TransAct Technologies Inc (TACT) 2006 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the TransAct Technologies fourth quarter and year-end 2006 earnings conference call. At the end of this call, there will be a replay available. To access the replay, please dial 877-660-6853. It will ask you for an account number. The account number is 3055. Then it will ask you for a conference ID number. The conference ID number is 232106. As a reminder, this conference is being recorded. [OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host Ms. Denise Roche of the The Ruth Group Thank you, Ms. Roche, you may begin.

Thank you. Good afternoon, and welcome to TransAct's fourth quarter and full-year 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 review by Bart followed by Steve providing details on the financials. We will then have time for any questions. If you have not yet received a copy of today's results release, you can either call 646-536-7018 and one will be sent to you, or you can get access to one on TransAct's website.

Before we begin the formal remarks, the Company's attornies advise that this conference call contains statements about future events and expectations, which are forward-looking statements. Any statements in this call that are not a statement of historical fact may be deemed to be a forward-looking statements. Actual results may differ materially depending on a number of risk factors. For a full list of risks inherent in the risks inherent in the business of 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 like to turn the call over to Mr. Bart Shuldman.

Thanks, Denise, and good afternoon, everyone, and thank you for joining us on today's call. I'm pleased to report that TransAct achieved another strong financial performance, which contributed to a record sales year. Revenue for the full year of 2006 was $64.3 million, a 26% increase from 2005. The Company earned net income for the full year of $3.9 million, up nine-fold from 2005, showing the type of leverage TransAct gets with revenue growth. We experience year-over-year growth in all three of our sales units, and in our Gaming and Lottery business and TransAct services group, the year-over-year growth was double-digits.

Our results in 2006 are directly attributal to the initiatives we launched and investments we made to the business in 2005 and continued into 2006. Specifically, in Gaming and Lottery, despite operating in a weak domestic gaming market throughout 2006, we achieved a record sales year. We had a stronger year in casino printer sales in 2006 than we had in our best year, when ticket-in ticket-out upgrade cycle occurred. Domestic casino printer sales grew by 42%, and international casino printer sales grew by 34%. Most importantly, we achieved these results by growing market share, which will benefit the Company in the long term, especially once the new upgrade cycle for server-based gaming begins.

We also had a strong year with GTECH, where sales of lottery printers grew by 65% compared with 2005. Sales from our TransAct Services Group also reached a record level in 2006, even with the declining sales or replacement parts for our legacy impact printers. The additional sales people we added to this group, along with our service center in Las Vegas, has started to drive incremental revenue. And finally, our Point of Sale and Banking sales increased by 3% compared to 2005, despite the decline in sales of our legacy impact printers. We expect this transaction to continue for about two more years. An important point to make is volume growth across all of our markets regarding printer unit sales reached its record, its highest in its Company's history, growing over 36% over 2005. So while Legacy impact printer unit sales were declining, we more than offset the decline with the growth of our new products.

We also continue to make significant progress in positioning the business for the future. On the product front in 2006, we launched the Epic 430 printer for the off-premise gaming and kiosk markets. An interesting point is that we were able to leverage one printer design to enter two new markets, the kiosk and off-premise gaming market. Both markets present a new opportunity for TransAct. And as always, when we enter a new market, it takes about 12 to 18 months to see our first orders. But we are focused on these two new initiatives and believe they will both add incremental revenue over the years to come. And we launched POWEROLL, a specialized two-sided, true-color thermal paper into the U.S. market. This is an interesting initiative for TransAct, as we remain focused on growing our TL -- TSG sales.

Paper is a multi-$100 million market, and we strive to offer benefits to our customers in this business. This paper, which is printed in true colors on both sides, presents our customers with an option to increase their marketing and brand presence directly to their customer when they are in the store. Currently, no other paper manufacturer can print true colors, which is important when dealing with customers like ours in the POS and Banking space. Their color, our customers' color, is their brand, so we know how important true color is to them. And I can say we have over 50 different companies and opportunities right now and believe it is only a matter of time until we close some of them.

Our growth has always come from new products and also new products entering new markets. Just look at the success we have had when we launched our printers for the casino market. Just a few years ago, this business had no meaningful impact on our revenues and bottom line. Today it is the largest sales unit inside of TransAct, so we continue our quest to grow TransAct by offering solutions for our customers and solutions for new customers in new markets, such as our new Epic 430 and POWEROLL paper. And we continue our R&D efforts to deliver innovative products to our customers and to grow the revenue at TransAct.

On the sales side, we continued our international expansion into the growing Asian casino market, while also having IGT approve the use of our Epic 950 printer in all their gaming platforms. We also extended our relationship with Eurocoin, TransAct;s exclusive distributor and service agent for the gaming and casino market for Europe and Africa, and signed a five-year contract extension with GTECH. In our TransAct Services Group we signed an agreement with a leading national supply chain to sell inkjet cartridges. This is a new sales avenue for TransAct, which has added a significant amount of incremental inkjet cartridge business to us. These are just a few of the examples of our many accomplishments in 2006.

Now, let me briefly review each business unit. First I'll start with Gaming and Lottery sales unit, which as I mentioned earlier experienced significant revenue growth in both the fourth quarter and full-year 2006. For the fourth-quarter, revenue in Gaming and Lottery was up by $2.1 million or 33% compared to the fourth quarter of last year. This growth was achieved despite the fact that lottery sales was actually down $1.2 million or 37% compared to the fourth quarter of 2005. The growth in Gaming and Lottery in the fourth quarter was primarily driven by domestic casino sales, which grew by 90%. What we are most proud of is that our growth in the domestic market share is the result of gaining market share. You know, the domestic casino market was difficult in 2006, as most casinos upgraded their slot machines for ticket-in ticket-out technology from 2003 through 2005. And in 2006, we were still burdened by one of our key slot manufacturers that had their inventory issue. However, I believe our results show the market share of gains we achieved, which can only benefit us as the market grows and the new upgrade cycle for server-based gaming eventually starts.

For the full year, we achieved record sales in Gaming and Lottery. Sales reached $34.7 million, up 47% over last year. Casino printer sales were up 39% for the year, driven by growth in both international casino sales, which was up 34%, and domestic casino sales, which grew 42% year over year. We remain very optimistic about the opportunity for growth in the worldwide gaming market overall, While the domestic market remains slow, we believe that when the upgrade cycle for server-based gaming begins, we will benefit from the market share growth we have already achieved. The market we address today is double what it was when we entered the business, when you add in the new international markets, and it will continue to offer a large market size for our leading products.

Much of the $2.1 million year-over-year international growth was a result of our successful expansion to the Asia Pacific rim and also Europe. As the Australian and Asian markets continue to grow, we are poised to leverage our recent successes and continue to capture a larger portion of international market share. When you add the inroads we have made in Asia, specifically Makow, China, Singapore, and Japan, to the success we have already achieved on Australia, New Zealand, Europe, Latin America, we expect the international market to be a significant contributor to earnings in the future years to come. We continue to push our new innovative products, and while the market for our two off-premise gaming permits launched early this year is still in its infancy, we are already marketing and exhibiting these products in anticipation of the ramp-up of sales we expect to see.

Our relationship with GTECH continues to be sold. Lottery revenue was down $1.2 million in the fourth quarter. However lottery revenue was up $4.5 million, or 65% for the full year for 2006. But our investors must remember, this part of our business can be lumpy, which is a direct result of the contracts and orders GTECH gets and when they get them.

Turning to our POS and Banking sales unit, fourth-quarter revenues were up 10% compared to the fourth-quarter 2005. This growth was due in large part to increased sales of our thermal printers through our domestic distributor -- distribution partners. For the year, sales were up 3% in 2006. POS sales from our new printers were up $1.6 million year over -year and Banking sales increased $0.4 million or $400,000 compared to 2005. The sales gain in POS and Banking was largely offset by a $1.5 million decline in our higher-price legacy impact printers. As most of you know, when we first went public in 1996, we sold almost all printers based on impact technology. This technology is more expensive to manufacture, so in turn average selling prices of all impact printers back then were much higher.

Today our business is selling mostly thermal and inkjet printers. We currently sell almost 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 inkjet printers, are about 38% lower than the printers we were selling back then. But we worked hard at moving our manufacturing to Asia and other places, and our margins are now back to almost historical levels, even at these lower average selling prices, and we expect this transition to continue for about two more years. We will continue to see the decline of our impact printer sales and continue to see the growth of both inkjet and thermal technology. This decline will have less of an effect on us with every passing quarter, as the volume of impact printers continues to decline.

Our investment in our expanded sales team and products for the Banking market are beginning to turn into every day sales for TransAct, and we are seeing this business turn into repeatable sales. But we must emphasize again this still remains primarily a project-based business, which can affect results in different quarters. We continue to benefit from banks adding new branches and buying printers for these additions. Additional -- additionally these printers use our inkjet technology, so the more printers we sell the more inkjet cartridges we will sell every year after.

Now turning to the TransAct Services Group, or TSG, which includes sales of our repair services, spare parts, and consumables. TSG revenue for the fourth quarter was up 30%, as compared to the fourth quarter of last year. Revenue growth in the fourth quarter was driven by increased sales in all areas of the business; consumables, service products, spare parts, and refurbished printers. We also benefited from the previous-mentioned contract with a national supply chain. For the full year TSG grew 16%, which is a direct result of the sales team additions we made in 2005 and the new service centers we opened. Remember, we did -- we do see declining sales of our legacy impact spare parts.

As I said earlier, TransAct had a very successful year in 2006. I would like to thank our shareholders for their support during 2006 and also our employees for the dedication and hard work throughout the year they gave us. But while we achieved record sales last year, we have a very cautious outlook for 2007. After such a good year in 2006, I can say this is disappointing. But I can say we believe this is not caused by our business initiatives or our market position, but by overall market conditions that are not under our control. In the Gaming business, we are starting to see a slow down in new orders, especially in the domestic market. We believe one reason can be attributed to casino slowing down their purchase orders for new slot machines in anticipation of the expected upgrade cycle for server-based gaming. We faced a similar situation a few years ago, right before the upgrade cycle started for ticket-in ticket-out slot machines.

In addition, we are also concerned about the pending privatization transactions regarding certain casino companies, as they may also slow purchases of new slot machines. However, we strongly believe that once the market environment improves, TransAct, because of our premier patented printer technology, some targeted directly at the new server-based gaming technology, combined with our strong sales relationship is positioned to gain additional market share and achieve sales growth. We must also be cognizant of the current slowing economy, which could have a negative impact on our POS and Banking business. Even with this uncertainty, we believe that the POS market holds considerable growth potential. So in 2005, we plan on redirecting existing resources for research and development of new products for this market. I mentioned this earlier. We have a track record of growing our revenue by launching innovative products for our markets. We are very focused on this and now focused on doing this in our POS and Banking marketplace.

In our Lottery business, we expect lower sales to GTECH in the first quarter of 2007 compared to the prior year, due to timing of orders from them. However, we believe that sales to GTECH will begin to ramp up during the remainer -- remainder of 2007. And finally, we expect the TransAct Services Group, which has been a growth business for us over the last two years, will continue its upward sales trend in 2007, as our sales initiatives continue to take hold and the installed printer base continues to expand. We have made great strides to position TransAct for growth. Although the macro environment in all of our is unclear right now, we remain optimistic regarding the long-term growth opportunities for TransAct. On balance, although early 2007 order rates imply a slow down during the first quarter of 2007 from recent growth rates, we anticipate stronger sales growth compared to the first quarter in '07 during the remaining quarters.

With that, I'd like to turn the call over to Steve DeMartino our CFO for our financial summary. Steve?

Thanks, Bart. From a financial perspective, the year 2006 was a successful and much improved year for TransAct. In fact, during 2006, we marked our tenth anniversary as a publicly-traded company by achieving a record level of sales. We also shipped a record 186,000 printers during 2006. We believe the investments we made during a difficult year in '05 paid off in '06. Our net sales reached a record $64.3 million in 2006, up 26% from 2005 net sales of $51.1 million. We experienced year-over-year revenue growth in all three of our sales units in '06. Most notably, our Gaming and Lottery printer sales were up $11 million or 47% to $34.7 million, a record high, with domestic gaming printer sales up 42%, international gaming printer sales up 34%, and sales of lottery printers to GTECH up 65%. n addition, sales of after-market products from our TransAct Services Group also reached a record high of $12.8 million, up 16% from 2005. And POS and Banking sales increased by 3% to $16.9 million, even with declining sales of legacy impact printers, as Bart mentioned.

Operationally, both gross margin and operating margin showed marked improvement during 2006. For 2006, our gross margin improved to 34.8% from 30.5% in '05. Our return to a more historical level of gross margin during '06 was a result of higher sales volume, better sales mix, and the success of our outsourcing initiative in Asia. Our operating margin also improved 9.5% from just 0.4% in '05. Throughout '06, we were able to grow our sales significantly, 26%, while only increasing operating expenses by 6%. You should note, however, that during 2006 our operating income and income before taxes were impacted by three items. First, we incurred approximately $220,000 of expenses related to a potential acquisition that was not consummated. Second, we incurred approximately $160,000 of unclaimed currency exchange loss. And third, we reversed approximately $479,000 of accrued restructuring expenses due to the early termination of our lease agreement for our Wallingford, Connecticut, facility. The total impact of these items resulted in a pretax benefit of approximately $100,000 in '06.

As I just mentioned, we incurred a currency exchange loss of approximately $160,000 in '06. The loss resulted from exchange losses recorded from our UK subsidiary due to the weakening of the U.S. dollar against the British pound. Going forward we have taken measures to reduce this exposure. We recorded net income for 2006 of $3.9 million or $0.40 per diluted share. This compares to net income of $400,000 or $0.04 per diluted share in '05. The significant improvement in our earnings demonstrates the operating leverage we receive from our business as our sales rise.

Now let's look at the financial highlights from our fourth quarter of '06. Net sales for the fourth quarter rose to $15.7 million. This represents a 26% increase over our fourth-quarter '05 sales of $12.5 million. We experienced double-digit quarter-over-quarter revenue growth in all three of our sales units; 33% in Gaming and Lottery, 10% in POS and Banking, and 30% in the TransAct Services Group. You should also note that our POS and Banking sales did increase sequentially from the third quarter of '06 to the fourth quarter of '06, reflecting our success in the changes that we've made in the sales unit. Gross profit in the fourth quarter of '06 was $5.5 million compared to $3.1 million in the same quarter of '05, with gross margin improving to 35% from 24.7% from the fourth quarter of '05. The increase in our gross margin was due primarily to higher sales volume, a more favorable sales mix, and cost savings from increased sourcing in components in Asia. In addition, our gross margin for the fourth quarter of '05 was negatively impacted by a $600,000 write-down of excess inventory components related to our model 850 casino printer that has been substantially replaced by our Epic 950 casino printer. This didn't recur in the fourth quarter of '06.

Operating expenses for the fourth quarter of '06 included the reversal of $479,000 of restructuring expenses as I explained a few minutes ago. Absent the reversal, operating expenses were $4.5 million, compared to $4.2 million in the fourth quarter of '05. The increase was largely due to higher sales commissions and incentive compensation on our higher levels of sales, and improved financial results for 2006. Our operating income in the fourth quarter of '06 increased to approximately $1.5 million from a loss of $1.1 million a year ago. Our operating margin improved to 9.7% in the fourth quarter of '06. Absent the reversal of restructuring expenses, our operating margin would have been 6.7%. Net income for the fourth-quarter '06 increased to approximately $1 million or $0.10 per diluted share from a loss of $700,000 or $0.08 per diluted share in the fourth quarter of '05.

Now, looking at our cash flow, during '06, we generated approximately $3.3 million of cash from operations. You should note that we generated $3.3 million of cash from operations even after using about $3.1 million to fund growth in accounts receivable due to higher sales volume in the fourth-quarter '06 compared to the fourth-quarter '05. We used approximately $2.6 million of our cash from operations to repurchase our common stock. I'll talk a little bit more of our details of our stock buy back program shortly. And looking at our capital expenditures, we spent about $2.9 million during the year, largely for tooling for our new Epic 630 and 430 off-premise and kiosk gaming printers, tooling for cost-reduction programs for certain existing printers. and software and consulting costs for the implementation of a new phone system and Oracle software.

Our working capital increased to $16.4 million at the end of '06 from $15.4 million at the end of '05, largely due to higher receivables, inventories, and accounts payable due to higher sales volume. Our current ratios stood at a 2.9:1 at the end of '06 compared to 3.2:1 at the end of '05. Keep in mind that our working capital and current ratio for both '05 and '06 were impacted by our stock repurchase program, as we used available cash to repurchase shares of our common stock in the open market. Our EBITDA for the full-year '06 was $8.1 million, more than 3.5X 2005's EBITDA of $2.2 million. Depreciation and amortization for '06 totalled $1.6 million and non-cash compensation expense, which includes expensing of stock options as well as restricted stock, was $600,000.

And now let's take a look at our balance sheet at year-end '06. Our total assets were $33.7 million compared to $29.3 million at the end of '05. We ended the year with about $3.4 million of cash compared to $4.6 million of cash at the end of '05, largely reflecting $2.6 million of stock repurchases that we made in '06, which I'll talk about in more detail shortly. Receivables were $11.4 million at the end of '06, up from $10.5 million at the end of the third quarter and up from $8.4 million at the end of December '05. The increase in our receivables reflects increased sales volume for the fourth-quarter '06, especially in December, and an increase in international sales. If you recall, a growing portion of our receivables, result from sales to 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. Although our receivable balance has grown due to higher overall and international sales, our collection experience continues to be excellent.

Our inventories were up slightly to $7.6 million at the end of '06 compared to $7.4 million at the end of the third-quarter '06, and also up from about $6 million at the end of December '05. Since our business picked up in '06, we increased our inventory purchases and inventory levels compared to '05 to keep pace with the sales. In addition, you should note that, although our sales increased by over $13 million from '05 to '06, our inventories only increased by $1.6 million during the same period.

And lastly, as an update on our stock repurchase program, during the fourth quarter of '06, we repurchased 204,000 shares for $1.8 million, and for the full-year '06, we repurchased 296,300 shares for $2.6 million. This brings our total buy back to 801,300 shares for a total of $6.5 million at an average price of about $8.10. So to date, we've repurchased about 8% 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 this discussion, and with that I'll hand it over to Bart.

Thanks, Steve. Operator, at this point, we'll turn the call over to questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from the line of Graeme Rein with Bares Capital Management. Please proceed with your question.

Hi guys, congratulations on the year.

Thank you.

Thank you. It's Graham, right?

Yes.

Okay.

Just a few, I guess, more detailed questions on the financials. The stock repurchase program, has that continued into the first quarter of '07 and can you give an updated share count as of today, or is that possible?

No, we can only give a share count after we complete the quarter, announce our earnings. So we can't.

Okay. But can you say if it's continued in the first quarter?

The board has approved the purchase of up to $10 million through March 2008 --

Okay.

-- and you can see that we're pretty aggressive in the fourth quarter.

Okay. And then what do you anticipate gross margins for for the year?

Because we haven't given out any guidance like that, we can't under the new FD regulations -- the new FDC regulations, w e can't specifically say what those gross margins will be.

Okay, what about like CapEx? Can you give an estimate for that for '07?

The thing I'd like to say about CapEx, while I can't give a definite number, what I can say about CapEx is, if you look at the last couple of years what the Company has done, we've really focused on the Gaming and Lottery market. And we've launched three printers for the casino industry, now two printers for the off-premise market, and actually got one printer out of that for the kiosk market. We're going to do about the same for what we're going to do in the POS and Banking market. That same engineering group that worked on the casino market -- we're pretty much done with all the printers we need for the casino market and the lottery market too. We're now going to redirect that engineering team that we have right into the POS and Banking market.

And we've done a lot of work over the last six or eight months as we knew that that POS market, being as large as it is, and it offers us a very large opportunity. And I know that some of our investors have been waiting for that opportunity to really drive revenue, but we've spent the last six to eight months really looking at that industry and trying to understand what products would really benefit the industry -- those markets the POS and Banking market. And we've got some ideas and plans., I shouldn't say ideas, there are plans in place right now. That effort that we did in the Casino and Lottery market will now be directed to the Point of Sale and Banking market. And we feel really good about what we're looking at in front of us right now with those projects.

Okay. And then the last thing, can you speak specifically about Ithaca® 8000? I know in the past you said it takes usually 12 to 24 months to get up to speed, I think you're at about 16 months now. Are you starting to see a material increase in sales in that particular product?

What Tracey has done, who heads up our POS and Banking market, she literally has put together a report that tracks every opportunity we have by product. So we can download and see every opportunity for the Ithaca® 8000. It clearly -- besides for POWEROLL, has the number one opportunities in the business for incremental sales for new opportunities. So we feel very good about where we are with that product. Our number one customer that has been looking at it is very pleased with what's going on. We've extended that trial and added more stores to the trial, but we have many more now stores -- or what we call stores or customers looking at that product. It is clearly the number one opportunity within the business in our POS market right now.

Okay. Thanks for your time.

Sure.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of [Tim Dracoff] with Lamb Partners. Please proceed with your question.

Hey, guys, how you doing?

Good, Tim.

I have two unrelated questions. One -- I'll ask them both at the same time. One is an update on the Australian market and the regulatory situation down there and what your opportunities are? And the second relates to the lottery market. I don't understand this exactly, but what opportunities do you have when it comes to GTECH and others producing these instant lottery kiosks? Are there Tact printers in there or not?

Let me give you an update on each one, if you don't mind. I'll take the question. On the Australian market, right now we have what we believe to be over 90% market share in that marketplace. We have heard that sometime over the next three months that New South Wales will approve ticket-in ticket-out -- or what they call ticket-out and ticket-in -- which will drive for the New South Wales market, which is the largest market within Australia, is somewhere between 70,000 and 100,000 slot machines. So we believe that that regulatory environment is moving in the right direction. We've heard -- we've heard that it's eminent, we're waiting to hear that.

And our sales of printers to customers in that market clearly grew in '06 as some of the customers -- some of the -- the way that the Australia gaming market works is there's a couple of casinos, but then there's a lot of establishments, these private clubs, that have slot machines. And some of those clubs already began to buy slot machines with printers in them, getting ready for the regulation to change. Also some of our slot machine manufacturers in Australia are actually shipping product to Macaw, which is where we've seen some pretty good growth in '06. But we are -- we are optimistic and feel good about the opportunity that New South Wales will be the first state that goes ticket-out ticket-in, and that should be over the next couple of months.

In the lottery market, GTECH has used their kiosk or their instant ticket vending machines -- what they call their ITVM -- as not only as a way to get instant tickets, but you can actually buy a lottery -- a regular online lottery ticket, and we have a printer that goes in that machine when they do that. So depending on the state and the jurisdiction, if the state has approved buying a lottery ticket at a vending machine, our printer is in there. Now it's not the same printer that we make at the stand-alone like at the convenience store where you can go up and play your picks for the lottery. It's more a -- it's a different-style printer. It fits more into a kiosk application. But when GTECH places an ITVM in the marketplace that has ticket-printing capabilities, meaning that you can get a lottery ticket, not just an instant ticket, which is a scratch-off ticket -- the instant ticket is a scratch-off ticket -- our -- we have another printer that goes into that machine.

Okay, understood. One follow-up on Australia. The 70,000 to 100,000 slot machines, is that an opportunity you see happening in '07-'08, or is it kind of '08-'09? And do you anticipate getting a subset of the 70,000 to 100,000 or is that -- do you anticipate getting the whole 70,000 to 100,000?

I think right now we're sitting at about 90% market share, so I'd -- I believe we'll hold our 90% market share in Australia. And on the 70,000 to 100,000 slot machines, that's a nice market share to hold on to. I believe it's a second half '07 story and probably will roll out over two or three years.

Okay. Thanks, guys.

Okay.

Our next question comes from the line of John Morgan with Columbia Management Distributors. Please proceed with your question.

Hey, guys.

Hello.

Hey.

On the gaming side you commented that orders are slowing for domestic slots. Has that been a very recent phenomenon or something you've seen over the last few quarters?

No. No, if you remember what I said our domestic lottery business grew 90% in the fourth quarter. It is -- it was -- actually I'd almost use the word shocking to see how many printers we've sold in the fourth quarter, all the way through December, and then watch the slow down start in January. So it's a new phenomena. Clearly our results in Q4 of '06 did not reflect that at all. We had a very strong gaming year. If you think about it, we had the best year in the casino market, domestically, in TransAct history and that was three years after ticket-in ticket-out was first launched, so it's clearly a new phenomena.

It's a new situation that we're dealing with, so we -- we started seeing it in January. At this point, we don't know if it's going to continue. We have seen a slight pickup in March, so we don't know if it's just something that occurred in January, February, more of a cyclical issue, but we have heard casinos talk about the waiting for server-based gaming. We saw the same type of scenario happen right before ticket-in ticket-out; casinos waited for that technology to be ready so when they bought a slot machine it was all there. We heard people talk about that could be why casinos are slowing down, but clearly it was not a fourth quarter issue at all. We had a fantastic '06, something that we're just seeing just recently over the last month or two.

Okay. Okay. And then as far as your Q1 guidance, you didn't give any specific -- a specific revenue number, would you say it would be up year over year or down year-over year and then building after that?

We're not going to really give guidance for the quarter at all. What we did say is we think that the first quarter will be at one level and the quarters after that will be better. At this point -- we're just getting away from guiding quarter to quarter and just sticking to giving you ide -- fundamentals about the business, how we see it, and then talking about the results at the end of the quarter.

Okay, that's fine. And then lastly, in the UK, the AWP market, [A World of Prizes], is that a business that you're currently operating in or is that a growth possibility for you?

Well, I'm glad that you know about it, yes, it is an opportunity for us. The AWP market has seen a lot of changes. We are starting to see -- the reason why we launched our Epic 630 and our Epic 430 was to go after that market. There's 100,000 AWPs or more in the UK alone. There's probably 170,000 in Italy. So we -- we have targeted that market as a growth opportunity for us. It is going through changes. The old machine that used to be called a fruit machine was a single machine, not networked. You won some money, a coin dropped and that was the end of it.

Now they're talking about networking these machines, having the machines online, being able to use printers instead of coins because it's going to save money from the operator that puts the machines out and having to add coins to the machine. Now all you have to do is put paper in it. So that is exactly the market that we targeted for what we call our off-premise gaming market. And we have two wonderful printers, the 430 and the 630 for that market, and we have our partner, Eurocoin, which we signed our five-year extension agreement with that's going after that business today. We won our first order with a company called Leisure Link about a year and a half ago -- wasn't that, Steve, about a year and a half ago -- and they're a big player in that marketplace, and we've probably shipped them 10,000 or 12,000 printers over the life of our relationship so far.

Okay, okay. So good opportunity there, maybe not exactly happening now or in the first half of this year?

Right. Right. Good way to look at it.

Okay. Thanks a lot.

We have a follow-up question from the line of Tim Dracoff. Please proceed with your question.

Hi, it's actually -- it's Brian Black here with Tim.

Okay.

And I just wanted to ask, you've talked a little bit about this, but -- and I don't mean to sound frustrated, although I am a little frustrated, Reg FD allows you to give guidance if it's not given in selective disclosure. Your policy is not to give guidance, which is fine, but you then said that you're very concerned about '07 and clearly a very negative comment about this coming year. And so given your willingness to give sort of qualitative guidance in a fairly strong way -- and it's a bit of departure from what was a pretty positive tone in the last call -- can you give us a sense, order of magnitude on the sales level if we're going to -- if you expect us to be done '07 over '06? You made the comment qualitatively and you're allowed to discuss guidance if it's given to all of us together, so maybe you can give us just some order of magnitude directional sense of your expectation?

Tim, I -- i's Brian, right? I understand the question, I understand the frustration. What we're looking at is our markets and the issues that we see within our markets, and we're cautious. And we are cautious for a reason. There is an upgrade cycle coming in the domestic casino market, and what we're seeing early in the year is a slow down of orders to TransAct, even though we had a fabulous '06. And it is important, I think, that we tell our shareholders what we're seeing early in the year and have them understand that that's what we're seeing today. The reason why we're not giving guidance is, is this a one-month phenomena? Is it a three month? Is it going to go on all year? We don't know. We read all the analyst reports, we follow the market, we talk to our customers. What we believe is the results are going to continue to improve quarter after quarter, as Q1 goes, Q2, Q3. But when you can't get a good feeling of what the market's going to do, it's difficult for us to put a number around it.

And it's one of the things about being a small company, one order can change the results. So instead of trying to figure out what exactly are number's going to be and spending all that time, we're going to give you a market idea of what we're seeing, let it go with that, and then as we go through the quarters tell you how we're doing. I think the most important thing, Brian, about what we're doing today is the results that we had in '06. If you're looking at TransAct and you're saying okay, there could be a slow down in the domestic casino market, but you see the sales that we did in '06, where we grew market share a lot. -- our domestic business was up 42%, in what most people would say was pretty much a down year. So not only did we grow our business, but we grew our business in a down year. That gives you a sense of the relationship that we have with our customers and the relationship in the marketplace.

So if this is a hold-off for the server-based gaming market, which we don't know, but it's one of the things that we're thinking is going on and one of the things that we're hearing from customers -- it tells you when that market comes back -- and that market is much -- when we first started in ticket-in ticket-out, there are 600,000 slot machines domestically, now there's over 800,000. And if server-based gaming happens and people really like it and we see 25% or 30% of the machines get replaced every year, that's a significant opportunity for us, given now our new market share in the business. In '02 and '03, we started at zero. Today we've grown market share tremendously to the point that we had a very, very strong domestic market last year. But I can't stop, I can't change the macro environment. I can't tell casinos, look, there's new equipment coming, there's new technology coming, but buy slot machines any way. Or a casino that decides to go private that might say, you know what, until the transaction occurs, why don't we hold off buying some new slot machines? But what I can tell you is our results in '06 gives you an indication of the position TransAct has in the domestic market and when that market comes back how good this Company is going to do.

I'm also very proud of having 90% market share in the Australian market, and probably 60% plus market share in Europe. So this'll give you a feel for the -- what's going on in the business. So I understand the frustration, and trust me, I don't like having to come after a tough '06 and say, look, we see some difficulties in front of us in the short-term. But what I can tell you is the success that my team is having in, one, bringing out the right products for the market -- the other gentleman that talked about the AWP market. We're one of only one or two companies that have printers for that business. The growth that we've had in the international markets, we were first there and what it's done for our business and our position in the domestic markets. So I understand the frustration, but I think the Company has done a very good job at positioning itself when that market comes back to grow the business again.

Just to put one last comment on there. I don't disagree with the positioning that you've achieved for the Company and how that bodes or [augers] for success when the casino market comes back. I guess my question in a more focused way is, for the first quarter looks weak and it's already mid March and so it's no surprise that you can tell us quite clearly, even if there's no number, which is fine, tell us clearly that Q1 looks weak. My question is, given the variability in this industry and in the order flow, how you're able to comment so clearly on '07 as a whole? In other words, Q1 looks weak, this is a -- quarter to quarter's tough to predict, the market may change, there could be huge additional casino awards in different jurisdictions, et cetera, so how can you be so directionally negative on the year?

Well, it's, -- what we're trying not to do is try to give a total negative sense to '07. What we've used is words like cautious, we're concerned about the year. But clearly we could wake up in April and the market explodes and a couple of jurisdictions open up or a couple big orders come in and they can change. We're not -- we haven't given any real direction on all of '07. What we've said is we're concerned about what we see in front of us. The other thing that we see, by the way, is there's no doubt about it that GTECH business -- which we get a forecast from them, which it's not as accurate as we'd like it to be, but it does give us a sense to where the business is -- GTECH can be different quarter to quarter. Q1 will be low for GTECH this year, and we said it, and we expect it to ramp up starting in Q2. That has happened to our business since I've been in it in 1993. GTECH can be lumpy, it will be lumpy, and it's going to have an effect on our business this year. That's why we feel better about the second half of the year -- even Q2 than Q1 -- because we already know that GTECH is forecasting higher sales.

I also see our POS -- the work that Tracey's doing in our POS Group and the number of opportunities that she has in front of her, as she close those opportunities, we're going to see incremental sales. And she and her new sales team have got a good handle on what they're going after and what those opportunities are. I've also talked about POWEROLL and the opportunity that we see in POWEROLL. We have over 50 different customers looking at using POWEROLL in the marketplace. Now, I can't tell you when those orders are going to close, but as they do, that's going to have an effect on growing our revenue. So it's all intertwined into all the different things going on. However, the casino market is a big piece of our business right now, and what we're seeing early in the year is a slow down in the first quarter. Whether that continues in Q2 and Q3, I can't tell you. but what we're seeing is it is having an impact on our first quarter results.

Okay, thanks, that helps explain things.

Okay.

Gentlemen, there are no further questions in the queue. Do you have any closing remarks?

Sure. I'd like to thank all of our shareholders for supporting us in 2006. I'd also like to thank our employees for all the hard work. I look forward to speaking with everybody in May at our next conference call, which will be the first quarter results. I thank you and have a good evening.

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