TransAct Technologies Inc (TACT) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to TransAct Technologies second quarter 2003 results conference call. At this time, all participants will are in a listen-only mode. Later we will conduct a question and answer session. At that time, if you have a question, you will need to press star, one on your touch tone phone. As a reminder, this conference is being recorded today. A replay will be available after 8 P.M. Eastern Standard Time today through 12 A.M August 6th. The replay dial in number is 402-220-1124. Again, that number is 402-220-1124, with a pass code S207. The replay will be accessible at www.transact-tech.com. I would now like to turn the conference over to David Pasquale. Please go ahead sir.

Good afternoon and welcome to TransAct’s second quarter, 2003 results call. Joining us from the company are Bart Shuldman, Chairman and Chief Executive Officer and Dick Cote, Chief Financial Officer. Bart will review highlights from the quarter and TransAct’s outlook. Dick will then review the company’s key performance metrics and financial results. We will then have time for any questions. If you have not yet received a copy of today's release, please call Jim Olecki of the Ruth Group at646-536-7021 or you can get a copy of TransAct's website.

Before we begin the formal remarks, the company’s attorneys advise that this conference call contains statements about future events and expectations which are forward-looking statements. Any statement in this call that is not a statement of historical fact maybe deemed to be a forward looking statement. Actual results may differ materially depending on a number of risk factors. For a full list of risks inherent in the business of the company please refer to the company's SEC filings, including the company’s most recent annual report on Form 10-K. The company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the day of this call. At this time, I would now like to turn the call over to Bart Shuldman. Go ahead, sir.

[Missing Audio] in Q2 from Q1. Dick is going to review the detailed financials but I want to hit on a few key points. First, even though the market remains challenging, we exceeded our prior guidance based on strengths across all our market segments. As we indicated in this afternoon's release, revenues for the second quarter increased 49% sequentially and 23% year over year to $13.4m. Net income for the second quarter increased 200% year-over-year to $787,000 or $0.12 per share.

Secondly, because of our overall higher revenues, favorable product mix and ongoing cost controls, gross margins increased to 31.5% gross margin from 28.5% in the year ago period. In addition, we continued to manage our operating expenses, which resulted in more than a 150% increase in operating profit as a percentage of sales compared to year ago.

Let me now give you some color on our specific segments. Revenues from our gaming and lottery business were up over 80% sequentially. Growth in this segment was led by a significant increase in our lottery sales as we begin volumes shipments of our new thermal printer, lottery printer to GTech during the second quarter. We also continue to benefit from accelerated casino printer growth as a ticket in, ticket out opportunity build out at a rapid pace. TransAct continues to be an integral part of this initiative and its position to continue to benefit from its growth. Importantly, we don't see this growth letting up. If anything, it only further accelerate.

Additionally our video lottery terminal business is showing encouraging signs as state governments continue to evaluate roll out racinos (ph) as a supplemental source of revenue. The Pennsylvania State House of Representatives just approved a bill which would legalize 11 slot machine gambling venues. Industry sources also expect to see similar bills passed in other states, including Maryland and Massachusetts. And we already know that New York state has passed their legislation, allowing racinos, which we expect to start receiving orders for later this year. UBS Securities estimates that these additions could represent an additional 57,742 slot machines increasing the current total of 71,927by 80% over the coming years. And as all this happens, TransAct stands to be one of the clear beneficiaries.

Let me now give you some color on our POS business, no pun intended. This is one of our first quarters in a while that we actually have some positive news to report. In fact revenues from our POS business were up 11% sequentially. The increase was bolstered by strength from our POSJet (ph) and BankJet (ph) printer sales, which were up 69%sequentially. The double digit growth was actually ahead of what we were expecting, as we had a number of major orders ramp up or close in the quarter.

Also, we announced two very significant deals. The first is with one of the largest diversified entertainment companies for a complete upgrade of their 2500 thermal and impact printers and their converting to TransAct’s POSJet 1,000 inkjet printer. The second was with one of the world’s largest financial services holding companies, also for a full upgrade of the company's 6,000 U.S. Bank Telestations to our new BankJet 1500 printer. The size of these orders alone underscores what we have been working towards. We are now closing on deals with customers that have the scale to order large printer quantities. And we expect to continue to close more orders of this magnitude or larger going forward. This is key to our growth strategy and steadily increasing profitability.

We're also very active from an operations standpoint as we successfully launched our new ITherm (ph) 280 thermal printer, which offers customers a low cost. High speed two color thermal printing solution. More importantly, the printer as an integral power supply very important to the hospitality market and a vertically mounted circuit board to avoid spill damage. And is also available with the industry's first wireless option, 802-11B option. Customer reaction has been overwhelmingly positive and we already have orders on our books to ship in the current third quarter.

We also launched our new wireless technology based on the popular 802-11B standard. The wireless solution is initially available as an option to Our Ithaca POSJet inkjet printers and our new ITherm 280 thermal printer, as I just said. This is extremely compelling because it removes cumbersome and restrictive location and environmental constraints. Again, customer reaction has been overwhelmingly positive, especially in the restaurant and hospitality market, where space constraints are common. We have high expectation for our latest technology as many indicate or suggest that wireless could be the new technology application that will lead to rebound in retail IT spending and the POS market.

Additionally, we announced that HP is [inaudible] TransAct Ithaca brand of printers as part of the HP end to end retail solution. TransAct will supply HP with its Ithaca brand of printers, including our POSJet 1000 inkjet printer and 1500 inkjet printer and our two color thermal printer, as well as our ITherm 280 thermal printer.

Despite the weak IT spending environment, we continue to see significant interest in our POSJet and BankJet product lines, due to the competitive benefits they offer customers. As a result, we expect to see sequential growth in this segment led by an increase in inkjet printer sales.

Coupled together with the strong growth of our printers sales is the continued growth of our spare, service and consumables business. We had a great quarter in this segment of our business as we continue to grow in all these areas. However, the fastest growth in this segment clearly came from our inkjet cartridge sales, which is our new razor blade part of our business. As we sell more inkjet printers, the corresponding inkjet cartridge sales follows. This builds a recurring revenue base of business for TransAct that will on only continue to grow as we see inkjet printer sales continue to drive in the growth of our POS business going forward.

As we enter the third quarter, we are extremely excited about our prospects for the full year. We see growth in our gaming and lottery business continuing from the continued rollout of ticker in, ticket out initiative and the casino market. And increased shipment to GTech of our new thermal lottery printer. Additionally, we are positioned to benefit from the expected roll out of racinos, given our strong competitive position, proven printer models, extensive sales network and customer relationships.

Finally, we expect to see continued sequential growth in our POS business, driven by inkjet printer sales, as more hospitality, retail and banking locations upgrade their current line of printers. The major orders we announced in the second quarter have already started shipping. And give us confidence in our forecast.

Specifically for the third quarter ending September 30th, 2003, we expect to achieve revenues of $14m with earnings per share of about $0.14. We are also updating our previous outlook for the full year 2003 to $48m to $50m, with earnings in the range of $0.30 to $0.36per share.

Overall, we remain confident of the fundamentals of our business, the operating leverage we have built in to our model, and the growth trajectory we are on. Now, let me turn the call over to Dick for a financial summary.

Thanks Bart. Starting at the top. Total revenues in the second quarter were $13.4m, compared to $10.9min the second quarter a year ago. And $9.0m in the first quarter of this year. As Bart mentioned, revenues in the gaming and lottery market were up over 80% sequentially over the first quarter as we began shipping our new thermal lottery printer to GTech during the second quarter. POS revenues while still at lower levels due to the weak economy, grew 11% sequentially over Q1, partially the result of increased sales of our inkjet printers. And gross profit in the second quarter increased to $42m, up $4.2m and our gross margin improved to 31.5% from 28.5%a year ago and 27.1% in the first quarter of this year. The higher margin is attributable to higher revenue volume, favorable product mix and ongoing cost controls. We expect gross margins to further improve in the second half of the year as the volume of shipments increases, specifically in our gaming and lottery business.

We continue to manage our operating expenses, which for the quarter ended June 30th were $2.9m compared to $2.7m a year ago. Our selling expenses were up in the current quarter, largely due to increased commissions on increased sales. Operating income reached $1.3m in Q2 compared to $400,000 a year ago. As a percent of sales, operating income in Q2 this year was 9.6% compared to 3.7% in the second quarter last year, an increase of over 150%.

Interest expense in the second quarter this year was $76,000 compared to the $34,000a year ago due to higher average borrowings on our revolving credit line. Largely due to [inaudible] accounts receivable. In our income taxes, our income tax provision, we recorded a provision at 33.4% effective rate this quarter versus 36% effective rate a year ago. Net income then for the quarter was $787,000 or $0.12 a share compared to net income of $289,000or $0.04 a share in the second quarter last year, a 200% increase. Those per share amounts are after giving effect to a preferred stock dividends and accretion charges. Net income for the second quarter last year included a non-recurring pre-tax gain of $145,000 or $0.02 a share after tax related to common shares we received from our health insurance provider upon their demutualization.

Turning to cash flow. During the first half of 2003, we used approximately $3.9m of cash in our operations. This resulted from the following. We had higher receivables by $4.7m based on the timing of sales in the quarter. We had higher sales in the month of June. Inventories rose by $1.5m in preparation for the significant sales ramp up we experienced, particularly in our gaming and lottery business. And we paid about $500,000 of restructuring payments during the quarter. Those uses were off set by the net income of $589,000, depreciation and amortization of $900,000 and other items including a $1m increase in accounts payable. That takes care of the operating uses.

We had capital spending in the first half of about $0.9m, mostly for new product tooling. We paid out $140,000 of dividends on our preferred stock. Also, our cash flow was positively effected in the first half by two events. First, the repayment of the loan by the company to the CEO and the exercise of stock options by employees. Combined, these events brought in approximately $900,000 in cash during the second quarter alone. As a result of the net use of cash during the first half, our credit line borrowings increased by $3.4m from year-end and we reduced our cash position by $600,000.

Turning to our financial position, we ended the quarter with our balance sheet in good shape. Our total assets were $27.5m compared to $22m at December 31. Our inventories were at $9.9m compared to $8.4m at December 31. Receivables were at $8.8m compared to $4.1m at 12/31. Our credit line borrowings at the end of the quarter totaled $6m even. And we had $300,000 outstanding on our term loans. That concludes the financial portion of the discussion. And with that, we’ll turn it back over to Bart.

Thanks Dick. Operator, we are now open for questions.

At this time, if you would like to register your site for a question, please press the star then one on your touch tone phone. To withdraw from the queue at any time, press the pound key. Once again, if you would like to register your site for a question, please press the star then one on your touch-tone phone. Our first question comes from the site of Jeff Martin from Ross Capital Partners.

Good afternoon guys, how are you?

Good Jeff, how are you doing?

Good. Could you give us a little bit more detail on where your gross margin up side is coming from? Is it primarily the casino printers or are you seeing it across the board?

Its across the board, Jeff. First of all, it is clearly from more volume going through the factory. With tour restructuring that we did and our costs as low as they are. The incremental sales, most of the prime cost gets out and everything flows to the gross profit line. We got a couple of things going on in our business that are quite wonderful. First of all, the growth of our gaming and lottery business. That's usually at higher gross margin dollars or gross profit percent than our POS and with the increase of our inkjet printer sales, we are starting to see a significant increase in our consumables in our recurring revenue base. What we are seeing is our gaming and lottery business growing with those printers have higher margins to begin with and we're starting to see the pull through of all of SSC business, spares, service and consumables. That business is actually growing nicely. We had a wonderful Q2. So both of those and our spare service and consumables, the gross margin is somewhere between 40% and 50% higher than the company's overall margins. So by having the our recurring revenue base of business growing and it being at higher margin, that's having a positive effect. You're seeing it coming in from two areas plus the fact that the volume is up.

How quickly do you think you we get top maybe 10% of total revenue coming from the SSC you're calling it?

We're past that.

You're past 10% revenue for the quarter coming from parts and consumables?

We're calling our service spare parts and consumers yeah. We're getting close to 20%.

Okay. Where do you think that kind of maxes out at? And over what time?

The interesting thing that we're going through right now, Jeff, is we're trying to analyze the usage of cartridges. In certain cases we have a customer now that's using a cartridge every other week. We had told the street that the cartridge usage would be between 4 and 8 cartridges per year. When you have a large size customer using one every other week you are now in the 24 to 26 range. We're are going through our analysis of what the cartridge sales would be going forward. It's an evolving business for us. As we win more of these deals -- you can see the size of the deals. What's really nice about the deals we're winning, they're two color deals also. They are using both cartridges. We expect to see our 4 to 8 cartridges a year that that we gave out as kind of the target for how many cartridges we would sell per printer after a printer is installed, we expect that that will come up and that will help. Once we kind of see that over the next year or two and see what that level is, then we can give a better feel for what that growth rate is going to be because if you look at a customer that does let's say 20 cartridges per year and the average price of those cartridges is $12 to $14, we're getting back in recurring revenue the printer price or more, the original printer price. So it's going to be interesting to see how that mix comes together to kind of decide what that growth rate is going to be from a company standpoint and from an investor standpoint it's wonderful because it's recurring revenue every year after that printer goes out.

Thank you. And then on the ticket in, ticket out ramp up with Alliance, I assume you will be have some unit volume kick up when they start to install Hares (ph) and Boyd (ph) gaming, do you have any idea of timing on those two sets of property?

By contract or by agreement with our customers, we're not allowed to talk about individual sites. But the volume of business as we told everybody after Q1, we said Q2 was going to be strong and it was very strong. We only see it continuing. I think the real question now is, you know, how many properties go which continue to impress us with the amount of volume and then add to that the racino market, which really none of that has happened yet.

How is the sales pipeline on the point of sale?

Stronger than we thought it would be. We have talked about that for a while now. We really didn't know when the turn was going to come. We're trying to understand whether we're seeing an economic rebound or are we seeing the benefit of having the best and only real inkjet printers in the marketplace. So it's hard for us to call whether we're seeing a rebound in the economy and that’s what’s driving the sales or all the work that we've been doing over the last two to three years in launching our products and having the technology is driving the sales, clearly in the banking industry, we've got the best product in the market right now for the banking industry. It's got the best price. It's got the best features. Within six months of launching the product, we've won our first major deal. We have others that we're looking at in the hopper right now. If you look at the products that we have, in the thermal market our ITherm 280 by far is the best printer in the industry. Its 8 inches per second compared to 6 that everybody else has. It’s got a power supply inside which significantly helps the hospitality market. It's got a circuit board on the side vertical so spills aren’t an issue. It is two colors for those who want to use two color. And the price points are the lowest in the marketplace. So in the -- if you look at the market that we're serving now, we've got the best products in those markets. This is what we said is our goal four or five years ago, we needed to redo our product line and take market share by having the lowest cost best product in the marketplace. In the thermal, we have now done it with the ITherm, our POSJet 1000 is the best inkjet two color receipt printer in the market today, the POSJet 1500, there’s nothing like that. We are the only one out there and the BankJet 1500 is the only one out there like that. And then with the lottery business, GTech has now got the best thermal lottery printer in the industry and our sales clearly show what the results of that have been. And also we've got some of the best products in the casino market. We're really pleased with the positioning of our products, we now expect our POS business to be continue to grow. We don't know if it's because of the economy or just because we just have the better products out there right now.

And then on your two large orders announced during the quarters, when is the bulk of those ship? Has the bank printer already shipped the majority of that? You mentioned 12 months on a time frame, give us an idea of when the bulk is going to ship.

It's going to roll out over 12 months. It is going to be pretty almost evenly spread out over the 12 months. The entertainment company is going to be front end loaded to the first 6 or 9 months. And then the recent one we announced for 7,000 printers, that's going to roll out over about two years. That’s kind of evenly spaced over two years.

Okay. Great. Final question for Dick. On convertible preferred, when is that callable by you?

Callable by us is `07.

And callable by the --

By them by `05

And they can convert at any time?

After April, `05.

Okay. Thank you very much.

If you would like to register your site for a question, please press the star and then one on your touch tone phone. Next question comes from the site of Connor McLaughlin (ph) from JLS Asset Management. Please go ahead.

Congratulations on a great quarter.

Nice to talk to you again.

Given you were at a $0.15 per quarter run rate now which is $0.60, if the growth continues based on contracts you've already discussed and continued growth. Would it be possible to get $0.80 to $1.00 for the year?

Clearly, we're seeing significant growth of the business. And right now we said $0.14 for Q3. You’ve got us up to $0.15 [inaudible] $0.14 and the first quarter of this year was anomaly because we had no lottery business in there. You can take our results and say can we grow on top of those results next year Clearly we would should be able to. With the gaming business, the lottery business, the racino business, the growth of the POS business and then, you know, you could extrapolate what the earnings per share. What we've told everybody is for every million dollars above break even we earn $0.04 to $0.05. Whatever you think our growth rate is going to be and whatever you think the revenue is going to be we earn about $0.04 to $0.05 per share. What's happening with the growth rate, with the earnings per share due to the stock price being in the $14 to $15 range, the stock equivalence kicks in so the $0.04 to $0.05 is closer to the $0.04 than the $0.05 as the amount of shares outstanding grows but it's still in the $0.04 to $0.05 range. You decide what you think our revenue growth will be next year and then you can figure out what the earnings per share will be.

Just generally speaking, taking a pretty reasonable growth rate, that math lays out pretty well?

It can. We will give guidance at the end of the year. We'll roll it all up. If you take everything and everything happens right and Pennsylvania kicks in and New York kicks in, casino market continues to accelerate, our POSJet business to grow, clearly our consumables, spare parts and service continues to grow. We're going to grow our revenues. With that, you are going to get the earnings per share growth.

Clearly, you already said that stuff is already happening. So the right direction.

Exactly.

Thanks.

Good to talk to you again.

Once again, if you would like to register your site for a question, please press the star, then one on the touch-tone phone. Our next question comes from the site from Andrew Weiner (ph) from Burnham (ph) Asset Management.

Good afternoon.

Good to talk to you

Good to talk to you. I was wondering if you could give us some color on backlog. In particular, I'm interesting in the point of sale side. Maybe, you could give us, you know, at least in general terms what the backlog looks like versus last quarter maybe versus a year ago, particularly in light of some of these large orders?

I think what's exciting for us Andrew is the amount of deals that we've closed with POSJet. We don't break out backlog by market. I think what's impressed us the most right now is the size of the deals and the amount of orders that are coming in and the corresponding inkjet recurring revenues sales of the cartridge business that we're getting. What's really impressed me in talking to other people in the POS marketplace, other business leaders, people that manufacturer other devices for the POS market. I'm not hearing that are seeing this wonderful growth that we are. Maybe in July or August they start experiencing and we led the market. But right now our technology is selling. People are seeing the advantage of the color. In this deal that we announced for 7,000 printers, we're selling a two-color printer. It won the business because the technology was the perfect solution for what they do. The BankJet, the same thing. At the end of the day, we were really the only one that made it in to there lab for the testing and we've got a couple of other deals that we're looking that are in this size if not larger. What I need to look at from a go forward standpoint is not the backlog, but the amount of projects, new projects that we are working on, because that's what accelerates this growth. I am pleased that we've got numerous irons in the fire. They need to close, but we didn't have this a year ago. We didn't have this two years ago. It's clearly an up tick that we are seeing, that we're enjoying and that we're closing.

When you look over at point of sale and year-over-year basis and I mean, is that masking what is really, you know, strong growth in business won even though the numbers appear on the segment information to be down slightly year-over-year?

Well, you know, if you look at our legacy products, our legacy products have come down a little. Clearly the growth of our POS business has been our inkjet business. We were needing a new thermal printer. So that kicks in this quarter. I mean, we launched it in May. We're now in full production. We already have orders for it. We kind of call that a legacy product because it's not new technology. We needed a new thermal printer. I think we nailed it with the product, the price, the functionality. You know, I think in our next conference call, we will be able to say whether business is up or we're just winning the business because we got the technology that customers want. I like to say that we are giving our customers an excuse to buy printers again. When you walk in with an inkjet printer and they kick the tires and they see the benefit of color and they start testing it and seeing the benefit of what color can do for them, then they challenge themselves to buy the product versus wait for an upgrade or wait for the economy to turn around. When you walk in to somebody and hand them an 8 inch per second thermal printer, it does the things that we do but we have now taken the power supply off the floor. So when the cleaning up at the end of the day and mopping over the power supply and shorting it out and now they don't have to do that, we've given them a reason to buy printers again. It's too early for me to call whether it's the economy or whether we've nailed it and we're giving our customers a reason to buy printers again. Maybe like I said, at the next conference call and, you know, the numbers look good and Wall Street is talking about an economic rebound. I think we're in the third anniversary of the second recovery so maybe it finally happens. But right now we're thrilled because our products are selling and you could call it a business comeback or not, our products are selling.

Bart, I wanted to follow up your comments on the spares service and consumable piece of the business. Maybe you can give us some color directionally. You said closer to 20% of total revenue than 10% of total revenue. What would that comment maybe have been a year ago?

Probably in the 12% to 14%, 15% range.

It's been trending up pretty steadily throughout the year.

I would say significantly. If you look at the deals that we closed, 7,000, 2500, 6,000. You’re looking at 15,000 printers out in the marketplace. If you just take the cartridge and take the high end 8. 15,000 times 8, that's 120,000 cartridges. At $12 a piece that's incremental revenue for next year. You start looking at the amount of cartridge business that we're going to start doing. We’ve got aggressive on our service contracts. We're out there. We got our dedicated team going out and getting service contracts for us. And spare parts that we get. A lot of that comes from the gaming and lottery business where printers get used a lot. We've got 185,000 GTech printers out there. We got a 185,000 impact printers in the marketplace that are printing 5,000, 10,000 transactions a week. And those printers are getting pretty old. We're seeing all of that kick in?

I guess where I wanted to go with this is, it sounds like particularly on the consumable side there is even -- if I heard you correctly, you said that this gross margin on this segment of the business is about 40% to 50% above the corporate average?

Yes, I did say that.

Is it then safe to assume that it's even higher on the operating line with some of these items wouldn't be involved in selling commissions and things along those lines?

We have commissions on consumables and even on service contracts. But, you know the operating expenses against that business is lower because we don't do a lot of marketing. We don't do a lot of engineering. So you know, you can look at the operating costs against it to be slightly lower than our printer operating costs and the effect on the bottom-line is a bit better.

North of 50% then versus the corporate average?

I'm not sure I understood the question.

The operating contribution is at least 50% greater than the corporate average.

That's fair.

Last question I had is you didn't talk at all on this call about intellectual property and pursuing maybe some our intellectual property rights, particularly in the two color space. Can you give us an update on that?

We're taking our time on that. We think we've got some pretty significant technology that we developed to be able to accomplish two-color graphics. We are taking our time. We've got a lot of work going on. When the time is right to discuss what we're doing and what's going on out there with agreements and things like that, we will. At this point it makes no sense to discuss it because there is a lot of things going on. It's unnecessary to discuss it out in the public.

Thank you.

Once again, if you would like to register your site for a question, please press the star then one on your touch tone phone. One moment while we queue for question. It appears there aren't any further questions. I would like to turn it back over to Bart Shuldman.

Thank you very much for attending tonight's call. If there are no further questions, I would like to thank you for joining us on today’s call. Earlier the operator gave you our website. It's transact-tech.com. I would like to thank you for joining us on today’s call. Please feel free to contact Dick or me directly with any follow-up questions. Thank you for joining us. Thank you for your continued support. Have a great day and we'll talk to you in a couple of months. Bye-bye.

That completes today's conference. You may disconnect at this time.