Ian Cassel's  Instablog

Global Axcess Corp $0.70 (GAXC) is the 7th largest non-bank ATM Company in the US, managing a network of 4,500 ATMs in the United States. GAXC is the most profitable and stable public company in the ATM business. The company has only recently started to push the accelerator on sales and gaining more ATM wins as seen in recent press releases. The ATM side is rather simple to understand. There are two parts to the ATM business: 1.) Merchant Owned 2.) Company Owned. Merchant owned means the merchant (grocery store, convenience store, etc.) owns the ATM, and GAXC simply maintains it for them. Company owned means GAXC actually owns and operates the ATM. GAXC is primarily going after more “company owned” ATMs since this is higher margin business. Each company owned ATM brings in on average $5,000 a year with 40% Gross margins. The company recently hired a sales person (in Q1 2009), and another one in Q4 2009 who are going after grocery store chains, convenience store chains, gas station chains, etc, proposing them on our ATM services. A simple sales approach might not sound that novel, but in the ATM industry it is, as none of the other companies are really out soliciting ATM business. I met one of the sales people on my trip to visit the company and was very impressed with his background and enthusiasm in bringing in new business.

What makes GAXC’s ATM product offering different from the other ATM providers out there?

1.) Highest Up-time Percentage in the Industry. They are much higher than their competition ie ISO/Non-Bank. A 200 basis point difference is a HUGE deal in this industry, and their biggest selling point when going after new ATM business. If I own a grocery store with an ATM, and the ATM is out of cash all the time or isn’t working properly, it not only hurts store sales but also frustrates the customer. Again, this is a big deal.

2.) GAXC pays their clients quickly and on time every month. A lot of the competitors are not consistent when paying their clients.

3.) GAXC provides the best customer service in the industry. The result of these three strengths is that GAXC’s customer base literally “LOVES” working with GAXC. GAXC hired an outside research firm to survey their customers to find out if their perceived strengths/weaknesses were actually their real strengths and weaknesses. The research firm came back amazed that a high percentage of clients surveyed used the word “Love” to describe their relationship with GAXC. The company is using their superior ATM product offering in a sales effort to gain more ATM contracts while also leveraging this “love” relationship to up-sell their current ATM clients with their new DVD Kiosk offering.

The ATM business is affected by Fed Funds rate changes (lower the better). The board has authorized the purchase of derivative securities to hedge interest rate risk, but at this time no hedges have been purchased. The CEO worked for the Fed for several years and shared his insight and methodology with me of which seemed reasonable. He also spoke of branding strategies which could make up for margin loss in a higher interest rate environment. I’m confident management is on top of this.

GAXC’s ATM business has been relatively flat over the last two years ($21m Revenues) mostly due to management concentration on the turnaround of the company. The company is now ripe for ATM growth as they have 1.) hired a research firm to get an idea of their strengths to help them market their product better, 2.) Hiring salespersons dedicated to gaining new ATM business, 3.) sales approach has already started to work with recent ATM wins. I believe the ATM side will grow at least 5% in 2010 and could grow substantially more with any large ATM contract win. My estimates are for the ATM side of the business to do $22.8m in revenues and $3.0m in net income, or $0.13 for FY 2010. I believe there could be as much as 30% upside to my FY2010 ATM numbers.

DVD Kiosks: Coinstar (sym: CSTR) has had tremendous success with its Redbox Brand of DVD kiosks. Coinstar trades at 50x TTM EPS, so it’s obvious that Wall Street loves the stock. GAXC is now entering this business with a DVD product offering. The company recently returned from a convenience store convention in Las Vegas where feedback was tremendous for GAXC’s DVD offering. Since GAXC already has very good relationships with their ATM customer base, they will likely have no problem rolling out DVD kiosks. They have started pilot programs with a few grocers, convenience stores, gas stations etc. These pilot programs will last through December until which time the company will likely start rolling out DVD Kiosks on a more aggressive schedule. The financial dynamics of a DVD kiosk are very enticing. On average, a DVD kiosk will bring in $2,000/month in revenues with 40% GM. Most of this GM will hit the bottom line since the same maintenance person that takes care of the ATM will take care of the DVD kiosk. Coinstar also stated in their most recent quarterly report that it takes 12-24 months for a DVD kiosk to reach optimum revenues and over time a good DVD kiosk can bring in $3,000-$4,500/month in revenues with higher gross margins. It is GAXC’s goal to target retail channels that have been overlooked by Coinstar and other larger DVD kiosk operators.

The company said when the roll out begins (I estimate late Q1 2010), they will likely add around 20 kiosks a month. It is easy to model this type of rollout. For example, potential revenues/net income given DVD kiosk traction can be seen in the table below. The company has stated that over 25% of their 4,500 ATM clients would likely be interested in the DVD kiosk offering.

DVD Kiosks	100	200	300	400
Revenues Per Month ($2000)	$200,000.00	$400,000.00	$600,000.00	$800,000.00
Gross Margin Per Month (40%)	$80,000.00	$160,000.00	$240,000.00	$320,000.00
Net Income Per Month (25%)	$50,000.00	$100,000.00	$150,000.00	$200,000.00

If they add 20 DVD kiosks a month starting March 2010, GAXC would have over 220 in operation by December 2010. At 200 DVD kiosks, GAXC would be producing $150,000/Month in Net Income from the DVD side alone. Using a conservative DVD rollout schedule starting March 2010, I estimate that 2010 DVD Sales will be $2.7 million with $675,000 of net income. An increase in revenues per kiosk and/or number of kiosks rolled out will dramatically improve my conservative estimates.

Conclusion: My 2010 estimates remain very conservative as I’ve not included any ATM wins for the rest of 2009 and 2010. In 2010 I believe the company will grow revenues by 20% to $25.5 Million while growing net income 110% to $0.16 EPS. My expectations are based on 5% growth in ATM business (business already announced) accompanied by a modest roll-out of DVD Kiosks starting in March 2010. The company is also looking at other Kiosk opportunities that if materialize could also boost 2010 performance. The company is currently trading at 9x 2009 EPS, and 4x my 2010 EPS estimate.

My Estimates
	FY09E	FY10E
Sales (M)
Q1	$5.4	$5.7
Q2	5.3	6.1
Q3	5.3	6.6
Q4	5.3	7.1
FY (Dec)	$21.3	$25.5
EPS (M)
Q1	$0.005	$0.03
Q2	0.025	0.035
Q3	0.02	0.04
Q4	0.025	0.05
FY (Dec)	$0.075	$0.16

Disclosure: LONG GAXC

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Timberline Resources (sym: TLR) announced yesterday that successful surface drilling at its Butte Highlands Gold Project has increased gold mineralization from 500,000 ounces to over 750,000 ounces, using a cut off grade of 0.25 opt.  This increase does not include the results of a 5 hole drilling program which was recently completed by the company of which results will be made public in the next couple of weeks.
 

I remain bullish on TLR even since my write up in mid July when the stock was at $0.40.  There are not many mining companies that exist that own their own drilling company and have a gold mine fully funded to production by the largest independent underground mining contractor in the country, Small Mines Development (SMD).  Wall Street is starting to wake up to this rare low risk/high reward situation.
 

Timberline operates two drilling subsidiaries, Timberline Drilling which operates in the US and whose clients include Newmont Mining (NEM), and other major producers. Timberline also operates Worldwide Exploration, its Mexican drilling subsidiary.  Both subsidiaries experienced rapid growth in 2006-2008, but deteriorating economic conditions in late 2008 led to streamlining (trimming the fat) of the drilling operations.  The amazing thing is even with half the drills compared to the peak in 2008, Timberline’s drilling subsidiaries are generating more cash flow then at the peak.  I see the drilling operations not as an EPS generator but as a cash flow component that pays the overhead for the future profit center, Timberline Exploration/Production division. 

The other half of Timberline operates a small staff of production focused geologists trying to find and acquire late stage projects similar to the company’s Butte Highlands Gold Project.  Timberline Resources has a 50% carried to production ownership interest in its Butte Highlands Joint Venture Gold Project located approximately 15 miles south of Butte, Montana.  The interesting component is Timberlines JV partner is the largest independent mining contractor in the US, Small Mines Development (SMD).  Timberline and SMD are now authorized to construct exploration drifts, perform both surface and underground drilling, and extract a bulk sample. The acreage that may be disturbed under the permit totals approximately 50 acres, including 20 acres for surface facilities. The plan involves construction of exploration drifts approximately 14 feet wide by 16 feet high and 6,700 feet in length. The drill program to further define and expand the resource anticipates 120 drill holes from 10-15 drill stations located throughout the drifts. The drill holes will average 500 feet in length for a total of approximately 60,000 feet of core drilling. The plan also anticipates collecting a 10,000 ton bulk sample. The underground development, exploration drilling and bulk sampling is anticipated to take approximately one year.
 

The Butte Highlands Gold Project is scheduled to be in production late 2010/early 2011.  At $1,000 gold, Timberline's 50% interest in annualized net income is anticipated to be $17,150,000, or $0.45/Share EPS. 

The relationship between TLR and SMD is very rare in the mining space and is one that is starting to get a lot of attention.  SMD owner, Ron Guill, is also a director of Timberline, and he is also Timberline’s largest shareholder.  I believe Timberline and SMD are already starting to be approached by other companies with late stage projects that might not have the money or know-how to get them into production.  This puts Timberline in a position to cherry pick future projects that will add accretive revenues and cash flow in the future. 

Disclosure: LONG TLR

Electronic Game Card, Inc (sym: EGMI) signed a definitive agreement to partner with China LotSynergy to enter the Chinese Lottery Market.  China LotSynergy has partnered with International Game Tech (IGT), Lottomatica (used to be GTECH), and now EGMI.  This is a very material event for the company and one that could add tremendous revenue and net income in 2010.  China sold 9 billion lottery tickets in 2008, which is government mandated to double by 2010.  The Welfare lottery makes up approximately 50% of the lottery tickets sold (4.5 billion tickets).  China LotSynergy is the only player in the Chinese Welfare Lottery System, so it is logical to assume China Lot/EGMI can capture as big a piece of the welfare lottery market as they choose. 

Ivy Lau, Chairperson and CEO of China LotSynergy commented, "Our goal is to contribute to the secure operation and healthy development of China's lottery market. We have formed partnerships with global industry leaders such as International Game Technology ("IGT"), GTECH, and, now, Electronic Game Card to ensure the success of our mission. We are actively engaged in enriching the variety and content of games. The Electronic GameCard(TM) is an engaging next generation platform that we believe will contribute materially to the accelerated growth target of the lottery industry in China and throughout the region." 

International Game Tech (IGT) recently (10/12/2009) invested another $9.8 million in China LotSynergy to further develop the lottery system in China.  This further validates IGT’s vision to advance one of the hottest lottery markets in the world, while also making IGT an indirect partner with EGMI.  In addition to the People's Republic of China territory, once a joint venture between the companies is established, the joint venture will have the right of first refusal for further distribution expansion into the Asia Pacific region including Hong Kong, Macau, Taiwan, Malaysia Vietnam, Singapore, Philippines, Cambodia, North Korea, Indonesia, Thailand, Laos, Brunei, Fiji, and Federated States of Micronesia, excluding Japan and South Korea.  This China LotSynergy agreement could lead to infinite profit centers for EGMI. 

The deal with China LotSynergy is expected to be a 50/50 JV, so all revenues and profit would likely be split evenly.  Let’s say the JV sells 100 million electronic lottery game cards in China in second half 2010 which would represent a 1% market penetration.  The potential price per card will likely be $1-1.50/card with gross margins of 20-30c per card.  EGMI’s take could be $50-75 million in revenues, and $10-15 million in Gross Profit in the second half of 2010.  This China deal alone could add $0.10+ in after tax net income in the second half of 2010.  EGMI will likely report $16 million in revenues and 14c EPS for FY 2009.  I expect EGMI will have a breakout year in 2010 as revenues and net income could increase dramatically from 2009 levels.    

Disclosure:  LONG EGMI

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