TOP CONTRIBUTORS

Francis D'Hondt

GMTC AT A GLANCE

P/E ► -1.52   EV/EBITDA ► -16.3   ROA ► -8.1% AVG ROE ► -26.5% AVG Debt to Equity ► 1.19 AVG Current Ratio ► 1.54 AVG Interest Coverage Ratio ► -2.46 AVG

 

 

 

 

 

 

GameTech International (NASDAQ: GMTC) makes electronic bingo machines and video lottery terminals (VLTs). Players can play more bingo cards on an electronic bingo machine than on paper cards, leading to more revenue per bingo session.^[1] GameTech's VLTs, which let people play state lottery games on a video terminal, are the most profitable part of its business - they contributed 20% of GameTech's 2007 revenues, but 65% of its operating income.^[2]

Although the Applied Analysis Gaming Index, which measures the performance of casino operators and gaming machine manufacturers, was down by 15.7 percent in January 2008, GameTech's revenue nonetheless grew by 19% from 2006 to 2007. The growing number of casinos in the United States^[3] and a shift towards electronic casino games^[4] fueled this revenue growth.

The casino industry has struggled in 2008 and so the company's growth has not been as strong - revenue increased slightly in Q2 2008 relative to Q2 2007, but net income fell over 90%.^[5][6]

Business Overview

Business Segments

Note: GameTech International groups its Portable Bingo Terminals and Fixed Base Bingo Terminals segments into one segment, Bingo Systems, for its Net Income statement.

2007 Revenue by Segments: Year ending Oct. 31^[7]

Bingo Systems (35% of 2007 Net Income, 80% of Sales)

Portable Bingo Terminals (64% of 2007 Sales)

These products are electronic bingo machines that can be placed anywhere within a bingo hall or casino setting (hence the term 'portable'). In addition to the bingo terminals themselves, this segment includes the management systems the terminals run on:

• AllTrak2 is a Windows-based accounting system for bingo hall operators running on standard PC. It provides inventory-tracking capabilities, complete sales data, and player tracking systems, and is used for all four of GameTech's portable bingo terminals.^[8]
• Diamond POS is GameTech's operating system that includes Point-of-Sale (POS) functionality and player tracking. This enables bingo hall and casino operators to load sales information to electronic player terminals. This system is also compatible with all four of GameTech's portable bingo terminals.^[8]
• GameTech Elite is the company's next generation operating system. It performs all of the traditional functions of the Diamond and AllTrak2 systems while supporting newer style games and markets.^[8]

In addition to these systems, GameTech offers four specific terminals in this segment:

• The TED was GameTech's only black and white portable terminal in circulation during fiscal 2007. The TED terminal can display four bingo cards at a time, plays up to 600 cards in a single game and operates using either the Alltrak2 back-office system or the Diamond POS system.^[9]
• The TED2C is a terminal with a color screen and clear easy-to-see graphics, and is similar to GameTech's fixed-base bingo systems. The TED2C terminal can display up to 16 cards at one time and play up to 600 cards in one game, and operates using either the AllTrak2 back-office system or Diamond POS system.^[9]
• The Traveler is a compact portable terminal with a color display and wireless communications and GameTech's most technologically advanced color terminal. The Traveler can display up to 8 cards at one time and play up to 2,000 cards in a single game. The terminal uses the company's crate loading methodology, eliminating the need to load a player’s information into a separate terminal. These devices run on GameTech's AllTrak2 back-office system, the Diamond POS system, or the GameTech Elite system.^[10]
• The Tracker is a low-cost color terminal that incorporates many features of the TED terminal onto a high-resolution color screen. The Tracker terminal can display up to 6 bingo cards at a time while monitoring the play of 600 cards in a single game, and operates using the AllTrak2, Diamond POS, or GameTech Elite system.^[10]

Fixed Base Bingo Terminals (16% of 2007 Sales)

This segment consists of products that use microcomputer hardware and touch screen displays, and enable players to play up to 600 cards simultaneously. Each fixed base unit consists of four parts:

• The File Server runs the terminal's network, and processes and stores the bingo game's data.^[11]
• The Caller Unit, located on the caller’s stand, enables the caller to communicate with each player’s terminal through touch screen. The caller unit connects with each player’s fixed-base terminal and enables the winning electronic bingo card images and paper cards to be displayed on monitors within the bingo hall.^[11]
• The Sales Unit is a point-of-sale terminal, typically located near the entrance of a bingo hall, where all customer purchases are made. Using a touch screen, the cashier can activate player buy-in choices for the session, after which the unit automatically calculates pricing and totals.^[11]
• Finally, the Player’s Terminal consists of a separate computer and touch screen monitor. Each player’s terminal lets players cycle through all of their electronic bingo card images during play, marking the numbers called on each electronic bingo card image being played.^[11]

Video Lottery Terminals (65% of 2007 Net Income, 20% of Sales)

This segment consists of both VLTs themselves and slot machines, both of which are produced under Summit Gaming.^[12] These products are created using themes developed both by GameTech and external companies. As of fiscal 2007, GameTech planned to use its VLTs to enter the Class III gaming market.^[11] The Class III market consists of games such as slot machines and electronic casino games (such as video poker). GameTech's other products fall under the Class II market, which contains bingo games under all mediums.^[13]

Business and Financial Analysis

2007 Revenue by Geographic Segment ($ in millions): Year ending Oct. 31^[14]

In 2007, there were minimal decreases in the revenue of two of GameTech's three segments: Portable Bingo Terminals and Fixed Base Bingo Terminals.^[15] However, GameTech's 2006 acquisition of Summit Amusement & Distributing opened up its Summit Gaming division, leading to the creation of a brand new segment in 2007 - video lottery terminals. This new segment was responsible for 20% of GameTech's 2007 revenue, and kept GameTech's overall revenue from suffering. This is a high-margin business for the company as well, as the VLT segment contributed 65% of the company's income. In fact, although the casino industry struggled as a whole, this acquisition helped cause a 19.3% increase in GameTech International's total revenue from 2006 to 2007.^[14]

In 2007, GameTech's international revenue increased by 12%, up to $4.53 million from $4.04 million in 2006. GameTech's International segment consists of markets in Europe, Canada, Latin America, the South Pacific, and Asia. As of 2007, GameTech was pursuing additional opportunities in Latin America, Europe, and certain provinces in Canada.^[7]

The operating income disparity between 2005 and 2006 can be explained by lower expenses across the board in 2006.^[16] For example, GameTech had to pay elevated legal expenses in 2005 due to stricter gambling regulations, driving up its operating expenses and subsequently its operating income.^[17]

Key Trends and Forces

The growth of new casinos across the United States greatly increases business opportunities for GameTech

According to the Native American Times, there was a substantial growth in the number of casinos in the United States from 2006 on, especially on Native American reservations and 'racinos' (a racetrack with a casino).^[18] The increase in the number of casinos has presented manufacturers of slot machines, video poker machines, and bingo machines (such as GameTech) with new business opportunities. According to the U.S. Bureau of Labor Statistics, the growth in the casino industry will continue, with employment in gaming services occupations projected to grow by 23 percent between 2006 and 2016, a much faster rate than the average for all occupations.^[3] This growth is greatly beneficial to GameTech because these new casinos need to fill their floorspace with casino games, including GameTech's electronic bingo machines.

Customer preferences are shifting towards electronic casino games

According to competitor International Game Technology, there has been an ongoing shift in consumer preferences away from traditional table games and towards electronic casino games beginning in fiscal 2007.^[4] In 2008, casinos nationwide continued to follow this trend, implementing high-tech game systems, wireless customer-service features, and other technologically advanced services. The shifting preference towards electronic games in casinos, racinos, and bingo halls greatly benefits GameTech because its entire product line is made up of such electronic casino games.^[18]

Economic cycles that decrease disposable income hurt the gambling industry

People tend to participate in luxury activities such as gambling only when they feel they have enough disposable income. In 2008, domestic disposable income suffered from factors such as all-time highs in oil prices, and a struggling U.S. housing market. As of June 2008, the price of oil had reached $117.40 a barrel, a 76.8% increase from 2007.^[19] These factors have contributed to shaky consumer confidence, which has sent the Applied Analysis Gaming Index, which includes casino operators and gaming machine manufacturers, down by 15.7 percent in January 2008.^[5] Although other factors, such as its acquisition of Summit Amusement & Distributing and the nationwide growth of casinos, enabled GameTech to avoid most of these harmful effects, this trend is nevertheless potentially harmful if GameTech is unable to continue to find ways to fuel its growth.

GameTech International depends on a few specific markets for the majority of its revenue

GameTech obtained an estimated 24% of its 2007 revenue from just two states - Texas and Montana. In 2007, Texas accounted for 14% of total revenue and 17% of bingo revenue, while Montana accounted for 10% of total revenue and 50% of VLT revenue. Therefore, if there is a change in government regulations in either state, GameTech will suffer substantial losses in revenue.^[20]

Competition

As an electronic bingo game manufacturer, GameTech primarily competes with other electronic bingo game makers. However, GameTech also heavily competes with manufacturers of other electronic casino games for valuable floorspace in casinos. Its competitors include:

• FortuNet (FNET) manufactures and distributes electronic video games and related servers. Its primary focus is on electronic bingo games, which it helped pioneer in the 1980s. Its BingoStar platform is its primary product, and competes for business from casinos and bingo halls with the electronic bingo games GameTech International produces.^[21]
• International Game Technology (IGT) manufactures electronic casino games, and has the largest market share in the North American slot machine industry with a 70% share. In addition to simple slot machines, IGT also manufactures video poker games and other electronic games, thus competing with GameTech for floorspace in casinos. IGT has an advantage over GameTech due to its wider range of products, as it also produces network systems for operating casinos.^[22]
• Bally Technologies (BYI) is another manufacturer of slot machines and other electronic casino games, such as Easy Lotto and Millionaire Sevens. As a result, Bally is another company whose products compete for casino space with the less popular bingo games produced by GameTech International.^[23]
• Multimedia Games (MGAM) supplies its customers with electronic video games, video lottery terminals, and casino management systems, offering products from gaming giants such as Bally Technologies and Shuffle Master.^[24] Although MGAM's business struggled in late 2006 due to increased competition in its primary markets,^[25] it received a boost in 2008 by expanding into new markets such as Washington state. Multimedia Games competes with GameTech in the distribution of both electronic bingo games and VLTs.^[26]

References

1. ↑ Reuters: Gametech International Inc (Consolidated Issue listed on NASDAQ Global Market)
2. ↑ Online Casino News: GameTech International, Inc. Announces Agreement to Acquire Summit Amusement & Distributing, Ltd.
3. ↑ ^{3.0 3.1} SeekingAlpha: Eight Ways to Play the Slots
4. ↑ ^{4.0 4.1} SeekingAlpha: International Gaming Technology: Clear Leader in a High-Growth Industry
5. ↑ ^{5.0 5.1} ReviewJournal.com: Casino-stock index declines during January
6. ↑ GameTech International Q2 profit falls
7. ↑ ^{7.0 7.1} GMTC 2007 10-K, Item 1: Business, page 2
8. ↑ ^{8.0 8.1 8.2} GMTC 2007 10-K, Item 1: Business, page 3
9. ↑ ^{9.0 9.1} GMTC 2007 10-K, Item 1: Business, page 4-5
10. ↑ ^{10.0 10.1} GMTC 2007 10-K, Item 1: Business, page 4
11. ↑ ^{11.0 11.1 11.2 11.3 11.4} GMTC 2007 10-K, Item 1: Business, page 5
12. ↑ MSNMoney: GameTech Reports 2nd Quarter 2008 Fiscal Results
13. ↑ Wikipedia: Indian Gaming Regulatory Act
14. ↑ ^{14.0 14.1} GMTC 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition, page 25
15. ↑ ^{15.0 15.1} GMTC 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition, page 31
16. ↑ GMTC 2006 10-K, Item 6: Selected Financial Data, page 20
17. ↑ GMTC 2006 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 26
18. ↑ ^{18.0 18.1} Native American Times: Downstream Casino Resort Goes High-Tech
19. ↑ Inflation Data: Historical Oil Prices
20. ↑ GMTC 2007 10-K, Item 1A: Risk Factors, page 17
21. ↑ FortuNet.com
22. ↑ Wikinvest: IGT
23. ↑ Bally Technologies: Company Information
24. ↑ Multimedia Games: Company
25. ↑ Seeking Alpha: Multimedia Games: A Bull Turns Bear
26. ↑ Reuters: Multimedia Games Inc (Consolidated Issue Listed on NASDAQ Global Select Market)
27. ↑ Google Finance: GMTC
28. ↑ Google Finance: FNET
29. ↑ Google Finance: IGT
30. ↑ Google Finance: BYI
31. ↑ Google Finance: MGAM