Please note that I own a small amount of shares at the time of writing. As always, please do your own due diligence if considering buying or selling anything.

A special thanks goes to both Left and Zippy for the source for this idea and for helping in my understanding of the business. They each have their own substacks that you should check out here:

• Mostly Microcaps - Zippy Capital

• Left’s Newsletter - Left Field Investing

The Big Picture

TableTrac is a tiny microcap that is highly illiquid. The price can be very volatile as a result and buying and selling is not generally going to happen instantly. The business trades on the OTC markets and has a market cap around 20 million USD. The business is not without risks but is a growing niche provider in its market and remains founder led after 25+ years of operations. It should enjoy some operating leverage and reasonable growth over the next few years and has a few advantages over its competition.

What They Do

TableTrac owns its operating business, CasinoTrac, and its associated offerings. It sells Casino Management Software (CMS). It was founded in 1995 by its current CEO Chad Hoehne and for a long time operated as a small team with a handful of people supporting the CEO. Recently it has hired an experienced CFO and grown the team to drive sales growth and product offerings to a wider range of geographic locations and to upsell/cross-sell to existing customers.

Offerings

CasinoTrac is the software typically sold first to clients and is the overall CMS. It is known for its strong reliability and security and relatively good integration with third party hardware.

DataTrac is the company’s data analysis software that leverages the data gathered with CasinoTrac and gives the client an easy integrated way to visualize and analyze operational data in real time.

KioskTrac software is one of the newer offerings which allows customizable mobile rewards systems from customers phones to engage with touchpoints throughout the casino.

REPULS security solutions is the security solution provided to customers. At this point it is a small part of the business.

They sell to over 250 tribal and commercial casino customers in 13 states, LATAM, Australia and more end markets. Latest information suggests over 30,000 games are connected to end users. This is a very small fraction of the overall market.

Management Quality

With a company this small, the management team is an integral part of the investment thesis.

The founder and CEO, Chad Hoehne, is still a big part of the technical development and overall leadership of this business. This is a double-edged sword. He is now in his 50’s, and while isn’t showing any signs of near term departure, it is an operational risk that even the company admits in its filings. There is currently no formal succession plans in place but the board will be directing one in the near future. Regardless of plans, this is a key-person risk for the operation of the business. The opposite side of this risk is that the CEO has decades of expertise and experience in the industry and probably has one of the best understanding of this niche out there. Over the long term, you need not look much further than the stock chart to see that he has delivered good value to shareholders; mostly due to operating fundamentals of the business and not some valuation appreciation.

Company insiders and management own a good chunk of the business. The CEO owns approximately 26%, while the directors and officers as a whole own about 32%. I would look to see the new CFO Randy Gilbert buy more over time as a good sign.

Management is incentivized with some stock options as described in the table below. Currently they expire in 2031 and have a exercise price of 2.42, well below the current stock price. Not an amazing incentive at this point. It would be good to see some renewed incentive structure better aligned with the current value of the business to better align with shareholders.

Business Quality

Value Proposition for the Customer

The products and services provided by TableTrac are essential to its customers. It is a relatively small portion of the expenses to operate a casino but it is essential and its absence would be immediately detrimental to the continuation of casino operations, especially with a modern context of how these businesses must operate. This reminds me a great deal of the business that Constellation Software owns in that they are mission critical but low cost and sticky. Not quite as high quality of those VMS business but has a lot of the qualities they would typically look for, plus better than average organic growth and more market to grow into.

That aspect, coupled with the relatively low cost of TableTrac compared to much of the competition, means the initial installation cost and more importantly, the maintenance costs, mean that there is tremendous value for the customer. This is also evident in the supposedly low churn rates that TableTrac enjoys.

Margins and Operating Leverage

The business has been increasing its maintenance revenue over time while increases in expenses have risen more slowly. As a result, operating margins should increase more dramatically in the near future. As revenue increases, there will be more profit to drop to the bottom line compared to the past. Look for expenses to be kept somewhat flat while new installation sales to be more profitable as a result.

The maintenance revenues are mostly recurring and therefore require very little extra expense to maintain. The SG&A costs should soon be less than maintenance revenues, at which point the margins on new installation sales will have much higher margin. Higher maintenance revenues are coming with a significant increase in installs and cross selling of offerings has occurred over the last couple of years.

Recent years have demonstrated a successful formula for organic growth in other sales including the DataTrac and KioskTrac products. There is obviously something of value there and customers are recognizing it.

Expansion of Products and Integration

The current backlog of projects stands at 11, the same as the prior year. This remains at an all time high and is a good sign of continued organic growth as these projects are normally framed as incomplete system installations and expansion of offerings to existing customers with previously installed systems.

Over the years, the company has successfully been expanding geographic markets that it serves. It has expanded into new states and also internationally. A key metric to look for is a stable and slow expansion into nearby locations. Trying to expand too quickly will be very challenging for the sales teams as they will not be able to keep up or offer the same level of service which has made them successful to date.

Focus of the Team

TableTrac has a relative focus on the business it provides as most of its competition is focused on games and offers CMS as an add-on. For this reason, the software is much less of a patchwork mess than most and can easily be updated to provide easier and better solutions to its customers. It’s a Linux based program and can easily be installed and integrated with third party software and API. The competition is often built on top of Windows and can be more of a web of add-ons compared with the comprehensive offering that TableTrac provides.

TableTrac products are, according to sources, around 30% less costly than the competition on average. They also provide free upgrades. The larger competitors will often provide the CMS software for “free” with other products as a bundle but the overall cost when considering maintenance fees etc. tends to be higher as a result so TableTrac has a low churn rate and can be seen to steal market share over time. It would seem reasonable that in an environment with increased operational costs for casinos (staff, etc.) that TableTrac might be a beneficiary with its lower cost solution.

Customer and Geographic Concentration

Due to the size of the business, it still has some significant exposure to customer concentration. It defines major customers as >10% of revenues and these customers make up 40% of revenues in 2022, an increase from 33.3% in 2021. Another interesting note is the recent increase in customers from the US, from 88-95% in 2021-22. This is likely a result of organic growth being strong in the US install base and the expansion into new states such as Louisiana, Mississippi, West Virginia, and Wisconsin and increased sales in existing states such as California, Nevada and Texas.

Capital Allocation

The business is relatively capital light and should not need large infusions of capital to sustain or to grow, unless they decide to undertake a large acquisition, which they have not historically pursued.

No dividend is currently paid but they are sitting on $4.6 million USD in cash and equivalents with only $2.0 million USD in TOTAL liabilities, of which, $1.7 million is current. This leaves a good cash margin to consider paying out a special dividend should there be no need for the cash in the near term for reinvestment or acquisitions. Stock repurchases would be challenging due to the illiquid nature of the trading, although there could be other ways to do so. I suspect a special dividend would be the preferred choice.

Valuation

At current market cap around $20 million USD, you are getting a 10% earnings yield. I would not expect significant share dilution or repurchases and with the cash available on the balance sheet, I would think a 5-10% special dividend is possible sometime in the next year or two. The valuation may appreciate a little bit if the market appreciates the growth and value of the recurring part of the business. With margin expansion, you should expect revenue growth in the low double digits to produce higher EPS growth rates.

I would not think that a double or triple in 5 years is out of the question and with some operational missteps you should still get a reasonable return so long as costs are maintained under control. Even if margins do not expand as I hope, I would expect this holding to outperform over a 5 year period, more importantly though, the downside seems reasonably protected with the strong balance sheet and sticky revenues with predictable cost structure.

That’s it for now, check back soon for more. As always, follow me on twitter and please share this with anyone who might interested in my work. My work is now completely free for all but there is an option for a low cost paid subscription as a way to support my work.

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