TransAct Technologies Inc (TACT) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

[OPERATOR INSTRUCTIONS]

As a reminder this conference is being recorded today. A replay will be available after 8 p.m. eastern time today through midnight eastern time on March 14th. The replay dialing number is 201-612-7415. The account number to access the replay is 3055. And the password is 189388. The replay will also be accessible at WWW.TransAct-tech.com.

I would now like to turn the conference over to your moderator for this afternoon, Ms. Denise Roche. Thank you, maam, please begin.

Thank you, good afternoon and welcome to TransAct's fourth quarter and year end 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 detail on the financials. We will then have time for any questions.

If you have not yet received a copy of today's results release please call Sharon Lou 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 statements in this call that is not a statement of historical fact may be deemed to be a forward-looking statement.

Actual results may differ materially depending on a number of risk factors. For a full list of risks inherent in the business of the Company, please refer to the Company's SEC filings including the Company's most recent annual report on Form 10K. 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.

2005 was a year filled with mixed results at TransAct. At the start of the year we set goals and objectives, and while we delivered on our strategic and operational goals we did not deliver financial growth.

The year was severely impacted by a combination of unrelated events that culminated it to create a less than ideal market conditions. However, even with the issues we faced in 2005 we did not deviate from the growth initiatives we launched at the beginning of the year to better position our company in the markets we serve and to build a company that can peruse sustainable revenue and earnings growth.

Even with the difficult market and customer issues we encountered we stayed focused on the growth initiatives that we believe could grow our company in the long term. What we did was organize TransAct around three strategic business units led by three executives responsible for revenue and contribution margin for their business unit.

Each SBU as we call them, is focused squarely on the respective markets, customers and products. Then once we establish these SBU's we added additional salespeople in each to expand their reach both domestically and internationally.

This in fact doubled the amount of salespeople we now have at TransAct and gave us access to Europe, Asia and Latin America for all our SBU's while also increasing our sales coverage here in the United States. In addition to adding the salespeople, we added a new service center in the gaming capital of the world, Las Vegas, to support our rapidly growing gaming business while also giving us a local precedence for repair service for our west coast point of sale and banking business.

Finally, we hired additional engineers so we could launch new products attracting new opportunities for TransAct. In 2005 I'm pleased to say we launched a total of seven new products. Four for the point of sale and banking market including the Ithaca 8000, the industry's first wireless label printer. It has already garnered lots of attention and we are optimistic it will drive future revenue and profit for the Company.

We also launched three new products for our gaming and lottery business focusing on printer sales in what I call off-premise gaming for the global marketplace. This new market could develop into the same size as the current domestic casino market for thermal printers and I'm pleased to say we got our first win for this new line of printers and we have some other prospects we feel very strongly about in the pipeline.

You know when we first entered the casino market back in 2001 and 2002, the number of potential slot machines that could be fitted with one of our thermal printers was approximately 600,000, all in North America. Today the market we address, we believe is now over 1.2 million slot machines and includes Australia, New Zealand, Europe, and Latin America.

Over the next next several years, based on casino analyst research about the growth of casinos and gaming around the world, and adding in the new off-premise gaming market we are also targeting we believe the new addressable market could far exceed 2 million machines. And with the potential of downloadable slot machines coming at the end of this year here in the United States, this new upgrade cycle will further add to the market growth I just spoke about.

Now, the strategic investments we made did return some positive results in 2005 even with the difficult market and results we experienced. We grew our international gaming business by over 300% and now have a meaningful business in the international markets.

And with the success we are having with our new Epic 950 casino thermal printer, JCM American Corporation, the industry leading currency handling systems company decided to exit their own printer business and sell our printer instead. I believe this to be a water shed event for TransAct that gives us additional global coverage and is already paying off for us.

In addition, our new point of sale and banking sales team had some success in 2005 as they got trained and fully up to speed in our products. By the end of the year they had secured some solid new business for TransAct that will lead to growth in 2006 and beyond.

They also continued to win new banking business and have sustained our position as a leading supplier of new banking printers in the banking teller station market. And finally our TransAct Services Group, we call it TSG, had solid growth of the new businesses they are attacking such as ink jet cartridge sales, paper sales, service and repair.

Let me make just a comment about the sales in our TSG group. As some of you know TransAct many years ago made printers under the Magna Tech brand name mostly for the kiosk and ATM market. We exited those businesses years ago.

However, we continued to sell old legacy spare parts and specialty impact ribbons to those customers even though we no longer made the printers. Over the last two years we have seen those legacy spare parts and spare print head and ribbon sales decline as these products end their life in the market.

With the biggest decline in 2005 representing almost a million dollars. We replaced that loss of sales in 2005 with sales from our new products and services we have spoke to you about, which is really not explained in our numbers. These legacy sales go back over 16 years. The good news is that decline is almost complete, so you will see meaningful growth of TSG sales in 2006 based on our new sales model of ink jet cartridges, paper, service, service contracts and spare parts as we call that our tie ratio.

Of course the margins in that business are solid. Our TSG strategic business unit is now positioned with its two service centers and new sales force to continue to play a meaningful role in the growth and profitability at TransAct.

Overall we view 2005 as a building year. A year in which we built our new strategic business unit organization, each with a dedicated sales force. We increased our industry leading product line, we grew new partner relationships and of course we positioned TransAct to grow our worldwide market share.

By the end of 2005 we had laid the foundation for growth for TransAct. So now it's time to look forward, look ahead to see the effect of all the changes and what we see for 2006. The first quarter is starting off quickly, actually faster than we originally thought.

We expect the full year of 2006 to be a year of solid growth in revenue and with our operating leverage, larger growth in profit. The investments we made in the business last year are already paying off in the first quarter of 2006.

And let me make a note, this growth is happening while the domestic casino market is still sluggish. Once this market returns it will just add to the growth we are now experiencing.

Of note, we expect each strategic business unit to achieve double digit revenue and profit growth in 2006. Helped by the increase in salespeople we added last year and our new relationship with JCM American in the casino market.

We also expect that the new products we introduced last year will give us an advantage in the marketplace and present new opportunities for growth. Overall, we are excited about our prospects in all of our business units in 2006. We believe we have all the necessary elements in place to deliver top and bottom line growth for our shareholders in 2006 and beyond.

With the revenue growth, we will experience a larger growth in profit. This is due to an operating leverage in the business as we will not be adding much expense in 2006. So you will see solid top line growth coupled with significant bottom line growth and we will continue to drive cash into the business.

Based on our current outlook the Company expects revenues for the full year of 2006 to be in the range of $63 to $65 million with net income in the range of $0.38 to $0.40 per share. And like I said, we are seeing a quicker start than we originally thought for the first quarter in 2006.

Even though the one OEM and the gaming market that had the inventory issue last year is still not expected to return to normalized sales levels till next quarter. We expect revenues for this first quarter ending March 31, 2006 to be approximately $15 million with net income in the range of $0.07 per diluted share, that compares to EPS of $0.02 per diluted share in the first quarter of last year.

As we look out into the coming years we see much potential for growth for TransAct. We set upon a strategy in 2005 to add the infrastructure needed to attack these opportunities and we are now seeing the beginning of the results of that work. We have many things to still do, but I can say I am extremely pleased with the work my team did in 2005, staying focused on the goal and positioning us for 2006 in the future.

With that I'll turn the call over to Steve.

Thanks, Bart.

From a financial results perspective, 2005 was a challenging year for TransAct. While we delivered on our strategic and operational goals we did not deliver financial growth. Our 2005 results were dramatically impacted by an overall slow down in the domestic casino market, including the effect of Hurricane Katrina.

An inventory issue at a major gaming OEM customer and lower than historical lottery printer sales to GTECH. As a result of these events we reported net sales for 2005 of $51.1 million, down from $59.8 million in '04.

Operationally, gross margin and operating margin for '05 were impacted by the lower level sales and our decision to strategically invest $2.5 million in the growth elements of our business. This included sales and marketing to effectively double the size of our sales force, engineering and product development to launch seven new products during '05, and operations expenses related to our new service centers in Las Vegas and Connecticut.

We expect that beginning in '06 these investments we made in '05 will accelerate our revenue growth and with our operating leverage should lead to much improved operating results. Despite the challenging year and our increased level of investment in '05, we still reported net income of approximately $400,000 or $0.04 per diluted share.

Excluding two fourth quarter items I will explain a little bit later, proforma net income for '05 was approximately $800,000 or $0.08 per diluted share, this compares to net income of $5.5 million or $0.51 per diluted share in '04.

Now let's look at some financial highlights from our fourth quarter '05. Net sales for the fourth quarter '05 were $12.5 million compared to $14.6 million in the fourth quarter of '04. Gross profit in the fourth quarter '05 was $3.1 million compared to $5.1 million in the same quarter of '04.

Our gross margin was 24.7% in the fourth quarter '05 compared to 35% in the fourth quarter '04 and 32.2% in the third quarter '05. Gross margin for the fourth quarter '05 was negatively impacted by a $600,000 write down of inventory primarily for our model 850 casino ticket printer as our Epic 950 casino printer which was launched in late '04 has gained customer and market acceptance faster than expected.

Looking forward, we expect our gross margin to improve back to more historical levels, in the mid-30% range during 2006. Operating expenses for the fourth quarter '05 increased to $4.2 million from $3.5 million in the fourth quarter '04.

Fourth quarter '05 operating expenses included approximately $76,000 of severance charges related to the implementation of our new business unit structure. Absent the severance charge, the level of expenditure for the fourth quarter was in line with our expectations and reflects the initiatives and staff additions we made to our organization earlier in the year.

Since we substantially completed our $2.5 million of planned initiatives at the end of the third quarter '05 our operating expense level of $4.2 million for the fourth quarter '05 represents the full effect of these initiatives. Looking forward, we do not expect a significant increase in quarterly operating expenses in '06 compared to the fourth quarter '05.

We reported a net loss for the fourth quarter '05 of approximately $700,000 or $0.08 per diluted share compared to net income of approximately $1 million or $0.10 per diluted share in '04. Excluding the two fourth quarter '05 charges for the inventory write down and severance charges noted above, proforma net loss for the fourth quarter '05 was approximately $300,000 or $0.03 per diluted share.

Now let's take a look at our cash flow. During the fourth quarter '05 we generated approximately $1.6 million of cash from operations which includes approximately $500,000 of depreciation, amortization and non-cash compensation expense.

We used approximately $700,000 of our cash generated from operations during the quarter to repurchase our common stock. I'll talk a little bit more about the details of our stock buy back shortly.

Our working capital decreased by approximately $2 million to $15.4 million at the end of the fourth quarter '05 from $17.4 million at the end of the third quarter '05. This decrease from the third quarter was largely due to the repurchase of approximately 700,000 of our common stock during the quarter.

In addition the decrease in our working capital reflects a $1.6 million reduction in inventory levels, bringing out net inventory to an all time record low of just over 6 million at year end. This reflects our continued success in driving lower inventory levels during '05.

Let's now take a look at our balance sheet at the end of the year. Our total assets were $29.3 million compared to $31.3 million at the end of September. We ended the year with approximately $4.6 million of cash compared to $4.5 million at the end of September.

So our cash balance increased by $100,000 even after repurchasing 700,000 of common stock during the quarter. Receivables were down again this quarter to $8.4 million from $9.4 million at the end of September. Reflecting lower sales in the fourth quarter '05 compared to the third quarter '05 as well as our continued success in improving our already very good collection experience.

Our inventories were down significantly to 6 million compared to 7.6 million at the end of the third quarter and 8.1 million at December 31st '04 as we successfully continued to reduce our inventory levels and improve our inventory terms. Shareholders equity was $21.3 million at year end compared to $22.6 million at the end of the third quarter. The decline was largely due to our stock buyback during the quarter as well as from our reported net loss.

And lastly, as I mentioned earlier as part of the stock repurchase program authorized by our board at the end of March last year to date we have purchased 505,000 shares for a total purchase price of $3.9 million including an additional 96,100 shares in the fourth quarter for 700,000 at an average price of $7.62. So to date, we have bought back approximately 5% of our total shares outstanding which now stands below 10 million shares at approximately 9.6 million shares.

Just as a reminder under our current buyback program we are authorized to repurchase up to $10 million of our common stock through March 2008.

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

At this point operator we would be glad to take some questions.

Thank you gentlemen.

[OPERATOR INSTRUCTIONS]

Our first question comes from the line of Mr. Jeff Martin of Roth Capital Partners, please proceed with your question, sir.

Thanks, good afternoon.

Hi Jeff.

Your guidance implies 23% to 27% growth in '06, could you give us a little bit of detail, you said double digit growth in each segment give us a little detail on which you expect to have the heaviest growth?

You know Jeff we're seeing it across all three business units. A couple of points, one I am really pleased to start seeing growth in our POS market. We added the people, Scott Carter is running the business for us, and we're going to see some solid growth in our POS and banking market.

So I'm really pleased with what we're seeing. We added the salespeople, we've got some new products, we've got some existing products and it's selling. So we're going to see the growth over all three business units.

To me what's impressive is we're going to see it in POS and banking, clearly we will continue to see it in the TransAct Services Group, we're selling more printers every day, so we're getting more service contracts, more printers under contracts are driving more revenue and we're getting clearly more cartridge sales and we're seeing some good increase in cartridge sales.

But in addition to that we're planning on seeing some solid domestic casino growth even though the market is pretty sluggish and as I said in my call, in my conference, my talk that we're still not expecting that one OEM to come back to normalized levels until the second quarter.

So our products are selling, our new salespeople are selling, they're in the markets. Our new JCM American relationship, their team, they have 16 people calling on casinos, pulling through our printers, so we're going to see some solid growth in each one of our business units this year.

Is that--is the domestic casino business picking up despite still a sluggish market, a function of JCM or is it a combination of that with something else?

It's really market share growth. I mean it's solid market share growth. The Epic 950 has been accepted, I mean it's integrated in everybody's slot machine. There's a lot of pull through from the casinos asking for it.

Clearly the relationship with JCM American has been very helpful. And our relationships with the slot manufacturers. So I mean domestic market clearly market share growth.

And that's before this downloadable game starts with, most people are talking about by the end of this year we should see a new upgrade cycle. Clearly we should see some market growth from the Gulf Coast getting rebuilt, we're somewhat optimistic that we will start seeing some revenue out of Pennsylvania, Florida, New York by the end of the year. I think the downloadable slot machine that they're talking about could really kick off another upgrade cycle going into '07.

Okay. To that same extent could you give us, you normally break out point of sale, gaming and lottery and the services group, could you give us that break down for Q4?

Just for the fourth quarter, Jeff?

Yeah.

Yeah, hold on one second.

It's in the press release.

It is?

Yeah, for the fourth quarter POS and banking is $3.757 million.

You know what, I see it, I'm sorry. That's okay. What's your tax rate assumption for '06?

It should be somewhere in the 36% effective tax rate

And you will see that Q3 drop as you did in --

It won't be as dramatic in '06.

Okay, and on the renewal with GTECH, the new contract, are there any change of terms there or are they exactly the same?

Other than extending the contract out to 2012 I think. So we have another five years. It was going to run out next year, it was going to end in '07, so it it really takes us out now to 2012.

Okay. What was the specific GTECH contribution in Q4?

We don't break it out, Jeff.

Okay, you normally do in your Q and K, I guess I'll wait for that. Then what about stock based comp for '06?

We accelerated all of our--the vesting of all of our stock options in the fourth quarter of '05, Jeff, so that eliminated any compensation expense related to anything that was outstanding prior to '06. The only thing that it will effect will be any grants that we make during '06 or afterwards.

Okay, what did that accelerated vesting cost you in Q4?

$26,000. It was immaterial.

Okay, great, thanks guys.

It won't have much of an effect on our '06 results at all.

Yeah, and our projections to you for '06 includes all that.

Great, thanks, Bart.

Sure.

Our next question comes from the line of Mr. Jim Bradshaw of Bears Capital Management, please proceed with your question, sir.

Thank you. Afternoon, Steve and Bart, how are you doing?

Good, Jim, how are you doing?

Good, thanks. I was wondering if you could give us a little update on Future Logic?

Due to the lawsuit there's nothing I can say, I'm sorry, our lawyers have said we can't say anything. So there's not much I can say.

Okay. What about--it sounds like you are taking market share from them, what about like how is pricing going as far as rolling out the new 950 versus the 850 and that kind of thing?

Our sales--what you really have to look at is our gross margins and how they're doing. In '05 the gross margins came down only because of volume, only because of overhead absorption. In '06 we will go back to more historical levels of close to the mid 30s. So our pricing is fine.

Okay. That was kind of my next question, was about the margin.

What is the margin for the 950 in relation to the 850, not meaning necessarily exact numbers, but --

We don't really break out margins from the standpoint of each product line, but the Company itself is going to get right back to more of what we saw in '03 and '04 from the standpoint of gross margins in that mid-30% range, from an overall company standpoint.

Okay.

So the 950 is solid and it's where everything--where it should be.

Okay, and for GTECH, are they kind of back to a more regular pattern now or --

We expect GTECH to have a good year with us this year.

Okay, I'll take that for what it's worth, that comment. What about your CapEx for '06, do you have an estimate there?

It will probably be anywhere between $2 million to $2.5 million.

Okay, great, I think that's all I have, thank you, gentlemen.

You're welcome.

[OPERATOR INSTRUCTIONS]

Our next question comes from the line of Terry Frank of TF Trading and Company, please proceed with your question.

Hey, Bart.

Hey, Terry, how are you doing?

I'm doing terrific, how about you?

Okay.

I was in China last September and I talked to some people and I have an old bridge associate there who was involved with Macao, the gambling is growing enormously and I was wondering about what you're doing about any in roads in to China?

We're really excited about what's going on in China and Macao, first of all, we're working very hard with certain casinos in Macao in regards to providing them ticket in ticket out technology for their casinos. So we will be in Macao.

The word I'm getting out of China from some analyst reports and talking to some industry people is they're saying over the next five years there can be-- this is outside of Macao, this is in just mainland China. They could be close to 750,000 VLTs added to that marketplace. That's kind of what I capture as this off-premise gaming market.

You've got what we used to call VLTs, video lottery terminals that look like slot machines, we have that going on in Europe right now, we have got some going on in Latin America, and they are talking potentially 750,000 in China. We're positioned with not only our relationships with our slot manufacturers, but we're also in Macao with our relationship with JCM, we're already in the Australia Asia Pacific market with relationships that we have there.

So the work that we did last year in building our sales organization to be able to attack all these regions in the market, if you remember last year, '05, we did a really good job in Europe and I think this year is going to be the story of Asia. There's a lot of neat things that we're doing by the way with the printer for the Asian market that I would rather discuss--not maybe in the next conference call, but in the one after that, that's really going to be kind of neat what we can do with our printer and our technology to be able to provide the technology for the Asian market.

So we think it could be the year of--this could be the year of Asia where last year was the year of Europe in regards to our international expansion of our gaming business. It's really exciting what we're hearing out there.

That's why I think by the time we get out a couple years, the addressable market for our printer and slot machines off premise, VLT's, amusement with prizes, things like that is far going to exceed 2 million machines. Remember, we started at 600,000 just a couple years ago.

Thanks a lot.

Okay.

Gentlemen, there are no further questions from our participants.

Okay. We appreciate you joining us on the call today. And look forward to talking to you after our first quarter results. Thank you very much for joining us tonight, bye-bye.

Ladies and gentlemen, this concludes today's teleconference. We thank you for your time and your participation and you may now disconnect your lines.