TransAct Technologies Inc (TACT) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the TransAct Technologies first quarter 2007 earnings results. 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. It is now my pleasure to introduce your host, Ms. Denise Roche. Thank you, Ms. Roche, you may begin.

Thank you. Good afternoon, and welcome to TransAct's first quarter 2007 results conference call. Joining us from the Company are Bart Shuldman, Chairman, President and Chief Executive Officer, and Steve DeMartino, Executive Vice President and 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 access it on 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 are not a statement of historical fact may be deemed to be a forward-looking statement. Actual results may differ materially depending on a number of risk factors. For a full list of risks inherent in the business of 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 would like to turn the call over to Mr. Shuldman.

Thanks, Denise, and good afternoon, everyone, and thank you for joining us on today's call. As we had anticipated in our last quarterly conference call, 2007 has gotten off to a slow start at TransAct. We experienced a decline in sales in the first quarter which was primarily attributable to changes in overall market conditions and specific customer order timing issues, and not the result of any shift in our market position. Overall revenue for the first quarter was down 30% to $11.5 million.

The issues in Q1 centered around five items. First, sales to GTECH were down $2.6 million, or 69% from the first quarter of last year. We have 100% of GTECH's business, and when they lose a contract or have delays in implementing a new one, our revenue gets affected. This quarter's sales to GTECH were significantly below our typical average quarterly sales volume, and at this point, we believe that this is a one-quarter event. We have not seen a quarter at this low level with GTECH in quite some time.

Number two--in our international casino sales, one large European customer, where we also have 100% of their business, was down considerably compared to Q1 of last year. This is strictly a timing issue. They just didn't need many printers in Q1 of this year versus Q1 of last year.

Number three--our banking business is a contract project-oriented business. It has been and will continue to be lumpy. In Q1 of last year, we had a $1.4 million contract for a large bank that did not repeat in Q1 of this year.

Number four--the domestic gaming market is soft, and this slowdown has a direct impact on our sales.

And lastly, number five--in our POS market, our legacy printer sales were down $600,000 compared to last year, and we were not able to completely offset the decline of the higher-priced legacy printers with our new lower-priced inkjet and thermal products. We expect this issue will bottom out by the end of this year.

On the positive side, in our TransAct Services Group, we experienced a 13% growth over the first quarter of last year, which is a further testament to the initiatives we made over the past several years to build a recurring revenue business within TransAct, one that will help to soften the impact of our project-oriented OEM business. In addition, I would like to tell you that we did experience solid growth in our Australian and Asian casino business, which is one area of growth in the worldwide casino and gaming market.

Now let me briefly review each sales unit. First I'll start with gaming and lottery, focusing on the gaming side. As I mentioned earlier, for the first quarter, revenue in gaming and lottery was down $3.4 million, or 39% compared to the first quarter of last year. Specifically, gaming sales were down 16% in the first quarter of last year for the two reasons I just mentioned, but mostly due to the one customer issue in Europe. Despite the slowdown in the domestic casino market, we actually did okay in the U.S. marketplace.

The area where we did see revenue growth was gaming sales in the Asia-Pacific Rim marketplace. Asia is a growing market, and Macao is the driving force. Our proven model in the U.S., Europe, and Australia has been to build a local presence to best serve customers, so we recently announced the opening of our Macao office to further accelerate our growth in the Asia-Pacific market.

The Asian gaming market is just beginning, and the opportunities for us to grow our revenue looks very promising. Although Asia has historically been a table game market, one of the goals for the new casinos opening in the region is to add slot play into the Asian experience. In addition to new casinos being constructed, many other casinos are talking about expanding their casino floor to include more slot machines with ticket-in, ticket-out capabilities.

In addition to opening the new sales office, we have also appointed Andrew Hanley to lead the sales effort in Asia and Australia. Andrew will be responsible for the sales and marketing of the Company's casino gaming printer products and services into targeted key manufacturers and casino operators based in Macao, Australia, and all over the rest of Asia.

Having just returned last night from Asia and traveling with Andrew, I can say the prospects for growth in many Asian countries looks positive, and having a TransAct sales manager in this region is very important for us. Andrew joins us with over 12 years of casino gaming experience, including spending the last four years focused on the Asian market. Andrew's industry experience and enthusiasm will be a valuable asset to our Company. We believe that his experience in Asia's market, combined with the past success, make him the right person to have on the ground in Macao.

Turning to our domestic casino market, I'm disappointed to tell you this market is soft, and while we continue to focus on this market and leverage our relationship with JCM, we believe we will not see any significant improvement until the next upgrade cycle begins. However, I believe our market position, coupled with our patented technology, will benefit us when the new upgrade cycle for server-based gaming eventually starts.

Despite the challenges, we remain very optimistic about the opportunity for returning to revenue growth in the worldwide gaming market. The size of the market today is double what it has been when we first entered the business, and when server-based gaming begins in the U.S., it could provide a significant catalyst to drive revenue. And the worldwide gaming market continues to show expansion possibilities.

We continue to push our new innovative products, and are optimistic our recent move into what I have termed the off-premise gaming market, with our new Epic 430 and Epic 630 thermal printers, targeted for Europe and Asia, will start to also drive more printer sales. This will also add to our gaming sales and lessen the dependence we have on the casino market. We have recently received our first two orders for these new printers, and while it is just a start, our salespeople remain positive about the long-term potential in this new market for us.

Turning to our POS and banking sales unit, first quarter revenues were down 43% compared to the first quarter of '06. As I mentioned earlier, the decline was due in part to a $600,000 decline in our higher-priced legacy impact printers, and a $1.4 million shortfall in our banking market compared to last year. 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, the 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 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 inkjet printers--are about 40% lower than the impact printers we were selling back then, so it is not a one-for-one replacement.

Now, we've worked hard at improving our-- at moving our manufacturing to Asia, and our margin's back to almost historical levels, even at these lower average selling prices. I just spent time with our Chinese partner last week as part of my trip to Asia, and I am pleased with their commitments to our business, their support, but more importantly, the amount of money they continue to use to invest in the latest equipment and technology to allow us to maintain our low cost structure.

We do believe the decline in our legacy business is almost over and will have less of an effect on us with each passing quarter. This should be the last year it will have a real negative impact on our revenues. While our investment in our sales team and products for the banking market are starting to turn into everyday sales for TransAct, we must emphasize again that this remains primarily a project-based business which can affect results in different quarters. This is evident in our first quarter results. What I do want to emphasize is that these printers use our inkjet technology, so the more printers we sell and have sold, the more inkjet cartridges we will sell every year after.

I want our shareholders to know I am not pleased with our results in the POS and banking market and know we can do much better. We are taking the same time and energy we put into developing our casino sales and putting it into our POS and banking market. Nobody inside TransAct is happy with these results. We are all working hard to drive this business higher in the quarters to come.

Now turning to the TransAct Services Group, or TSG, which includes sales of our repair services, spare parts and consumables, TSG revenue for the first quarter was up 13% as compared to the first quarter of last year. Revenue growth in the first quarter was driven by increased sales in consumables and service products. We also benefited from the inkjet cartridge contract with a national supply chain we signed last year. Our growth in this quarter was a direct result of the sales team additions we made, the service centers we opened, and the focus the management team continues to put into this business to create a higher margin, recurring revenue business within TransAct.

While we believe the worst is behind us and the remainder of the year will be better than the first quarter, we do have a cautious outlook for 2007. In the gaming business, the domestic market is soft. One reason for this is that casinos are 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 still concerned about the pending privatization transaction 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 technologies, some targeted directly at the new server-based gaming technology, combined with our strong sales relationships, is positioned to gain additional market share and achieve sales growth.

We remain cognizant of the economy, which could affect our POS and banking business. Even with this uncertainty, we believe that the POS market holds considerable growth potential. We continue to focus our resources, our research and development of new products for this market. We have a track record of growing our revenue by launching innovative products for our markets.

In our lottery business, we expect sales to GTECH in the second quarter of 2007 to improve compared to the first quarter and believe that they will be even stronger in the second half 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 with upwards sales trends for the remainder of 2007 as our sales initiatives continue to take hold and the installed printer base continues to expand.

Although the first quarter was tough and a disappointing one, we do remain optimistic regarding the long-term growth opportunity for TransAct. On balance, we anticipate stronger sales growth in the second quarter and the remaining quarters of 2007.

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

Thanks, Bart. From a financial perspective, the first quarter of 2007 was both a challenging and disappointing quarter. However, as Bart stated, we believe that the worst is now behind us, and we expect to see marked improvement and a return to bottom line profitability beginning in the second quarter of 2007.

Our net sales for the first quarter of '07 were $11.5 million, compared to $16.4 million in the first quarter of '06, down 30%. Gaming and lottery sales were $5.3 million in the first quarter '07, compared to $8.6 million in the first quarter of '06. Our sales to the gaming and lottery market for the quarter were impacted primarily by three items--lower lottery printer sales to GTECH due to the timing of orders, lower casino printer sales due to the continued softness in the domestic casino market, and lower-than-expected orders from one specific European gaming customer.

POS and banking sales were $2.7 million in the first quarter, down from $4.7 million in the first quarter of last year. The decrease is largely due to $1.4 million of bank teller printer sales to a large bank in the first quarter of '06 that did not recur in the first quarter of '07. Keep in mind sales of banking printers are project oriented and can fluctuate significantly quarter to quarter. In addition to lower banking printer sales, sales of the legacy impact printers also declined by $600,000.

While our overall sales were down in the first quarter, sales of aftermarket products from our TransAct Services Group increased by 13%, reaching a record quarterly high of $3.5 million. This increase was led by strong inkjet cartridge sales and higher services revenues as we continued to win an increasing number of extended warranty contracts and other service programs.

Our gross margin in the first quarter of '07 was 32.7% compared to 34.6% in the first quarter of '06. Both gross profit and gross margin were impacted by the lower sales level in the first quarter of '07. We expect to return to a more historical level of gross margin beginning in the second quarter of '07, as we expect our sales volumes to increase.

Operating expenses for the first quarter of '07 were up 4% to $4.2 million, compared to $4.1 million in the first quarter of '06. Operating expenses for the first quarter of '07 were higher, due primarily to severance charges related to a reduction in staff, higher legal expenses related to the continued expansion of our international patent portfolio, higher depreciation expense associated with Oracle software that we successfully implemented at the beginning of this year, and the full year effect of new sales personnel hired in our POS and banking sales unit. These increases were somewhat offset by lower engineering and product development expenses in the quarter. And on the bottom line, we recorded a net loss in the first quarter of this year of about $223,000, or $0.02 per share. This compares to net income of $1.1 million, or $0.11 per diluted share in the first quarter of '06.

Now looking at our cash flow. Even with our net loss for the first quarter, through working capital and capital expenditure management, we still generated approximately $800,000 of cash from operations and held our cash balance essentially flat from year end at approximately $3.4 million. We also used approximately $500,000 of our cash from operations to repurchase our common stock. I'll talk a little more about the details of our stock buyback program shortly.

And looking at our capital expenditures, we spent about $300,000, largely for software and consulting costs with implementation of a new Oracle software system, which I'm happy to report we successfully went live with at the beginning of this year. Our working capital remained relatively flat, at $16.3 million at the end of the first quarter, compared to $16.4 million at the end of '06. However, our current ratio increased to 3 to 1 at the end of the first quarter of '07, compared to 2.9 to 1 at the end of '06. Both of these metrics remained strong, despite our business being impacted by downward changes in overall market conditions and customer order timing issues.

Keep in mind that our working capital and current ratio for '06 and the first quarter of '07 were impacted by our stock repurchase program, as we used available cash to repurchase shares of our common stock in the open market. Due to our net loss, our EBITDA for the first quarter of '07 was approximately $200,000, compared to $2.1 million in the first quarter of '06. Depreciation and amortization for the first quarter of '07 totaled about $400,000, and non-cash compensation expense was about $200,000 for the quarter.

Now let's take a look at our balance sheet at the end of the first quarter. Our total assets were $33 million, compared to $33.7 million at the end of the year. As I previously stated, we ended the quarter with about $3.4 million of cash, which was approximately the same level of cash we finished with at the end of '06. So our cash balance remained relatively flat, even after repurchasing $500,000 of our common stock and incurring $300,000 in capital expenditures during the quarter. Receivables were $8.3 million at the end of the first quarter of '07, down from $11.4 million at the end of December '06. The decrease in our receivables reflects reduced sales volume for the first quarter of '07 compared to the fourth quarter of '06, and our collection experience continues to be excellent.

Our inventories increased to $9.6 million at the end of the first quarter from $7.6 million at the end of '06. Our inventories grew primarily due to the unanticipated slowdown of our business during the first quarter of '07 as we fulfilled inventory purchases commitments made during the fourth quarter of '06 to our Asian sourcing partners. We anticipate our inventory levels in the second quarter to decline from the first quarter level as we adjusted down our level of purchasing and use inventory on hand at the end of the first quarter to fulfill our expected higher level of sales in the second quarter.

And lastly, as an update on our stock repurchase program, during the first quarter of '07, we bought back 70,000 shares for approximately $500,000 at an average price of about $7.44 per share. This brings our total buyback to 871,300 shares, for a total of $7 million at an average price of about $8.05 per share. So to date we've repurchased about 9% of our total shares outstanding as of the beginning of the program. And just as a reminder, we're authorized to repurchase up to $10 million of our common stock through March of '08.

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

Thanks, Steve. Operator, at this point we'll open up the call to questions.

Thank you. (Operator Instructions.) We'll take a moment to poll for questions. (Operator Instructions.) Being as there are no questions in the queue at this time, I'd like to turn the call back to management for any concluding remarks.

Well, we--operator, you're sure there's no questions?

That's right.

Okay. Well, we appreciate everybody joining us on this call today. I do want to invite everybody to the annual Shareholders' Meeting, which is Tuesday, May 15, at 10 a.m. It is at a new location. It's at the Clarion Hotel in Hamden, Connecticut. We've actually moved our corporate office from Wallingford to Hamden, Connecticut. As you know, we've leased out our old manufacturing space. So I do invite our shareholders to attend the annual Shareholders' Meeting on Tuesday, May 15, in Hamden, Connecticut at 10 a.m. Then I also look forward to talking to our shareholders at the end of the second quarter. Thank you very much for attending. Bye-bye.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.