TableTrac develops and designs Casino Management Systems (CMS) for small-mid sized casino operators around the United States and internationally. They currently have their systems installed in over 265 casinos all around the world. They first had Table Trac which was the system designed for the table games at the casinos, i.e. poker, blackjack, etc. They started expanding their offerings into marketing, analytics, accounting/auditing, security, and became what it is today, CasinoTrac. Their system, as stated above, provides information for management on the table games, slot machines, marketing, accounting/auditing, player reward program/loyalty program, analytics, etc. 

The current CEO of the company founded the company in 1998 and patented the product. The same founder/CEO is the 26% owner of the business.

Thesis

The company is very close to reaching operating leverage and has the upside of being a very high margin business with recurring revenues. The company has substantial upside as when it reaches operating leverage, maintenance revenue will cover all fixed costs and then the profits of the new installments of systems will drop straight to the bottom line and the earnings are going to increase and so will the cash flow. They can also operate their business without the addition of new systems and still break-even. The recession will not kill them as casino operators will have to find ways to cut costs during the economic downturn and TableTrac’s CMS is the cheapest option they will have with similar or better functionalities than other expensive CMS. At today’s price, I believe the company is a bargain and has a promising future on its back that should bring the stock increased attention.

Recurring Revenue/High Margin Business

 TableTrac sells systems. They earn revenue in 3 ways; installing the system, maintenance fees, and licensing fees. They earn RECURRING revenue. They earn monthly maintenance revenue from already installed systems. This is a very high margin business at about 79% gross margin. The recurring revenues are so advantageous in the way that it provides stability. These recurring revenues will also be able to help achieve operating leverage so with any additional system installed profitability can scale in huge amounts. The benefits of recurring revenues also comes with not having to acquire additional customers. The company can almost operate with only receiving the maintenance fees revenue and almost break even with it. It is also easier to forecast revenues and profits in the future if outside forces don’t influence much in operations. 

Cash Cow 

Another reason why this company is top quality is it is not capital intensive. They can grow significantly without having to pour tremendous amounts of capital into the business. I mean, they have averaged $25,007 in capital expenditures the last 5 years. The business is an absolute cash cow and with future growth making that cash flow run, the company at these multiples is a bargain all day. Cash flow generation is essential in a company. It is what keeps the engine running. A negative cash flow business has its days counted, while a cash flow generating business is better every day. If I would buy a business in its entirety it would be a company with the same characteristics as this one; not capital intensive and with the ability to increase its cash flows throughout the years. The company is essentially a cash cow and has yet to reach operating leverage. When it does, the company will be able to generate tons of cash and optimally, return it to shareholders.

Cheapest CMS Provider

 The company offers the cheapest CMS out there in the market. In the 2008 10-K, the management team said this regarding the pricing of their systems “At the same time, Table Trac feels that it can still claim their system’s sales price is “half-price”, compared to Nevada competitors.” I know this is an old 10-K and one would imagine that is not the case anymore, but it is still the case. According to Zippy Research, Seeking Alpha author, he talked with a small casino about TableTrac’s CMS regarding the pricing of its system and they said “ According to the company, the CasinoTrac suite is 30-50% cheaper than the big player alternatives, but offers similar (or better) functionality. In addition, TBTC does not charge for software upgrades. I was able to confirm these assertions after an interview with a director at a small commercial casino.” As a result, in the risk of recession they don’t have to worry about churn rates or losing customers because they are already the low cost provider which is what casino’s need when dollars need to be stretched as far as possible. The only risk they run is basically if their customers go bankrupt. I don’t know the probabilities of that happening but we can get an estimate or a more accurate picture by seeing the trend in bankruptcy during recessions. However, they will likely not lose customers during a recession, but will be harder to gain more customers but easier than other CMS providers as casinos start looking for a more affordable system provider like TableTrac. They have also said this in the past, around 2009, they said a recession might actually benefit them as casinos will start looking to cut down costs and since TableTrac provides a cheap system with similar or better functionality as the most expensive ones, they are able to put their name out there during a recession and gain customers in the recession and coming out of the recession. Plus they don’t charge for upgrades which I think is an advantage and are able to personalize the software to the casino’s needs. According to Zippy Research, a casino operator had to say this about the company’s software customization “ A director at a small commercial casino told me that TBTC “was able to do some very specific things for us that were not available with larger offerings”. He noted that: “Technology, operations, and marketing all have to go hand in hand, and [CasinoTrac was] able to make all of the changes and integrations we required ”. This is an additional advantage TableTrac has over their competitors.

Pristine Balance Sheet

The company has virtually no debt. The reason is they don’t require capital to grow, so issuing debt makes no sense. Going hand in hand, they also don’t have to raise equity due to the fact that they are self-sustaining and don’t need outside resources to operate profitably. Companies like these have huge advantages over companies that don’t, they have huge flexibility and are more likely to perform better than companies with a not-so-flexible balance sheet during an economic downturn. It was seen back in 09’ where they said that they did way better than competitors during that downturn due to the fact that their balance sheet was so strong. They also have the advantage that if they want to issue debt at a lower rate, they will be able to do so because their financial position is so strong. As a result, they have a strong capital structure.

Operating Leverage

I think I have mentioned this point enough but we have to keep emphasizing because of how important it is. We are also going to take a deeper dive into what operating leverage is and how this might affect the company’s profits. Operating leverage occurs when a company’s fixed costs are completely covered and any additional unit sold will drop straight to the bottom line. Operating leverage happens where fixed costs are the majority of the costs such as manufacturing companies. Companies with low operating leverage are those such as retail which contain a lot of variable costs. There are advantages and disadvantages of owning a company with high operating leverage. The advantages are profits are going to rise exponentially as revenue rises during good periods. A disadvantage is when for example, a company is experiencing seasonality, so sales volume is low, they will struggle to cover their fixed costs and profitability will be low. However, in companies with low operating leverage, they barely have fixed costs so they can still be profitable during low volume quarters since they are mostly variable. TableTrac’s main expenses are SG&A, and sure it does increase with sales volume but it doesn’t grow by the same magnitude as sales does. So that is why I consider SG&A to be a fixed cost for TableTrac even though accountants might not agree with me. To support my view, in 2014 SG&A was $2,854,759 and Revenue was $3,478,580. In 2021, SG&A was $3,562,003 and Revenue was $6,966,683. SG&A grew 25% while total Revenues grew 100%.  To put it in perspective, TableTrac in 2014 generated $1,339,829 in maintenance revenue. SG&A was $2,865,759. This brings revenues covering 47% of SG&A (fixed costs). In 2021, TableTrac generated $3,121,283 in maintenance revenue. SG&A was $3,562,003. This brings revenues covering 88% of SG&A (fixed costs), really close to reaching operating leverage and substantially expanding the profit potential. To conclude, the company is very close to achieving operating leverage and once it does every single dime from new installments will drop straight to the bottom line helping the earnings and free cash flow of the company to increase in a substantial and material amount. In addition, the continued installations of new systems will increase maintenance revenue. The company can operate without having to add new systems and still break-even.

OTC & Illiquidity

TableTrac has traded on the OTC market for a long period of time. Buying a company in the OTC has risks. For example, illiquidity is a big risk when you buy a company in the OTC as these tend to be overlooked companies as everyone has their attention on the NASDAQ and NYSE. Let’s say for example you want to enter a position, it will take you a long time to get to your desired allocation since shares are barely traded in the market. It will also affect you when you want to get out, it will take time and it will hurt more when you know you were wrong and are selling at a loss as it will take time and be a slow-painful death. 

Now a positive is, barely any people are watching these companies. No analyst coverage and no institutional ownership. This can cause mispricings in the securities since no one is paying attention to them. You have an advantage among other people since you are finding a bargain in the market earlier than everyone.

Competition

The company unfortunately competes against big players in the Casino industry. Among them, the biggest competitors are Konami, International Game Technology (IGT), Aristocrat Technologies. These players have way more financial resources than Casino Trac and way more customers.

Valuation

At the moment the company trades at the most recent years P/FCF of 6.5 and FCF yield of 15.3%. Best part, they haven’t reached operating leverage still. They only have to generate $400k more in maintenance revenue and it will reach operating leverage. Also, if they are able to make maintenance revenue overpass their fixed costs, its game over. Profitability should skyrocket and so should cash flow generation and what you are buying today for a P/FCF of 6.5 is a steal in every sense of the word. I’m not able to put a definitive fair value on the stock, but what I can tell you is it is very undervalued at today’s price, and should be trading above what it currently is at. No company with these qualities should be trading so low. It is understandable the fear of a recession, but as mentioned above, TableTrac can come out of a recession as a better and improved company relative to competitors if they are able to get their name out there.