TransAct Technologies Inc (TACT) 2006 Q3 法說會逐字稿

Greetings, ladies and gentlemen. And welcome to the TransAct Technologies Third Quarter 2006 earnings results conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded. This replay will be available beginning one hour after the ending of the call until November 16, 2006. This replay may be accessed at the TransAct website at www.transact/tech.com or by dialing 1-877-660-6853 and entering account number 3055 and ID # 217089. It is now my pleasure to introduce your host, Miss Denise Roche of The Ruth Group. Thank you, Miss Roche, you may begin.

Thank you. Good afternoon and welcome to TransAct's Third Quarter 2006 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 overview by Bart followed by Steve providing details on the financials. We will then have time for any questions.

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 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 date of this call.

At this time, I'd now like to introduce Bart Shuldman. Please go ahead.

Thanks, Denise. And good afternoon everyone. And thank you for joining us on today's call. I'm very pleased to report that TransAct achieved another quarter of strong financial performance. Revenue in the third quarter of 2006 was $15.3 million, an increase of 8% from the third quarter of 2005. Earnings per share in the third quarter were $0.10 per diluted share, up from $0.07 reported in the third quarter of last year.

All of our business units continue to benefit from the investments we made to the business last year. The initiatives we launched and partnerships we put in place across our business lines are translating into growth of revenue and market share.

I'm very pleased not only with our results in the third quarter but also in the first 9 months of the year. As you have read, we are clearly benefiting from the investments we have made in different parts of our business last year when we were in the midst of a difficult gaming market. This is evident by the 26% growth in sales and 166% growth in net income for the first 9 months of 2006 compared to last year. Specifically, in gaming we are potentially on our way to a record year driven by increased domestic casino sales which this quarter more than tripled compared to the third quarter of last year.

More important, the growth is the result of our increasing market share. Think about it. We're having a strong year in casino sales, even higher than when Ticket-In/Ticket-Out first occurred. The domestic market remains a difficult one yet we are on our way to a record year. Our revenue growth clearly demonstrates the success we are having with the initiatives we have put in place including our partnership with JCM.

We have also had great success in the TransAct Services Group which is benefiting from our 2 fully operational service centers, dedicated sales teams, and a rapidly growing installed printer base. Revenue from TSG is up 12% for the first 9 months of this year compared to 2005. We expect TSG to remain on a growth track as we continue to ramp up our sales efforts.

In the third quarter we signed a contract with a leading national office supply chain to supply ink jet cartridges for use in the existing and growing installed base of TransAct's line of ink jet printers in the marketplace. This is a new sales avenue for TransAct. With this contract, TSG has secured a significant amount of incremental ink jet cartridge business. We continue to make inroads on the product front as well.

We recently partnered with Murley Paper Converters, the UK's largest independent manufacturer of receipt paper rolls to exclusively distribute in the U.S. thermal paper that will have true full color images printed on the front or back. TransAct will market the paper under its newly created PowerRoll brand. This new product represents an opportunity that goes beyond the normal footprint of our printers and will permit us to reach out to a large group of prospective customers that we have not targeted in the past.

This paper can be used by stores, restaurants, mass merchants, credit card companies, by using it in anyone's printer. That means we're addressing the total TransAct market, including those customers like IBM, NCR and that use Epson printers. We believe this offers significant opportunities for TransAct and further strengthens our competitive advantage in the marketplace. I can tell you we are already in discussions with some very large potential customers to use this paper. Now this does not mean we will get the order, but the initial response has been wonderful and we have many opportunities in front of us right now.

Now before I start discussion the individual sales units in a bit more detail, I'd like to talk to you about the change in technology that is occurring inside of TransAct which I don't believe we have done a good job explaining to our shareholders. When we first went public in 1996, TransAct sold almost all printers based on impact technology. This technology is more expensive to manufacturers so in turn average selling prices of all impact printers back then were much higher than today. Where today our business is selling almost all thermal and ink jet printers, as a company we have, in my opinion, successfully transitioned this company through this major technology change. Just think how many companies have faced a technology change in their business and failed. Today TransAct is selling more than twice as many printers as we did back in the 1990s but the revenue picture is different as the average selling prices of today's printers, the thermal and ink jet printers, are about 40% lower than the impact printers we were selling back then.

I am proud of what the employees at TransAct have done and accomplished as this major technology shift occurred. Our margins are now back to almost the historical levels we experienced back in the 1990s as we worked hard at moving our manufacturing to Asia and other places. And we have gained considerable market share in all our markets with this newer technology. And, of course, we invented the first ink jet POS printers, our line of POSjet printers. And the best part of our move to ink jet technology is the lucrative cartridge sales we are getting. It's the sticky part of our business.

I highlight this to you as our results clearly don't show the successful transition we are going through. Our volume in printers this year will approach 200,000, a record for TransAct. And again, this is more than double what we did back then. The other impact, the other issue impact technology has caused affects our TSG Group. With less impact printer sales, comes less impact ribbon sales for our TSG Group. In addition, thermal and ink jet printers tend to be much more reliable than impact printers, one of the major reasons the industry has changed. But this means less spare parts and service for TSG. So although we are seeing nice growth in our TSG unit, this growth is really amplified by the fact that TSG has to overcome the missing revenue that used to occur with the reduced population in sales of legacy impact printers.

We expect this transition to continue for about 2 more years. We will continue to see the decline of our impact printer sales and continue to see the growth of both ink jet and thermal technology. This decline will have less an affect on us now as our volume of impact printers at the end of this year will be much lower.

Now let me briefly review each business unit. First, I'll start with our gaming and lottery sales unit, which I mentioned earlier experienced significant revenue growth in the third quarter. 46% compared to the third quarter of 2005 and 52% for the first 9 months of 2006 compared to the same period in 2005. This is further validation that our investments are taking hold and translating into more revenue. The growth in gaming and lottery was primarily driven by domestic casino sales. More specifically, casino printer sales this quarter more than tripled from the third quarter of '05. We believe that the domestic casino market is still sluggish, but we are encouraged with the signs of a rebound shortly.

States such as Pennsylvania should start their openings and expansions at places like Wynn Las Vegas and other casinos underway. And server based gaming opens a new upgrade cycle in the future for our market which will clearly benefit TransAct. But in the meantime, our market share continues to grow.

What we are also very proud of is that our growth in domestic market is the result of gaining market share with our sales relationship with JCM. International casino sales continues to be an important part of the business and in the first 9 months of this year, we saw a 20% growth in international gaming sales despite the shut down in Russia. When you add in the inroads we have made in Asia, specifically Macau, China and Singapore, to the success we have already achieved in Australia, New Zealand, Europe and Latin America, we expect the international market to be a significant contributor to earnings in the quarters and years to come.

Wynn Macau just opened with all TransAct Epic950s. And we provided them with something different, the printer printing in 2 colors and in Chinese characters. It was Wynn Macau's goal to add slot play into the Asian experience as most believe the Asians were typically a table game market. So we worked with the people at Wynn Macau and provided them something to help the Asian experience at the slot machine. And the success Wynn Macau is having with slot play seems to be having a very positive effect on this growing market. As we understand, other casinos are now talking about expanding their casino floors to add many more slot machines. This is very exciting for us to see the results of our work help move a market.

Never resting on our laurels, we continue to push our new products. And while the market for our 2 new off premise gaming printers launched early this year is still in its infancy, we are already marketing and exhibiting these products in anticipation of the ramp up in sales we expect to see sometime in 2007. We remain very optimistic about the opportunities for growth in the worldwide gaming market overall. While the domestic market has been slow, we are seeing many more opportunities here in the States The worldwide market we address today is double what it was when we first entered the business 3 years ago and continues to grow due to the international expansion. The growing number of slot machines and gaming devices provides a very attractive market for TransAct.

When we add the opportunity in the international markets to the expected growth here in the U.S. for new states and expansions of existing casinos and the opportunity in off premise market sales, we believe it gives us significant opportunity to grow our business in the future.

Now turning to our lottery business, lottery sales were flat in the third quarter and more importantly, down significantly from our results in the second quarter this year. As our shareholders know, our lottery sales are to one customer who's business can be very lumpy. It can vary a lot from quarter to quarter and can be difficult to forecast

Turning to our POS and banking sales unit, revenues were down 1.9 million compared to the third quarter last year. This decline was due primarily to decreased sales of our BANKjet 1500 printers used in bank teller stations as we shipped a large installation in the third quarter of last year that did not repeat this year. As we have said in the past, the banking segment of the business tends to also be lumpy and the sales cycle to large financial institutions is longer than it is for most of our products.

Our investments in our expanded sales teams and in products for this banking market are turning into every day sales, however, for TransAct, and we are seeing this business turn into repeatable sales. But it still remains primarily a project based business. That said, we continue to benefit from banks adding new branches and buying printers for these additions every day. Remember that these printers use our ink jet technology, so the more printers we sell, the more ink jet cartridges we will sell every year after.

Looking at our POS revenue for the quarter, sales were down compared to the third quarter of 2005 due to the lower legacy impact printer sales which I explained earlier. This decline was partially offset by increasing thermal printer sales and I remain encouraged with the growth in unit sales for all the new printers in our portfolio as all of our new products sold well in the third quarter. We are seeing continued adoption of these products and believe they will continue to contribute to our growth.

Now let me mention an update regarding our new Ithaca 8000. We call it the Print-It, Stick-It printer which I have spoken to you about before. I personally had an opportunity to visit with one of our major customers who is trialing the printer right now. What I saw was extremely encouraging. Every printer in their test location was our Ithaca 8000 and the employees and management all had positive things to say. But more importantly, the functionality and productivity the customer was expecting to gain from the use of our Ithaca 8000 was happening. I saw it demonstrated live with actual customers and orders and everyone that was with me was very pleased. I have high expectations for this product which will still take time to go through it's many trials, but will eventually turn into meaningful revenue for TransAct.

Now turning to TransAct Services Group, or TSG, which includes sales of our repair services, spare parts and consumables. TSG is a significant part of TransAct's business, one that really complements our businesses and allows us to offer services to our customers that also further enhances our relationship with them. TSG revenue for the quarter was $3.2 million, a 12% increase from the third quarter of last year. Revenue growth in the third quarter was driven by increased sales of consumables and service products. We also benefited from the new contract with the national supply chain I mentioned earlier.

As I said earlier, TransAct has had a very successful first 9 months in 2006. But given the lower lottery sales we experienced in the third quarter, we are adjusting our yearly annual revenue guidance to 63 to 64 million. We expect to see continued growth in Q4 from Q4 last year. It is a good time for TransAct right now, despite a soft domestic casino market. Even with the transition from impact printers to thermal and ink jet printers, our volume of printers sold will approach a record of almost 200,000 this year. And all these new printer sales give our TSG unit more opportunities for service, spare parts and consumables.

We remain excited about the long term prospects of our business. We continue to gain more market share in the domestic gaming market through our relationship with JCM and we continue to expand our international gaming presence. And TSG remains a significant growth driver as we expect even more growth in that business unit in the quarters to come. And in POS and banking market, we continue to see demand for our innovative products. The investments we have made, combined with the hard work and dedication of the TransAct team, has opened up new opportunities for the company, opportunities that will help increase our reach and grow all of our business units. We believe we have just begun to see the advantages of these investments and what they have provided to TransAct and remain encouraged that the nest couple of years will even be more exciting. We still have many things to do and remain committed to growing the business and delivering growth for our shareholders.

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

Thanks, Bart. I'll begin with a quick review of our financial results for the third quarter. As Bart said, we experienced much improved financial results during the first nine months of '06 as the investments we made during a difficult year in 2005 are now paying off.

Net sales for the third quarter of '06 rose to $15.3 million, an 8% increase over our third quarter '05 sales of $14.2 million. We experienced revenue growth in both gaming and lottery, and in the TransAct Services Group. 46% year over year growth in gaming and lottery and 12% in our TransAct Services Group.

POS and banking sales were lower by 35% due largely to a shipment to a large bank in Q3 '05 that did not repeat as well as lower shipments of our legacy impact printers. Gross profit in the third quarter of '06 was $5.4 million compared to $4.6 million in the same quarter of '05. Our gross margin for the quarter was up to 35.6% compared to 32.2% in the same quarter of last year due mostly to higher sales volume, a more favorable sales mix, and product cost savings resulting from our move to sourcing more components in China. .

Operating expenses for the third quarter of '06 remained flat at about $3.9 million compared to the third quarter '05 as we continue to successfully manage our spending levels in 2006. Our operating income in the third quarter of '06 increased to approximately $1.6 million, from $700,000 a year ago. And our operating margin substantially improved to 10.2% from 4.8% in the third quarter '05 demonstrating the operating leverage that we experienced in our business as our sales volume increases. In fact, for the quarter, while we grew our sales grew by 8%, we maintained our operating expenses at the same level as 2005.

We earned $25,000 of net interest income in the third quarter this year, compared to $19,000 of interest income in the third quarter of last year. We also incurred an currency exchange loss of approximately $55,000 in the third quarter and $137,000 in the first 9 months of '06, The loss resulted from exchange losses recorded by our U.K. subsidiary due to the continued weakening of the U.S. Dollar against the British Pound. Going forward, we are taking measures to reduce this exposure in the fourth quarter.

Net income for the third quarter '06 was approximately $1 million compared to $700,000 in the third quarter '05. We posted improved EPS for the third quarter at $0.10 per diluted share compared to $0.07 per diluted share in '05. So our bottom line earnings increased 51% on an 8% increase in sales. Again, demonstrating the operating leverage in our business.

Now looking at our cash flow, during the third quarter we used approximately $400,000 of cash from operations. You should note that we used about $500,000 to fund growth in accounts receivable due to higher sales volume in September. We also used approximately 2.1 million of cash to reduce accounts payable while we generated $800,000 of cash from reducing inventory levels in the quarter.

Let me explain. Beginning in the third quarter, we took measures to use our available cash to improve our production efficiency which has the effect of reducing our production labor costs. We accomplished this through what we call level loading our production in the factory based on forecasted and actual demand. Meaning even though we typically ship up to 50% of our quarterly revenue in the third month of a calendar quarter, we now bill product ahead in the first two moths of a quarter. This requires us to make inventory purchases and carry a higher level of finished goods inventory than we have in the past while also increasing our accounts payable interesting the first few months of a quarter.

Then in the third calendar month of the quarter, we ship the finished goods inventory and pay our suppliers thereby reducing our cash balance at the end of a quarter. We believe that this is an effective way to use our cash to reduce production and labor costs and we don't have to carry the extra labor in the first 2 months of a quarter in order to meet the increase production demands in the third month. In fact, we successfully used this approach to reduce our direct and indirect labor costs by approximately $75,000 in the third quarter and we expect this trend to continue each quarter.

Looking at our capital expenditures, we spend about $700,000 during the quarter largely for tooling for our new Epic 6309 and Epic 430 off premise gaming printers, tooling for cost reduction programs for certain existing products and our ongoing implementation of Oracle software. Our working capital increased to $17.4 million at the end of the third quarter of '06 from $16.5 million at the end of the second quarter '06, again, largely due to higher receivables and lower inventories and accounts payable for the reasons I previously explained. Our current ratio stood at a strong 3 to 1 at the end of the third quarter, compared to 2.5 to 1 at the end of the second quarter.

Our EBITDA for the third quarter was $2 million compared to $1.2 million in the third quarter of '05, representing a 70% increase. Depreciation and amortization for the third quarter totaled about $400,000 and non-cash compensation expense, which now includes the expensing of stock options as well as restrictive stock was about $100,000 for the quarter. And our year to date EBITDA through the third quarter '06 was over $6 million. .

Now let's take a look at our balance sheet at the end of the quarter. Our total assets were $34.5 million compared to $29.3 million at the end of December. We ended the quarter with about $4.6 million of cash and cash equivalents, relatively unchanged from the end of December '05, but down from $5.7 million at the end of the second quarter. The decline in our cash balance from our second quarter is primarily due to the reduction of our accounts payable balance as I explained earlier. Our lower cash balance also reflects $154,000 of stock repurchases we made in the third quarter '06 which I'll talk about in more detail shortly. Of course, cash flow will begin at the start of the fourth quarter as customers pay for the large amount of products shipped in the month of September.

Receivables were $10.5 million at the end of the third quarter, up from $10 million at the end of the second quarter and up from $8.4 million at the end of December. The increase in our receivables reflect increased sales volumes for the quarter, especially in September, and an increase in international sales. If you recall, a growing portion of our receivables result from sales to our international customers who we grant longer standard payment terms to than our domestic customers due to the additional time it takes us to ship products overseas. Overall, our collection experience continues to be excellent.

Our inventories were down to $7.4 million at the end of the third quarter compared to $8.3 million at the end of the second quarter due to lower sales and our continued success in driving reduced inventory levels. However, our inventory balance at the end of the third quarter, '06 is up from $6 million at the end of December, '05. As I mentioned before, since our business has picked up in '06, we have increased our inventory purchases and inventory levels compared with '05 to keep pace with the sales.

Shareholders equity stood at $24.8 million at quarter end compared to $21.3 million at the end of December largely due to our reported net income for 2006 offset somewhat by our stock repurchases. And lastly, as an update on our stock repurchase program, during the third quarter, we repurchased 17,500 shares for $154,000, bringing our total buyback to 597,300 shares for a total of $4.7 million, at an average price of about $7.90 per share. So to date we've repurchased about 6% of our total shares outstanding as of the beginning of the program. Just as a reminder, we are authorized to repurchase up to $10 million of our common stock through March 2008.

And that ends the financial portion of the discussion. And with that, I'll send it back to Bart.

Thanks, Steve. Operator, we can now open up the call to questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Jeff Martin with Roth Capital Partners. Please proceed with your question.

Thanks. Good afternoon, Bart. Could you help to understand the timing of some of the events in the gaming industry, how they might impact you? Pennsylvania seems to coming on soon. Maybe start there, when you think that will contribute to make demand for you. And then secondly, the server based gaming, that seems to be still somewhat uncertain. Wanting to understand what you think on timing there and if that's a one-for-one, you need a printer for every new unit that goes out or if there's some sort of technology change that doesn't require a new printer when that business model rolls out? Thanks.

Great, Jeff, let me start with server based gaming because that's probably one of the easier questions to answer. The server based gaming market, when those units go out, will change the printer. There are some technology changes that we have made to the printer in response to our slot machine manufacturers in order to utilize the benefit of server based gaming. So the games that go out will all go out with new printers. So in the case of server based gaming, that upgrade cycle that happens will be a major plus for TransAct.

And there's a couple of things in there. Not only does the new units go out with new printers, so you can't take an old printer out and put it into a new machine, but in certain cases, we have some patents around our dual port technology that will benefit us as that technology rolls out and people decide to use server based gaming with the dual port technology. So there's not only a plus from the standpoint of a market upgrade cycle gaming, and from a standpoint of my knowledge in talking to people like John who runs our gaming business, when that's going to happen, I think next week we will learn a lot more at the G2E Trade Show in talking to the customers and seeing the casinos' response to the server based gaming. But it's got a double plus for us. It is an upgrade cycle and when we first started in the Ticket-In/Ticket-Out market, there was about 600,000 casino slot machines in the domestic market. We're now up to about 800,000, 825,000, so we'll be involved in a major upgrade cycle. But we also have some patents around our dual port technology that if certain customers use the dual port technology in our printer the way they want to use server based gaming, it will have a major factor in our sales.

The nice thing about what's happening to our business right now, Jeff, is we are seeing significant increases in our casino sales, in our casino printer sales without a good market. And if you think about it, the market is soft right now. I don't know anybody that's really bragged about how good the market is, yet our volume is up. We are on our way to a record year in a difficult market, so just think what happens when the server based gaming market comes in and the upgrade cycle happens, what it's going to mean to TransAct with our much improved market share.

Pennsylvania, look, we're just waiting for those casinos to start getting built. We're hearing good things about next year. We listen to probably the same conference calls that you do with our slot machine manufacturers to hear what they're saying. There is some bullish attitudes by the slot manufacturers for next year, things Like Pennsylvania, Florida, even New York expanding. Things like Wynn expanding their casino, so we are cautiously optimistic that '07 will be a growth year which is just a plus for us because we significantly grew our market share and that will only help to increase our volume next year.

Okay. And how is business with IGT ramping? I know that was a pretty big event for you last year that you became a vendor to them. What are you seeing out of them?

You know, we don't talk about individual OEM sales, but what I can say is I am really pleased with the outcome of the investment we made.

Okay. And then jumping over to point of sale, you mentioned the transition away from impact, what - - could you give us some historical perspective what percentage of POS printers last year versus kind of year to date this year are impact on a unit basis?

Yeah. If you go back to when we went public, about 96% of all of our sales were impact printer sales. And the average selling price between the impact printer sales and the thermal and ink jet is about 40%. Even between '05 and '06, we'll see about a 30 to 40% decrease in those, just those sales, the legacy sales. So we'll see about a 30 to 40% decrease and remember, we're replacing those sales, but they're replaced at a 40% less price. And that's what I think we haven't communicated to the street is that we are growing our volume, but when you're in a 40% average selling price difference, and actually the difference in printers in '05 that aren't repeating in '06, the legacy printers, because the impact printing market is coming down, we've raised prices many times in our impact printer sales. So that delta is even probably closer to 50% between our thermal and ink jet and our impact printer prices. We're having to make up that lost revenue, not because the volume is going away, just because the average selling price is lower.

I think we're getting to a level - - next year it won't be as dramatic and clearly the year after will be much less dramatic. The last couple of years it's continuing to come down and I don't think we've explained that story because our volume of printers is going to hit a record this year but we are being affected by this average selling price in our POS market that is dramatically different between impact and thermal and ink jet.

What's the percentage of units out the door today, the quarter or 9 months that are impact?

Oh, 5%, even less. Maybe a little more.

What do you think it was last year?

Higher. I mean, it's come down 30 to 40% from last year. So it was more printers and less volume. It was more impact printers last year and less volume, so it's got a pretty dramatic effect when it's this year when it's less volume. So last year when we were selling those printers with the average selling prices being higher, it's got a positive effect. This year, of course, we're taking out higher average selling price product and replacing it with lower average selling price product.

Okay.

But, our thermal business will be up like 25% this year, maybe even more. So we're replacing that business. We're actually growing our business. It's just when you have such an average selling price difference - - and it's not because of competition, it's just because of technology. So I mean, if the world had stayed with impact printers, TransAct would be probably close to $100 million in revenue right now. So we are growing our POS business, our thermal and ink jet business is growing. It's probably going to be up, like I said, 25% this year. It's just the fact that the average selling prices are so much different.

Okay. And then my last question is relating to your revenue guidance. It looks like for, if you just look at the last 2 quarters of this year, you're expecting about $2 million higher revenue than when you gave the 65 to 67 million guidance last quarter versus the 63 to I think 64 now. Just wondering what was different in your assumption then versus what happens now.

Yeah, one customer, GTECH. That's the effect of the GTECH difference in Q3. GTECH lost an order and there was nothing we could do about it. They lost a big order. And that one order affected the business by that much plus some. We're actually making up some of the loss because our casino business continues to grow and naturally POS looks like POS is actually having a decent year. That is strictly one order at GTECH that they lost that affected us.

That's gone, not to be recaptured?

Gone. They lost it, that's right.

Okay, thanks, Bart.

Thank you. Our next question comes from Jim Bradshaw with Bares Capital Management. Please proceed with your question.

Thank you, good afternoon, Bart and Steve. I wonder if you can give a little bit more color on how things are looking in Australia now that they've got the Ticket-In/Ticket-Out and just the international markets in general?

You know we in fact just yesterday we had our partner from Australia in the office who came to visit us. He's on his way to the G2E show. Things are looking bright. The distributor's name is Bright, so no pun intended. Our market share remains over 90% on Australia. So we're really pleased with the work both Bright and our sales team have done. The word that we're hearing is Ticket-In/Ticket-Out is finally approved in Australia. There is some work that we hear has got to be done, but our partner in Australia is feeling very positive that as they get through the last things that they have to do that it could have a meaningful impact to our sales at least next year if not by mid next year.

Okay.

Yeah, it's looking good. The whole Asian market, what we call the Asian market which starts as Australia and comes right up through Macau, is looking very bright. It's difficult to quantify and give you an exact date when things are going to happen, but our position in Australia is extremely strong and Ticket-In/Ticket-Out is now at it's final end of being approved We're told it's going to happen, so our position is very strong and it's going to have a nice affect to us.

The work in Macau that we did with Wynn Casino was another great event for us. Their goal was to drive people to the slot machine, to hand them these tickets that had Chinese characters, was printed in Chinese. We do that all with the printer, by the way, so the slot machine manufacturers send us the signal and then we interpret that and print Chinese characters. And the word that we're hearing in Macau is that now with the success that Wynn is having with slot machines, that that's only going to increase. Singapore is going to happen, and of course you probably read the same things we hear about China, so we're quite positive. And with our relationship with JCM, we've done some work in Asia with them. We continue to develop that relationship so we get that area covered very nicely with them with the help of my sales team now. But we remain very optimistic about the next couple years what that's going to mean to the business.

Good, good to hear. And then for competition in POS and banking, mostly speaking of the banking, are you still winning the large majority of any deals that are actually out there? I know you didn't get to really replace the big one this time, but - -

We haven't lost any yet. When they're buying what we consider to be the typical teller station printer, meaning that they print a receipt and validate a check or validate and insert a form. We know of no order that we lost so far. These are big deals. They're project by project. I think the thing that we're seeing out of all of this is the fact that each one of the banks that we've closed has come back for repeatable business, for repeating business. And there's a couple of things that does for us. One, it gives us volume every quarter. Two, we've signed service contracts with each one of these banks so what you'll see in our deferred revenue is in the balance sheet you're going to see that go up because every time they buy a new printer they get on the service contract which gives us more deferred revenue which is wonderful. And of course our cartridge sales go up over time. So it's got a kind of a domino effect where we start shipping a couple more printers, they put more printers on the service contract which means we bill them more for service, and then of course we get more ink jet cartridge business.

That's great to hear. Speaking of the servicing of the printers, do you know what percent you actually service now?

You know, we just did, yeah, we just did an analysis for the board the last couple of days. In the POS market we're about 56% of the installed base of our printers. What we find is, what we're analyzing is there are some customers that actually repair the printers themselves. Jim and his group are working. We won a couple of orders recently where we've convinced them to hand that over to us, let us do it. We're now partnering with certain VARS where they go out and actually sell the service, but when the customer wants to have the printer repaired, they actually call us. So we're diving deep in it. We actually have some lottery, some gaming customers that actually do their own repair, so we're working with them to prove to them how it would be more cost advantageous to do the business with us. Jim's got quite a bit of opportunity ahead of him. There are two areas that the TSG Group is really focusing on. Service and paper. We have a huge opportunity in the paper side, especially this new color paper and service of our printers.

Okay, great. And lastly, have you seen anything or had any trouble with like knock offs in printer cartridges or anything of that nature?

No. No, we don't see that all and one of the thoughts, one of the concerns we had early on was would people try to reload the cartridges with ink. And what we found is the cartridge - - we've stuck the cartridge at what we call 7 million characters. And normally the cartridge breaks down, the resistors and the little filaments inside the cartridge, they actually break right at about 7 million characters. There's probably a little more ink in it, so even if they refilled it, it wouldn't work. But we see no knock offs and no refilling at all in our market.

Okay, sounds great. Thanks for your time.

[OPERATOR INSTRUCTIONS] Our next question comes from Terry Frank with T.F. Trading Company. Please proceed with your question.

Hey, Bart. Just three things. One have you continued to make some progress in terms of POS sales with the fast food industry? Secondly - -

Okay, let me write them down. I got it.

Secondly, when you were talking about the last question about the ink jets, when they replace on a consumable basis, when they replace, do they have to use our inkjet cartridges or is there some other brand that can be interchanged.

Got it.

And the third one was, in terms of the buyback, you mentioned third quarter buyback. Was there any buyback this year in terms of shares in the first or second quarter or was it totally in the third quarter?

Let me take them one at a time. In the POS fast food, we basically that's our biggest market. I should actually say, we've defined the hospitality market as the major market that we serve in the POS market. And in the hospitality we define it as quick serve. Our customers don't like to call it fast food. They call it quick serve sit down, sit down dining which is like a Red Lobster, more of a formal dining but not - - and then you've got fine dining which is your fancy restaurants. That's the market that we concentrate on a lot. That's our largest market that we serve in the POS market. We have the best set of printers for that marketplace. So we're doing quite well in that marketplace. We have customers like McDonald's, Disney that use our printers every day. The Ithaca8000 is targeted for that marketplace. Let me give you an example.

Is McDonald's growing with this?

I can't go into the specific customer, but let me give you an example. When you go to a McDonald's or you go to a quick serve restaurant and you go through the drive-thru, the statistics that we're learning right now is over 60% of the quick service market goes through the drive-thru. So the issue is how to get the cars through the drive-thru as quick as possible. So when you get your bag of food, they drop the receipt in the bag. And two issues with that. One, they're putting chemically coated paper on your fries. But more importantly is the driver is going into the bag, searching for the receipt to make sure that one, they got their food, they got the right amount of food and they were charged the right amount of money. And that searching for the receipt delays the next car from going up. Our printer will actually stick the receipt to the outside of the bag. So when they hand that bag to the driver, that receipt is staring them right in the face. They can see exactly what they ordered and exactly how much it is.

That is a major productivity improvement for the drive-thru piece of the quick service market. The other side of that is specialty orders. In the quick serve alone, 30% of all orders are special. Hold the mayo, hold the ketchup, no pickles, whatever. The cost of how to handle that is very high right now because of the types of ways that they do it. With our printer, literally the order is printed out on a sticky piece of paper that gets attached to either the bag or the wrapper and then the operator prepares the food, moves it down the line, and gives it to the customer. So the response to the printer has just been wonderful.

Like any market that we're in, Terry, it takes about anywhere from 12 months to 24 months once we introduce the technology for us to see the meaningful sales. In this business, we're right around 12 to 14, 15 months with the introduction of the printer. The biggest problem that we've had, Terry, is paper. The paper manufacturers making the paper where it's either too sticky or not sticky enough. We think the paper manufacturers have finally, finally solved that issue. To me, that's been the only delay in meaningful sales of the 8000. What I saw 2 weeks ago in one of the stores and at what they call the innovation center, was wonderful. The work that they've done with our printer, the commitment that they're making to our printer was just wonderful. It's just a matter now of finishing the paper, getting the paper right, and then getting the sales out.

Answering your second question on the ink jet technology, it's TransAct only. This is a custom cartridge that was made just for this technology. So there are no other sellers. There's not an Epson or there's not a Chinese guy making a cartridge. So it strictly is ours. What we did win just recently was a major stationer that we found out was getting cartridges through somebody else and what we did was step in the middle of that and win that business back. Next year you'll see our cartridge sales grow a lot because of winning that business back. We had no idea it was going on and once we found out about it, we worked with our partner, HP, to stop it and now we've won that business back. So you will see pretty significant growth in that cartridge sales next year.

From a buyback standpoint, Steve, I think you can answer that question.

I can update you on that, Terry. We made, we bought back about 17,000 shares in the third quarter, about $150,000. We had no buys in the second quarter, and then we bought back about 75,000 shares in the first quarter for about $700,000. So total for the year about $850,000 bought back, about 92,000 shares.

Okay. Thanks, I appreciate it.

Thank you. Gentlemen, at this time there are no further questions. Do you have any closing comments?

Yeah. I'd like to thank everybody for joining us today. For those that will be at the global gaming exposition, G2E next week, the show is Tuesday, Wednesday, Thursday in Las Vegas. I will be presenting at the Goldman Sachs Deutsche Bank Conference at about 10:30 on Tuesday and I look forward to seeing anybody there or in our booth. By the way, if you are in Las Vegas, just to let you know there is a banking show, the BAI, which is the largest technology show for the banking show going on at the same time and will have booth at both trade shows. And our team will be at the banking show also in Las Vegas. So once again, I thank you for joining us and look forward to seeing everybody who goes to the gaming show and the banking show. Thanks.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.