|
|
|
Wednesday, January 21, 1998
GameTech International, Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GMTC)") else Response.Write("(Nasdaq: GMTC)") end if %>
Phone: 602-804-1101
Price (1/20/98): $6 1/16
HOW DID IT FIND TROUBLE?
Bingo! Or maybe not. After playing a short game with this developer of interactive bingo systems, investors have quickly thrown out their cards.
On November 25, underwriters Donaldson Lufkin & Jenrette and Prudential Securities teamed up to bring GameTech public at $11 per share. Given the skittish markets, raising nearly $33 million for a company with just $5.4 million in 1996 sales wasn't bad. A week after the IPO, the stock hit a high of $13.
Then on January 9, GameTech reported a 135% increase in annual revenues to $12.6 million. That was good for pro forma EPS of $0.27 versus $0.08 per share in 1996. The company's core business of installing interactive bingo systems in halls throughout the United States was going well.
Yet its rollout of the new Satellite Bingo Network (I kid you not) was being delayed because some Native American bingo halls had backed out of the deal. GameTech also said its international expansion was hit by a December typhoon (in Guam, where a new bingo hall was planned) and by the Asian economic problems, which have forced a Philippine partner to slow the installation of the company's systems.
Before one could say "B-9," the news proved anything but, slicing the stock $4 11/16 to $5.
BUSINESS DESCRIPTION
GameTech designs and markets interactive electronic bingo systems, including handheld devices. These systems allow up to 600 electronic "cards" to be played during one game, and make it easier for players to monitor more "cards" at the same time. Unlike a lottery, most bingo games have a pre-set prize. So if a bingo hall can get players to play more cards at once, it should be able to make more money.
GameTech usually installs its systems at no charge to the operator, instead receiving up to 30% of revenues. It has over 8,000 electronic bingo units operating in over 120 halls throughout the U.S. Nearly half of sales occur in Texas. The firm has units in charitable bingo halls located in five of the 26 states that permit them. It also has systems in halls in seven of the 46 states that allow electronic bingo on Indian tribal lands.
The company owns 50% of The Satellite Bingo Network (TSBN), which launched in December. TSBN is developing a network that can link different Native American bingo halls, plus offsite players, into one huge bingo game for larger prizes.
Insiders own 53% of the company.
FINANCIAL FACTS
Income Statement
12-month sales: $12.6 million
12-month income: $2.9 million
12-month EPS: $0.27
Profit Margin: 23%
Market Cap: $58.2 million
Balance Sheet*
Cash: $0.2 million
Current Assets: $2.4 million
Current Liabilities: $3 million
Long-term Debt: $2 million
(*As of July 31, 1997. Does not include $32.5 million from the Nov. 25, 1997 IPO)
Ratios
Price-to-earnings: 22.5
Price-to-sales: 4.6
HOW COULD YOU HAVE SEEN IT COMING?
A developer of electronic bingo games strikes me as a good candidate for trouble simply because it sounds so goofy. Still, it's rare for so much bad news to hit within seven weeks of a firm's going public.
On the other hand, investors might have found this trouble after representatives of the FBI and U.S. Attorney's Office raided the Tulsa headquarters of Multimedia Games <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MGAM)") else Response.Write("(Nasdaq: MGAM)") end if %> on New Year's day. They were looking for evidence relating to that firm's electronic bingo game, which they allege is actually a slot machine and thus illegal.
Native American tribes in Oklahoma immediately filed suit demanding the courts to clear the game under the Indian Gaming Regulatory Act (IGRA). Such a legal dispute should have made an investor uneasy given that GameTech had planned to introduce its own "progressive bingo game" this year. That plan has been shelved until the legal issues can be resolved.
WHERE TO FROM HERE?
Although bingo may seem like a low-cost pastime of little old ladies (my great aunts!), it's actually a $5 billion a year industry in the U.S., which puts it right up there with the movie business. Only about 5% of bingo games are played on electronic units, suggesting lots of room for GameTech to expand.
In announcing year-end results, Chair/CEO Richard T. Fedor expressed confidence that the company's penetration of new markets would continue apace after adding Texas last year and Washington State in 1997. But projected revenue for 1998 will be hurt by the spate of troubles.
After GameTech's stock tanked, Prudential issued a "buy" rating, which is hardly surprising since they helped underwrite the IPO. Then again, the company has delivered terrific sales growth and lofty profit margins. It also has about $3.25 a share in cash.
Though I wouldn't want to put my money in a microcap trying to capture a bigger chunk of the electronic bingo market, the cash and profitability suggest this one might prove interesting to investigate as a speculation, or maybe just a conversation piece.
-- Louis Corrigan
([email protected])
Check out the Daily Trouble Message Board!
|