TransAct Technologies Inc (TACT) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to today's Transact Technologies' fourth quarter 2004 and full year earnings result conference call. 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 call is being recorded.

Please note the today's conference call includes an online PowerPoint presentation that can be accessed on the Company's website at www.Transact-Tech.com. A replay of the call will be available after 8:00 p.m. Eastern Standard Time today, through midnight Eastern Standard Time on Thursday March the 10th. The replay dial in number is 719-457-0820. And the pass code is 4847552. The replay will also be accessible at www.Transact-Tech.com.

I would now like to turn the call over to Ms. Denise Roche. Ms. Roche, please go ahead, ma'am.

Thank you. Good afternoon, and welcome to Transact's fourth quarter and full year 2004 results call. Joining us from the Company are Bart Shuldman, Chairman, President and Chief Executive Officer, and Steve DeMartino, Chief Financial Officer.

The format of the call will be a brief business review by Bart, followed by Steve, proving details on the financials for both the full year and fourth quarter. Following the review of 2004 results, Bart will outline Transact's outlook for 2005 through 2008. We will then have time for any questions. If you have not yet received a copy of today's results, please call Sharon Lou, at 646-536-7026 and she will get one to you immediately.

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 forward-looking statements. Actual results may differ materially, depending on a number of risk factors.

For a full list of these risk factors inherent in the business of the Company, please refer to the Company's SEC filings, including the Company's most recent annual report on the 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 like to turn the call over to Bart Shuldman. Please go ahead, sir.

Thank you, Denise. Good afternoon, and thank you for joining us on today's call. I'm going to review the highlights for the full year 2004, then Steve will run through the detailed financials. After that we will take time to outline and review Transact's business going forward and then we'll open the conference call to questions.

Two-thousand-four was a good year for Transact. It was a year of execution and growth across all three of our core businesses. Revenues for the full year increased 15 percent, to $59.8 million. Each business unit achieved revenue growth. Transact remained focused throughout the year, both on the top line growth of our revenue, and also on the bottom line, as the leverage we established in our business grew our margins even more. As a result of our sales growth and our efficiencies, we were able to expand our gross margin to 36.8 percent and increase our operating profit margin to 14.1 percent for the year.

EPS grew to 51 cents per diluted share, from 12 cents per diluted share in 2003. We also ended the year with over $8.6 million in cash and short-term investments. And finally, our return on equity for 2004, was 31 percent.

Our gaming revenue grew 16 percent over 2003, driven by sales of our casino thermal printers into the casino and gaming markets. We did gain market share in the US market, in addition, began shipping printers into the international markets also. As most of you know, we launched our Epic 950 Thermal Printer into the casino market in early October, and not too long after, the Epic 950 was chosen by IGT to be offered as a standard printer on all platforms and in all jurisdictions where IGT does business. We believe this to be a major win for Transact and a validation of the strength of this product in the market.

Our printer technology is the foundation of our success. To that end, in 2004, we expanded our patent portfolio with three patents or notices of allowances from the US Patent and Trademark Office and have filed over 15 more.

In late 2004, we established our Global Gaming and Lottery Headquarters in Las Vegas, making us neighbors with many of our gaming customers and positioning us to take full advantage of the market opportunities in that sector. Adding to our market penetration, we won 100 percent of the new Wynn Las Vegas Casino slot floor, something we are very proud of.

And on the international front, the European and Australian markets now present a tremendous opportunity for growth, representing now a combined addressable market we believe to be over 400,000 slot machines. To go after this business in 2004, we added Gary Parkin to lead our European Gaming Sales operations, a seasoned, experienced casino executive. We are making significant inroads in Europe and expect it to be one, if not the major growth driver for our Gaming and Lottery business later in 2005 and beyond.

In Australia, we engaged the sales organization to build on our deal with Aristocrat, Australia's largest slot machine manufacturer, which chose Transact as its exclusive printer supplier. In the Lottery business we strengthened our relationship with the world's largest lottery company, GTECH, by expanding our business and providing an expanding offering of printer solutions to them. Transact is now the default printer for the newly acquired subsidiary Speelo (ph), and we are developing two new Gaming and Lottery printers for them right now.

In addition to the growth of our gaming sales, we experienced growth in our POS and Banking business, which grew 26 percent over 2003. The growth was driven by sales of our BANKjet 1500 line of inkjet printers, which remain the printer of choice for financial institutions, with the adoption of Check 21 initiative.

To further leverage the growth of our POS and Banking business and to capitalize on our new product offerings in the segment, we recruited Scott Carter to lead our newly formed POS and Banking business unit. We introduced several new products in this business segment in 2004, including the launch of our KITCHENjet line of printers for the restaurant industry. The KITCHENjet line has been well received, and since launching we have landed a chain-wide rollout for this printer with a major restaurant chain.

We also grew our VAR relationship program. We call it our momentum program, by adding over 150 percent more VARs in 2004. Our Transact Services Group revenue grew 18 percent over 2003, as we sold more spare parts services and consumables to our customers. Each area of this business, spare parts, services and consumables, came in with growth during the year, something we are very pleased with. The increased sales of our inkjet printers to our POS customers and our Banking customers, coupled with what we call our TI (ph) ratio, the number of cartridges sold for every printer installed, resulted in a 75 percent increase in inkjet cartridge sales. This recurring revenue will only continue to increase as we sell and install more inkjet printers every day.

In addition, we've been very focused on the repair services side of the business, as we aggressively pursue more service contracts and repair business. To this end, we established a Western Region Service Center in Las Vegas and an Eastern Region Service Center in Wallingford, Connecticut, to allow us to better service our customers on both sides of the country and pursue the significant growth opportunities available through our Services business.

Other achievements in 2004 included major service contract wins with both POS and Banking customers, execution on a 14,000 unit expedited warranty contract in the financial services market, and the continuation of a 36,000 unit service contract supporting the UK Post Office through Fujitsu Services.

At this time I will turn the call over to Steve DeMartino, for a quick review of our fourth quarter and full-year financials. Steve?

Thanks, Bart. As Bart said, 2004 was a year of solid execution by Transact. Through focusing on growing our revenue, leveraging our operating costs and improving operational efficiencies, we achieved record levels of gross margin, operating margin and earnings per share for the year.

Looking at our financial results for the fourth quarter, our net sales were 14.6 million, compared to 14.7 million in 2003. Revenues in POS and Banking in the Transact Services group for the fourth quarter of '04 were in line with expectations. However, Gaming and Lottery sales were short of expectations, as the growth in international gaming printer sales was not enough to overcome a downturn in domestic casino sales we experienced in the month of December.

Gross profit in the fourth quarter increased to 5.1 million, compared to 4.1 million in the fourth quarter of '03. Our gross margin also improved to 35 percent, from 27.8 percent in the fourth quarter of '03. The increase in gross profit and gross margin resulted from a more favorable product mix and continued component cost savings. You should note that both gross profit and gross margin for the fourth quarter of 2003 were negatively impacted by a charge we incurred of approximately $740,000, related to a royalty for the usage of certain Seiko Epson pins (ph).

Operating expenses, excluding restructuring and expenses incurred for IGT's integration of our new Epic 950 Casino Printer, were 3.4 million in the fourth quarter of '04, compared to 3.3 million a year ago. We were able to keep operating expenses essentially flat, despite an increase in professional fees related to Sarbanes-Oxley compliance. As a result, our operating income reached 1.6 million in the fourth quarter of '04, compared to an operating loss of 300,000 a year ago.

As a percentage of sales, operating income in the fourth quarter was 10.8 percent, compared to an operating loss of 2.1 percent in the fourth quarter of '03.

Net income in the fourth quarter of '04 was $1 million, or 10 cents per diluted share, compared to a net loss of 200,000, or 3 cents per diluted share in the fourth quarter of '03. It's important to note that the per share data in the fourth quarter of '03 has been adjusted to reflect the 3 for 2 stock split that was distributed in April '04. We also continued to generate cash during the fourth quarter of '04, with EBITDA rising to 2 million for the quarter.

Now looking at our financial results for the full year of 2004. Our net sales increased 15 percent, to 59.8 million, compared to 52.1 million in the same period a year ago, due to the strength of sales across all areas of our business. Sales into POS and Banking, Gaming and Lottery and our Transact Services Group all increased during 2004, compared to 2003.

We achieved record profitability in 2004, as a result of our top line growth and operating leverage. Our gross margin rose to a record 36.8 percent, from 29.8 percent in '03. Our operating margin, which is operating income expressed as a percentage of net sales, rose to 14.1 percent, from 5.2 percent in '03. Our diluted earnings per share increased 325 percent, to a record 51 cents on year-over-year revenue growth of 15 percent.

And finally, for 2004, our EBITDA more than doubled, to 10.4 million, from 4.2 million in '03, as we turned our increased profit into increased cash during the year. The dramatic improvement in all of these financial metrics demonstrates the powerful operating leverage and success of our business during 2004.

Now let's take a look at our balance sheet at the end of the fourth quarter. Our total assets were 34.1 million, compared to 26.4 million at December 31, '03. Our working capital increased by 72 percent, to 20.3 million at the end of '04, from 11.8 million at December 31, '03. Our current ratio also improved to 3.3 to 1 at the end of '04, from 2.4 to 1 at the end of '03. Both metrics increased due largely to our significant cash generation during 2004, and our conscious effort to maintain or reduce our inventory levels. In fact, at the end of '04, our inventory levels remained at 8.1 million, unchanged from the end of 2003, despite a 15 percent increase in sales and increased production volume.

Cash flow in '04 was extremely strong. We ended the quarter with over 8.6 million in cash and short-term investments and no debt. And we believe that we will continue to generate increasing levels of cash and increasing interest income throughout 2005.

Shareholders' equity more than doubled, to 23.7 million, from 10.3 million at year-end '03. The significant increase was primarily due to the conversion of approximately $3.9 million of preferred stock to common stock, our reported net income of 5.5 million during the year, and proceeds from stock options and warrant exercises during 2004.

Our return on average equity for '04 rose to 31 percent, up from just 19 percent in 2003. Again, reflecting our increased level of profitability and successful asset management. Overall we have a balance sheet that continues to strengthen each quarter and is capable of supporting our planned investments and expected future growth.

That concludes the financial portion of the discussion and with that, I'll turn it back over to you, Bart.

Thanks, Steve. Before reviewing our future outlook and providing guidance, I'd quickly like to review our track record of growth and some key milestones we have reached over the last few years. Starting with 2002, which was a year of restructuring for Transact. That year we outlined our new growth plan, as we realigned our sales organization to focus on the Casino coinless slot machine opportunity and Check 21 Banking initiatives. To that end we launched two new Casino thermal printers and also launched the BANKjet 1500, in preparation of the Check 21 program.

And we began our move to Asia, where our operations staff would combine the Asian low-cost manufacturing for our parts and sub-assemblies and combine it with our ability to final assembled printers just for our customers, what they want and when they want it.

Then 2003 was the year of execution for our growth plan. We significantly increased growth in two core markets, Gaming and Lottery, driven by the industry move to coinless gaming, and also our POS Banking market. We launched three new products that year and also began our international expansion in the Gaming market. This resulted in dramatic improvement to operating profit and gross margin.

In 2003, sales increased to over 52 million, and net income increased to 1.5 million, or 12 cents per share. And in 2004, as we reviewed a moment ago, was a year of accelerated growth, not only for revenue, but just as important, gross profit and operating income. As we said, we expanded our operating leverage and improved our margins. Sales increased to 59.8 million, with gross margins of 36.8 percent. And we achieved a significant increase in diluted EPS, to 51 cents per share.

As illustrated in these graphs, the groundwork we laid out in 2002, and the execution that followed, resulted in both top and bottom-line growth. Transact went from reporting a loss of 700,000, or negative 12 cents diluted earnings per share in 2002, to reporting net income of 5.5 million, or 51 cents per diluted earnings per share in 2004.

Looking at these graphs, I think we can all agree that we executed in the plan we set. Our results were driven by our focus on the opportunities we saw in front of us, combined with our powerful brand, and most importantly, by the success of our proprietary products and technology. We set out to design and build a suite of new products for every market, and we did just that. We designed these products just for the markets, just for the customers in those markets.

In POS Banking we have introduced new inkjet and thermal technology. And in Gaming and Lottery we introduced five new products, mostly for the coinless slot machine. We basically have all new products for the markets we serve.

Looking forward, we actually see more opportunity for growth than we did back in 2002. We have many more products addressing larger opportunities and our addressable markets are expanding. For example, while I thought our international growth in the Gaming market would come mostly from Australia, having just come back from the International Casino Exposition show in London, I believe Europe will be a true revenue growth driver for us over the years to come. It could actually be a larger revenue opportunity for Transact in 2005 than Australia, something I would not believe just a few months ago.

Our Company is in the best shape it has ever been in, and given where we are, we put a plan together to go out and significantly grow our business.

Now I know the beginning of this year will not be where we thought it would be. Clearly, the domestic casino business took a big downturn in December of '04, and we do believe this will continue throughout the first six months of this year. However, we believe it will come back and we will grow our market share with the initiatives we are taking and the international casino business will add to this growth also, in the second half of 2005.

We have the balance sheet, we have the markets and we understand them. And we now have what we called our Program 2-3, to double our revenues and triple our profits. There are many opportunities for continued growth across all three of our businesses. The Gaming and Lottery expansion continues worldwide, as coinless slot machines continue to penetrate the market.

The POS and Banking market is expected to achieve domestic and international expansion, and as our installed printer base grows, the New Transact Services group will continue to see increases to revenue and profitability. In order to capitalize on these opportunities, we must invest in these businesses. That means investing in our people and our products.

We must add the organization to go out and get the business, and program 2-3, as I said, will do just that. To achieve this we'll make an investment of about $2.5 million in the business now, with most made in the first quarter of 2005. The $2.5 million will be spent in three areas; $1.2 million in sales and marketing; $900,000 in operations, specifically investments to establish our two new service centers in Las Vegas and Wallingford, Connecticut; and lastly, $400,000 in engineering costs for the continued development of new products.

With some of the investment we expect to launch four new products in 2005; two in POS and Banking and two in Gaming and Lottery, later this year. And in 2006, we'll also launch a major new POS and Banking product.

The Transact that existed through 2004 was a lean organization that reported to me, the CEO. As we have significantly grown our sales and our worldwide customer base, the time has come to organize the business around our markets and around our customers, to give us the necessary management and sales staffs. Investing in and strengthening our organization is vital to reaching the next step in Transact's evolution and to further increase our market penetration.

As you can see, the Transact we have created has three senior business managers leading each business unit. In our Gaming and Lottery business we have organized the sales team by region, where one Casino salesperson and one OEM salesperson are responsible for the Western part of the country, and two others take care of the Eastern part of the country. There are 911 casinos in the US alone. And with our push-pull sales strategy, we feel good about our penetration growth later this year.

As I mentioned earlier, we have also added a European sales manager and now have two international sales organizations helping us penetrate the international markets; one responsible for Europe and one responsible for Australia and New Zealand.

In addition to the senior business manager in our new POS and Banking business unit, we now have four regional salespeople and one channel manager handling our distribution relationships for POS and Banking. And our Services group, which has zero dedicated salespeople, now has one sales manager, one dedicated salesperson for Consumables and one for Service contracts.

We have also added a customer service rep. In addition, we now operate three service centers; one on the West Coast, one on the East Coast and on in Europe. This allows us to get close to where our customers are, where the opportunities are.

Like I said, 2004 was a good solid year for Transact. We stayed focused on our core markets and are delivering profitable growth. This effort came from the initiatives we set in 2002. And now in 2005, we set our new initiatives to take Transact to the next level.

In 2005 we anticipate achieving revenue growth of between $70 and $74 million. We expect this year to be backend loaded, as the initiatives I just spoke about take hold. We are disappointed that the US Casino market took a big downturn in December, and we now expect it to continue through the first six months, based on market input we have received.

However, in the second half of 2005, we believe that this will turn, and at the same time we will have growth coming from our international gaming markets and a pickup in our domestic markets, as we expect market share gains as we finish the integration of the Epic 950 into all of IGT's slot machines in the second quarter of this year.

We also expect growth coming from our POS and Banking market, as we expect a new organization to deliver growth later this year. We have two new products coming and are working on some Banking and POS deals we hope to close for the second half of this year.

We now have a new sales organization, led by a senior POS sales executive. And finally, our Transact Services Group will continue to deliver growth all year long. Their addressable market grows every day as we sell more printers, and they too now have a larger sales organization attacking the many opportunities in front of them.

Going forward, in 2006, we expect revenue to be in the range of $85 to $90 million, based on the initiatives we are taking. And in 2007, in the range of $95 to $100 million, as our POS and Banking market and Gaming and Lottery market continue to grow. And in 2008, we expect to reach our goal of doubling our revenue, of reaching between $115 and $120 million.

Now we start our initiative in 2004 with EPS at 51 cents. We grew our revenues and became more efficient in 2004, and became more productive, resulting in significant increases in earnings per share. After taking into account the 2.5 million strategic investment in sales and marketing, engineering and operations we are making this year, we expect diluted EPS in 2005 to be in the range of 58 to 65 cents.

We expect the second half of 2005 to be much bigger than the first half, as I've already explained. In 2006, 2007 and 2008, EPS will increase significantly as incremental revenues drop to the bottom line. We project that 2006 diluted EPS will be in the range of 86 to 96 cents, and we'll end 2008 in the range of $1.46 to $1.56, our goal of tripling earnings.

As you can see, the operational leverage we achieved from investments in the business are significant and our track record of executing on our business plan speaks for itself. Over the past two years, our business has evolved and grown dramatically by design. At this time in our Company's history, as I look out at all we have in our three core markets, as I listen to our salespeople, I've never been more optimistic about the opportunities available to the Company. Our business units have each achieved a critical mass and now is the right time to invest in the future of the Company and position Transact to even more aggressively penetrate the markets.

We believe this investment of $2.5 million has a huge upside potential for both top line and bottom line growth. There is a lot of work ahead of us and we know that. I felt it was important to share this all with our shareholders, to show you our path, to show you how we are investing our money wisely and to set off our next round of growth for Transact. We know we have a lot in front of us, but we are optimistic about the future and feel confident that we have built a sales organization and operating infrastructure needed to achieve our goals.

With that, I would now like to open the call for questions. Operator?

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

Hi, Bart. Bart, given all the chatter that's been going on around the investment community, I was wondering if you could clarify how the second half of 2005 should play out and maybe characterize by business segment or if there are specific events that will trigger a ramp in the business? Maybe you might highlight that for us, although you may not want to be too specific, could you give us just a general idea?

Well, we really see it coming from a couple of initiatives. Clearly the move that we're making in getting our printers approved at IGT and all their platforms, which should be done by the end of the second quarter, maybe even earlier, should take an effect in the second half of the year, allowing us to have our printer approved by the casinos and be assembled in the IGT slot machines. That's all incremental growth for us.

What our customers are saying about the casino market is that they expect the second half of the year to be bigger than the first half, based on the slowdown that they're seeing. We also expect all the initiatives that we're making with our sales people -- we've gone from basically two sales people in the Casino industry, to four. We have people working in the casinos doing the pull, while we have people working with the OEMs doing the integration of our 950. And we really feel good about the integration of the 950. It's going well with all the slot manufacturers.

The only issue that we face right now is just the downturn in the domestic market. We're also hearing very good things out of the international market. We're working on some very significant opportunities. And while I can't really discuss those with you, I would hope that we'd be able to announce them over the next couple of months, so you could see how those will rollout in the second half of the year.

Clearly, the moves that we're making with our sales organization in both POS and Banking and our Services Group will clearly have an effect in the second half of the year. We just opened up our new service center in Las Vegas, and starting in May of 2005, we have a lot of printers coming off of warranty in the Casino industry. Most of our printers, or all of our printers are shipped with two-year warranties and we started shipping in the tens of thousands in May of '03, so all those printers start coming out of warranty in May of '05. So we should start seeing that work in the second half of the year.

We also have four new product launches; two kind of interesting in the POS and Banking market, that you'll see in the second half of the year, that we think address some very interesting opportunities for the Company.

So when we roll it all up, the sales forecast has come in with the second half of the year being much larger than the first half.

Okay. And what about business with GTECH, do you think that will be up in '05 over '04?

I think so, based on their input. We do somewhere around $8 million a year with them, but we've got two new printer initiatives that we started and we should be launching those sometime over the next couple of months. And we are starting to hear things about some opportunities that are a little above what we saw last year.

The only thing that's going to happen there, Jeff, is I don't think they're going to start rolling out until April of this year. So I think the first quarter is going to be much lighter than the rest of the year with GTECH. And that's how it always is with GTECH. But we actually think our business is going to be up in '04, but basically the last three quarters of the year. Oh, '05, I'm sorry. I'm struggling with this cold.

Of the $2.5 million investment, how much of that is an ongoing annual expense, how much of it is one-time?

It's all ongoing annual expense. I broke it out for you, and how it breaks out; $1.2 million is in sales and marketing. The $400,000 is involved in launching these four new products, really the engineering work that we're doing. Plus we've got a pretty big project that we're working on right now that will launch in middle of '06. So that $400,000, that might actually come out, depending on the projects we do, after the middle of '06. But the $1.2 million in sales and the $900,000 in service will stay.

Got you, okay. And then could you give us an idea of timeline of approvals of Epic 950?

It's going well. I can't talk about the specific customers, based on the agreements we have with them. But I know that it's difficult seeing the first half of the year come down. And we really believe it's based on the domestic market slowdown that is occurring. But from what we're hearing from all the customers, they are integrating, it's going well and we expect to see the shipments to start in the second half of the year.

Is that essentially approved in each jurisdiction is approved with that in it, with the --?

One machine for each OEM? I'm not sure I understood, Jeff.

In the regulatory approval process for you on the Epic 950, how does that work? Are you approved when the manufacturer gets approval for their machine and the printer in it?

Yes, the manufacturer has to do the approvals. And each manufacturer is doing that right now. The first location that will probably get the Epic 950 is the Wynn Casino, where we've won the whole floor. And I think that's going to be with all 950s. And that happens in April.

Right, okay. For Australia, any idea on timeline when Aristocrat will receive approvals for ticket-in, ticket-out?

We've already begun to ship in Australia. What we're hearing is the second half of the year, there's some approvals going on in New South Wales and Victoria, and we're hearing that's going to really start rolling out in the second half of the year. But we've been shipping to Australia for the last, what, three-months, Steve, four-months? Our international business actually was up in Q4 of '04, but it's not up enough to overcome the domestic shortfall.

Is that for just ticket-out or is that ticket-in, ticket-out?

It's really ticket-out.

Okay. When will you start shipping printers for ticket-in, ticket-out?

I don't think we'll know about whether they convert to ticket-in, ticket-out, because of the move to ticket-out and how they like the thermal printer better than the impact printer. So I don't know if we'll really -- I'm going there at the end of this month, so maybe I'll have some more information for you. But it's really the ticket-out and the thermal printer that they're getting approved.

Okay. And are you guys -- you said you're exclusive on that?

We are. I know there's been talk about us not being exclusive, but we've asked the question many times and I don't know of any other printer shipping to Aristocrat at this time.

Barry Raeburn, Emerging Growth Equities.

I have a quick question. Just on the gross margin, Steve, can you kind of talk about what was one-time, what's sustainable and how we should kind of look at that? Nice improvement year-over-year, but a couple of things just in the quarter.

We don't really manage to the gross margin line, Barry. We really manage to the operating margin line. The operating margin for '04 was around 14 percent for the year. Going into '05, with the expected revenue increase, we're still going to get operating leverage, so the margin will expand, probably closer to like a 15 to 16 percent range. It would have been higher if it weren't for the investment that we're making in the items that Bart explained.

And we've got another $150,000 to be expensed for the IGT integration. Barry, is that the question you asked?

Well, you answered my second question without me asking it.

That's where you were going though. I think you were asking about the gross margin and some of the charges we took in the fourth quarter?

That's correct.

The two charges that hit were -- the charges we hit for the IGT integration, $500,000 of total cost, of which $350,000 hit in the fourth quarter. The rest of it, the other $150,000 we expect to hit in the first quarter.

That was in operating expenses, not in gross expenses.

There was nothing unusual that hit the gross margin line in the fourth quarter '04.

Okay, super. With respect to the business mix that 's been improving the gross margin, how do you see that as the growth factors move throughout this lumpiness in the business model, on an annual basis as well as over the three-year term that you're characterizing here?

Other than the expenses that we're adding for what we call Program 2-3, the Transact Services Group, as they grow, with their larger margins, the gross margins should hold, if not come up a little. And as the revenue goes up, the operating profit margins is really where you see the expansion. The gross margins will probably hold in the 36 to 38 percent range, but the operating profit margins will expand. Because once we get through this initiative, then that revenue growth happens without -- other than salary increases and all that, you don't see much more cost hit the business on the operating line.

Okay, great. Steve, thanks for your vision on going through the gross margin to answer my operating margin question. Thanks very much, appreciate it.

Andrew Weiner, Burnham Asset Management.

Hi, good afternoon, guys. You alluded to a Banking deal that you hope to be a driver of second half growth. Is that a deal that's actually one where you've already won the contract and are waiting for rollout, or is that something that's still in the RFP process?

It's one we clearly bid on and worked on. We're just waiting for it to close. There's some software things that are going on and we're waiting for them to get through that. We've been probably waiting for about four months for that one. And it really has, we believe, has nothing to do with us. It has to do with implementing the software to be able to run the Check 21 initiative at the Bank. And what we found with all these Banking projects is the hardware is the easy part. The upgrade of the software is really the hard part.

So you believe you are the only printer manufacturer now being considered for that project?

At this point, yes.

Okay. Secondly, you referred to, in your presentation, a large restaurant chain for the KITCHENjet. One, what stage of the rollout of that contract are you in now and two, could you quantify how many units or in round numbers you expect that to be?

It's probably close to 1,500 or 2,000 printers for the kitchen. And I bet you about probably 20 percent through the rollout. We've probably got 80 percent more to go. It'll probably happen over the next 12 to 15 months.

Throughout the year, Andrew.

Secondly, to try to give us a little bit better color, can you maybe talk a little bit in some way about either pipeline or maybe, you gave up cartridge unit growth, but could you give maybe printer unit growth of inkjet printers?

No, we purposely don't do that, Andrew, because we don't want -- because we're public, we're probably the only public Company in our space. We don't like to give that information out. We clearly gave a lot of information out today to our shareholders, knowing that our competitors are probably listening to our strategy and all that. But no, it's not something we will do.

We're pleased with the 75 percent growth. Clearly, our strategy of moving Jim Stetson over to running that Services Group and the people that he's hired, we've very optimistic about what he's going to be able to do for us over the next couple of years, given the margins that he works on.

His first initiative was to open up Vegas, which is now open. We've actually run our first out of warranty printers down the line, with our repair services. We've hired the people, the people are working. Now it's just ramping up the volume. We had some business on the West Coast already, so we've -- Jim has transferred that business from the East Coast to the West Coast already. But now that we're up and running with people in Vegas, we feel optimistic that that's going to bring in some good business for us over the next three to four years.

As we monitor that success and that happens, clearly we're going to be looking for other opportunities in the North and the South, to expand our reach throughout the whole country. Because there really is no service organization -- formal service organization dealing in those markets.

In light of the significant additional investment you're making, would you expect that the first half of the year will not be cash flow positive?

No, we'll be cash flow--.

We will be cash flow positive, Andrew.

Well, I don't know if you guys are aware of this, but it looks like your stock is going to trade significantly down, at least based on after-market activity. And it's hard to give quantifiable evidence of the growth you expect in the second half of '05 and '06. I think you might want to consider a stock buyback as part of the uses of your cash flow.

Clearly, the Board and Management will look at the best uses of our cash going forward. I appreciate the input.

Bill Goldman, HMC New York.

Hi there, it's Tony Winer (ph). Thanks for taking the call. Can you please explain, go into further detail, I have a few questions, about your IGT relationship and your fine use of the language that you use and just how it works?

I'm not sure I understand your question.

Well, as far as your -- not use of the word default printer?

You know, I don't want to get into that game. I don't know who you are and I appreciate the press releases that come out. We've put out a press release that says that we will be a standard option. Once we are through the IGT integration, any casino can ask for our product and get it as a standard printer that goes down the line at IGT.

So it's a casino that has to -- that's (inaudible) for me. I appreciate it, so it's a casino. And then as far as--.

And in most cases the casino does ask for the printer. So, it's like going into a dealer and buying a car and your standard default is an AM/FM radio and you want to add a cassette or something. I don't want to get into this default and standards set.

Okay, I'll move it along then. As far as the -- actually can you talk for a minute -- I'll go back to IGT for one second. The competition from Asia, its been some of our research that there's now not only a couple of the competitors, but now four or five different competitors out of Asia right now.

In what market?

Your market, the printer market.

Okay. In our POS and Banking market, there's us and Epson. Epson's an Asian manufacturer. And there's a company called TPG, which used to be the old Axiom that went bankrupt a couple of years ago, and a couple of smaller players.

In particular, slots though, that's the main part our business.

In the slot business we only know of one competitor called Future Logic. We don't know of any other Asian manufacturers.

Because some other people, I don't want to mention names, have said that the competition between you and Future Logic is now seven-deep.

You know what, do me a favor and send me who the five others are.

I actually don't know, that's why I'm asking, because they're private. And I appreciate the fact that you guys are the only public company. You're the ones I have the information for--.

Is your name Tony?

Yes.

Tony, there is no other -- we know of no other. And look, I'm not going to debate you. I'm the CEO of this Company. We know of no other printer manufacturers that are competing with us other than Future Logic at this time.

Okay, I'll try to get them and then send them and try to clarify why your customers have said that there's a lot of other competition.

Our customers have said that?

Yes.

Can you name one?

I don't want to, for the same reason that you don't want to, but I'll do it off line with you --.

Okay. And I just want my investors to know, we know of no five Asian manufacturers. This is not a market that anybody can just walk into. This is one where it's costly to get integrated. It's a market where you have to understand the OEM and the integration process is very difficult.

There have been some that have tried to get in. A company called Money Controls tried to get in about two years ago and failed miserably. They could not get their printers integrated into the slot machines. It is a very difficult process, very high quality. The OEMs are looking for high reliability. And we know of no Asian manufacturers competing against us in the casino market.

Okay. And is that why it cost us some money to get the IGT business?

The reason why it cost us money to get the IGT business, we believe, is because we did an accelerated implementation program with them. Normally it would take somewhere between 12 and 18 months to get our printer integrated in the slot machines. And we wanted to work alongside with IGT to offer -- we had a great balance sheet, a lot of cash sitting on the balance sheet, and we used that, so that we could get through our integration process. Let's see, we started it in October-November and we'll be done in less than six-months. So we used our cash to be able to go in and work with IGT and get this done quickly.

And it is a process. It is a long -- it is a tough process to get integrated. And that's why we're working alongside of them and spending the money to get done.

So, if it wasn't a timing issue, we wouldn't have spent the money, is that what I'm understanding?

If we didn't get it done this quick, I don't know if we would have spent the money. I can't answer that. But we did spend the money to get it done quickly.

So--.

Can we get another question? I don't know where you're going with this. Can we get another question from you, or operator, can we get somebody else to ask a question?

Bill Gucci, Zebra Fund (ph).

Hi, thanks for taking my call. Going back to the issue of the downturn in December and what you mentioned about being the casinos that request your printers, can you tell us whether it was some specific casinos, whether it's a function of consolidation that's going on in the casino market, what caused this sudden downturn? Because certainly from what I recall the last conference call, you guys were pretty upbeat about the prospects for that market and all of the sudden it looks like it hit a wall.

We were. We were actually expediting printers in October and November. We were getting inundated with orders. And I can't explain it. Our salespeople were coming in with forecasts and the OEMs were asking for product and then it just ended in December. And we thought it might pick up in January and it hasn't. Our February results are much higher than January, but we don't think it's enough to overcome the downturn that we saw in January.

I don't like to talk about our slot customers, our slot manufacturers, so I'm not going to talk about what they're telling us and what's going on in the marketplace, but I'm sure that you've read from, in the casino industry, that other OEMs have also announced that the slot machine market is slowing down.

Now certainly IGT did not shine over the last few months. But, can you sense why the casinos, leaving aside the OEMs, have pulled in the reins all the sudden? I mean, they're certainly spending a lot of money to merge and build new properties and it seems almost a disconnect that this is sort of --.

Well I don't think the mergers have helped us. I think that there is -- and that's just a speculation on my part. I haven't gone to our casino companies and asked them personally. But I think with the mergers going on, you could be seeing them hold off until they complete these large mergers that are going on. I mean, four of the top casino companies are in the process of going through some pretty big mergers.

And one last quick question. As far as the merger between Caesar's and I believe of Harrah's, you guys were doing quite a bit of business with Harrah's and did that develop in some business from the Caesar's properties or what happened there?

I think we'll talk about it more after Harrah's finalizes the acquisition of Caesar's.

Barry Raeburn, Emerging Growth Equities.

Hi, Bart. Just given the extensive outlook you guys have taken the time to detail, was the visibility into the operating margins and the comfort you have in the business and the direction you're taking your business, do you foresee any capital structure changes throughout that time period? As another caller alluded to, some uses of your cash? I'd rather you decide how to use your cash, frankly. But, it seems as though you will, however, as he pointed out, be generously earning net income. I'm trying to get to the sense as to what you think the company's going to look like as you progress through this time period that you guided to?

Clearly it's going to be a company with a lot of cash on the balance sheet. I mean, we don't have a lot of capital -- we don't have a lot of --.

It's not a capital intensive.

That's right. We don't spend a lot of money on capital equipment in the business. I mean, our CapEx runs between $1 and $2 million every year, depending on how many products we bring out and computers we buy and software programs we might update in regards to how we run our business. So, it's not a very capital intensive business at all.

In fact, with the growth, what we did in modeling out our business, we actually modeled it down to the product line and how many printers we would sell, the customers we would sell it to, the markets, we looked at Australia, we looked at Europe, we looked at what's going on in Europe. We looked at the US and what we think our market share would be. We looked at our Epic 950 and what's going on there, clearly, with the dual port, the opportunities we have.

And one of the things that we did was try to model and see what the demand would be in our operations in regards to whether we would have to expand our operations or not. And the conclusion that we came up with is all this would be done in our factory in Ithaca. So all this organic growth that we're looking at will occur in our one factory in Ithaca. Then that's why you see this growth of the operating income happen.

Debbie Slater, Slater Financial Services.

Good afternoon, gentlemen, how are you? Very well, thank you. I just have a quick question. And that is, you're talking about international markets being maybe even more lucrative than the US for the next few years?

Well the growth of it, we're starting out at zero base. And the growth of it. So, we're clearly getting involved with the Australian market, which is starting out with a low base, even though we started shipping printers in September through December. And we really haven't shipped any printers in Europe yet. And we are working on some very sizeable deals there. So the growth of that market, we think is -- and like I said, I think Europe could be larger than Australia this year, if everything that we see in the forecast happens.

Great, that sounds awesome. My question was actually if that is true and you will be spending this ongoing money for marketing that you have allocated, do you have plans for offices overseas or can you tell me what the future holds?

Oh, no. What we did in Europe, is we already hired our sales manager, a guy named Gary Parkin. And we work with also a company called EuroCOIN in Europe. And Gary actually has his office in their facility. So that expense is already in.

In Australia, we work with another company, local in Australia, who handles our sales and service for us and we just manage the account from the US. So we don't plan on adding any more cost in Europe for our Gaming and Lottery sales or Australia. What you see what we've done, in the 1.2 million that we've added to the business this year, already accounts for that expense.

And ladies and gentlemen, due to time constraints, we will end the question and answer session now. Mr. Shuldman, I'll turn the conference back over to you for any closing remarks.

Well we appreciate the time you've given us tonight to explain our story and to give you the outlook for the years to come. We look forward to talking to you again, when we complete our first quarter. And of course, we'll let you know about our annual shareholders' meeting in May. Thank you very much for attending.

Ladies and gentlemen, this does conclude today's Transact Technologies fourth quarter 2004 and full-year earnings results conference call. We do appreciate your participation and you may disconnect at this time.