Description

GLXZ has been written up twice before, by woop (12/11/20) and Ares (8/18/22). 

https://www.valueinvestorsclub.com/idea/GALAXY_GAMING_INC/6325097054#description

https://www.valueinvestorsclub.com/idea/GALAXY_GAMING_INC/2827473990#description

I highly recommend checking the former for a thorough description+discussion of the business and then the latter for an update. 

In a recent interview the CEO gave this TLDR:

https://www.proactiveinvestors.com/companies/news/1049012/galaxy-gaming-ceo-matt-reback-discusses-q1-financial-success-and-future-plans-1049012.html?region=ca

Based in Las Vegas, Galaxy Gaming has been in business for approximately 30 years, originating from the creation of the Lucky Ladies side bet. The company now offers a variety of games, including felt games, electronic table games, and interactive table games. Galaxy Gaming’s products are distributed globally, with installations in over 600 casinos and 76 cruise ships. The company offers traditional games like blackjack and baccarat, as well as proprietary games such as Easy Baccarat and Heads Up Hold'em. Known for its popular side bets, Galaxy Gaming holds five of the top seven blackjack side bets, including 21+3 and Perfect Pairs.

The company has seen significant growth in its online presence, reporting 3.5 billion wagers on its games in the past year through partnerships with major gaming companies like Evolution and Playtech.

But really, go read woop and Ares.

What’s happened since then? The stock was soaring…and then came back down to Earth.

2023 was going well: they signed a 10-year contract with Evolution Gaming (https://www.sec.gov/ix?doc=/Archives/edgar/data/13156/000095017023022315/glxz-20230331.htm) in May.

Then in June they acquired the EZ Baccarat table game’s distribution rights, starting in Sept. (https://www.galaxygaming.com/news-and-events/galaxy-gaming-secures-distribution-rights-for-ez-baccarat).

They also received new or expanded licenses in 23 jurisdictions in North America, and 3 new iGaming jurisdictions.

However, they also had a terrible looking 3Q23 (https://ir.galaxygaming.com/news-events/press-releases/detail/574/galaxy-gaming-reports-q3-2023-financial-results) and, on 11/6 - a week before that release on 11/13, they fired their CEO (https://ir.galaxygaming.com/news-events/press-releases/detail/573/galaxy-gaming-announces-leadership-change) for unclear reasons (on a 11/21 recording (https://d1io3yog0oux5.cloudfront.net/_ad5d4e1ee0d5b474f643cb80a3494f1c/galaxygaming/files/audio/GG-InvestorRelationsAUDIO-112023.mp3) posted to the company IR section, the Chairman explained that the BoD’s decision was unanimous and that while Todd had done a great job since he was hired in 2017, they had been looking since the Spring for someone with more urgency and a greater focus on growth a multiyear strategy’). The stock dropped like a rock, from $2.75 to $1.50, and there it remains today.

Why was 3Q23 so terrible?

“We had a sequential decline in revenue in Q3 principally because sales of perpetual licenses were lower in Q3 than in Q1 and Q2. We expect that future sales of these perpetual licenses will make our quarterly results lumpier than in the past. However, we will continue to pursue these sales as they result in substantial increases to our installed base and offer additional recurring revenue opportunities.”

Tell me something good!

As woop and Ares can tell you, it’s a pretty good business with very high margins. I don’t have much to add there.

Bad but also potentially good: as discussed in the prior VIC writeups/comments, in 2021 GLXZ took on 60mm of L+7.75% 11/15/26 debt from Fortress. The current amount is about 54mm. But they also have an increasing amount of cash, currently 17.5mm, which they could use to pay down that debt. Instead they are effectively paying an 8% spread as “an insurance premium”:

https://www.youtube.com/watch?v=cK-8CLNYEXU

Harry Hagerty, CFO on 5/24/24:

…the first question asked why we keep so much cash on our balance sheet when we could use  some of it to pay Down The Fortress debt uh that question is a fair one as there is currently about an 800 basis point spread between what we earn on our cash uh and what we pay on our
debt however the number one concern that we hear from investors is that we might default on our debt with the result that uh creditors would take over the company in bankruptcy we think that's unlikely uh but the best way to prevent it is to pay interest in on time and we are keeping
the cash on hand in order to make sure that we can do that even if economic conditions worsen significantly the cash we had at March 31 around 17.5 million uh represents more than 2 years of interest and mandatory principal payments we could take 10 million and make a partial payment on the Note but then the remaining cash would only cover a Year's worth of interest at current interest rates and would not cover the minimum amortization so we view the negative
interest uh on the high cash balances as essentially an insurance premium against the failure to pay interest and principal when due. 

For reference, GLXZ guided to 12-13mm adjusted EBITDA for 2024 (17.9% yoy growth at the midpoint and so far looking good with 1Q in the books at 3.17mm). 8% on 10mm is 800k per year.  It might be nice to have that cash flow to pay down debt. To put it another way, L+5.75 is currently >13%, which works out to be 7mm of annual interest on 54mm of debt.  Meanwhile their LTM adj EBITDA is 10.7mm and LTM EBITDA is 9.2mm (difference is mostly ~1mm of SBC and ~600k for CEO severance/transition).   

GLXZ just hired a new CFO last month, Steve Kopjo, and he started May 28, 2024, just a few days ago. Perhaps GLXZ was a bit upset with Hagerty for not hedging their aforementioned 60mm of variable Fortress debt. Also I noticed Hagerty has had a few number typos in a few of the recent earnings releases. Earnings typos are not the end of the world but not a good look for a CFO.

As for the new guy, maybe he will feel differently about some of that 17.5mm in cash. And I couldn’t help but notice this ex E&Y auditor has investor relations, debt restructuring, and M&A experience in his bio. GLXZ needs all 3! And though not necessary, just imagine what a well funded acquirer could do for GLXZ’s cost of capital. I also imagine their opex would be a lot more efficient under a larger umbrella – SG&A was 15.7mm in 2023 vs 31.7mm of gross revenue.  As woop will tell you, GLXZ is operating subscale compared to its competitors.

https://www.galaxygaming.com/news-and-events/galaxy-gaming-appoints-steve-kopjo-as-chief-financial-officer

…With over 15 years of experience in the gaming industry, Kopjo began his career at Ernst & Young as an auditor for casino operators, acquiring his CPA license. Kopjo developed an eclectic skillset in Technical Accounting, Investor Relations, Corporate Finance, and Mergers & Acquisitions through a series of roles with both operators and suppliers, including SHLF entertainment, Wynn Resorts, Play AGS, and most recently as Vice President of Finance at Everi Holdings. Kopjo was a key member of the Play AGS team that led the company’s successful IPO in 2018. At Everi Holdings since 2021, he managed debt restructuring, investor relations, FP&A, and board of director communications, and played a pivotal role in several successful mergers and acquisitions.

Also perhaps important, on 2/5/24, GLXZ hired an EVP of Product.

https://www.galaxygaming.com/news-and-events/galaxy-gaming-welcomes-michael-ratner-as-executive-vice-president-of-product

As for the CEO, here is his bio:

…Prior to accepting this role, Mr. Reback served as the founder and President of Bravery Gaming. Prior thereto Mr. Reback held senior management positions in product management, sales, marketing and operations with AGS, Konami Gaming, Red Rock Casinos (formerly Station Casinos) and Caesars Entertainment. Mr. Reback is a graduate of UCLA and University of San Diego School of Law.

Also good to see GLXZ has a new board member to represent investors, at the behest of another investor named Tice Brown, who owned 6% of the company in 2023, but is not listed in the 2024 proxy.

https://ir.galaxygaming.com/news-events/press-releases/detail/555/galaxy-gaming-appoints-meredith-brill-to-its-board-of

Just so you guys have it, here is the proxy. They have a 5 member staggered board (3 classes) and they all seem to be paid pretty well for such a small company.

 https://www.sec.gov/Archives/edgar/data/13156/000095017024048930/glxz_def_14a_2024.htm

Meredith Brill is a Director and was appointed to the Board effective July 13, 2022. A graduate of the University of Toronto, Ms. Brill earned a Bachelor's Degree in Applied Science & Engineering in 1997 and a Law Degree from Osgoode Hall at York University in 2000. Ms. Brill is a private investor who focuses on evaluating special situation investments and unique business models. Prior to shifting to investing, she was an experienced Canadian intellectual property lawyer and Patent Agent with a chemical engineering background. Her legal career included all aspects of patent drafting and prosecution, intellectual property portfolio and management strategy, and competitive intelligence research.

The Board considers Ms. Brill’s extensive private investment experience and legal career with a heavy focus on patents and intellectual property qualifies her to serve on the Board.

With an EV of $75mm, GLXZ trades at 6x 2024 adj EBITDA guidance, 7x LTM adj EBITDA, and 8x LTM EBITDA.  For such a high quality business with high margins and minimal capex, that sounds cheap to me, especially if they can optimize their balance sheet, which seems like a very low hanging fruit for the next year or two. In the meantime, I expect GLXZ to continue to grow ~10-15% per year, as long as this new managment team turns out to be merely competent. And if they are good, it's very possible GLXZ does a little better. 

Risks

This is a microcap and it doesn’t trade much.

Leverage, which also comes with a Total Net Leverage Ratio covenant (net debt to EBITDA), which has a  max ratio, currently 5.0, dropping to 4.0 on 3/31/25 and then 3.0 on 3/31/26. GLXZ’s ratio is currently 3.8x.

Brand new CEO/CFO/CPO. The jury is still out on them. 

Catalyst

Balance sheet optimization.