TransAct Technologies Inc (TACT) 2005 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the TransAct Technologies' second quarter 2005 earnings conference call. (Operator Instructions) It's now my pleasure to introduce Ms. Denise Roche of The Ruth Group. Thank you, Ms Roche. You may begin.

Thank you. Good afternoon and welcome to TransAct's second quarter 2005 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 providing detail on the financials. We will then have time for any questions. If you have not yet received a copy of today's results, please call Sharon Lou of the Ruth Group at (646)536-7026 or go onto TransAct's website and download a copy.

Before we begin the formal remarks, the Company's attorneys advise that this conference contains statements about future events and expectations which are forward-looking statements. Any statements in the call that are not a statement of historical fact may be deemed to be a forward-looking statement. Actual results may differ materially depending on a number of risk factors. For a full list of risks, inherent in the business of the Company, please refer to the Company's SEC filings, 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, and good afternoon and thank you for joining us on today's call. I'm going to review the highlights of the quarter, and then Steve will run through the detailed financials. After that, we'll open up the call to questions.

As you saw in our press release this afternoon, we are now issuing our earnings press release by highlighting the three strategic business units we have established inside TransAct. This format should give you, the shareholder, a view of how each one is doing. I will follow that same format in my business discussion now.

Second-quarter earnings were in line with our expectations. Revenues for the quarter in the second quarter of 2005 were 12.3 million compared to 14.7 million in the same period a year ago. The Company earned net income for the second quarter of 2005 of 0.3 or $300,000 compared to net income of 1.5 million in the same period of 2004. Earnings per share for the three months, ending June 30, 2005, were $0.03 per diluted share compared to $0.14 per diluted share a year ago.

Now, regarding our business units. Regarding our gaming and lottery business unit, first, I'll discuss the gaming portion. Despite the continued weakness in the domestic gaming market, what some call difficult, the gaming portion of the gaming and lottery business was down only 8% versus the second quarter of 2004 and was up 53% over the first quarter of 2005.

This was a result of TransAct's increasing worldwide market share, resulting from growing acceptance of our Epic 950 printer, sales of our existing series 850 printer, and also our fourfold growth in our international gaming sales compared to the same quarter of last year.

Looking at it sequentially Q1 to Q2, both domestic gaming sales and international gaming sales were up over 50%. Our strategy of opening up the international markets for our gaming products, focusing on Europe and Australia in particular, had a solid impact on our revenues in the quarter. In fact, it was the second quarter in a row of over 300% sales gains in our international gaming sales compared to last year. So, we believe we gained market share in the domestic gaming market and continued to lead the fast-growing international gaming market.

We are experiencing sales not only from Australia, but I am extremely pleased with the revenue growth we are seeing from Europe. Europe can now be larger than Australia in total opportunity for printer sales for TransAct over time.

Now we continue to operate in a difficult domestic slot machine market, which some estimate was down over 40% in the second quarter. Our sales continued to be affected by this slowdown and also an inventory issue with one of our key OEMs. This is a slot manufacturer we sold a lot of printers to last year, who has purchased very little printers this year due to their inventory issue. However, we believe this issue will end over the next two quarters.

Despite both of these issues, the quarter shows that we are gaining market share and positioning ourselves for growth when the market rebounds. As many of you already know, one of our wins was the Wind Resort in Las Vegas, which selected TransAct as the sole provider of gaming printers, which opened at the end of April.

I'll now give you a quick update on jurisdictional approvals for the new Epic 950 printer. We received our first jurisdictional approval for our Epic 950 printer in IDT's slot machines by the Nevada Gaming Control Board back in April. Since then, we've received notice that multiple slot manufacturers have been granted gaming licenses, including the GLI license for the approval for the use of TransAct's ITHACA Epic 950 in the slot machine platforms for the many jurisdictions GLI is associated with.

Turning to the lottery part of the gaming and lottery business unit, revenues were lower this quarter, but this was strictly due to timing of orders from GTech and a last buy of our legacy impact printer that GTech made last year. Based on recent announcements from our lottery customer, GTech, we expect sales to increase in the second half of the year and also into the first half of 2006. It now looks like the end of the year and 2006 should be much better for TransAct regarding our lottery revenues. I do want to make note that our printer sales to GTech has no reflection on GTech's financial results.

Turning to our POS and banking business unit, I'll speak about the POS business first. We continue to make good strides in our POS market. POS revenues, excluding banking, increased 12% compared to the second quarter of 2004. This was largely attributable to increasing sales of our new line of thermal printers and growth in our POS international sales. We are optimistic the year-over-year growth rate in sales of POS products will continue in the second half of this year, as we have experienced two quarters in a row of increasing POS revenues compared to the same period a year ago.

During the first half of the year, we made progress in the growth initiatives set in motion at the end of last year in our POS market. At the end of the year, we outlined our plan to grow both revenues and profits. Our plan is on track, and our initiatives are starting to reap results.

Our larger POS sales team is in place and we are seeing our sales pipeline grow across the entire business unit. Part of the strategy is to grow our international sales, which came through in the second quarter with an almost 50% increase.

On the engineering front, our POS printer projects are well on their way. As an example, in the second quarter of 2005, we announced the introduction of four new products in our POS business. In May, at both the National Restaurant Association Show and Retail Systems Show, both held in Chicago, we launched our first label printer specifically for the POS market.

We entered the label printing market with the introduction of the L/R 8000 thermal printer, which provides the benefits of a liner list label printing and customer receipt printing with an all-in-one product. At the same time, we also launched three new printers, the ITHACA 500, 5100 and 610 printers, to meet the needs of the reseller channel. These printers are exclusively available through our distribution partners and represent a dedicated line of POS printers all under the ITHACA brand name just for our distribution partners around the world.

We are now seeing more customers buying our printers due to the technical and cost benefits the printers provide, and we are optimistic we can continue to achieve year-over-year growth in this portion of the business through the remainder of the year.

Turning to just our banking business, we continue to make great strides with our new organization we put in place. While revenue in this business was down considerably in the quarter, the sales decline was due to the decline in the project oriented banking business as we benefited from shipments of banking printers to two large institutions in 2004 that of course did not recur in 2005. However, at the end of the second quarter of this year, we announced that TransAct's Bank Tech's 1500 inkjet printer has been selected by a top-tier financial services institution.

The purchase order was for a minimum of 6,000 printers. We shipped a small number of these units in the second quarter of 2005 and expect the remaining to ship during the third quarter. As you are well aware, the sales cycle in this business tends to be a bit longer because of the nature and technicalities of the financial services sector. However, our sales team is making significant inroads in this sector and is diligently working to continue to build our sales pipeline. We are currently working on closing other projects right now.

And finally, the TransAct services group continues to be a great revenue growth driver for the company. The TSG business unit revenue grew 27% compared to the second quarter of last year and over 21% sequentially. We expect this growth will continue throughout the remainder of 2005, as the number of installed printers continues to grow and our sales initiatives continue to ramp and gain momentum. We sold more spare parts services and consumables to our customers.

The increased sales of our Inkjet printers and all of our printers in all of our markets, coupled with our tie ratio, the number of cartridges, paper rolls, ribbons and service sold for every printer installed, continues to drive our revenues in this business. We believe that this recurring revenue will only continue to increase and grow and we are very focused on this business unit due to the benefits it brings TransAct.

Our new service center in Las Vegas is now up and running, along with the Connecticut repair facility. Our presence in Las Vegas is opening up more opportunities for us with spare parts and repair services and our casino customers are glad we are there. Our focus on the repair services side of the business is beginning to show results and we continue to aggressively pursue more service contracts and repair business.

Now from an operations standpoint, TransAct continues to focus on costs, while also driving forward with our strategic initiatives. Gross margin improved in the second quarter from the first and our operating expenses were in line with our expectations. We have added the salespeople, the management structure, and the additional engineering as we focus on growing TransAct. The costs we expected to add are basically done, the people in place. And we are adding an assistance and technology to make our business even more productive.

As I finish my opening remarks, I want to make some comments about the announcement we made regarding our dual port patent we received this week. I can say we are pleased, but more important proud of the work our engineers have done to create technology that we believe benefits the industry we serve. And the work our lawyers did to help protect the technology that we developed.

The grant of this patent should show our shareholders that we do what is right and we also provide leading technology that should continue to drive our printer sales. We're working with some customers right now with the technology and believe it represents a large opportunity for TransAct in the future.

Our shareholders should know that everyone in TransAct is working hard and focused on driving growth in our businesses. Although we expect the softness in the domestic gaming market to continue in the third quarter, and continue to feel the effect of one of our slot machine manufacturers dealing with an inventory issue, we are cautiously optimistic about the prospects for our gaming and lottery business. We continue to gain market share and expand relationships around the world.

Our Epic 950 printer is being widely accepted, and we are seeing growing interest for it.

In the lottery portion of the business, we expect revenue to improve in the second half of 2005 as sales ramp up. The POS and banking business unit is driving forward as the initiatives we put in place earlier this year take full effect. The POS market alone is a huge opportunity for us and we finally have the sales force and management team to attack it.

Interim banking business, as I said earlier, we closed our latest banking deal with most printers set to ship during the third quarter of this year.

Looking ahead in the third quarter of 2005, we anticipate revenues will be between 14.5 million and 15.5 million, and we expect net income for the second quarter of 2005 will be in the range of $0.06 to $0.09 per diluted share.

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

Thank you, Bart. As you may recall during the first quarter of '05, we announced our plan to make strategic investments in the growth elements of our business. I'm happy to report that these investments are substantially complete. Our focus now 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.

With that said, let's look at our financial results for the second quarter of 2005. Net sales were 12.3 million compared to 14.7 million in the second quarter a year ago. Sales of our POS and banking printers, which include sales of our printers used by retailers in hospitality, restaurant, and specialty retail industries, and printers used by banks and other financial institutions at bank teller stations, decreased 32% over the second quarter of '04 to 3.2 million.

The sales decline was largely due to the project oriented banking portion of this business unit, as we benefited from shipments to two major financial services companies to upgrade bank teller stations during 2004 that did not recur in 2005. However, in June 2005, we announced that a third top-tier financial services company selected our BANKjet printer for use in up to 6,000 of their bank teller stations. We shipped a small number of these printers in June and expect to ship the remainder in the third quarter of '05.

Despite the decline in our banking business, the POS portion of the business unit, which excludes banking printers, was up over 12% compared to the same period of 2004, led by increasing sales of our iTherm 280 thermal printer and our new line of printers exclusively for POS distributors just launched in May.

Sales of our gaming and lottery printers were down 20% compared to the second quarter of '05 from 7.6 million to $6 million. Sales from the gaming portion of this business, which primarily include sales of printers used in slot machines that print tickets, continues to be impacted by the overall downturn of the domestic gaming market. However, despite a decline in domestic gaming sales, overall sales of gaming printers, excluding lottery, were down by only 8% versus the second quarter of '04 and up 53% sequentially over the first quarter of '05. This in large part was due to a quadrupling of our international gaming printer sales over the second quarter of last year, reflecting our success in European and Australian markets as they begin to adopt ticket printing and slot machines and other gaming and amusement machines.

Sales of lottery printers, which including lottery printers used in G-Tech lottery terminals worldwide, were down approximately $1 million or 73% in the second quarter. This steep decrease was due to the timing of orders from G-Tech and shipments of Legacy Impact printers to G-Tech in the second quarter of '04 that did not recur in 2005.

Sales from our TransAct Services Group, which include lucrative after market sales of consumable products, spare parts, repairs, service contracts, refurbished printers and shipping and handling charges, grew 27% to $3.2 million. TSG sales accounted for 26% of our total sales in the second quarter of '05, up from just 17% in the second quarter of '04.

The increase reflects the momentum we are seeing as a result of the investment we made in creating this focused business unit. With a dedicated sales staff and two fully functioning service centers in Las Vegas, Nevada and Wallingford, Connecticut, we have the infrastructure needed to continue to grow this portion of our business.

Gross profit in the second quarter was 4.3 million compared to 5.6 million in the same quarter of '04. Our gross margin was 34.5% compared to 38.2% a year ago and 30.6% in the first quarter of this year. We were able to significantly improve our gross margin on a sequential basis, on nearly the same sales volume as a result of favorable product mix and continued product cost improvements.

Looking at our operating expenses, as I mentioned earlier, some planned strategic investments to our sales, marketing and engineering functions, we announced in the first quarter are substantially complete. Now with a new senior vice president of marketing, and a sales force more than double the size of last year, our three business units are fully operational and staffed and positioned to grow our business.

As we explained during our first quarter conference call, operating expenses for the second quarter include a full quarter's effect of the decisions and initiatives we put into place at various times during the first quarter, including the addition of sales and marketing staff. As a result, operating expenses for the second quarter of '05 increased by approximately $0.05 million to 3.9 million, as we planned.

Our operating income was 378,000 in the second quarter of '05 compared to2.3 million a year ago, down largely do so lower volume of sales in the second quarter of '05 compared to '04. We earned $20,000 of net interest income in the second quarter of this year, as we maintained the cash balance between 4 million and $5 million, and still have no outstanding debt. This compares to 2000 net interest expense in the second quarter of '04. Net income in the second quarter of '05 was $267,000 or $0.03 per diluted share compared to $1.5 million or $0.14 per diluted share in the second quarter of '04.

Now looking at our cash flow. During the second quarter, we used approximately $800,000 of cash from operations, and our cash balance declined by about $2.9 million to 4.7 million. The decrease in our cash and cash equivalents resulted primarily from several factors. First, we bought back approximately $1 million of our stock at an average price of just over $8 per share under our stock repurchase program during the quarter.

Second, our capital expenditures were approximately 600,000 largely for the ongoing implementation of Oracle software and new product tooling. Third, accounts receivable grew by about $0.5 million, which I'll talk about a bit later. And lastly, we acquired certain intangible assets relating to casino printer designs and technology from BALI gaming for approximately $0.5 million.

Prior to the acquisition, pursuant to the terms of a license agreement, we were required to pay BALI a royalty on sales of certain gaming printers utilizing the licensed technology. As a result of the acquisition, effected July 1, 2005, we are no longer required to pay any future royalties to BALI. We expect the elimination of future royalty payments to BALI to result in cost savings to the company beginning in the third quarter of '05.

Our working capital decreased to 19 million at the end of the second quarter of '05 from 20.5 million at March 31, 2005. Our current ratio improved to 3.8 to 1 at the end of June from 3.6 to 1 at the end of March. And our EBITDA was approximately 900,000 for the second quarter.

Let's now take a look at our balance sheet at the end of Q2. Our total assets were 31.9 million compared to 33.9 million at the end of March. We ended the quarter with over 4.7 million of cash and cash equivalents. Our receivables were up slightly to 9.7 million compared to 9.1 million at the end of March, mostly due to a greater proportion of sales occurring towards the end of the quarter, as well as substantially increased international sales and the resulting receivables from our international customers, who we grant longer standard payments terms to than our domestic customers due to the additional time it takes up to ship product overseas. Overall, our collection experience continues to be good.

Our inventories were down slightly to 7.9 million compared to 8 million at March 31, '05, as we successfully held our inventory levels. Shareholders equity was 23.9 million at quarter end compared to 24.5 million at March 31, '05. The decline was largely due to our stock buyback during the quarter, partially offset by our net income earned during the quarter.

And lastly, as I mentioned earlier, as part of the stock repurchase program authorized by our Board of Directors at the end of March this year, we repurchased 122,000 shares of common stock for a little under $1 million at an average price of just over $8 per share. Under this program, we're authorized to repurchase up to $10 million of our common stock over the next three years.

That concludes the financial portion of the discussion. With that, I'll send it back to Bart.

Operator. Thank you, Steve. Operator, it's time for us to open up the call for questions.

Thank you.

(Operator Instructions)

Our first question is coming from Todd Eilers with Roth Capital Partners.

Hi, guys.

Hi, Todd. How are you doing?

All right. I have got a handful of questions here. First one, can you guys talk a little bit more about the four new POS products you mentioned earlier in terms of in use, timing of introduction and potential revenue contributions for the combined products in '06?

Yes, Todd, if you look at the products that we introduced in May, there was kind of two sets of products. One was a brand new product for us, which is the L/R 8000, which has some very interesting opportunities. A lot in the food service market where if you think about the drive-through at a McDonald's, they're putting the thermal receipt in the bag, which is chemically coated paper and the customer doesn't like that. By having what's called a liner list label printer, they can actually stick the receipt on the bag which saves -- which allows McDonald not to put the receipt in the bag and then, of course, you don't have the chemical and the thermal paper in the bag around the food.

There is applications if you do a special sandwich at a certain restaurant, you can put the label right on the sandwich, which designates it's a chicken and hold the mayo. And the interesting thing is, it could also function as a receipt printer so the restaurant industry, the hospitality industry, can use the same printer whether they want to print labels or receipts. So it's not like they have to change out printers to be able -- or worry about which printer they're using in regards to either receipts or labels. So we think it's got a wonderful opportunity in the restaurant market. So, that's more of a new product and a product that we're creating a new market.

The L/R 500, 510 and 610, the distribution side of our business, our channel partners, are really growing. And we have launched a line of products just for them. Our technology, our reliability, our quality, at price points, that we believe are going to make them very successful.

They hit a market in a price point that we've been working with our distributors that they felt they needed. We were able to get to the price points that we wanted due to our Asian manufacturing and it really sets us apart from our competitors in regards to having a product line just for distribution.

The response has been wonderful. The distributors don't have to worry about a customer buying it direct from the manufacturer because the products only go through distribution. It is a product line just for distribution. And this came out of a lot of meetings with our distributors and trying to understand what we could do to help grow their business as much as growing our business.

Okay. Thanks. Let's see. Got a couple more. Can you talk a little bit about your pipeline in terms of additional BANKjet orders, and could we see some additional orders hit in 2005?

What we're seeing right now is a combination of two things. We're seeing a lot of small deals, which is wonderful because that kind of happens every day. We closed a small credit union and I think we had one in Puerto Rico or something. So, we are starting to see a little more activity from the regular banks that aren't the big multinationals. And then we've got a couple of projects working with the big, large financial institutions, like the one we just won for 6,000 printers.

I don't know if we'll close another big one by the end of this year. Looks like at least one big one, larger than what we have today for next year. But it all depends. There's so much testing that goes on with the software and the technology, so it all depends on how quickly they can get their -- on the big order range, how quickly they can get their systems to do exactly what they want it to do.

Okay. Also, I had a question on the receipt of the dual port printer patent. Do you think that will speed up? Or can you comment on that patent speeding up potentially to rebound in the domestic casino printer market? And you talked about a large opportunity, I believe, earlier. Do you guys currently have a backlog of those right now?

No. When we say we have a large opportunity in the future, if you look at the opportunity in the casino market to have a printer do dual port. The opportunity, in some of the things that we're looking at could be half the market, a third of the market in the US just going and using dual-port technology.

So we're very excited about the opportunity. We are working with a bunch of customers right now. I really don't want to go into the details. I'm sure my competitor is listening to the conference call and being that we're public and they're not, they get the benefit of that.

We're just very pleased that we got the patent. Our engineers did a great job at the designing the technology. I think we did a very good job at working with the patent office. We had it reviewed twice, not just once, but twice and we're just thrilled to have the patent. And over time, I think the shareholders will get to see what the benefit is to TransAct and to them.

Great. One -- let's see. You guys commented on share repurchase activity. Have you guys bought any additional shares since the end of the quarter?

Well, we can't really make any comment on that.

Okay.

We can really report them with our quarter. But, I mean, we can't. We have the same open window that a typical -- the new rules in buying stock back is we have to work within a window.

Okay.

So that window opens at a certain time and closes at a certain time.

Okay. And then final question and then I'll let you guys get to some other questions. Just in terms of SG&A and R&D levels, you mentioned getting the company to position, to support growth initiatives going forward. Can we look at the second quarter levels as kind of a good run rate going forward, or should we see some increases, further increases, or were there any unusual items in the quarter?

There might be some variation quarter-to-quarter, Todd. But generally, it's going to be at the second-quarter level. One thing that will be a little higher in the third quarter is our selling and marketing expenses because we have a big gaming trade show, the G2E show.

Yes. This year, Todd, we are taking out a very large booth at G2E. We've got a lot to show. We've got a lot of things going on. I really can't just tell you because at this point because I'm sure our competitors are listening. But we've got a lot of interesting things that we'll be showing at the show. So, this year it's a little larger. But all the initiatives that we took, the establishment of the three business units, the hiring of the senior executives, the doubling of the sales force, opening up Las Vegas, which is done, opened.

In fact, Las Vegas is going to be a real show place for us. We're doing a good job at fitting out the building. We have a lot of trade shows not only for gaming, but for our hospitality market, our banking market, our POS market. A lot of trade shows in Vegas and we can now use our office to host cocktail parties, breakfast, show them all of our products. That's basically done.

So, what you see in the second quarter is basically, all of the ads are now in and the typical fluctuations you'll see quarter-to-quarter. But the ads that we've made, the infrastructure that we've put in, we've doubled the sales force, it's all done.

Okay. Great. Thank you very much. Look forward to seeing you guys at G2E. Take care.

Yes. It's going to be a good show for us.

Our next question is coming from David Gorman with Benchmark Capital.

Good afternoon, guys and congratulations on the quarter. Bart, you made some comments about gaining market share. Can you articulate that a little bit in terms of where you're gaining market share and who you're taking market share away from?

Well, the only way we can really view market share is when we look at the domestic market and analyze what our slot manufacturers are saying, how many slot machines they're shipping and all that. And then look at how many -- and in this case, how down they are in the quarter-- and then look at how many printers we're shipping and domestically, what we're down or up. We conclude that we're gaining market share because our volume is not falling as much as what we're hearing in the marketplace.

On top of that, we've made some wonderful inroads with customers that we previously had very little business with. And we're shipping a lot more printers to them. I'm going to stay away from talking about individual customers. We have non-disclosures with all of our slot manufacturers. So, I'm bound by those non-disclosures. But when we look at it quarter-to-quarter or year-to-year, we look at the customers that we ship last year versus the customers that we are shipping this year and we see that the increased volume from the customers that we didn't ship or shipped a minimum amount last year. So, when we look at that, we conclude that we are gaining market share domestically.

Okay. One other question. You guys bought back, I believe, almost $1 million worth of stock.

Yes.

Okay. Obviously, you made a nice purchase down in the low $8 area. Do you continue to buy here? I mean, what's your thought process in shrinking the market shares?

Well, what we are looking is to really kind of two things. One is the use of cash and how we can apply that to helping the shareholder and clearly when the stock was at that high sevens, low eights, we felt that it was the right time to buy the shares. So, we kind of look at from a standpoint of how we can use our cash to benefit the company. So, we are not allowed to comment about our stock purchase program, when, if, and all that. We are bound by our lawyers have told us we can't say anything. But as you could see, we did buy a million dollars worth of stock back.

Okay. All right. Thank you very much.

Good day.

(Operator Instructions)

Our next question is coming from Jeffrey Meyers with Intrepid Capital.

Great. Thanks, guys. First question is I guess a clarification. In the press release, I think it said for next quarter, $0.06 to $0.08. I think you said $0.06 to $0.09.

Yes. It is $0.06 to $0.08.

$0.06 to $0.08. Okay. Next question is, and I think you might have addressed what your answer might be, but within IGT, within non-- sort of, mandated sites, like not the Wynn property but in other properties, are you guys seeing share gains there?

Again, I won't talk about individual customers. What we do is we look at -- the way we look at share gain is one, the volume of printers and what the market is telling us. And then we look at what we shipped the customers last year versus what we are shipping the customers this year. And we conclude that we are gaining market share. I'm not going to talk about individual customers. We are bound by non-disclosures. And so, I just can't talk about the individual customers and what we are doing.

Okay.

Our conclusion is that we are gaining market share domestically. And let me tell you, not only that. The domestic market has had its -- it is a serious decline in the domestic market. There's no doubt about it. I think the good news for us was last year around this time, we announced to our shareholders that we were going to move into the international markets to go after business in Australia, to go after business in Europe. We opened up offices in Australia and Europe with two great partners. And we've had two straight quarters of 300% sale gains, quadrupling of our sales. It is becoming a meaningful part of our business.

So, our move to the international markets on top of the share gain that we are getting domestically has really helped to buffer the downturn in the domestic market. Our sales were only down 8% quarter two '04 to quarter two '05. We feel very strongly that international sales pipeline is only going to grow and actually Europe, which has been a real surprise to us, could actually be larger than Australia overtime in repeatable business. So, we're feeling really good about that. And with the Epic 950, with what we believe to be the share gains that we're making. You've got the international market where, clearly, that's growing. And I think our market share is much higher internationally than it is domestically. Then once the domestic market comes down it comes back and it will come back -- I mean, it'll get more to a normalized level.

I've heard statistics that by the end of the decade, there's going to be a million slot machines in North America. We've got Pennsylvania coming online over the next year, 18 months. We've got New York State that looks like another 7,500-10,000 slot machines. Wynn is expanding. We get back to a more normalized level.

You've got the international markets that we didn't have last year, which is now growing, and then you'll have the domestic markets. So, we're feeling really good. Even though, it's going to be a tough year. We've told our shareholders it's going to be a tougher year than it was last year. But when you look forward and see the share gains that we're making, the moves that we made into the international market. The market gains themselves and the growth of the market, things like dual port and the opportunity that that brings us with our new patent. We're feeling pretty good about the future in our gaming business.

So, okay. And then the customer who has had some inventory issues, do you have any visibility into, when sales sort of might recommence there?

I think by the beginning of '06 we're going to be through it. I really do. We're in close contact with them. We're working with them. And I think by the end of this year, it will be over and we'll be back again to normalized levels with them, which is only going to improve our sales in '06. Because basically, this is a customer that bought a lot of printers last year that's not buying many printers this year. I got to tell you, if they were buying what they bought last year, our results would be meaningfully different.

All right. Take care. Well thanks a lot, guys.

Okay.

Our next question is coming from Jim Bradshaw with Bares Capital Management.

Afternoon, gentlemen.

Hello, Jim.

Hi. I was wondering if the new facility in Nevada is running according to plan.

Yes. You know it is. The goal was to get it up and running to hire the right people. We've got a service manager, we've got technical services people on the phone. We're right in the middle of construction. It's quite to sight. I'm going out there next week. We've been in the construction for about four weeks. We've got about another six weeks to go. I talk to our office manager, Nancy, almost everyday and, yes, I think it’s right where we wanted it to be. We got some interesting business because we're there. We got some things going on with a customer in California where we're doing some things. I think it's exactly where we want it to be.

We are looking forward to getting it fully fitted out. I think the opportunity to host our other customers. We're not just a gaming printer company. We're not just a lottery gaming printer company. We make printers for the POS market, for the banking market. And I think that once we can get that showroom opened and get our other customers in to see everything that we do. Get our casino customers in to see that we also make POS equipment and printers and what we can do for them. I think it's just going to be a home run for us. And so we've got about another six weeks under construction, but the people are in place, everybody's hired.

We're very fortunate. One of our key technical service people actually moved from Ithaca to Las Vegas. We're pleased with what we've done. Jim has done a great job at getting everybody up to speed and getting the systems up and running. So I think we're -- overall we're pleased with the progress we've made.

It's our first chance to expand our business like that. We look at TransAct Services Group as an unbelievable opportunity for us. It's quite low-hanging fruit. We've got 1 million, 2 million printers in the marketplace. We're nowhere near repairing what we should be repairing. I think having the service center being able to attack the West Coast, not only in gaming but POS is wonderful.

Supplying consumables and spare parts out of that facility is going to grow our business. Our TransAct Services business is growing nicely now. We think it's going to continue. So it's been our first shot at, as a business, at opening up a new service center. It gave us the platform and the blueprint on how to do it. And I think we're going to continue to open more.

Great. What kind of growth are you thinking can be directly attributable to that facility? Can you quantify it yet?

We don't break it out by facility right now. But there's a lot of printers in Vegas that are just coming off warranty right now. We started shipping a lot of printers in 2003 and our printers have a two-year warranty. And really the volume picked up, if you remember, back in May of '03. So May of '05, they are just coming out of warranty. So, that volume will continue to ramp up.

Good. Thanks for your time.

Okay.

Gentlemen, at this time there are no further questions. I'll turn the floor back over to management for any closing comments.

Well, again, we thank you for joining us on the conference call. We look forward to speaking to you on our next. Have a wonderful evening.

Thank you. This concludes today's conference. Thank you all for your participation.