Global Axcess Corp (GAXC) DVD Kiosk Update
Global Axcess Corp (OTC Bulletin Board: GAXC; the “Company”), an independent provider of self-service kiosk solutions, today announced that three weeks ago it commenced deployment of new DVD kiosks with the major grocery chain (“Grocery”), that Global Axcess signed a three-year contract with to initially install 300 additional DVD kiosk locations. To date, over 85 new DVD kiosks have been deployed with the grocery chain, approximately 40 additional kiosks will be deployed by Saturday, July 31 and 323 total kiosks are scheduled to be deployed with this grocery chain by the end of August.
In aggregate, across the Global Axcess system, the Company will have 165 DVD kiosks deployed by Saturday, July 31.
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I just ran some numbers on the potential contribution from the DVD division. These #’s are not from the company, but I think are fair estimates
| DVD Kiosks | 300 | 500 | 1000 |
| Revenue/month | $750,000 | $1,250,000 | $2,500,000 |
| Net Margin (15%)/month | $112,500 | $187,500 | $375,000 |
Disclosure: LONG GAXC
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Ian,
Thanks for your thoughts. W/R, I think your #s re DVD kiosks are pretty far off (understated) especially using the 15% margin at different levels of deployment. The issue is the fixed admin cost burden related to this division. Here’s what I mean in accounting terms using yearly contributions. Bear with the analysis which I know you’ll understand.
Each kiosk does conservatively $30,000/yr gross. Mgmt has stated that they expect conservatively a 40% margin or $12,000 to cover fixed asset cost and fixed admin cost. The total purchase price is $11,000 per unit including movies which is written off over 5yrs or $2,200 per year. Add interest at their new financing rates of 5.5% and you get first yr interest of say $500. So, when you subtract this total equip cost/yr of $2,700 from the gross margin of $12,000 you get a contribution to fixed admin cost per year of $9,300/unit. Multiply that by 300 and you get $2,790,000 per year contribution to fixed admin cost.
So what is fixed admin cost ? the additional 3 corp people hired, “some” allocation of the existing execs, additional cost for field people and some allocation of computer/office cost. If we use your 15% net/net estimate that would be add’l fixed admin cost per year for 300 kiosks of $1,440,000 to net the $112,500 net profit per month you show. I say $500,000 at the most and this might be high. So with my estimate the net/net would be ($2,790,000 – $500,000) or $191,000 net margin per month for 300 kiosks. OC, this difference grows at higher levels of deployment since the fixed admin cost is not a linear variable, though it will likely increase but be an even lesser %.
A couple of other points not considered with relation to this contract or future DVD kiosk growth is that the current marginal fixed admin for this division might already be covered by existing kiosks deployed. That is if my est of $500.000/yr is close, and the margin on DVDs is predictable, then $500,000/$9,300 kiosk contribution/yr means breakeven for the total operation is only 54 kiosks and they have them installed now. So, assuming this additional cost is covered by say 60 fully ramped kiosks, this contract is truly contributing $9,300/yr/kiosk.
Finally, I know the Co is lowballing both the revenues and gross margin of 40% for this contract. Revenue s/b more like $3k/month/kiosk ($36,000/yr) and the gross margin @ a higher %, That’s why I’m fully comfortable saying each additional kiosk (after the first 60 fully ramped ones) makes $10k/yr/kiosk bottom line profit (when fully ramped).
Fixed admin might “materially” increase to another level when they deploy 750 or 1,000 units but, by then, the increase in revenue and gross margin will make it an even smaller % increase such that it will truly be a non event.
Sorry for all the detail, but I can’t see where I’m that far off based on what I heard from the Company.
OC, I’m always interested in your take and if you agree you could publish your estimates assuming a far lesser amount of fixed admin cost burden.
BTW, I appreciate your continuing interest in this stock.
b\r
Tom
Tom:
Great analysis. I was just taking a very crude, simple, and conservative approach. We will know a lot more how to model the roll out once we see Q3 results in November. I’m also assuming there are going to be some dvd wins that are greenfield, so it will take 6 months or so to probably get to breakeven on those types of deals.
IC
Listen to this, especially the last part.
http://www.marketwatch.com/story/story/?guid=%7BE550D77B%2D5BAB%2D49CC%2DB414%2DF34CAF8B80AA%7D&siteid=yhoo
Found this on the yahoo finance board. Quote from the Netflix CEO on the Q2 call.
Reed Hastings
You know when we ask them, it’s a little bit of choppy exactly because you ask about movies, where did you get movies from? This is going to be different answer than where you get TV shows from. But when you ask where we get movies from, consumers say that kiosk, the $1 rental. That’s the big one and is still rising. Almost everything else is in the noise.