price of bigger competition for the same or even better services, thus making them suited for smaller casinos looking for a cost effective solution. While larger casinos can afford to pay up for CMS software and often have relationships with those larger game providers, smaller casinos need to manage their budget. In addition to the need for smaller casinos to choose a cheaper solution, larger casinos have relationships with the larger CMS providers via gaming contracts or other services. As with aforementioned example where a casino switches when a CMS provider built a new casino wing, the process of getting new CMS systems can be relationship driven rather than value driven for larger providers. If you’re a large Las Vegas casino and your kids go to the same school as the people at scientific games, quality and price aren’t much of a criteria for selecting a CMS system. Since the huge casinos likely won't choose TableTrac even if their offering is better for cheaper, they sell to a different segment of the market
There are ~1000 domestic target casinos for TableTrac (from the company, consistent with 500 tribal casinos and 500 commercial casinos in the USA), They have placed their system in only 220 locations so far. Their market also includes non casino locations that offer gambling and international casinos so the runway for growth is large.
COVID impact: Though the pandemic took a toll on the gambling industry, TableTrac's business should come out stronger. The typical barrier to switching CMS systems is twofold: 1) the downtime of replacing a CMS and 2) The 'good enough' nature of many CMS systems. Many CMS systems are overpriced and serve only the barebone needs because casinos and gaming rooms typically mint money and have no need to constantly analyze cost-effectiveness. However, COVID shocked the industry to point where casinos too a hard look at their budgets Since TableTrac's offers comparable, if not better, services for half the price, the stress placed on casinos should catalyze growth for TableTrac. The downtime offered to casinos with lockdowns will also allow them to switch providers with limited friction. However, TableTrac didn’t lose a single casino during the pandemic demonstrating their resiliency. We can see evidence of the boost they received from COVID in their Q1 results1 where they added nearly 40 locations and have a record backlog.
Inflection point in the model: while TableTrac isn't a SaaS business, the maintenance revenue is recurring in nature. They typically charge 10-15% of the initial system sale and the gross margins for these sales is ~90% and the unit economics are favorable because as they add casinos in a single location where one technician can service all of them. While maintenance revenue took a dip last year as TableTrac renegotiated some contracts so they didn't lose some customers, it should bounce back as people return to casinos. As pointed out by Avi at Long Cast Advisors(3Q18 letter), their maintenance revenue is hitting the point where it can cover operating expenses for the company which creates operating leverage. The system sales are just the gravy on top.
Future Growth opportunities: although they have taken a conservative approach to growth so far, they have numerous levers for growth. Expansion into new states, larger casinos, and cross-selling/upselling ancillary products will all contribute to growth. They will continue to expand into new states and have opportunities on the east coast as well as an application pending for California. Although their target market is smaller casinos, they have started expanding into larger casino systems that recognize the value TableTrac provides. Upselling opportunities also exist both within the CMS system with upgrades and cross-selling for ancillary products such as security systems. TableTrac's singular focus on casino management gives them a product advantage evidenced by the accelerated development of systems to help casinos comply with social distancing protocols.
Why has growth been lumpy? Although the growth in revenue looks cyclical with some up years and some down years, the company has steadily added casinos each year. The cyclicality in growth stems from their financing program where deliver systems to casinos who then pay for it over time rather than all at once. The key metric to look at is growth in casinos/casino operators which has been steady.
Management: Chad Hoehne is a founder/CEO with 30% ownership in the company. They have a small employee base, and have prioritized responsible growth with consistent growth since inception with no need for outside capital since 2008.
Modeling the financials:
Whenever I create a model, it isn't complicated, but relies on a few key drivers of business performance. In TableTrac's case, I model the maintenance revenue as an amount per casino and the system sales as a function of the number of casino's added. Using their historical numbers, each system sale costs about 300k. The system is priced at ~1,500 per game thus a 300k system sale makes sense for a small 200 game casino. The maintenance is modeled as an amount per casino. Although the maintenance is said to be 1/10th of the system sales, the historical numbers don’t map this out perfectly and are a little bit lower in the 17-19k range per casino. Assuming a return to slightly lower than normal traffic, the maintenance can be put at the lower end of the range at 17k per casino. The model assumes no change in the size of casinos they sell to. For the full list of assumptions, see below.
The OPEX retention rate is the % of OPEX retained as a % of revenue.. EX: the year 2 OPEX will by 95% of 60% (year 1 OPEX) and so on. The OPEX margin should decrease by 5% each year. This leads to net margins of 10%, 12%, 15%, 17%, and 19% for the next five years. Minimal capex/DA means FCF maps closely to net income. With a cost of capital of 10%, we can generate a sensitivity chart based on the casino growth rate and the terminal FCF multiple.
Risks:
While the company may look risky as an illiquid nanocap that was unprofitable in 2020, the risk of losing money is fairly low in my opinion. They have a great product and the sticky recurring revenues should keep them profitable in a normal operating environment. It only trades at around 12x EV/EBITDA based on 2019 numbers and the company should benefit in the aftermath of the pandemic.
What about the drama at the company? Around 2010, some drama occurred regarding an activist investor and management. The activist took a position on the board aiming to realize shareholder value by cutting some costs such as CEO pay and possibly taking the company private. However, a breakdown of trust led to the director and other being ousted by Hoehne. After this drama, one thing is clear: TableTrac is Chad Hoehne's company. Buying the stock means trusting him. It’s a positive sign that they don't constantly dilute shares and he owns a significant amount of the company. They even repurchased some shares in 2015 suggesting the company would take moves to realize the value of the stock if needed.
The stock is extremely illiquid so building a position without an active seller is difficult and is intended for individual investors. I hold a small position because I can't build a larger one :). To me, this is one of the best risk rewards out there. My fair value target is $5.80 a share based on a conservative multiple (15x) and reasonable growth of 12% (which was absolutely destroyed by their Q1 results.
Blow out Q1 results, for reference 12% growth in casinos put them at 200 casinos at YE21, but they are now at 220 at the end of Q1.