May 07, 2014 - 1:55pm EST by
2014 2015
Price: 7.82 EPS $0.17 $0.00
Shares Out. (in M): 94 P/E 46.0x 0.0x
Market Cap (in $M): 737 P/FCF n/a 0.0x
Net Debt (in $M): 101 EBIT 0 0
TEV (in $M): 838 TEV/EBIT n/a 0.0x

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  • Gaming
  • Online gaming
  • Canada
  • Market Expansion


Amaya (AYA CN CAD$7.82) designs, develops, manufactures, distributes and sells technology solutions to the gaming industry.  It has three lines of business; land based, lottery, and I-gaming, the latter of which we believe will propel shares meaningfully higher over the next 2 years.  AYA’s Land-based business (its largest) means actual physical slot machines and electronic games where it offers a variety of feature-rich products, game themes, bonus options, and math models. It also provides slot management services and systems, including tools to monitor and balance the mix of gaming machines on a casino floor. Its gaming machines feature proprietary games from a library of more than 100 game titles, with new titles developed on a continuous basis. Over time this segment is expected to be surpassed by the currently small but higher-growth online/i-gaming business, but as it stands now, AYA’s revenue breakdown can be estimated as follows:

(one thing to note:  we use estimates because there is almost no actual quantitative disclosure as to the real breakdown of revenue or costs, margins, etc., by segment. Also, other than the management’s analysis excerpts quoted below, the company does not report any of the actual terms of its participation agreements, daily usage fees, lease terms or licensing fees.  It is a difficult company to be granular about)

60%: Land-based, where AYA offers operators (casinos, cruise ships, etc) solutions that are physically at the operator’s sites. This consist primarily of games and game systems, and related services and support, for the North American market, including tribal, casinos, commercial casinos, charitable gaming establishments/bingo halls, the video lottery terminal (VLT) market and racetracks.

Per AYA’s filings: Revenues are generated primarily through participation agreements with the gaming operator, under which Amaya receives a percentage share of the revenue generated by its gaming machines and systems or in other instances a daily fee. Revenues are also generated through the sale of gaming machines either on an outright basis or on a finance lease basis, as well as from software licensing.


The company is in the process of entering the much larger and more lucrative Class 3 machine market. Class 3 machines have more sophisticated and diverse algorithms that we see in Vegas/Atlantic City casinos. This move will diversify its current almost singular (93%) focus on Class 2 machines (more standardized, “bingo-like” algorithm machines, employed typically in Indian tribes run casinos). AYA aims to benefit from the continued market share erosion experienced by IGT - the historical leader in the class 3 market. Importantly, it will allow it to create further synergies with its online offerings to its casino customers as they enter the online market.


35%: Interactive and Mobile:  With its content library of 500+ popular games (Amaya has licensing agreements in place with  DC Comics, Paramount, Marvel), live dealer table games, and poker games, AYA’s integrated model takes care of costly and highly specialized activities (content development, technology development, maintenance, 24/7 multi-lingual technical and player support, etc.) for its partners. Allowing casinos to focus on sales, marketing and other revenue generating tasks, brings efficiency and profitability for online gaming operators. AYA positioned itself as a state-of-the-art business-to-business operator (as opposed to business-to-consumer) thus eliminating marketing and other typical b2c costs entirely, improving ebitda margins and lowering leverage. The b2b model also removes them from competing with its casino clients, eliminating conflicts of interest and making them more attractive for potential partners. 

Per AYA’s filings: Revenues are primarily generated via software licensing based on a percentage of the gaming operator’s net gaming revenue (or rake in the case of Amaya’s poker platform), hosting and network administration fees, and set-up fees for platform integrations (poker, CGS, AGO, third party tools), training, and consultancy services. Other revenues in 2013 were generated via hosted casino related to online casino operations.


AYA acts on-line in one of two capacities: a content provider or a platform provider. In the former case it simply provides the actual games with all the accompanying support and customized according to the casino’s parameters. In the latter case it assumes a much larger role of building and integrating and running all of the casino’s online operations. While running an individual platform is a more profitable activity, the overwhelming share of AYA’s online revenues come from providing the content. That is because for competitive reasons no two casinos in a single online market would want to run the same platform as their rival, and therefore an AYA-type company can only run one platform in a given market, while it can license and customize games to all of them.


5%: Lottery/Government AYA develops and licenses its software enabling governments and regulatory bodies to run mobiles lotteries allowing players to purchase tickets via their mobile devices


The main thesis behind the trade is that you are buying a well run company with proven management at a reasonable price while you wait for the investments it made to prepare for New Jersey to pay dividends when  the eventual legalization of online gaming in other states occurs.  There is also scarcity value, as we believe this is one of the few ways to invest in the growth of online gaming, and the only good way if you are limited to North American companies.

 The CEO, David Baazov (highly regarded in the industry) is the largest shareholder with 26% of the shares, with interest clearly aligned with that of the shareholders. 

The stock only listed on TSX in 2013, does not trade in the US and has limited sell side coverage. But with NJ opening to online gaming late last year, and with regulatory landscape changing across the US and globally, AYA became one of only 2 North American vehicles to invest directly in the growing area. 

CACQ (last year’s spin-off from CZR) is the other name, but it has a clearly defined stock price ceiling, as CZR owns a call on it. While apparently often overlooked by the market, this was spelled out in the prospectus (p. 174) for CACQ as it went public last fall, and is referred to as the Call Right. In it, after three years post spin, CZR can buy back CACQ at a price equal to “fair market value … subject to … (ii) a maximum purchase price equal to the capital contribution in respect of such units plus a 25% per annum return on such capital contribution … taking into account prior distributions (other than tax distributions) with respect to such units.”

CACQ was distributed via a rights offering with $8.64 subscription price, which gives CZR a max strike price for its call on CACQ of $16.88 as early as Nov 2016. In other words, regardless of how profitable online gaming is for CACQ, CZR has the right to buy back all outstanding shares at a maximum price of $16.88 (as long as CZR remains solvent, with net leverage less than 9x and available liquidity of at least $1B). With CACQ trading at $13.80 now, we don’t believe this is a viable alternative to invest in online gaming. 

That leaves us with AYA.

It is one of a handful of solutions providers used by the online gaming operators. The other main ones, such as 888, Bwin and BetFair are non-North-American based companies with the b2c expertise (meaning they run their own online gaming sites with gamers being their direct customers). And when it comes to providing a one-stop solution for a casino trying to establish its online presence AYA’s offering appears very competitive despite company’s smaller size.

When a Caesars-type house is looking for an online partner, they evaluate the candidates according to multiple criteria: technical expertise, experience, speed of implementation, flexibility (e.g. can we quickly change the “skins,” logos, overall appearance, etc of the product?), strong back-office capability, tech/customer support, depth, uniqueness and popularity of game library, internal controls (fraud detection/prevention, monitoring) regulatory compliance, etc. AYA has developed a track record and reputation of excellence in all of these parameters as demonstrated by its successful penetration of the NJ Market.

On April 14 NJ released its 4th monthly internet gross revenue report since the market opened in December 2013.  Though the early numbers fell short of very aggressive initial estimates, the growth has been steady and the aggregate win revenues grew from $7.3m in Dec to almost $12m in March. The slow start is primarily attributed to payment processing difficulties (major credit card companies are still working on their control systems to address the newly legalized online gaming world), which in turn caused the casinos to hold back their marketing effort.

At this point, more important than the absolute revenue numbers, is the distribution of revenues among the operators:







Borgata, Amaya



Caesars Interactive / Bally’s Park Place

888, Amaya


Caesars /Boardwalk

888, Amaya



Golden Nugget

Chilligaming (Bally), Amaya

Bally IGP






Trump Plaza 

GameAccount, BetFair, SHFL, Amaya



Trump Taj Mahal

Ultimate Gaming, Amaya

Ultimate Gaming


It is telling that of the 7 casinos operating gaming sites in NJ Amaya participates with 6, securing exposure to 84% of gross win for the state. While the company does not disclose the exact numbers, with the exception of (where it runs the entire platform) Amaya is compensated through participation agreements. The most recent addition to this list was Trump Taj Mahal announced on March 31.

As explained above, no two casinos want to have the same platform provider in the same market. Therefore with one platform and 6 out of 7 content partnerships Amaya did as well as it possibly could in maximizing its NJ presence. In fact, it is the only company with such stellar performance. AYA managed to secure such vast exposure during a very brief window of opportunity after NJ decided to regulate the space. Its experienced and well-prepared team quickly obtained necessary licenses and formed relationships with the casinos and the online partners.

Such impressive performance and aggressive projections driven by market enthusiasm over the online gaming potential helped the stock to a 40%+ run between Sept and early March.  As the initial online win numbers reported by NJ fell short of the estimates based on the State’s own and analysts’ projections, the stock drifted down until it finally cracked after its earnings, when it became clear the online revenues would have to wait.

One more thing worth noting in this context is AYA’s relationship with Bally Technologies. In 2012 AYA signed an agreement with SHFL to exclusively distribute AYA’s Ongame Poker Platform in the US for 10 years, with AYA receiving an upfront $10m followed by a 50/50 revenue split. Further, per the agreement AYA is to receive $8m contingent upon regulated online poker commencing under either Fed statute or in California (more on CA later). SHFL was purchased by Bally in early 2013 and this deal was followed by a further agreement to integrate and license AYA’s poker platform and casino suite into Bally’s iGaming platform. It is through these agreements that we see AYA participating in Golden Nugget NJ online business which retains Bally.

AYA’s 15% post earnings drop on March 31, followed by a slide in growth stocks lead to a precipitous drop to the  high CAD$5 range. The Q4 report and the call afterwards spooked the market because it did not show the expected revenue growth and management deferred providing 2014 guidance till May. The latter was consistent with last year’s guidance release timing, but disappointed the market which was eager to hear a lot more details regarding the newly opened NJ online market.  

One reason for the market’s unpreparedness for the Q4 results was that since its last guidance the company refrained (for what it called confidentiality reasons) from communicating the details of the sale of WagerLogic’ B2C  business as well as some other “strategic” asset sales.  At the end of the day,  disposing of the cost-intensive B2C part of the business fits well with the company’s strategy of positioning itself as a pure one-stop B2B operation, but the resultant disconnect between the reported numbers and the analysts’ models proved to be too confusing to the market. If anything, the disposition of Wagerlogic’s B2C business reflects management’s prudence when it comes to capital allocation, and the series of acquisitions we saw over the past 3 years appear to be all part of a disciplined plan, not a simple roll-up play.

Two positive developments In the past month have lead to a partial recovery in AYA stock price.  First on April 16, the company made an announcement of a sale of 1100 gaming machines to existing and new customers in the US, alleviating the some of the rev growth concerns.   Second, last week the company announced that NJ’s Division of Gaming Enforcement approved AYA’s platform and associated hardware and software for NJ use. While the first news referred to the class 2 machines, the latter one deals with class 3, supporting company’s claim of making progress in this arena, and once again reinforcing the idea of future synergies between its online and land-based operations in NJ

While we wrote most our analysis when the stock was trading in the mid $6 handle, we believe the recent snapback is part of a larger move as the market finally sorts out the earnings mess,  digests the recent news and learns to once again appreciate the on-line gaming  optionality part of the thesis.

Today, trading around CAD$7.80 we are still looking an inexpensive option on the NA on-line gaming market.  Assuming almost no growth except for the already announced land-based deals this year we are looking at a 9x EV/ consensus ‘14 Ebitda - in the bottom of historical range, and not far from the its 8.5x peer average (IGT, BYI, WMH.l) (Looking at any FCF metrics for the last year would be difficult at this time, as it’s been obscured by large investments made in preparation for NJ market opening.)


Future catalysts:

New markets:

Its already wide network of relationships and track record, being based in North America (unlike most of its European-based peers), and successful NJ experience give Amaya a tremendous edge as the new markets start opening up across the US (CA being the most talked about, but others, e.g. Maryland, Illinois and most recently NY actively considering online regulation) .

With an estimated one million resident poker players CA would become by far the single largest Internet gaming market in the U.S. with gross poker wagers potentially exceeding one billion dollars. There is every reason to expect Amaya to do as well or even better in CA once it opens up. On top of demonstrated ability to quickly form new relationships, gain necessary licenses and capture market share, AYA has additional advantages in CA (As a caveat, please note that several of the largest Indian tribes have announced partnerships with various on-line gaming providers other than Amaya in anticipation of legalization of online poker.  We believe the market will be large enough that Amaya will be able to meaningfully participate).

Amaya is already actively operating in the state and has strong long term relationships with the Indian tribes operating casinos for which it supplies class 2 machines. This also introduces potential for land-based / online synergies that AYA and its peers have been realizing for some time now in European markets.

Some of these synergies are more applicable to games-of-chance played against the “house” (e.g. slots, roulette, black jack etc), rather than poker (game of skill played against other gamers) which is the only type of on-line gaming currently on the agenda in CA. Still, these need to be considered as it is expected that the poker approval will eventually be followed by the expansion into games-of-chance.  For instance, that is exactly what happened in Spain recently as the original Poker-only approval lead to approval of other on-line gaming a year later) Per company’s explanation, the synergies come in several forms. E.g. empirically, a player who enjoys their land-based machine becomes accustomed to and comfortable with the characters, brand, math algorithm behind it, and has therefore been drawn to the online equivalent. So the casinos will find it compelling to complement their land-based offering with the online "extension" to capitalize on this loyalty and keep the customer playing on and off-premises. Same works in reverse.

Also there are some licensing savings, given that they already have gained licenses for the specific type of games and algorithms. Other savings for the operator such as marketing and selling costs are also realizable in this model.

As CA currently is only considering poker for its foray into online gaming, AYA becomes an immediate plug-and-play candidate to serve as the online provider, with its widely recognized market-ready online poker solution. Amaya spent a large amount of money building a new poker platform from scratch to participate in online gaming in New Jersey. Much of the costs in building out an online platform for California should it legalize online poker has already been incurred. Further, in CA (unlike the NJ market) AYA will have the ability to provide a common platform to multiple tribes enabling them to take advantage of pulled liquidity, vital for the successful poker offering.

Finally, one of AYA’s board members, Harlan Goodson, is a former Director of CA’s division of Gambling Control, bringing invaluable expertise in both regulatory and tribal relationships sides of the California story.

To be fair, the timeline for CA action is subject to a lot of debate and uncertainty, and whether it will happen this year is a very open question. Several competing groups have not been able to reach an agreement on a structure that would accommodate their interests and concerns for three years now.  As recently as last month two competing bills were introduced by rival coalitions. Both bills are backed by coalitions of Indian tribes with divergent views on several key aspects of regulation including eligibility requirements, licensing and launching costs, security rules, number of websites a licensed operator could employ and numerous other provisions.

The current legislative session will end on August 31st and the Governor will have another month to act on any bills reaching his desk.


New Listing

Being listed exclusively in Toronto has clearly been a disadvantage for the mostly US-operating company and with most of its peers trading in NY or London. Listing in one of these two markets would be a huge benefit to the stock as it will expose it to a wider, more informed audience of investors, and more educated analyst coverage.  Management is aware of this potential benefit of a dual listing and has made public statements alluding to its intention to list either in New York or London.  Our base case is that this is a 2015 event.  In discussing the pros and cons of NY vs London, management pointed out that given that most of its cash flow is USD denominated , NYC listed company would present a clearer security to investors.



I do not hold a position of employment, directorship, or consultancy with the issuer.

I and/or others I advise hold a material investment in the issuer's securities.

This investment may change at any time.







I do not hold a position of employment, directorship, or consultancy with the issuer.
Neither I nor others I advise hold a material investment in the issuer's securities.


New Listing
New States opening to online gaming (particularly CA)
Progress entering class 3 market
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