TransAct Technologies Inc (TACT) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. A replay will be available after 2:00 PM Eastern standard time today through midnight Eastern standard time on November 10. The replay dial-in number is 973-341-3080, with pass code 4222079. The replay will also be accessible at www.transact-tech.com.

I would now like to turn the conference over to Jim Olecki. Please go ahead, sir.

Thank you, operator. Good morning, and welcome to TransAct's third-quarter results conference call. Joining us from the company are Bart Shuldman, Chairman and Chief Executive Officer, and Richard Cote, Chief Financial Officer.

The format of the call will be a brief business review by Bart, followed by Dick providing detail on the financials. We will then have time for any questions. If you have not yet received a copy of today's results release, please call Moon Lee (ph) of the Ruth Group at 646-536-7001, or go to 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 may be 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 included in the company's most recent annual report on Form 10-K. The company undertakes no obligation to advise 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. Please go ahead, sir.

Thanks, Jim, and thank you for joining us today on today's conference call. I'm going to review the highlights of the quarter, and then Dick Cote will run through the detailed financials.

As the press release stated this morning, this was another strong quarter for us, as we once again exceeded our prior guidance based on strengths across both our gaming and lottery and point-of-sale and banking markets. Volume unit shipments of printers for TransAct are now up over 100 percent year-over-year.

Revenues for the third quarter increased 70 percent year-over-year to 15.1 million. Net income for the third quarter reached 1.1 million, or 17 cents per diluted share, from a loss of 14 cents per share last year. As we said in our press release, we decided to change banks in our third quarter to significantly lower our costs going forward. This change resulted in recording a charge of $103,000.

Gross margins increased to 33 percent from 26 percent in the year-ago period. This was a result of higher revenues, a favorable product mix, and ongoing cost controls, which also led to increased operating leverage and profitability.

Let me now give me you some color, no pun intended, on our specific markets. Revenues from our gaming and lottery business were up over 112 percent year-over-year. Growth in the segment was led by the continued rapid rollout of ticket-in/ticket-out slot machines, as more and more casinos are embracing the benefit of the cashless gaming. For example, Harrah's agreed last month to purchase a minimum of 11,000 new coinless gaming machines from IGT to expedite the introduction of Fast Cash, the Harrah's-branded ticket-in/ticket-out coinless system being rolled out to all its casinos across the country.

This deal was one of the largest single orders ever for IGT, and it also confirmed our believed that the transition of coinless slot machine is well underway. And it also confirms our decision to support those casinos and system companies promoting system-controlled gaming. Clearly, our decision to support this effort has turned into a powerful revenue driver for TransAct in this market.

The ticket-in/ticket-out or coinless slot machine transition continues to be gaining momentum, and TransAct stands to be one of the prime beneficiaries, given that we have strategic relationships with all of the major slot machine manufactures and system providers.

And on the new product front, we launched the gaming industry's first jam-resistant printer bezel specifically for our ITHACA Series 800 thermal line of printers for coinless slot machines. The bezel significantly decreases the odds -- no pun intended, again -- of a ticket getting jammed into the slot machine, reducing game downtime and lost revenues at the casinos. This type of innovation is exactly what TransAct has become known for in the industry, and we have filed for design and product patents as we continue to protect our intellectual property as we bring it to the market.

Also contributing to growth in the gaming and lottery market was increased shipments of our new thermal lottery printer, the GTECH. Sales generated from GTECH this quarter were significant compared to a year ago, and our strategic relationship with GTECH continues to be fruitful for TransAct. Winning the new thermal printer for GTECH last year and starting production this year is now driving significant revenue for us.

Before I finish commenting on the gaming and lottery market, I would like to mention something about the international market and the potential from growth in what the industry calls racinos, or slot machines at race tracks. In our international markets, we see interest gaining steam in both Australia and Europe. Australia is the second largest slot machine market in the world, with about 240,000 machines. We are encouraged by what we hear -- that this market is seriously considering the moves to coinless, or ticket-in/ticket-out slot machine. While we don't know for sure whether it will happen, this new market potential can drive increased sales on our slot machine printers in the years to come.

And we continue to get inquiries from customers in Europe, another market that could drive growth for us. And just a few days ago, our customer Alliance Gaming announced the move of ticket-in/ticket-out to customers in Puerto Rico. It looks like the coinless slot floor (ph) has the chance to become an international event, also.

And finally, the racino market looks to be getting ready to start. We have heard one racetrack in New York is ready to begin installation of slots, and we are very encouraged to hear Ohio is seriously considering racinos to offset state budget issues. This move by Ohio has also lit a fire inside Pennsylvania and Maryland, states that would be surrounded by either racinos and/or casinos -- states that would see their residents spend their money in other states.

Now let me turn to our POS and banking business, where we can say we are extremely pleased with our progress and growth in this quarter. Revenues in the third quarter from this portion of our business alone were up 31 percent year-over-year as our POSjet 1000 and Bankjet 1500 printer -- inkjet printer lines continue to be widely adopted in the retail and banking markets, given their numerous benefits. We are starting to see growth come back to this market, and based on understanding how other companies are doing, we believe we grew at twice the rate of the others in the market due to our superior inkjet technology and the benefits that that technology brings the industry.

Not only were we encouraged by the growth we saw in this market, but during the quarter, we announced several significant wins in terms of order size and customer quality. First, we announced at the end of July a major win for 7,000 of our POSjet 1000 inkjet printers for in (ph) the world's largest quick-serve and take-out restaurant chains for an upgrade of their point-of-sale system. In September, we announced a major order for 4,000 POSjet 1000 inkjet printers, as one of the world's largest casual dining and restaurant chains selected TransAct for a complete upgrade of their food and beverage service operations.

Also, just the other day, we announced the first POS customer to use our industry-leading wireless technology. I have been to the restaurant myself, and the benefits of our wireless solution are wonderful. To me, the site is one of the most impressive uses of technology to both lower cost and provide the customers with better service.

And finally, in September, we announced our largest Bankjet win to date, with an order for 13,000 Bankjet 1500 printers from one of the United States' top-tier financial services companies for a complete upgrade of their bank teller stations.

Clearly, these deals are of significant size and prestige for us, and we expect to close more orders of this magnitude going forward. And one of the great advantages in winning these large orders is the recurring revenue we expect to see once these printers are installed. We continue to see at least 4 to 8 cartridges per printer being used with our inkjet printers, which equates to 20 to 40 percent tie-rate (ph) of recurring revenue every year after the printer is in the field.

And of course, over time, we expect to see spare parts and service revenues as these printers age in use. So not only are we pleased to see our growth come back in the POS and banking markets, we are also pleased and excited by the growth this will drive in our profitable spare-parts service and consumables business.

All along, we have been saying that the real turnaround in the POS market would occur in 2004, as companies came to the end of their five-year upgrade cycle, which began with Y2K in 1998 and 1999. Clearly, we have already seen orders ramp faster than anticipated this quarter, and we are starting to see signs this growth will continue into the fourth quarter, and are cautiously optimistic about the growth continuing into 2004.

Finally, we are also pleased this quarter with the growth of our spare-parts service and consumables business, or our recurring revenue. Revenues in this business were up 26 percent over the year-ago quarter. It is important to note that the increase in printer sales we are achieving will deliver recurring revenues through additional spare parts service and consumables.

Our inkjet cartridge sales continue to be driver in this portion of the business. We're anticipating strong growth in the market, as corresponding inkjet printer sales continue to ramp up in the fourth quarter and into 2004.

Looking forward, we are very positive about our 2004 outlook. As noted in the press release, we expect EPS to double year-over-year to 60 to 70 cents per share on revenues of between 58 and 61 million. But please note -- this is based on a preliminary 2004 budgeting process we have just started. Our customer forecasts come in during October through November --thru December period, so some important customer forecasts are still not finalized. However, given what we see right now, we are surely comfortable with the guidance I just provided, a significant increase in EPS next year.

In terms of the fourth quarter, this is traditionally the slowest quarter for TransAct, as POS and lottery installations slow down dramatically bring the busy holiday season. Given the high volume of customer traffic at stores during the fourth quarter, retailers typically do not upgrade their systems. While we have considerable momentum in our business, we do expect revenues in both of these markets to decline sequentially from the fourth quarter, and of course resume their growth trend after the year end. This is typical for TransAct.

Specifically, for the fourth quarter 2003 we expect to see revenues of approximately 13 to 14 million, with net income about 10 to 13 cents per share. This will translate into full-year 2003 revenue of over $50 million, with earnings in the range of 34 to 36 cents per share.

I would also like to comment on some non-recurring operating expenses we expect to incur in the fourth quarter. As we look forward, we are encouraged by the growth we are experiencing, and we are planning to aggressively go after every order we can. As part of our "more feet on the street" strategy for 2004, we will be adding two new critical sales positions by the end of the quarter. We expect the incremental, non-recurring recruiting fees for these positions to hit in our fourth quarter.

Well, as you heard, we are excited about the growth we are experiencing -- especially the fact that it's across the board, in every segment of our business. At this time, I will turn the call over to Dick Cote for our financial summary. Dick?

Thanks, Bart. Starting at the top line -- total revenues for the third quarter were 15.1 million compared to 8.9 million in the third quarter a year ago and 13.4 million in the second quarter of this year. As Bart mentioned, revenues in the gaming and lottery markets were up 112 present compared to the third quarter a year ago, driven by a significant increase in lottery printer sales and a continuing increase and shipments of casino slot machines printers.

POS revenues grew 31 percent in the quarter compared to the same quarter last year. Over 80 percent of that growth was attributable to increased sales of our POSjet and Bankjet line of inkjet printers. Of particular note is the increase of Bankjet printer sales since we just entered that market late last year. Sales of these Bankjet printers have been most encouraging. And included, as Bart said, in the overall sales growth, was a 26 percent increase in sales of our aftermarket products and services.

Turning to gross profit. Gross profit in the third quarter increased 2.5 million to 4.8 million on higher revenue and a higher margin rate. In fact, our gross margin percentage improved to 32 percent from 26 percent a year ago, and is attributable to the higher revenue volume, favorable product mix, and ongoing cost controls.

We continue to manage our operating expenses, which for the quarter ended September 30, 2003 were 2.8 million compared to 2.4 million a year ago, and that's before restructuring expenses of 912,000 last year. Increased selling expenses accounted for a majority of the increase in the quarter, largely due to higher commissions on increased sales and expenses associated with the opening of a new sales offices in Las Vegas to support our growing gaming business there.

So, operating income reached to 2.0 million in Q3 compared to an operating loss of 128,000 a year ago. Again, that excludes restructuring charges of 912,000 last year. As a percentage of sales, operating income in Q3 this year was 13.1 percent compared to a negative 1.4 percent in the third quarter last year. As we have said before, our revenues -- as revenues continue to grow, we expect to continue to see growth in our operating income, as a percentage of sales.

Our interest expense in the third quarter of 2003 was 61,000 -- about flat versus a year ago, as our average borrowings and average interest rates were approximately the same in both of those quarters.

And, as Bart mentioned, we had a write-off of deferred financing costs this quarter. In August, we entered into a new credit facility which will significantly lower our ongoing bank cost. As a result, we recorded a non-recurring charge of 103,000, or 1 cent per share, in the third quarter related to the write-off of unamortized deferred financing costs from our prior credit facility. We recorded a tax provision in the quarter at 36 percent effective rate -- the same as a year ago.

The net result -- net income for the third quarter was 1.1 million, or 17 cents a share. And as I mentioned before, the write-off of deferred financing costs in the third quarter had a negative 1 cent per share impact. Without that non-recurring charge, our EPS in Q3 would have been 18 cents.

In the third quarter of 2002, we had a net loss of 128,000, or 4 cents per share -- again, that's without the restructuring cost. Including those restructuring charges, the net loss in the third quarter year ago was 709,000, or a loss of 14 cents per share. And all of those per-share amounts are after getting effect to (ph) preferred stock dividends and accretion charges.

One point I would like to make here is that the share count used in our EPS calculation on a fully diluted basis has gone up. Stock option and warrant exercises during 2003 have added to the actual shares outstanding. In addition, common stock equivalents, or unexercised stock options, have increased over the year as the share price has risen significantly. The total effect on our third quarter of 2003 versus a year ago was an addition of about 676,000 shares to the average shares outstanding used to calculate fully diluted EPS.

Looking at our cash flow -- during the third quarter, we generated approximately 4.4 million of cash in our operations. This resulted from a net income of 1.1 million, depreciation and amortization of a half a million, a reduction of inventories of 1.4 million and a reduction of receivables of 1.3 million.

Capital spending in the quarter totaled 300,000, mostly for new product tooling (ph). And we paid out 70,000 of dividends on our preferred stock.

As result of the significantly increased positive cash flow in the quarter, we paid down 3.9 million of our credit line borrowings. This left us with only 2.4 million of debt outstanding at September 30th compared to 6.3 million outstanding at the end of Q2 this year.

So we ended the third quarter with our balance sheet in good shape. Total assets were 24.3 million compared to 22 million at December 31. Our inventories -- we ended at 8.5 million compared to 8.4 million at December 31, an increase of only 100,000. This is particularly notable considering the increased level of our business. Our inventory level is about the same as we exited a year ago, yet we have more than doubled our unit volume of shipments in the third quarter of 2003. We are truly seeing the positive effects of our lean manufacturing initiatives we began a year ago.

Our receivables at the end of the quarter were 7.4 million compared to 4.1 million at 12/31 going into this year. This increase, of course, is the result of our increased level of sales. However, our credit and collection experience has been excellent. Our day sales outstanding still stand about 40, and our receivables are from financially sound customers who pay on time.

As I mentioned, at quarter-end we had 2.4 million outstanding borrowings under our credit facility. This is down a half a million from the 2.9 million that we went into the year with, and down 3.9 million from the end of Q2 of this year. And we expect our borrowing level by year-end will be reduced even further.

That concludes my portion of the discussion, and I will turn it back over to Bart.

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

(OPERATOR INSTRUCTIONS). Jeff Martin, Roth Capital Partners.

Bart, could you give us an idea of how gaming and lottery versus point-of-sale might look like in '04 on a relative revenue mix basis?

Wow -- okay. Clearly, this year we're seeing a lot more gaming and lottery than point-of-sale. The revenue mix next year -- we'll start seeing the point-of-sale and banking picking up and our -- based on preliminary forecasts right now, we expect that side of our business to kick in even more, so the mix will probably -- I mean, it won't change that dramatically, but we should see point-of-sale a little higher than what the mix is today -- based on our preliminary forecast.

I mean, gaming and lottery is still going to drive our revenue next year as a percentage of sales, because the casinos will --you know, based on what we're hearing and seeing, we expect the casinos to continue to go. But we're getting really encouraged to see the POS and our banking market pick up.

Okay. And then of the orders that essentially are announced in the quarter, I total about 31,000 if you take the three point-of-sale and the Harrah's. Could you give us an idea of timing in aggregate of those? Perhaps, how many -- what percentage of that shipped this quarter, and what it might be the next two quarters?

Basically, all of those orders will ship between the fourth quarter of this year and the second and third quarter of next year. Most of those orders went out -- are going to go out Q4, Q1, Q2. Very few of those actually shipped in Q3.

Okay. And then with respect to GTECH, we have been trying to track where their business is coming from. Could you give us an idea of how you think, you know, deployments to GTECH will fall over the next two to for quarters or so?

Well, GTECH is one of the customers that provides their guidance to us in the October through December period. So, we don't have our final forecast from GTECH yet. So that -- we have taken a very, very conservative number to our revenue guidance and earnings guidance for next year, because we will probably finish our, you know, 2004 forecast with GTECH the end of November, the middle of December.

There is one kicker that we're all looking at, which is this Tennessee lottery that is sitting out there. Tennessee approved a lottery for the first time, and the lottery director has some type of bonus -- it's in like the 250 or $500,000 range -- if she gets the lottery up and running by April. If that all happens, the bids go out and they approve the bids, and there is nothing that stops it from happening, that will kick in Q1 very quickly if GTECH wins it -- and therefore, we'll of course win it. So that will kick in very quickly in Q1.

So we have taken a very conservative look at our business right now. And we are waiting for the final forecast from GTECH to come in. And one of the kickers is this Tennessee lottery that needs to settle -- I think their goal is by the 20th of November to settle it.

So, you know, we will have better guidance for next year, because -- in our Q4 conference call, because, of course, GTECH -- the forecast will be done, finalized, and will be put into our system.

Okay. Could you give me an idea of -- the Florida lottery, for example -- GTECH won that contract, which is set to start, I think, October of '04. When would you first start shipping units for that? (multiple speakers) I believe in the 20,000 unit range for that lottery?

Yes, right now. We are into steady production with them right now. Now what happens is, towards November and December time period, everything kind of comes to a halt because of the holiday season. So we try to match their production so that -- we ship them the printer, they put it in their terminal and ship it out the door. So we will see November and December slow down, and then January just pick right back up.

So you ship about two quarters in advance.

Between a quarter and two quarters in advance -- that's right.

Okay.

Their goal has always been to beat the time schedule, and that is the demand that they put on us. And that's -- you know, their strategy has always been to beat the end date. So we're always a quarter or two ahead.

Okay. And then my final question is for Dick. Dick, what kind of terms does the new credit facility have versus the old -- maybe give us the interest rate differential or the basis of the interest rate for the new facility?

We are saving about a point on interest. More importantly is the (multiple speakers) the banking cost, the ongoing monthly (multiple speakers) maintenance fees and all that. Those came down significantly with our move to Banknorth. And that's where the savings is coming from.

Yes. The breakeven is in less than a year and a half; probably a year and a quarter on that deal. So the fact that our business, Jeff, was doing so much better -- the debt was coming down, clearly our cash flow was much better -- we changed banks because of the cost savings. And any time that we can get a payback in a year or a year and a quarter or something like that, we are going to look at it. So, that is what we did. And it has turned out to be a real home run for us.

Great.

And then there's some soft cost in there, too, because the one bank was clearly much more difficult from the standpoint of ongoing reporting than the new bank. So not only did we save the hard cost, which we equate and did the break -- did the analysis, but also the work that Steve DeMartino has to do in running the bank -- his costs have come down, just from the standpoint of the reporting that we had to do. And clearly, it's because of the business being in so much better shape.

Okay. Great. And then I'd like to commend the both of you for the excellent management job you both are doing.

Well, that -- much appreciated. Thank you.

Chip Whitman (ph), Shocko (ph) Capital.

I have two questions. First, just trying to get a better handle on your budgeting process in the fourth quarter. Is it just the gaming side, folks like GTECH, or is it also in the banking side that you get your firmer orders?

And then secondly, with regard to the two new salespeople -- where are they focused in terms of -- are they more in the banking side, gaming side, or are they generalists? And how long does it take for them to get up to speed?

Okay. Q4 -- our forecasting process works with an ongoing, rolling 12 month sales forecast that we worked off of. Our senior sales guy, Tim Stefan (ph), comes in with the forecast. It's massaged (ph), and that's what drives our production, actually. We build no printers to inventory, but we are putting -- we're 88.5, 92 percent accurate (ph) to the customers and the forecast and the units, and then it usually -- the forecast usually -- the orders come in and then we make whatever adjustments we have to.

With the current gaming business being as strong as it is, and the current banking and some of the POS business that we won -- for instance, the 4,000 printers -- that deal has to end by the end -- we have to ship those printers by the end of this year. Some of the banking business -- they have given out the rollout schedule to us. That rollout schedule goes right into the forecast.

The casino business -- clearly the Harrah's -- was a bit of a surprise to us at the magnitude of the business. So that all goes into the forecast that drives our production. So we are very comfortable with Q4 and what we have given you as a forecast.

From the standpoint of the salespeople -- we are focusing on the banking business and the gaming business. We have opened up TransAct gaming in Las Vegas. We are adding people to that office. We are very encouraged with our success. We are very encouraged by the response that we are getting from the OEMs. We are extremely encouraged by the systems side of the business that is starting to get their approvals. And we are starting to see the rollout -- clearly the Harrah's deal in rolling out their Fast Cash system, being a total system-controlled casino business, ticket-in/ticket-out was very encouraging. It's a very quick rollout. The Harrah's conference call and press release said 10,000 by the end of this quarter, 30,000 by the end of June of next year. So we are ramping up to keep up with that.

So we are hiring another salesperson to handle that. We are being very successful at talking to casinos, where we can go in and present our technology and solutions. We are also working hand-in-hand with the casino slot machine manufacturers and the system people to show them the benefit of the printer and what the printer can do, especially in that system-controlled environment. So we are feeling very positive about adding another person to the team.

And the banking business -- we just entered last December -- that is ten months ago -- and we have run 19,000 printers already with our existing POS people. So we are going to hire a banking specialist, somebody from the banking industry. We've had some wonderful interviews to date. We haven't made our decision yet. And we will add that person to the team.

And the banking industry -- you've got to focus on what's happening to the banking industry right now. They are calling it "the year of the branch", the "year of branch banking". The banks are getting back into retail banking. They are getting back into driving the customer back into their bank so they can sell them the different services. Clearly, the BankAmerica/Fleet Bank deal is about gaining that retail client base.

And with are printer being one, less expensive, two, much quieter and faster than the technology they have today -- but just as important, if not more important, the fact it prints in color, and they can print their logo, they can print coupons, they can print the latest CD rates and mortgage rates, they can talk to their customer real-time -- it's driving our sales. So we want to take advantage of that.

Where we have been very successful is where we see a change going on in the marketplace. The banking industry is clearly going through a change. You also have Check 21 that's happening. Check 21 is check clearing for the 21st century, where the banks are going to transmit checks digitally, so you are not going to get a check back in the mail. Once the check hits the bank, it's going to flow through as an image. So the banks have to upgrade the hardware at the telestation to be able to handle Check 21. President Bush just signed off on it. It's going to happen over the next two years that they've got to do it.

So we want to aggressively go after that. As the banks look to upgrade their systems for Check 21, we believe there's going to be an upgrade cycle for the printer. And we believe we have the best printer out there. So we're going to aggressively go after it. We are calling it the "feet on the street" program. And we will hire somebody just for the banking industry to do that for us.

Great. I imagine you have a bunch of these relationships in the queue already. How long do you think before these folks become -- when will they start impacting and maybe hitting their quotas?

Yes, you know -- the banking person will hit pretty quickly, because he or she will inherit two large orders run away. And our pipeline of other bids that we have -- it's not like we don't have other bids or negotiations or other deals that we are working on. So we'll hand those deals right over to the banking person, and then put our two POS people back on the street, just focusing on POS, because their business is picking up and the demand on their time.

So the person will hit the street pretty quick. What we're hoping to do is find somebody from the banking industry that will bring us that expertise. One of the things we have been very successful at -- if you look the casino business -- I spent 13 years in the casino business. I worked in that business before I came here. We had those relationships. So when we went into the ticket-in/ticket-out environment, we already had a lot of those relationships. I called on some of the casinos. I called on a lot of the slot machine manufacturers myself, because I came from that industry. I was in the industry for a couple of years before coming here.

We want to do that with the banking industry. So we want to get somebody that's already got those relationships. So we think this person, you know, by the middle of Q1 should be up and running very quickly.

From the casino side, it's just a matter of the amount of work that we've got. This person is just going to take some of that work away from our existing sales force now.

(OPERATOR INSTRUCTIONS). I am showing no further questions at this time. I'd like to turn the floor back to Mr. Bart Shuldman for any closing comments.

Well, we thank you for joining us on the conference call right now. Clearly, we are encouraged by the results of quarter three, with both growth in our gaming and lottery point-of-sale and banking, and our consumables, spare parts and service business.

We look forward to updating you again, and talking about our Q4. Being the fact that it will be an audited end-year, we will probably have it towards the end of February, and we look forward to talking to everybody again at that time. In the meantime, have a wonderful Thanksgiving and a Happy New Year. Thanks.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.