Micro CAP. RESEARCH REPORT
BUY Recommendation
December 1st, 1998
Go Call, Inc.
| Go Call, Inc. | Shares Outstanding: | 11 million aprox. | |
| 15 Queen Steet | Estimated Float: | 4.0 million | |
| Cambridge, Ontario | Recent Price: | $0.875/share | |
| Canada N3C 2A7 | Average Daily Trading Volume: | 50,000 approx. | |
| Telephone number | (519)-651-2121 |
Company Description:
GoCall, Inc. is a diversified Internet/Telecom company that has generated substantial internal growth and has just recently started to make strategic acquisitions to help broaden its products and services to meet the individual clients’ needs. The company has a broad based product line of Internet/telecom. services that include an Internet Banner Advertising Company, On-Line Casino, Internet Search Engine and a minor presence in pagers, and pre-paid calling cards,. The company has recognized the growth potential of the Internet and has smartly broadened its product line to include Internet services including an on-line casino and cyber cafes. The company is in the process of developing an Internet Kiosk that will include Internet access and an ATM machine in one unit. In addition to this the company has a solid management team to lead its future growth. This company appears to be positioning itself to take advantage of the growth potential in the Internet and telecommunications industries.
Just over 1 year ago Go Call acquired a resort hotel in the Domincan Republic. With the recent launch of the On-Line Casino, the servers for the casino are now located on the property of the hotel. This provides a favorable jurisdiction for the gaming operations of the casino. This location also provides an ideal location for future expansion plans for the hotel.
Go Casino:
The on-line community’s interest in full service casinos that allow users to play with, and win real money has been proven, and the number of private online casinos is expected to grow from the current six or seven dozen to over 300 in the next two years. While revenues and net earnings are not readily available for these private casinos, Cryptologic Inc., which introduced one of the first online casinos, reported 1997 net after tax earnings of $8.7 million on revenues of $17.6 million
Since opening its doors in the summer of 1998, Go Casino has been exceeding both company expectations and industry model based projections. This continued growth will provide substantial cash flow to fund additions and refinements to the existing site, as well as allow internal funding for expansion in other divisions.
The casino is housed in an offshore server, which provides legal and tax benefits. The servers are located on the company’s resort hotel property in the Dominican Republic. This allows the casino to operate outside the cumberson jurisdiction of the various states govermenments seeking to regulate the On-Line Casino industry. To the best of our knowledge there is not currently pending any legislation within the United States that would be able to regulate On-Line Gaming. In the past the US Justice Department has characterized previous legislative attempts to regulate On-Line Gaming as unenforceable.
Go Casino allows players to play their favorite casino games for real money, in real time, with other players from around the world, at a higher of pay out than conventional casinos. Go Casino is equipped with the latest Internet technology, including on-line “playing chip” ordering, on-line account updates, real-time on-line help, superior graphic player representations, as well as an incomparable security system.
Go Internet Kiosks
Go Call, Inc. has developed a kiosk that incorporates Internet access along with a traditional Automated Teller Machine (ATM). This Internet kioks will allow people to withdraw money from their banking accounts and access the Internet. Go Call, Inc. will be able to charge for Internet access as well as sell advertising on these machines. They are initially being targeted towards the 53,000 convenience stores within North America. It is expected that these kioks will be introduced in the near future.
Banner Ad
Banner Ad, a division of IAG, specializes in Target Audience Marketing (TAM) through banner placement on specifically targeted Internet Web sites. Another division of IAG, Indexus, the future concept in index search engines, will allow companies to modify and update their product information on a minute by minute basis if necessary, something that the current generation of search engines is not capable of.
Go Internet Cafes – The New Wave of Cyber Cafes
The standard Internet cafe is a much like a traditional cafe that has been equiped with a few computer terminals for people to surf the web and check their email. Go Call has expanded upon that concept by offering additional services that the typical consumer should find beneficial.
The Go Internet Café concept that allows customers the choice of any or all of Go Call Inc.’s services. In addition to a nutritious, competitively priced lunch or snack, the customers may avail themselves of all the business amenities in a normal office setting. Fax machines, photocopiers, E-mail and computer programs are available to enable clients to conduct business while on the road or away form the office.
There are currently two Go Internet Cafés in operation with several more in the works.
Go Call Pre-Paid Long Distance Calling Cards
Pre-paid calling cards made their entrance into the North American market in 1990 with sales in the United States of $30 million. By 1992 annual sales were in excess of $300 million and in 1997 exceeded $2.1 billion.
The company has recently established a distribution channel for these cards in Canda through the Korean Businessmans Association which has over 4,500 conveinence stores in Canada. The company is looking to establish a similar agreement within the United States which is obviously a far larger market with greater sales potential.
The Internet has demonstrated some of the fastest growth of industry ever. It is not just a new industry, but a whole new way of doing almost everything. In its fourth quarter results America Online, Inc. announced a 5.6% sequential growth in its subscribers, bringing the world wide total to 12.5 million subscribers. America Online has 2.5 million international subscribers, demonstrating the international appeal of the Internet and products available over the Internet. In addition to this America Online reported that its average daily minutes of usage per member was 44.2 minutes during the last quarter. On a 30 day month this translates into the average user being online a total of 1,326 minutes or 22.1 hours a month! This is an impressive amount time being spent online.
Another interesting item from the recently reported 4th quarter numbers from America Online was that the company’s merchandising revenue continued to decline. This is veiwed as a favorable item in a very recent research report on America Online by Bear Stearns Securities. They view it as favorable because it allows America Online to concentrate on higher margin advertising business and than the lower margin retailing business. It also removes the risk associated with carrying inventory. I view this decession by America Online to focus on advertising and move away from retailing merchandise as sign of their lack of desire to compete with other on line retailers. It also means we won’t be seeing the America Online casino anytime soon.
In their research report Bear Stearns Securities stated that their price target for America Online assumes a cash flow multiple of 15 times for 2002 and a 15% discount rate.
Our analysis of the Internet indicates that it is capable of generating growth at a faster rate than any other industry. In addition to this the overhead and infastructure required to operate an Internet business is very low when compared to other “brick & mortor” companies. This creates the opportunity for higher profit margins than are associated with the traditional forms of the same industries. The Internet is truly a world wide entity, as demonstrated by America Online’s 2.5 million international subscribers.
Gaming Growth
A recent research report on the Gaming Industry by Bear Stearns Securities indicated that this last August was the second best month for the Atlantic City gaming industry. The revenue for August of 1998 was only slightly below the best month ever August of 1997. The recent changes in state laws concerning gambling have dramatically widened its apeal. I remember growing and the only areas to gamble within the United States was Las Vegas and Atlantic City. Then several key Mid-Western states started to legalize gambling. First with legalized gambling on Indian Reservations and then with Iowa’s legalization of River Boat gambling.
Now the domestic gaming industry has what it considers to be emerging markets in locations including Council Bluffs, Iowa, St. Louis, Mo., and Vicksburg, Mississippi. Several years ago I traveled through St. Louis, Mo. on a business trip and decided to spend the night, and my associates and I check out a River Boat casino. It did not look like an “emerging market” to me. It looked pretty well established. What these entrants into the new gaming markets have accomplished is to broaden is exposure and familiarity with the public. The more familiar people are with a product the more likely they are to use it. The same is true with gambling. There continues to be considerable growth in these emerging markets and over seas where gambling is more widely accepted.
There have been some interesting changes in the slot machine industry that I believe are significant for the On-Line Gaming industry. There has been a very noticable and definate trend among the players of slot machines to be focussing on new machines with more features. The effect that this has had is to shorten the life span of slot machines. The casino operators are being forced to replace their machines in as little as 2 years. The managers of casino slot machines are finding that the players are increasingly moving towards machines with video screens, sharper graphics, better sound quality, and more interactive features. Many slot machine manufacturers now find themselves competing with software companies for the talent needed to design these machines. Slot machines now account for almost 75% of the typical casinos revenue. On-Line Casinos are ideally set up to provide slot machine players with the enhanced features they are seeking in the new machines. They are well positioned to customize their sites to provide slot machine players with the newest and most sought after features.
On-line Gaming
Due to the uncertainty of the legal aspects regarding gaming and the Internet the larger traditional casino companies have been reluctant to develop online gambing operations. They have enourmous amounts of capital invested in their physical casinos which are heavily regulated by the states within which they operate. They are unwilling to take the risk of angering state regulators who could create problems for their traditional casinos by operating an online casino. As a result they have not yet entered the online casino industry. This has created an opportunity for smaller and quicker entrantents to enter this market and become established.
The heavily regulated nature of gambling combined with the evolving laws concerning the Internet has created a situation where the ideal location for an online casino to be located is outside of the United States. Many of the early entrants into the online gambling industry where located in the Caribean or Central America. Go Call, Inc. is head quartered in Ontario, Canada which we feel is a more stable location than where the other online casinos are located.
Recently I had the chance to speak to one of the analyst at Bear Stearns that covers the casino industry. They are of the opinion that the traditional casinos see themselves more as operators of entertainment complexes and events than anything else. He did not believe that they had much desire at this point in time to pursure any ventures in the on-line gaming industry. He felt that the producers of gaming equipment with their computer expertise would be the most likely to venture into the online gaming industry. My opinion is that the manufacturers of gaming equipment probably do have the desire to deal with the differences that come with actually operating the type of equipment they manufacture. This should create an opportunity for the On-Line casinos to become well established before the traditional casinos begin to be attracted to the On-Line Gaming Industry.
CryptoLogic
CryptoLogic is a Canadian based software company that has developed software to operate an On-Line Casino, and in addition to liscensing this software to other companies operates its own On-Line Casino. CryptoLogic wa essentially a start up company in the middle of 1996 and for all practical purposes did not commence operations until the start of 1997.
In its first full year of operations CryptoLogic was able to generate a net after tax profit of $8.7 million Canadian Dollars from total revenue of $17.66 million Canadian Dollars. This represents a very healthy 49% net profit margin!!! In the first 9 months of 1998 CryptoLogic’s revenue has grown to $24.1 million Canadian Dollars versus $11.2 million Canadian Dollars in the same period of 1997. Net after tax income for the 1st 9 months of 1998 is $16.9 million Canadian Dollars. The net profit margin has increased to 70%. While I do not expect the after tax margin to increase above this level, it definately indicates the low overhead and economies associated with a computer based business.
Go Call Inc.
Go Call, Inc. has positioned itself to provide an ever broadening array of products and services to meet their clients needs in the Internet/Telecom Industry. Their recent strategic acquisitions have expanded their reach into the rapidly growing field of Internet advertising. This should prove to be a steady source of revenue and income for the company. The On-Line Casino that was launched in the summer of 1998 should prove to be an incredible source of revenue and earnings for the company. While information on other publicly traded On-Line Casino companies is limited our analysis of the industry has uncovered several very promising facts.
- The Internet is one of the fastest growing industries with a reach that global in nature.
- The traditional gaming industry within the United States continues to see revenue at record levels. And is growing into new markets throughout the United States deomstrating its broadening appeal.
- The Gaming consumer is demanding new and higher quality Slot Machines that are coming closer to resembling video games available over computers.
- It does not appear that the traditional operators of casinos or the manufactures of gaming equipment will be entering the On-Line Gaming industry in the near future.
- There are very few other publicly traded On-Line Gaming Casinos.
- CryptoLogic the other publicly traded On-Line Gaming Casino has demonstrated extremely impressive growth in its sales and earnings.
We believe that CryptoLogics provides an excellant comparable for Go Call due to the similar capital structures and nearness in time to the launching of their On-Line Casinos. The shares of CryptoLogics were recently quoted near $9.00/share. This is a market capitalization slightly above $72 million Canadian Dollars. We believe that Go Call, Inc. will most likely see a similar growth to its revenue and earnings. With approximately 11 million shares outstanding, and a current share price of approximately $1.00/share we believe there is substantial room for price appreciation in the shares of Go Call, Inc. Our near term price target for the shares of Go Call, Inc. is $3.00/share. Looking futher down the road we are willing to place a price target in the range of $6.50-$8.00/share on the shares of Go Call, Inc.
Notice of custom research
Sterling Investment Services, Inc. is an independent investment management and research firm. Sterling Investment Services publishes four different newsletters. Three of which are broadcast on a nightly basis. Additional information on these newsletters can be obtained from our web site at ‘www.sterlinginvestments.com’. Sterling Investment Services, Inc. was paid a consulting fee in conjunction with the production of this report.
The Sterling Investment Series of newsletters is produced by Sterling Investment Services, Inc. If you would like to receive a chart on any index or stock mentioned in this report please contact us at the below mentioned numbers. We also offer custom research reports on any stock investment that you may desire information on. To receive further information on these services please visit our web page at: www.sterlinginvestments.com If you would like to contact us our # is 800-275-6901, fax # (404)-816-8830 Email address is: enelson@sterlinginvestments.com Sterling Investment Services may hold positions in the securities recommended or may be providing consulting services to the companies mentioned within this report.