TransAct Technologies Inc (TACT) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to today's Transact Technologies First Quarter 2005 Earnings Results Conference Call. (Caller Instructions.) As a reminder, today's conference is being recorded. A replay of this call will be available after 8:00 p.m. Eastern Time today through midnight Eastern Time on May 11. The replay dial-in number is 719-457-0820 and the passcode is 8804483. The replay will also be accessible at www.transact-tech.com. I would now like to turn the conference over to Denise Roche. Please go ahead.

Thank you. Good afternoon and welcome to Transact's First Quarter 2005 Results Conference 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 providing details on the financials. We will then have time for any questions. If you have not yet received a copy of today's results, please call Sharon at 646-536-7026 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 the number of risk factors. For a full list of risks inherent to the business, please refer to the Company's SEC filings, including the Company's most recent Annual Report on Form 10-K. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the day of this call.

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

Thanks, Denise. Good afternoon, and thank you for joining us on today's call. I am going to review the highlights of the quarter and then Steve will run through the detailed financials. After that, we'll open the conference call to questions.

First quarter results were clearly impacted by the significant decline in slot machines sales into the domestic casino market. This slowdown has overshadowed the general strength and performance we are experiencing in our other markets, and the important progress we were making with the growth initiatives we set in motion earlier this year. Our strategy of investing back into our business during the slowdown is showing signs of taking hold. Offsetting some of the weakness in the domestic slot machine market was the tripling of our international gaming sales, which was a result of the investment we made in our sales team, specifically, the addition of a European sales manager and the expansion of our worldwide distribution network.

In addition, sales in the POS portion of our POS banking business grew by over 50 percent compared to the same quarter of 2004, well beyond the overall growth rate of the POS market. This growth was driven by the additions we made to our sales team and the increased number of products we have added to our POS product portfolio. In fact, we experienced increased sales across most of our POS products. We are optimistic that the year-over-year growth rate of the POS portion of this business unit I just spoke about will continue into the second quarter. Finally, sales in our new Transact Services Group grew by over 6 percent compared to our first quarter in 2004. We believe that this growth will accelerate throughout the remainder of 2005 as the additional sales staff and new service center in Las Vegas ramp up in game momentum.

During our March conference call, I laid out our plan to grow both revenues and profits. Even though the decline in the domestic slot machine market still exists, we believe our initiatives are starting to take effect. And once the domestic slot machine market returns to historical levels, we should be well positioned to experience a true ramp up in both revenues and earnings. Just to review what we did, our plan was to increase staff that would in return directly lead to increased revenues. We added salespeople to our POS and banking business unit and salespeople to our gaming and lottery business unit. And we added salespeople and an additional service center in Las Vegas to our high margin Transact Services Group. And we added resources to our engineering team to allow us to continue to design, build, and market innovative products to the many markets we serve.

And just this week, we announced the addition of Tracey Chernay, our new Senior Vice President of Marketing. Tracey is a 20-year marketing veteran of Xerox Corporation and she'll be responsible for developing and executing Transact's global marketing strategies. Her in-depth understanding of the color printing market and extensive experience in developing and implementing global marketing strategies will be a great asset to us as we continue to implement our strategies for growth and achieving additional market penetration. Let me say, we are extremely fortunate to have such a caliber person as Tracey join our Company.

There is no doubt the downturn in the domestic slot machine market is having a negative effect on revenues and profits. When the market declines as much as it has, the effects of that downturn will be apparent. However, we are not standing still during this downturn, and as we have done before, we will continue to invest in our business during this time, and believe it will lead to even more increased revenues and profits when the domestic casino market returns. This slowdown is clearly overshadowing the general strength and performance we are experiencing in our other markets and the important progress we are making across all over our business units.

Our investment into the international slot machine market where we added a European sales manager and increased our worldwide distribution is clearly showing signs of working. Our revenues tripled from Q1 of 2004 with both Europe and Australia contributing. We gained even more traction in the international markets in April after the close of the first quarter of 2005 as we announced two additional deals.

The first was with U.K.-based Leisure Link, who chose the Epic 950 as the exclusive thermal printer to be utilized in their new cutting edge products. Leisure Link is the U.K.'s largest manager of public space gaming and entertainment machines, supplying nearly 90,000 machines to over 25,000 leisure retail venues.

Second, Austrian Gaming Industries GmbH selected our Epic 950 as a preferred thermal ticket printer for their full range of gaming platforms and slot machines. AGI is a wholly owned subsidiary of the Novomatic Group of Companies, a leading European gaming and leisure company. AGI's focus is on designing, developing, and producing high quality gaming products. We also added additional salespeople to our domestic gaming business, and even though the market is down right now, we are readying ourselves for the market share growth even during this downturn.

An example of what is happening, we recently received our first jurisdictional approval for our Epic 950 printer and IGT slot machines by the Nevada Gaming Control Board. As most of you know, this is new business for us as a competitor had their exclusive printer business before. We expect to have approval for our Epic 950 printer and IGT slot machines from the other jurisdictions announced by the end of June. We also increased sales and marketing resources in our POS banking business and results also showed signs of taking hold. While revenue was $3.9 million in the first quarter of 2005 compared to $5 million in the first quarter of 2004, the sales decline was strictly due to a decline in the project oriented banking portion of this business unit.

Sales in just the POS portion grew by over 50 percent from Q1 last year with increasing sales across most of our POS products. Clearly, this growth rate outstripped the industry growth rate by a lot. We are now seeing many more customers buying our printers due to the technical and cost benefits they provide and we are optimistic we can continue this year-over-year growth level through the second quarter.

On our banking side of the business, we did not have any active projects in the first quarter. As you are well aware, this is a project-based business. However, we are now currently seeing increased activity and interest in this market right now. Our sales team is making significant inroads in the banking portion of this business and they are diligently working to build our sales pipeline. And we are starting to see the results with the additional opportunities we are now working on. We now have many more deals we are working on right now.

I cannot go into any more detail. As you know, our competitors could be listening to this conference call. The sales cycle in this business tends to be a bit longer than our POS market because of the nature of the technical investments that need to be made by the financial services sector. But we have proven that we have the best available printers and continue to see great interest in our BANKjet 1500 printer from the banks across the U.S. We believe that we remain the market leader with our inkjet technology for banks and it's only a matter of time before we announce the close of our next set of orders.

Finally, our Transact Services Group continued to drive revenue higher as we sold more spare parts services and consumables to our customers. Each area of this business came in with growth in the first quarter. The increased sales of our inkjet printers, coupled with our TI [ph] ratio, the number of cartridges sold for every printer installed, continues to drive our revenues in this business. We believe that recurring revenue will only continue to increase as we sell and install more inkjet printers everyday.

In addition, we are very focused on the repair services side of the business as we aggressively pursue more service contracts and repair business. We now have two service centers up and running, including our Las Vegas service center.

Let me spend a few minutes talking about the investments we have made in our engineering team that will lead us into the future. Our strategy has always been to lead the markets with our technology and to also launch additional printers to our family of products every year. This year will be a big one for us. Our strategy, of course, is to develop printers that answer our customers needs, to design products for the markets we address, like our BANKjet printers for the banking industry or our KITCHENjet for the hospitality market, and our leading Epic 950 for the gaming market. This year, we will launch at least seven new printers for the markets we serve.

First, in our POS banking business, we expect to launch four new products in 2005. One especially will open up a totally new vertical market to transact. We also plan to launch three new printers in our gaming and lottery market. Our engineers are busy working and the additional staff we added gives us the capacity to launch this many new printers in one year.

As I finish my opening remarks, I want our shareholders to know that everyone in Transact is working hard focusing on driving growth in our business. With our new facilities and organizations, we are putting in the systems that will enable us to continue to manage our business. We are not standing still. We are not sitting still. You know the downturn in the domestic casino market has been severe. As the largest casino groups get through their mergers and new jurisdictions and growth in existing ones takes a bit longer that what was expected. We believe the significant downturn in the domestic slot machine market will continue in our second quarter and that has an effect on our sales.

Looking ahead, in the second quarter of 2005, we anticipate revenues will be between $13 and $14 million and expect net income for the second quarter of 2005 will be in the range of 3 cents to 5 cents per diluted share. In the second quarter, we'll experience a full quarter's effect from the strategic investments we have made, including the addition of sales and market staff and expenses associated with the opening and expansion of our service centers. Because of this, we do expect to incur somewhat higher expenses in the second quarter than in the first of 2005. However, some increased expenses in the second quarter will not recur, such as employment and recruiting fees related to the new hires.

Before I turn the call over to Steve to review the financials, I'd like to make a brief comment about the lawsuit we filed last week against Future Logic. I expect some of to ask questions once we open the conference call, but we have been advised by our lawyers we cannot answer any. What I can say is we want to compete in the marketplace based on the merits of our products and the success of our business. While we understand this is not always possible, we believe that future logic has engaged in business practices that are unacceptable. Nobody likes a lawsuit, but we felt we had no other recourse at this time. In view of the litigation, I am really not in a position to say anything more.

With that, I will turn the call over to Steve for our financial summary. Steve?

Thanks, Bart. During the first quarter, we began to make strategic investments in our business as we used our solid balance sheet to position Transact for future growth. With our new business unit structure and our new facilities we are also putting the systems in place to enable us to streamline and more cost effectively manage the increased complexity of our business as it grows and to deliver value to our shareholders in the long term.

Our focus remains on growing revenue over the long term and on leveraging our operating costs, streamlining our operations, and improving efficiencies throughout our organization to continually improve Transact's profitability. Let me start by saying that beginning with our first quarter, we've made a slight change in how we report revenue. Given the change in our organizational structure to three dedicated business units, we will now report sales by each of these three business units--point of sale and banking, gaming and lottery, and our newly formed Transact Services Group.

Reported sales from the POS and banking business unit will now include printer sales only. Similarly, reported sales from the gaming and lottery unit will include printer sales only. In our newly formed Transact services group or TSG, as we like to refer to it, we'll now include sales of all our after market products, including consumable products such as inkjet cartridges, ribbons, and paper, spare parts, repairs and service contracts, as well as sale of refurbished printers and shipping and handling charges. Prior to the implementation of our business unit structure, we analyzed and then added to each of our POS and banking market sales and gaming and lottery market sales their corresponding after market sales. We now break out our after market sales separately so our shareholders can see how TSG business is doing.

With that said, let's look at our financial results for the first quarter of '05. Net sales were $12 million compared to $15.1 million in the first quarter a year ago. Sales of our POS and banking printers, which includes sales of our printers used by retailers in the hospitality, restaurant, and specialty retail industries, and printers used by banks and other financial institutions at bank teller stations, decreased 21 percent over the first quarter of '04 to $4 million. The sales decline, as Bart said, was strictly due to a decline in the project oriented banking portion of this business unit as we substantially completed shipments to two major financial services companies to upgrade bank teller stations during 2004.

However, the POS portion of this business unit was up 50 percent compared to the same period in '04 as we experienced increase across just about all of our POS product line. In addition, both domestic and international POS sales were up.

Sales of our gaming and lottery printers were down by 28 percent compared to the first quarter of '04, from $7.6 million to $5.5 million. Sales in this business unit were impacted by the overall downturn of the domestic casino market. However, our international gaming printer sales more than tripled compared to the first quarter last year, reflecting our success in the European and Australian markets as they begin to adopt ticket printing in slot machines and other gaming and amusement machines.

Sales of lottery printers, which includes lottery printers used in G-tech lottery terminals worldwide, increased 47 percent in the first quarter. This increase was driven b y the previously reported shift in orders by G-tech from the second and third quarter of '04 to the fourth quarter of '04 and the first quarter of '05.

Sales from our newly formed Transact Services Group, which include lucrative after market sales of consumer products, spare parts, repairs, service contracts, refurbished printers, and shipping and handling charges, increased 6 percent to 2.6 million. TSG sales accounted for 22 percent of our total sales in the first quarter of '05, up from just 16 percent in the first quarter of '04. The increase reflects the momentum we are beginning to gain from the investment we've made in creating this new focused business unit. With a dedicated sales staff and two fully functioning service centers in Las Vegas and Wallingford, Connecticut, we now have the infrastructure in place to significantly grow this portion of our business.

Gross profit in the first quarter was $3.7 million compared to $5.4 million in the same quarter of '04. Our gross margin was 30.6 percent compared to 35.9 percent a year ago, largely down to lower overhead absorption on lower volume of sales in the first quarter of '05 compared to that of '04.

Operating expenses for the first quarter were $3.4 million. Operating expenses for the first quarter of '05 include a portion of the $2.5 million investment we plan to make during '05 in the growth elements of our business as we announced during our earnings conference call last quarter. More specifically, expenses for the first quarter included $100,000 for engineering expenses related to IGT's integration and the payment of the jurisdictional approvals for our new Epic 950 casino printer as well as higher expenses related to our strategic investment and the addition of new sales staff, including the initial staffing of our newly formed Transact Services Group, and the expansion and establishment of our two new service centers, Wallingford, Connecticut on the East Coast, and Las Vegas, Nevada on the West Coast.

In regard to the timing of when we expect to incur the $2.5 million of expenses, we expect to incur these expenses relatively evenly throughout the year. However, since many of the strategic decisions were made at various times during the first quarter, we did not experience a full quarter's worth of these expenses in the first quarter. As such, we expect expenses for the second quarter to be higher as this will be the first quarter in which we will experience the full quarter effect of our decisions and initiatives.

Our operating income was $233,000 in the first quarter of '05, compared to $2.1 million a year ago, again, down largely due to lower volume of sales in the first quarter of '05 compared to '04. We earned $20,000 of net interest income in the first quarter of this year as we continued to maintain a cash balance between $7 and $8 million and have no outstanding debt. This compares to $10,000 of net interest expense in the first quarter of '04 as we did have an outstanding balance on our term loan and the total was repaid in January '04. Net income in the first quarter of '05 was $163,000, or 2 cents per diluted share, compared to $2.1 million, or 12 cents per diluted share in the first quarter of '04.

Looking at our cash flow, during the first quarter we used approximately $400,000 of cash from operations and our cash balance declined by about $1 million to $7.6 million. The increase in our cash and cash equivalents resulted primarily from significant capital expenditures made during the first quarter of '05, largely for the purchase and implementation of Oracle software of approximately $500,000, and from a final royalty payment for past usage to Seiko Epson for approximately $400,000. Absent these two items, we would have been about cash neutral for the quarter.

Our working capital increased to $20.5 million at the end of the first quarter of '05 from $20.3 million at the end of '04. Our current ratio also improved to 3.6 to 1 at the end of March from 3.3 to 1 at the end of last year. And our EBITDA was approximately $700,000 for the first quarter.

Let's now take a look at our balance sheet at the end of Q1. Our total assets were $33.9 million compared to $34.1 million at December 31, 2004. We ended the quarter with approximately $7.6 million in cash and cash equivalents. Receivables were up slightly to $9.1 million compared to $8.9 million at December '04, mostly due to the timing of sales at the end of the quarter. Our collection experience continues to be good. Our inventories were down slightly to $8 million compared to $8.1 million at the end of last year as we successfully held our inventory levels. Shareholders' equity was $24.5 million at quarter-end, compared to $23.7 million at year-end '04.

And lastly, in March '05, we announced that our Board of Directors approved a stock repurchase program. Under this program, we are now authorized to repurchase up to $10 million of our outstanding shares of common stock over the next three years from time to time in the open market depending on market conditions, share price, and other factors. As of the end of March, we did not repurchase any shares of our common stock under this program. We will report any purchases under this program in our quarterly reports on Form 10-Q.

That concludes the financial portion of the discussion. And with that, we'll open the call for questions.

Thanks, Steve. Operator, we'll now open the call to questions.

Thank you. (Caller Instructions.) We'll take our first question from Jeff Martin with Roth Capital Partners.

Thanks. Hi, Bart. Hi, Steve. Bart, with the Q2 guidance, you didn't update the full year '05 guidance. Are you essentially suspending that for now to see what the domestic slot market does or should we still look at 58 to 65 cents as kind of your targeted number for the year?

The issue that we see, Jeff, is that we've been given limited visibility from the domestic gaming OEMs, the slot machine manufacturers in the domestic market. We're encouraged because the mergers are finally going through and a lot of the effect of the--we think the downturn--is clearly the four largest casino companies merging together--the two of them coming together and the other two going together. And so we're encouraged by that, but they've given us limited visibility.

The issue that we face, Jeff, is we could wake up tomorrow morning and with the banking deals we're working on and with the casino market as good as it can get, we could come in tomorrow and have all these orders come in. At the same time, it could take another quarter until the domestic casino market returns. So we felt it better just to guide the next quarter out and wait--and continue to look at how the market's developing. Our sales are clearly being affected by the domestic casino market. If a slot machine is not going out, then a printer is not going out. And our other markets, the POS market is now growing. This is something that most of our investors have been looking forward from us to finally say that our POS portion is growing. We've got many more banking deals that we're working on right now. This domestic casino market has just put us in a situation that we've got to wait till it gets back to at least historical levels, not even growth levels. We'd like it to get back to historical levels.

And we think we're doing better than what the market is doing because of the international growth we're going through, and some of the share gain that we're starting to go through with some of the new customers we picked up like IGT from the Nevada side alone. But we just don't have the visibility right now to be able to go out and give you two and three quarters out.

Okay. To that degree, Bart, could you give us a little more color on some of the things that are specifically affecting you with the domestic slot market? The reason I ask the question is looking back, it looks like about a third of your total gaming printer business in '04 was to WMS. And they put out numbers yesterday and they had a strong unit number for the first quarter. Is there a timing lag? And how do we look at that relative to the softness you're seeing versus what I would call relative strength with some of your larger customers?

Well, WMS is a good customer of ours. We do a lot of business with them. Clearly, they had some inventory of our product, so they had to eat through some of that inventory that they bought from us. So that affected some of our sales going forward. I think they're going through some inventory adjustments and you hear from with what they're doing to improve their operations of their business. I listened to their conference call yesterday and they clearly talked about the initiatives that they're going through to better align their operations with their business.

So even though we had success with them in '04, clearly, they are eating off some of the inventory that we shipped from '04 into--they've clearly ended up on their shelves in '05. So that--their growth is wonderful for us. We're just getting through an inventory situation with them. But the overall casino market, Jeff, is down a lot. And as much as they've been through--before what they were doing is they were shipping a lot of replacement kits or upgrade kits versus slot machines. Now, they are shipping slot machines then replacement kits, so their revenue is up. It is--their business from a standpoint of more printers and all that I can't talk about because I don't--they didn't give like how many more machines--or I don't know how many more machines or how many more upgrade kits they shipped.

But the rest of the market. I mean, there are other customers that are down significantly. You know who they are. We know who they are. One customer doesn't make the whole market. And overall the domestic casino market is down and it's down a lot. And it's going to have an affect on us. Now, we don't think we're down as much as the market. A lot of that has to do with the international. It has to do also with the market share that we're picking up. But there's not much that we can do in them. I have asked even my Board members, what do you do when a market is down as much as it is? I mean, you just--all you can do is influence their decision on what they're going to buy at the time. You can't change the dynamics of the market and try to change how much it's down.

Okay. So, is it safe to say on the international side of the business you expect to at least repeat the first quarter performance in the second quarter?

Oh, yes. It's not [indiscernible]. Signs out of Australia are clearly positive. The forecast looks like it's coming up, which is wonderful. And we signed two new deals in Europe after we closed the first quarter and most of those deals no shipments had went out in the first quarter. And those start shipping out as we go through May and June and into the second half of the year. So clearly, we should see the international casino market to continue to expand. And it's becoming a good-sized business for us. And if the amount of business that we're hearing from the customers that we close continues, it's going to be a sizeable business for us.

Okay. And--.

--And then, Jeff, then when you take the domestic market and take that domestic market back to historical levels. I mean, just look at what some of the OEMs have reported. I mean, granted WMF came out with some good numbers. But look at what some of the big players have announced and the amount of business that has come down. Just think when that market comes back what's that going to mean us. Not only are we going to have growth from the international market, but we're going to get back at least to historical levels in the casino market. We'll have share gain in the domestic market. And now, we've got a growing POS market, a growing TSG market, and our banking business is increasing. At least, the visibility on projects has increased tremendously.

Okay. Two questions on the point of sale side, first being, the 50 percent growth you saw year-over-year in the first quarter. Do you think you can--is that a sustainable base to assume or model going forward? And will you continue to grow that essentially because you've added to your sales force there and you're targeting essentially a larger market now?

Yes. I think, Jeff, it leads--look, we got it to the second quarter, so that's all I can talk to right now, Jeff. And we said--we just said in our announcement that we think that year-over-year, Q2-to-Q2 growth, will be at least 50 percent. That growth rate will continue.

Okay. And then, secondly, can you give any idea on timing of potential contribution from the banking segment. I know that's been slow to develop, but is it something we should see a high probability for in the second half, or is it still fairly uncertain and could be really a 2006--?

--Well, the good news is we have many more. Before on the March conference all we talked about having one good deal that we're working on. I can tell you now we have many more. And that gives us a better higher probability that at least one, if not more, will close in the second half of the year and will ship in the second half of the year.

Those will ship. Okay. And then, Steve, did I hear correctly with 47 percent increase in G-Tech [ph] printer?

Yes, that's right, Jeff.

Okay. And my final question is, Bart, should we start to think about maybe modeling a little more legal expense during 2005? And any idea on the relative magnitude of it?

I can't give you the magnitude, but you can add in at least in the second quarter some more legal expense.

Okay, great. Thank you.

(Caller Instructions.) We'll move next to Bill Suki with Zebra Fund.

Yes, hi. A couple of questions. Last call there was--someone asked about competition and there was some confusion about competition in Asia and what not. And did you guys ever find out what that was all about and can you tell us a little bit outside of Future Logic what's going on with the competition?

The gentleman on the last call talked about--I don't know, was it 7 or 8 or 10 competitors or something. The gentleman never called us back. Clearly, again, we believe there is one major competitors called Future Logic. That's what we compete against every day in the marketplace. So, Phil, you and I have never met, but I don't know what that was all about. I think that was an unnecessary approach to asking questions and the gentleman never called back.

Okay. And as far as operating margins, I think you guided around 15 or 16 percent for all of '05. What do you--do you guys have a feel at this point on where they might come in?

Well, we guided to the second quarter, and that's what we're going to stick with. I mean, clearly, as revenues come up the operating margin comes up. But we've guided for the second quarter and that's about as far as we can go right now. As--once the domestic casino market comes back and the revenue kicks in and what we're seeing with our POS market now, what we're seeing with our international and TSG, I mean, 15 or 16 percent is clearly the operating margin you'll see from us if not higher.

Okay. And one last quick one. As far as the Europe and Australia business, relative to what you guys were seeing at the time of the last call, how are those two markets shaping up? Better, same, or as you expected, worse?

I think the good news is Australia is picking up and that has been--the talk was always that they would go from--they've always had what's called ticket out. And it was impact printers and they got approval for thermal printers and we were just waiting for--it's more ticket out than ticket-in/ticket-out. It's really changing over from impact printers to thermal printers. And that move is taking hold and the latest forecast that we just got is higher, so we're pleased.

Europe, as we said on the March call, we thought could be something that would kick in more than we thought. Two of the deals that we were working on closed, Leisure Link and Novomatic. And we're pleased about that. Europe could be a good amount of printers from us. So from the standpoint of how we feel about it, it was clearly an initiative on our part to broaden the reach of our products all around the world. And it's nice to see Australia kicking in and Europe kicking in now.

Okay. Thank you very much.

(Caller Instructions.) And we'll take our next question from Brian Bauer with Bauer Capital Management.

Hi, guys. Are you still sticking to the long-term guidance that you gave in the 10-K and end of 2004 given that there is not visibility beyond Q2? I think you had something about revenues doubling and earnings tripling by 2008. Was that more of an internal sort of forecast for you guys or a benchmark by which you compare yourself?

It's clearly the benchmark. It's clearly the program that we put together internally that we think that we can--that we're striving for. I would say that the good news about where we are against that plan is what we're seeing in POS. I mean, finally, we can now tell our shareholders that we've had some significant growth in our POS market. And I think some of our longer-term investors have been waiting for us to say that. We've actually got four new printers that we're introducing too this year, so I think that will add to that.

And so, POS is pretty much on target for what we thought we would come in at. And the same thing with our banking, and the same thing with TSG. Even our lottery is pretty much where we thought it would be and our international side. So really, it's just going to be the timing of the domestic market. But the other initiatives that we've put in place are on target if not ahead.

Okay, great. And then, kind of on a different note. For your stock printers, could you sort of just describe to me what percentage of the sales process is spent with trying to push it from the OEM side and how much is spent from the actual casino side? In other words, is 95 percent of your sales process going to a Harrah's versus dealing with IGT?

Based on the amount of salespeople we have, it's split 50/50. So we have 50 percent of our sales force just calling on casinos directly, and 50 percent working with the OEMs. With the OEMs, it's not really pushing. We get involved in projects, new ideas, new ways to use the printer and things like that. And those salespeople tend to be more engineering-type people that get involved and help them out. And then, the salespeople on the casino side tend to be more of your regular sales person that goes out, builds the relationship, works with the people in the slot tech areas, works with the slot managers in teaching them about the product and doing the pull. That's had some good effect so far that we can see. From what we hear from our sales team, the pull strategy of going directly to the casinos, at least showing them what the product does, especially with the fact that hopefully by the end of June we're approved in all jurisdictions in IGT machines. That should have a lot of effect to our sales in the second half.

But in the end, you're trying to make it so it's actually the Harrah's of the world that have the ultimate decision making on whether we're going with a Transact printer?

It's both. It's both. I mean, there's a lot of features that our OEMs like with our printers. And that's why they choose our printers. So there's certain OEMs that will only buy our printer. And there we're working the relationship to make sure that we're doing everything possible to make them happy. We're--whatever--I mean, there are situations we get involved with where we do special mounting brackets and special things. They've got special projects. So it's both. I mean, there are certain situations where we're the only printer that they'll buy.

And then, of course, we want to let the casinos know a couple of things. One, we want to let them know about our Epic 950 and why we think it's a good printer. And we do a lot of selling in regards to teaching about the functions. We're also teaching them about the capability of the product, such as now printing color out of a printer. You can print two-color graphics. You can print graphics. The downloadable ports. Your ability to hold graphics in the printer. The ability for the printer to hook up to two things, not only the game, but directly to the system so that you can do real-time coupons and real-time complimentary tickets. So we're introducing the casinos to that.

It was very helpful with Wynn Casinos. Wynn opened up with--100 percent of the floor is 100 percent Transact. And there, they had both us and Future Logic go in and teach them about the printers and they made the decision on what printer that they wanted to use. And they thought--they saw the benefit of the printer.

One of the comments we heard from one of the casinos was this is a printer that's going to take me out 10 years. You've got all this technology in it. I won't need to upgrade or I won't need to think about the next generation or next model. I'll be able to keep using the Epic 950 now. So it's important that we do that and explain those benefits and differences.

Thank you very much.

And like I said, it was very helpful with Wynn because we won the whole floor.

Thanks. That's very helpful.

We'll move next to Larry Kilburn with Alber Stokes.

Hey. How are you? I just wanted--just for my numbers get up to speed with some of the issues here. What do you think the penetration is in the domestic market of ticket-in/ticket-out across the casino floors?

Oh, I've got to bet it's probably 70, maybe 75 percent.

Okay. Do you see any of your growth coming from converting the existing coin machines or is most of your growth coming from new machines?

I think we're to get it--I think we're going to get growth from a couple area. One, we're clearly going to see--eventually, we're going to see Pennsylvania come online. We're going to--New York State just made a nice announcement, so it looks like things are going to go ahead there. We're going to eventually get back to a normalized replacement cycle and we did not have any of IGTs business before. So by the end of June, we should be able to sell in every jurisdiction in the country, if not every jurisdiction in the world that IGT sells a slot machine. And that opens up 60 to 70 percent of the market that we never had. So we should see share gain from that standpoint. And we'll get back to a more normalized level.

From where we are today, clearly, the amount of slot machines being sold into the marketplace does not compare to what it normally was. So we should see growth just from that standpoint. And again, the new jurisdictions, the expansions. Wynn has already announced that they are going to expand their property. We're already hearing things about [indiscernible]. Singapore. Russia is talking. Big story there. Europe. Australia. So it's all going to come together and just all add to the opportunities in front of us.

Okay. I'll come back to that in one second. What do you think your perceived share is of the domestic market with--between you and Future Logic?

I've got to say we're 35 percent. Somewhere around there. Maybe a little higher because of our relationship with Harrah's, our relationship with Fox Woods [ph] where we have 100 percent of the floor. We have basically 100 percent of Harrah's, 100 percent of Fox Woods. We now have 100 percent of Wynn. So even though we weren't on certain IGT machines, we were able to--our printers are in some IGT machines at places like that. So I would probably say we're in the 35 percent range.

Okay. And then--.

--And that’s domestic. In the international markets, I think we're much higher.

Okay, good. And the last question is, what's the lead time for a new casino opening, slot machines need to get built, and your printers be placed in those machines? Wynn, obviously, has a lot of machines on the floor. They opened up in I believe April, but that didn't really hit you in the first quarter? But when would you have--?

--It hit some in the first and some in April.

So actually, you shipped your printers in April for an April opening?

Yes, we did. In certain cases we did. Yes we did.

So it's basically your printers are one of the last things to go in before the machine is shipped?

You know, it goes on their production line. And once they build and ship, we're like kind of just in time with our OEMs. We have certain programs with our OEMs where we ship every week. And we're shipping so the next week it goes on their production line and the next week it ships to either customer. That's kind of how we handle our vendors. So it could be pretty close to when the slot machine ships to the casino.

Okay. So basically, if we hear about more about New York or Pennsylvania or where the casinos as expanding--wherever they're expanding, we should equate your sales to the same time as those shipments, more or less?

Yes. If you--I mean, the New York State announcement we were very pleased to hear. As the slot machine manufacturers start shipping to the racinos [ph] and all that, we should see sales pick up. That's right.

Okay, great. Thank you very much.

And next, we'll go to Patrick Kirksey with Trustco Capital.

Hi. I was just curious. You announced that the Board announced a stock repo plan at the end of March. And can you tell us if you've been active in the market at all in April?

We couldn't. We were in a quiet period, so we couldn't. As soon as we announced the share buyback, we went into a quiet period because of the end of the quarter. And that quiet period ends pretty--very quickly now. So we could not.

Okay. Can you maybe just provide some general guidelines on what you guys look at to maybe lead you to purchase the shares? Do you have any guidelines that you all use in a general sense?

I mean--we don't--there's no--we don't sit back and make a calculation . I think that the share buyback is a wonderful use of cash while we have the opportunity to buyback shares at what we would consider to be an opportunity buyback shares. To me, it's if you've got a chance to reduce the denominator the equation goes up. And in this case, our business is clearly being affected by--it's not like we lost a customer. It's not like our printers failed. It's not like a competitor beat us someplace. The domestic casino market is down. And because of that, we're down. And we believe in our future. I mean, you just look at our cash flow in the first quarter. We bought some software. That's going to help us run our business better. We paid off some last payments on royalties. We had some other royalty payments that we made. Without that, we would've been cash neutral if not cash positive. And now with revenue growing and earnings coming up a little and what we think is going to be the future, it's a great way to use cash as long as the stock is down at these levels. Now, that's just my opinion. And Steve and I will talk about it once we get out of the quiet period and look at the opportunities in front of us with share buyback.

Okay, great. Thanks a lot.

And we have a follow-up question from Phil Suki from Zebra fund.

Yes. One quick question on gross margins. I noticed they were down a little bit. Were there any pricing issues with the products or was it just a--can you tell us anything more about that?

Phil, two things went on in the quarter. One was lower sales and that means we're absorbing the overhead less. So increased sales would fix--with your overhead fixed, the margin is going to come up. So clearly, the lower revenue equates to lower margins. There was one other thing that occurred. We sold a little more Epic 950s than we thought we would and the way that we start a new project, the Epic 950 is our casino slot machine printer. It's our new one and we feel really good about the opportunities in front of us. Normally, for the first six months to a year, we manufacture that all domestically. We want to make sure the printer works. I mean, right after we launched it, we won the Wynn casino. We've now got a lot of printers at Wynn. We want to make sure that we have a successful launch and the printer works.

After six months or so, we then start transferring the printer, the sub assemblies, to our Asian partners. We're in the process of doing that right now and that process will be completed by the end of June. The margins on the Epic 950 for the first six or nine months, or any new product, are normally a little lower because we're using domestic manufacturers just to prove out the build and prove out our manufacturing processes and the rest. The fact that we've been successful with our prove out period, we feel very good about. We've had a wonderful launch at Wynn. The printers worked, from what we hear, fabulously. We're in the process of moving it to our Asian partners, and by July 1 that margin will come back. So we did ship a little more Epic 950s than we thought we would. We sold a little more conversion from 850 to 950. Our 850 has some--which was our existing casino printer, has a bit more margin than the 950 because most of that is made by our Asian partners. The margin starting in the second half will improve just because of the move that we've made.

Okay. Do you have an internal target for gross margins once things stabilize? I've noticed that they have been in the 35 to 38 range so to speak?

That's a good level for us.

It should recoup back to that level, Phil.

Yes. And that's a good level. What we do, Phil, is we model the business and our--the modeling is POS and banking is a little lower than our corporate average. Gaming and lottery tends to be a little higher. And then, our Transact Services Group tends to be higher. And what we are able to do is we play with pricing a little on our POS printer business because it comes back in return with our TI ratio of cartridges and services contracts and all that. So we--our model is pretty much in that 35 to 37 percent range.

Okay. Thank you much.

And then, of course, the operating profit just continues to grow from there.

Okay. Thank you.

And we'll move next to Barry Raeburn with Emerging Growth Equities.

Hi, Bart. How are you?

How are you doing?

I'm doing very well, thanks. I wanted to ask you a couple of questions with respect to the Epic 950 mix where it is--where it was in the quarter. Given that it was recently introduced and there was a lot of jurisdictional progress made, have you been selling the product at this point or are we still looking forward to those sales and the contributions that they bring?

No, that's--Barry, you nailed it on the head. We've got to go through jurisdictional approvals with the 950. Every slot machine manufacturer in every jurisdiction has to get the Epic 950 approved. And we were impressed at how quickly the OEMs moved to the Epic 950. So we have already started selling it. And that's within six months of launching the product. We launched the product in October and we've already got sales going. And normally, it would take us 12 months, 15 months to see that happen. And like I said, that's one of the reasons in answering Phil's question about the margin. It is something that surprised us a little was how quickly the OEMs embraced the Epic, moved over to the Epic and started buying it. And we're also impressed with how some of the casino groups are starting to ask for the Epic based on its functionality. So we feel really good about its future, and therefore, we already started selling it.

Well, that's great news. And I know the division was down year-over-year, but do you have any commentary that you might want to share relative to the mix of printer sales having said that?

I'm not sure I understood the question, Barry.

The mix of printer sales within the gaming segment that were 950 and just within the commentary that you just gave of the adoption rate.

Yes. I can't break that out. We normally don't break individual printer sales out. We are the only basically public company and our competitors love to listen to our calls and get as much information on us as they can. So we do not break out individual printer models. What I can say is that we did--we are selling it and it is a bit faster than we thought.

That's good news. I appreciate that. Thank you for the commentary. Bye, now.

That does conclude today's Q&A session. I'll turn the conference back over to our speakers for additional or closing remarks.

Again, we really much appreciate everybody joining us tonight. And again, we'll talk to you on our second quarter conference call. Have a wonderful evening.

That does conclude today's teleconference. We thank you for your participation. Have a great day.