‘Cause That’s Where the Money Is’

by Marc Robins CFA

I’ve been to LasVegas, Reno and Tahoe countless times, and I hold the distinction of losing just 75¢. How did this miserly figure come about? I was sent to interview management way back in the late 1970s and as I was leaving Las Vegas to fly home, I plugged a slot machine and thought, “That’s about as pleasurable as plugging a parking meter and not as rewarding.” That ended any involvement whatsoever deriving fun, excitement and pleasure from playing casino games. To this day, I don’t play game of chance. I only step inside casinos when calling on management, attending conferences or wandering the G2E (Global Gaming Expo) in Las Vegas.
 
I do invest in gaming operations. Why? Cause that’s where the money is! Just look around the next time you visit a card room, slot parlor, video poker room or casino. Why do the owner/operators provide these entertainment halls and palaces? Cause there is money in it.
 
As I said, I don’t play games but do play casino operators. My favorite is Galaxy Gaming, Inc. (OTCBB: GLXZ–$0.30). This operation is a creator, designer and purveyor of casino table game “software.” To best explain what is going on here, understand that most casino table games (not slot machine games) are represented by poker, pai gow poker, blackjack, craps, baccarat and roulette. They are public domain games that can be played by anyone and practically anywhere and no one owns, and therefore licenses, the ‘technology’ or name, or rules to players, card rooms or casinos.
 
“Caribbean Stud Poker,” a fairly well-known table game name, is by contrast a proprietary game. This is a premium game. This class of games are also stand-alone games with their own unique set of rules and strategies but the name, rules, approach, mathematics that empower the “play”, etc. is owned by a creator or author. To play these premium games, someone—in most cases the casino—has to pay a royalty per hand, per game or per month to its owner(s), thereby licensing the right to make the game available to the casino’s clientele. Galaxy does not own Caribbean Stud Poker, but it does own and license a hand-full of premium “side-bets” to public domain and premium-owned games as well as over a dozen of their own premium titles. A short list of owned games include 21+2, Top 3, High Card Flush, Lucky Ladies, Heads-up Hold’em, One Hand-50 Grand, Bonus Craps and many others. Combined, the royalties generated from their stable of games produced $11 million in (2015) revenues and should crest $13 million this year. Because of the premium game benefits—enhanced fun or challenge, better pay-outs, more ways to play to score, a better chance to win a life-altering jackpot, etc., Galaxy enjoys nearly a 98% gross margin as well as a better than 95% placement retention of their games in casinos. (What one Wall Street Wag in a public presentation claimed is “that Galaxy has better returns that a drug dealer!) What this means is GLXZ enjoys strong recurring revenues and cash flow.
 
My thoughts about the stock: Galaxy has suffered a series of legal set-backs, roadblocks and
operating interruptions. Probably the worse “problem” is that 5 years ago, when it was generating only $3 million in revenues, it bought Prime Table Games for $23 million. The road ahead is now clear, dry and straight, they’ve paid down all but $9 million of the PTG debt, they have the hottest game found in casinos….I think prospects have definitely improved and believe the shares will see $0.50 this year and $1.00 next.
 
Robins and all members of his family own shares and may buy or sell shares at any time in the market for portfolio management purposes.