TransAct Technologies Inc (TACT) 2004 Q1 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. Later we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded today. A replay will be available after 8 PM Eastern Time today through midnight Eastern Time on March 10th. The replay dial-in number is 973-341-3080 with the passcode 468-2116. The replay will also be accessible at www.transact-tech.com. (OPERATOR INSTRUCTIONS). I would now like to hand the conference over to Mr. David Pasquale. Please go ahead, sir.

Thank you, operator. Good afternoon and welcome to TransAct's first-quarter results call. Joining us from the company today are Bart Shuldman, Chairman, President 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 running details 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 you can get a copy off of TransAct's web site.

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. Actually results may differ materially, depending on a number of risk factors. For a full list of the risks inherent in the business of the Company, please refer to the Company's SEC filings included in the 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 date of this call.

At this time I would now like to turn the call over to Bart Shuldman. Please go ahead, sir.

Thanks, David. Good afternoon and thank you for joining us on today's call. I am going to review the highlights of the quarter, and then Dick Cote will run through the detailed financials with you. As the press release stated this afternoon, this was another impressive quarter for us, and the ninth quarter in a row where we either met or exceeded our guidance, excluding special charges.

A few years ago we set out strategy on focusing on three major businesses within TransAct that we believe would open the opportunities for revenue growth. And in parallel with this market focus, we set upon our strategy to deliver increased margins with our operation team by implementing lean manufacturing and the use of offshore manufacturing for our parts and sub-assemblies. Well, with the efforts of our first quarter of 2004, I'm pleased to report that this effort, this strategy and Company focus, produced significant results for TransAct and our shareholders, as every business came in with impressive revenue growth. And coupled with that revenue growth, our cost initiatives, lean manufacturing, and favorable product mix lead TransAct to gross margins that approached 36 percent of sales and operating income of 14 percent of sales. And I am extremely pleased to report to our shareholders that we now have paid off all of our debt and have almost $3 million in cash on the balance sheet, a quarter we are very proud to report to our shareholders.

So, for the first quarter, revenues increased 67 percent to 15.1 million, from 9 million in the same period a year ago. Net income in the first quarter of 2004 was 1.3 million, or 13 cents per diluted share, compared to a net loss of 198,000, or a negative $0.03 per diluted share in the first quarter of 2003. Remember, the per-share data in the first quarter of 2004 and 2003 has been adjusted to reflect a 3 for 2 stock put split we announced in March and completed in April.

The completion of the stock split is exciting for TransAct, as we believe it will ultimately serve to increase shareholder value through improved liquidity in the trading of our shares and a broadening of our investor base. In March, we provided first-quarter guidance projecting revenues to be over 15 million, with net income of approximately $0.11 per diluted share on a post-stock split basis.

Now let me give you insights into what we accomplished in the first quarter of 2004 and give you some color on our specific markets. First, our gaming and lottery revenue grew by 75 percent from Q1, 2003 as we continued to benefit from the rollout of coinless gaming machines at the casinos in the U.S. We remain well positioned to capitalize on the market's change from coins to tickets, based on our best in class printers and a relationship with all the major OEMs and manufactures.

We are also seeing encouraging signs in the international markets. For example, in February we announced that Aristocrat had selected our series 850 line of thermal printers as their standard for slot machines in the Australian gaming market. This represents a huge opportunity for TransAct as Australia is the second-largest slot machine market in the world, with over 240,000 machines. This agreement further extends the momentum we have generated domestically, and should significantly drive increased sales of our slot machine printers in the years to come.

We have already started to receive initial orders and expect to start shipping our printers to Aristocrat later this year. And we are starting to see increased activity in Europe. The continued rollout of coinless machines in the U.S., coupled with the international rollout that we anticipate beginning over the next few years, has brought our present addressable market to over one million slot machines. This large market will continue to be the primary driver of our growth over the next several years, given our strategic relationships with all the major slot machine manufactures and system providers.

In terms of new products for the gaming market, during the quarter we extended our Series 800 line of thermal gaming printers with the launch of what we call our Model 850-V. The 850-V printer offers the same high-quality functions and convenience of our industry-leading model 850-V gaming printer, but is designed into a vertical format to fit within the more restrictive size constraints of slant-up and bar top slot machines. We continue to expand our offerings in the casino market by providing solutions that meet customer needs and extending our Series 800 product line, further validates our efforts to support the migration to coinless systems for the gaming and lottery markets. And we will have more in the future that we are really excited about.

On the lottery side, our relationship with the world's largest lottery Company, GTECH, remains healthy. We continue to provide one-stop shopping to GTECH for its lottery system printers. And our strategic relationship with GTECH continues to grow as they expand their business with the purchase of two companies and other segments of the lottery market. As state governments continue to approve lotteries to offset their budget deficits, we expect this segment will continue to be beneficial to TransAct.

We also continue to see positive signs in the VOT or Racino (ph) market, as more and more states look to have slot machines at racetracks to supplement budget shortfalls. The nature of this market demands receipt printing and TransAct has been the primary supplier of printers to the gaming manufactures for the past decade. There are currently 19 states reviewing the potential monetary benefits of adding slot machines, and we are also starting to see opportunities develop in the international markets.

Our results in the first quarter also benefit from a 59 percent year-over-year growth in revenue in the POS baking portion of our business. This growth continues to be driven by our sales of our BANKjet 1500 line of inkjet printers as major financial institutions refocus their businesses on local branches. And we continue to see many opportunities with our POSjet line of inkjet printers for the POS market. And I'm encouraged with the momentum we have started to see with our new iTherm 280 thermal printer we introduced mid-last year. Our POSjet, BANKjet, and iTherm printer lines continue to be selected as the printer of choice by retail and banking customers given their numerous benefits.

The real growth driver, of course, has been the increased sales of our BANKjet printers to major financial institutions as several factors are forcing upgrades. First, banks are refocusing their businesses on local branches. And second, as the government's Check 21 initiative, which we expect will drive increased printer volumes as we move throughout the year.

In terms of new products, we just introduced our new 10-based Ethernet interface for the POS market. This is an additional option to the printer interfaces currently available on our iTherm 280 thermal printer, POSjet 1000, POSjet 1500, and BANKjet 1500 inkjet printers. With this new Ethernet interface, the printer becomes IP addressable, allowing it to be a shared device on an Ethernet network. TransAct's Ethernet interface implementation provides the utility, enabling users to conveniently use a web page to configure protocols, assign IP addresses, and update Ethernet firmware. We are committed to providing the technology that our customers need. As the benefits of Ethernet connectivity become more widely adopted, we have provided our customers with a solution that is both user-friendly and cost-effective.

And finally, let me speak about our aftermarket business, which has become a major business at TransAct. Revenues in our spare parts, service, and consumables business were up 25 percent over a year ago quarter, primarily driven by our inkjet cartridge sales. These aftermarket sales represented about 16 percent of total sales in the first quarter of 2004. Importantly, the increased printer sales we achieve now will deliver future recurring revenues through spare parts services and consumables in the future. For each inkjet printer we sell, our customers will use at least four to eight inkjet cartridges per year. This, coupled with our focus on selling spare parts and service contracts, provides TransAct with recurring revenue for each printer that exceeds 200 percent of the original printer price over five years. Clearly, this is an extremely lucrative business for us and we're extremely focused on this part of our business as we see it contributing significantly to our revenue base every year going forward. We continue to aggressively pursue these sales as our installed base of printers grows and our CRM (ph) software program we implemented, along with our dedicated sales team we assembled, is really starting to positive impacts on our revenues and profits. This will remain a major focus for us going forward, given the recurring revenue and higher margins associated with this business.

So, as you heard, every business within TransAct contributed to the growth we experienced in the first quarter of 2004. As a separate note, we also just announced that all of our shareholders of our Series B preferred stock have converted all of their preferred shares into common stock, which will result in a cash savings of approximately $280,000 for us annually as we no longer pay dividends.

In terms of our outlook, we continue to be optimistic about the momentum we have in our business and our prospects. Growth in our gaming and lottery business is expected to come from the continued rollout of the ticket in/ticket out initiative in the casino market. While a majority of this growth will come from our customers in North America, we expect to see additional orders from our customers in the international markets.

On the lottery side of our business, our relationship with GTECH remains strong. Based on current orders we have in house already, significant shipments of our new thermal lottery printer to GTECH will be made in the third and fourth quarters of 2004. We also expect to see continued year-over-year growth in our POS and banking business, driven by our POSjet, BANKjet, and iTherm printer lines, as more hospitality, retail and banking locations upgrade their current line of printers.

As we enter the second quarter of 2004, we expect revenue for the second quarter to be approximately 15.5 million to 16 million, with earnings of approximately 11 cents per share to 13 cents per share. Based on our current outlook, we are increasing our full-year guidance, as we now expect that revenue for the full year 2004 will be in the range of 63 to $65 million, with earnings in the range of 49 to 52 cents per share on a post-stock split basis. Overall, we remain confident in TransAct's growth prospects, given the fundamentals and momentum in all of our markets and the leverage that now exists in our operating model.

One comment about our second-quarter guidance before I turn the call over to Dick Cote. In the second quarter, we will be manufacturing and shipping the Legacy printer to one of our most important customers. This ordering shipment was part of a strategic move on TransAct's part to build a stronger relationship with that customer and we accepted this order at a lower gross margin than our typical printers. Of course, this does affect our overall margin for the quarter, which is calculated into our guidance.

And finally, I want to say something about the person sitting next to me that has decided to retire. Dick Cote has been my partner, my friend, and amazing help in building TransAct. All of us in TransAct will miss him dearly, and I’m sure those investors that have met him personally or talked to him on the phone share these sentiments. This will be Dick's last conference call, and I want to personally thank him on behalf of all the employees and shareholders of TransAct for his dedication and hard work.

Just to let you know, we will be holding our annual shareholder on May 26th at the Century Club in New York City. I make mention of this as the meeting will be followed by an investor lunch in honor of Dick's retirement. I encourage anyone who is interested to attend and say your good-byes at lunch. The annual meeting will begin at 11:30 AM and the investor lunch is scheduled to begin right after, at approximately noon.

Well, Dick, for the last time, let me say "At this time, I will turn the call over to Dick Cote for our financial summary. Dick?"

Thanks for those kind words, Bart. I have really enjoyed working with you over the past several years, and I am going to miss being a part of the great team we've built here at TransAct.

I want to thank our shareholders too for their support of TransAct. It has been a pleasure dealing with all of you over the years and answering your questions. As this is my last conference call, I want you to know that I am confident that my successor, Steve DeMartino, will do a great a job in his new role as CFO. He has been a key contributor to TransAct and knows every aspect of our business.

So starting at the top line, total revenue in the first quarter increased 67 percent to 15.1 million, compared to 9 million in the first quarter a year ago. And as Bart mentioned, revenue in the gaming and lottery market was up 75 percent over the first quarter last year, due to the continued rollout of coinless gaming machines in the U.S. and increased sales of lottery printers. POS and banking revenues grew 59 percent over the first quarter of 2003, primarily the result of increased sales of our BANKjet printers.

Gross profit in the first quarter increased to 55.4 million, up approximately 3 million year-over-year, and our gross margin improved to 36 percent from 27 percent a year ago. The higher margin is attributable to our higher revenue, favorable product mix, and additional cost savings.

We continue to manage our operating expenses. For the quarter ended March 31, 2003, operating expenses were 3.3 million compared to 2.7 million a year ago. These expenses were higher in the quarter due to our expanding sales and marketing efforts to support the growth we are achieving. In addition, we incurred higher professional fees, including those related to Sarbanes-Oxley compliance initiatives. And in connection with those initiatives, we have added a corporate governance link to the investor relations section of our website.

Operating income reached 2.1 million in the first quarter of 2004, compared to a loss of 264,000 a year ago. As a percent of sales, operating income in the first quarter was 14 percent, compared to a negative 3 percent in the first quarter last year. This clearly highlights the operating leverage we are now experiencing in our business.

Interest expense in the first quarter of this year was 10,000 compared to 46,000 a year ago. With all of our debt paid off, this expense now represents primarily the unused credit line fee to our bank.

As to our income taxes, we recorded an income tax provision at a 36 percent effective rate this quarter, the same effective rate as used a year ago.

Net income in the first quarter of 2004 was 1.3 million, or 13 cents per diluted share, compared to a net loss of 198,000, or a negative 3 cents per diluted share a year ago. It is important to note that the per-share data in the first quarter of 2004 and 2003 has been adjusted to reflect the three for two stock split we announced in March and completed in early April 2004. In addition, as Bart mentioned, we just announced that all of the shareholders of our Series B preferred stock have converted all of their preferred shares into common. Under the conversion, a total of 666,665 new shares of common stock were issued, bringing our total to 9,818,000 shares of common stock, with no preferred shares outstanding. This conversion will result in an annual cash savings of 280,000, as we will no longer pay dividends under the terms of the preferred.

The earnings per share guidance previously provided for the full year 2004 and updated earlier today by Bart has been calculated on a fully-diluted basis, and therefore includes those converted shares.

Turning to cash flow, during the first quarter of '04, we generated 2.7 million of cash from operations. As a result, during the first quarter, we were able to pay off the 420,000 remaining on our term loan and we exited the quarter debt-free. In fact, we ended the quarter with almost 3 million in cash. Our current ration at March 31 improved to 2.7 to 1, from 2.4 to 1 at December 31. We have a solid balance sheet, which will be capable of supporting our expected growth.

Let's take a look at that balance sheet at the end of Q1. Our total assets were 27.6 million, compared to 26.4 at year-end. And as I mentioned, we ended the quarter with almost 3 million in cash. Our inventories were at 8.6 million, compared to 8.1 million at December 31. This increase is to support the increased level of sales we are now achieving.

Our receivables were 7.8 million at the end of the quarter, compared to 9.1 million at December 31. And our day sales outstanding were about 42 days in the quarter.

Shareholders equity was 12.6 million at the quarter's end, compared to 10.3 at year-end. And with the conversion of the preferred stock, we added almost 4 million more to our common equity in April. That concludes the financial portion of this discussion. And with that, I will turn it back over to you, Bart.

Thanks, Dick. At this time, we will open up the call to questions. Operator?

Thank you. The floor is now open to questions. (OPERATOR INSTRUCTIONS)

Jeff Martin, Roth Capital Partners

I wanted to compliment you on a job well-done. Could you give us a little more detail on gaming and lottery, which segment was stronger if either one was particularly strong? Seventy-five percent growth for the group is wonderful, but could you give us a little character of each of the two?

The way the quarter turned out, Jeff, was the casino was the hot market for us in Q1. And it had many effects. What we are seeing -- GTECH ordered some printers in Q1, but they placed a very large order that will basically ship in Q3 and Q4. Q1 was primarily affected by the large casino orders that we got. And with our lean manufacturing and cost initiatives, that had a tremendous effect on our bottom line. So the real growth came from the casino market.

How did the margins compare on that GTECH order?

Which GTECH order, Jeff?

The one that they placed that you will fill in the second half of the year?

They are historically the same margins as we always got from them, so there's no real effect to the third and fourth quarter based on the GTECH lottery business. What really helped and was wonderful was the amount of casino printers we did in Q1 and the margins associated with it.

Covering GTECH as well, I noticed that they plan to spend about $600 million over the next 12 months on Cap-ex, up from about 400 million the past year. Do you see the larger orders continuing beyond the second half? And could you characterize what parts of '05 you might foresee some additional larger orders?

I can't comment on next year because we go from year to year, and by contract, we can't really talk about what we are seeing with them. But I can tell our shareholders that, with all of the positive things going on at GTECH right now -- their growth in the lottery industry, their move into the Racino and VON and Class 2 with Spelo (ph), their move into the instant ticket vending machine with their recent acquisition there -- it all is bring opportunities to us since we are basically one-stop shopping to GTECH. So, we are excited about everything that is going on in GTECH. Clearly, there's a lot of momentum in their business. There's a lot of momentum in the market. You've got the growth of the lottery markets that we're seeing with the states' budget shortfalls going on.

I mean, Tennessee is up and running right now. I just read an article that they are projecting more revenue growth next year than they thought they were going to get. We're starting to hear that some of the last remaining states in the country are starting to look at it. The international markets are becoming hot. And now, with their acquisition of Spelo, they now move into the VOT, Racino, and Class 2 market, which clearly we'll be working on with them. So, we're pretty excited about this year, especially that the orders are coming in, in Q3 and Q4, which as you know, Q4 is usually our lower quarter because POS sales kind of come down after Thanksgiving. And now, we've got this large order going through the factory in the fourth quarter. So, we're pretty excited about what's going on in the lottery segment of our business.

Okay, great. And on the Spelo side, were you the previous printer with (indiscernible) Spelo?

We were one of the suppliers to Spelo. However, based on our relationship, we are optimistic we will become THE supplier to Spelo.

Okay, great. And then on the -- give us some more detail on the point-of-sale side. Are you seeing the retail side pick up at all? Or is most of your strength still coming from the banking and the --

Interesting. The banking segment is hot for us right now. I mean, you could see it in our results of the first quarter, we're really pleased with that, and that rolls out, basically, all year. And that's the two orders we closed last year in some of the other business we had. We are working on other deals as we speak, and we are encouraged with what is going on there.

I guess what is most encouraging to me about the POS market is we continue to see increased activity in bids and conversations with our customers, both for our POSjet line of printers, but now our new iTherm thermal printer is starting to get a lot of attention. Recently, we were qualified by the largest fast food chain in the world for our thermal printer, and that is starting to have meaningful effect to us in getting some large orders through the factory. And we are starting to see other people take look at it. So, we are encouraged with that. And we are also encouraged with all of the calls that we are getting regarding orders or potential orders coming. So, we're encouraged with the prospects, but clearly the BANKjet printer in the first quarter had a meaningful effect to the results.

Could you take a stab at characterizing the product mix in the second quarter between gaming and lottery and point-of-sale?

I think the mix is going to be kind of the same, except we are going to see a little lower margin on one of the orders that we accepted, as we put in our press release and I made mention on the call. We did a strategic move with one of our key customers to build a new product for them, and as part of that, it's at lower-than-historical margins. So, we will see a bit of a mix change to -- from some of our newer products. We've got this one product going through the factory that will be at a little lower margin. But I think the mix is going to be about the same between gaming and lottery, point-of-sale, and banking.

And we continue to see our services group pick up. I personally have been getting involved with our services group because of our implementation of our CRM program. You know, I've talked about this previously, where people call in to the factory and want to know information about our printers, or they have our printer and the light is on; they want to know what that's all about. We have now implemented that software package and have everything up and running where we can get the information from the customer, who they are, the serial number, and that automatically, by the program that we have, goes right to our consumables sales force, or service sales force, and we call the customer back, and we're selling service, we're selling spare parts, we're selling consumables. In the first month that we've really been running the program, I can say I'm impressed with the results so far. We even get a list, Jeff, of those products that are coming out of warranty and we get that by the serial number, because the serial number has the ship date. And we get that by customer name with telephone numbers, and we get a report once a month that our service people call. They call the customer and say "did you know your printer is coming out of warranty, coming out of warranty in ten days? Would you like to buy a third-year warranty? Would you like to have a fourth-year warranty?" And I tell you, our hit ratio is really high. The cost of offering that to the customer is very competitive, and the margins are extremely high. So, I am really excited about that growth also, and we see that continuing in Q2.

And then, looking into the Australian and European markets, I've run some numbers on what I think Aristocrat could do for you in '05, and if you assume the same base of 63 to 65 million in '04, just if you add the Aristocrat business, I'm getting about 20 percent growth topline. Is that kind of in the realm of logic?

You know, when you look at Aristocrat and the market being 240,000 machines, and Aristocrat having 70 percent of that, it is not out of the realm that we could see close to that. We haven't modeled it yet; it's too early for us to do that. I mean, clearly, we've got our first order in-house. We're excited about that. There is kind of different levels of casinos and gaming in Australia. In fact, in some situations, there's already ticket printing -- not ticket printing, but there's receipt printing going on. And Aristocrat is excited about going from impact printers to thermal printers, which will drive just a retrofit market. That is without ticket in/ticket out; that's just replacing impact printers with thermal printers. So, you know, 12 million could be a little high, but is it out of the realm? No, it is not.

The other thing, Jeff, is we've got some really exciting technology that we're developing for the casino market. And we'll have more to talk about over the next four to five, six months. That could have, also, a material impact to the revenue growth within the company.

It sounds like 2005 is shaping up to be quite a year for you, forthcoming.

Thank you.

I also have some general items for Dick. On the Cap-ex side, what was the number for the quarter?

200,000.

200,000? Okay, and depreciation and amortization?

500,000.

Okay. And then, what was the percentage of revenue derived from spare parts, consumables and service?

Sixteen.

Sixteen percent on the higher revenue line. And the higher revenue number.

Great. Nice job, guys.

Thanks. You know, the thing that was really exciting was to see how the lean manufacturing and the off-shore partnerships that we've developed in Malaysia, Singapore, Mexico really paid off in the margin expansion. And we hit 14 percent operating profit in the first quarter.

So, we'll see a dip in margins second quarter, and then a return to first quarter levels in the second half? Or will we --

Depending on the revenue line and the mix in the third and fourth quarter, it should.

Okay. Thanks for your time.

(OPERATOR INSTRUCTIONS) Andrew Winer (ph), Birmingham (ph) Asset Management.

Good afternoon, guys. I just wanted to make sure I heard you correctly. Obviously, the first quarter was impacted favorably in point-of-sale by the two large bank orders, but is it your expectation that those will roll out basically evenly throughout the course of the year? Or were they heavily weighted to the first quarter?

No, they are basically evenly through the first three quarters.

I was going back and looking, and the point-of-sale revenues, I believe, were strong this quarter as they have been for any quarter since the fourth quarter of 2000.

Yes, it was very strong.

So, I'm hearing you correctly in that that strength should, at the very least, continue throughout the year, pending new competitive wins?

Yes. And I think we're going to see some momentum towards the back end of the second quarter and the third quarter, just based on things that we're hearing from customers in regards to opportunities, and also some new product launches that we'll be doing.

Secondly, related to the prior questioners, you made a comment about some new technology in the casino market that could help drive additional revenue growth. I was wondering whether the strategy will be to take this new technology and continue at the same price point to gain additional share of market? Or does this technology add such functionality that you think not only you'll be able to take additional share, but you'll be able to charge a price premium?

I really can't get into the details, Andrew. I'm just very excited about what we're working on and the opportunities that it presents us for many reasons. And many things that the casino market wants to do, this technology will help them get there. So, clearly the casino market -- you know, if you look at how we model the business, the casino market, and even the lottery market, doesn't have the consumables business that we have in the point-of-sale market. So the gaming and lottery market, our printer margins tend to be a bit higher. Also, the demand on the printer, the functionality and the reliability has got to be really robust so we get a bit of higher price there. So we expect to see those types of margins with what we're working on. In the POS business, of course, our margins are lower on purpose, because we just drive that consumables and spare parts and service business every year after. So, we clearly look at our casino and lottery market to drive those types of revenues as historical.

Sure. And while we've been focused a lot on Australia, you threw in a couple of times in your both prepared comments and in your response to the prior questioner that you are also seeing some good things in Europe. I was just wondering if you could elaborate maybe a little more on that.

Well, I mean there is a lot of focus on the U.K. right now, which is wonderful because that would be another market that would maybe kick maybe lat '05 or more likely '06. We're starting to see increased activity in Russia. We are starting to see some activity in Central Europe. There's talk how casinos are going to drive tourism. And we're also starting to see increased activity in the VOT market, which already exist there in certain countries, but it looks like either a major upgrade cycle could be coming through our an expansion cycle comes through as those governments look to increase revenues themselves. So we are seeing increased activity from those areas.

There's also some other technology in some other markets we have not addressed before. And those markets are looking, in the gaming sector, but not in the casino sector, that are also looking to maybe put printers in those machines. And we're talking with key customers and key players in the marketplace right now to determine what technology they would like and to see if we can launch the technology in the foreseeable future.

Have you begun receiving orders for those markets?

We have some orders for Europe already, nothing of scale. Clearly, our business is being driven by the domestic market. But we are encouraged. We have a partner in Europe that is out their calling on all the casinos and all the OEMs. We are encouraged with the activity. Now let's see if it really develops and grows even more, because that is just going to add to the business that we've got in the U.S.

Okay. Thank you.

Craig Liefer, Curhan Capital.

Could you quantify the size of that strategic order you spoke of for that coming quarter here?

No, we're not allowed -- I am sorry. By contract, we have a nondisclosure with the customer, so we can't. But we felt it was the right thing for us to do. It's not a typical situation for us where we would take an order at the margin. In fact, it was important for our investors, shareholders to know that it's kind of like a one-time deal and it will have an effect of lowering our margins in the second quarter. But as I said to Jeff, we should see our margins come back in the third and fourth quarter.

Okay. Did you disclose who that was, then?

No, we did not.

But you still can't quantify it, even though you don't know the name.

No, we know the name, we just can't --

No, I mean us.

I'm sorry.

Okay. What you guess your share of the casino printer slot market is at this point?

Oh, I would have to say 40, 45 percent.

And where do you think that can go?

Knowing us, we would like 100 percent. But we will be satisfied in the 70 to 80 percent range.

Okay. And what would you say the domestic (indiscernible) attach rate is now on machines that are shipping?

Attach rate as everything going out the door? I would have to say every machine going out the door is (indiscernible) to have a printer. I don't think it's if and when; it's now. The success at some of the casinos has been wonderful. The opportunity for the printer and what it does to the casinos, the cost savings -- the player likes it. And then, what we've always talked about is the promotion capabilities. You now, if you think about a table game, you've got a pit boss that is being able to do the marketing function, they can -- you've lost some money, they can hand you a show ticket, a free meal ticket. And with the casinos going more to the slot machine, I think 60, 70 percent of the floor space is now slot machines; there's no way to talk to a player. But with a printer, you can now talk real-time to the player. So, I mean come, with that and everything they are trying to get accomplished and the cost savings, it's not if and when; it is happening. The order is going through the factories every day.

Okay. So, your growth is not only the growth of the market, but you are also taking share -- you had three things going before, right? The market was growing, you're taking share, and Tito was penetrating, right?

Yes, we have all three going on right now. And now, we've got the international markets going. We've also got Class 2 that looks like it's going to expand. We got the VOT and Racino that looks like it's picking up. And New York State is already happening. Michigan just announced that they'd like to go. Clearly the battle in Pennsylvania and Maryland -- if Pennsylvania goes, Maryland made an announcement that they will have to go, then. It's kind of a domino effect. So, we want that, by the way, all in our gaming revenue.

Okay. And on your long-term business model. I guess, could you update us what that is? I mean, given the quota you put here with 35 percent gross margins and 14 operator? Where do you see that going?

Well, we've always targeted the business between 16 and 18 percent operating margin. That was the goal that we set for us. Kind of a short-term goal, the next couple of years. The margins that we hit in the first quarter, I must add admit, were a bit higher than we had thought we could get to this early in the game, being in the $60 million range. We are encouraged by that. The initiatives we have taken on our lean manufacturing and our outsourcing is really working. So, we would like to see a minimum of 16 to 18 percent as we get into '05 and '06.

And then I guess just lastly, on the leverage front, given that you've outsourced a lot of your manufacturing, is this more of an op-ex leverage? I mean, mix shifts or consumables ramping? You're trying to leverage your operating expenses more at this point?

Well, first let's talk about -- we are not outsourcing the manufacturing per se. What we're doing is we are having our subassemblies and parts manufactured overseas. We are doing the final assembly. Our cost, our labor as a cost of sales is 2 percent plus or minus .1 or .2. And what that allows us to do is customize the printers for every customer. We have some OEMs, like in the gaming industry, we have four or five different models. So we are still doing some of the final assembly, or most of the final assembly in Ithaca.

From a leverage standpoint, we get it in two areas -- on the manufacturing side, once we get through full absorption of our overhead, then sales minus labor and materials, your prime costs, everything else drops to the gross profit line. So, you get gross margin expansion just from the volume going through the factory. Then from a standpoint on the operating expenses, there's not a dollar-to-dollar add, revenue to expense. So we have 12 engineers, we don't add any more engineers just because our revenue grew.

Selling expense goes up a tiny bit because of commissions. Marketing might go up a tiny bit just because we've got an extra tradeshow or an extra add going in. So you see the leverage through to the gross profit line because you threw your absorption and you are driving increased gross profit. And then you see it again on the operating side because your operating expenses don't go in concert with the revenue growth. So really, it's a double hit, or double growth, to the operating income line, both from gross profit and not the expansion of our op-ex cost.

Understood. Thanks.

(OPERATOR INSTRUCTIONS). Thank you. I am showing no further questions at this time. I will now turn the conference over to TransAct's CEO, Mr. Bart Shuldman. Sir, the floor is yours.

Well, I thank you for joining us today. Clearly, it was a very positive quarter for us. I'd like to also remind you that we are holding our annual shareholder meeting on May 26th at the Century Club, and I invite you all to attend. And please, if you do, stay over for the luncheon in honor of Dick's retirement. Again, I thank you for attending the call today, and we will talk to you in another quarter. Bye-bye.

Thank you. This does conclude this afternoon's teleconference. You may disconnect your lines. And enjoy your day.