TransAct Technologies Inc (TACT) 2007 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the TransAct Technologies third quarter 2007 earnings results. (OPERATOR INSTRUCTIONS.) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Pasquale of The Ruth Group. Thank you. Mr. Pasquale, you may begin, sir.

Thank you, Operator. Good afternoon, and welcome, everyone, to TransAct's third quarter 2007 results conference call. Joining us from the Company today are Mr. Bart Shuldman, Chairman, President, and CEO, and Mr. Steve DeMartino, EVP and CFO.

The format of the call will be a brief business review by Bart, followed with Steve reading 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 facts may be deemed to be a forward-looking statement. Actual results may differ materially depending on a number of risk factors.

For a full list of risks inherent in the business of the Company please refer to the Company's SEC filings, including the Company's most recent Annual Report on Form 10-K. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the day of this call.

At this time, I would now like to turn the call over to Mr. Shuldman. Please go ahead, sir.

Thanks, David. Good afternoon, everyone, and thank you for joining us on today's call.

As noted in our press release this afternoon, revenues for the third quarter of 2007 were $11.7 million compared to $15.3 million in the same period a year ago. The Company recorded a net loss of $1 million or $0.11 per diluted share in the third quarter of 2007 compared to net income of $1 million or $0.10 per diluted share in the same period of 2006.

I would like to note that despite the challenging conditions affecting our critical markets we were essentially breakeven when costs associated with the FutureLogic lawsuit are netted out along with the costs incurred during the quarter associated with our plan to focus our resources on growth oriented opportunities.

We incurred a $110,000 charge for severance resulting from the termination of certain employees in the quarter. We expect to realize $600,000 in savings in 2008 as a result of the changes we made.

The way to look at the third quarter of 2007 and also the full year, too, is TransAct is in a transition year, and let me explain. First, we realigned our Company in the third quarter of 2007 to position and focus TransAct on growth opportunities where we have strong positions either in a specific market, in a certain region of the world, or with the customers that will serve those markets. These opportunities include printer sales in the casino, gaming, lottery, banking, kiosk, and point-of-sale markets, as well as printer supplies provided by the Company's TransAct Services Group. As previously explained, this change not only focused TransAct on these opportunities but it will also lower our costs next year by approximately $600,000.

In addition to the personnel changes, we are focusing our research and development efforts on these growth initiatives. Just yesterday we announced the latest addition to our banking product portfolio, the BANKjet 2500, in response to certain banks' requests. These banks wanted a replacement printer for their existing printer that is faster, reliable, has a small footprint, needs to be one color, just like their existing printers, with a cut-through slot for validation, and our new BANKjet 2500 is the solution.

We are targeting this product after the replacement market where banks are not upgrading their total system and platform as much as they are just upgrading their printers. There are over 500,000 banking teller stations in the U.S., and if a bank is not considering a full upgrade of their system then our new product offering gives them a new printer solution to replace their older existing technology. This will now open up a new opportunity for banking printer sales for TransAct.

Utilizing our global manufacturing capabilities we now offer an extremely compelling and cost effective solution, adding to our existing BANKjet 1500 which has won many new contracts. We believe in this opportunity in the banking sector, and this investment will show you how we are focusing on those opportunities where we have positioned TransAct as the leader.

Just speaking about TransAct's banking results in the third quarter, our revenues were down in the third quarter compared with the third quarter of 2006 as we did not close any new banking deals in the quarter. We had some very large banking printer orders last year in the third quarter.

Since we have been relying on banks to do major upgrades to their system, for things like Check 21 conversion, to drive our revenue in this market, our new BANKjet 2500 solution, I just spoke about, should help drive incremental revenue TransAct by targeting replacement sales instead of waiting for a full upgrade to be approved and implemented by a bank.

In looking at our POS market, we are in a transition in this market, too. First, we are eliminating certain products where sales do not justify their existence. In addition, one of our largest customers is going through a transition to a new POS operating system. Their transition has impacted our POS sales this year as they wait to get this new system certified and working. While it has affected our revenue this year, it leaves pent-up demand for our printers next year once this system is ready. We are working very hard to be ready for when this business is ready to grow again by offering the customer multiple product solutions.

As a final comment to our changes within the POS Team, our restructuring does not mean we are exiting this market, in fact, just the opposite. We'll be expanding our coverage of this market by utilizing channel partners where the costs are not incurred by TransAct. We are streamlining our product offering to allow our partners to focus on where they can grow and be profitable, but we also use our global manufacturing to allow TransAct to be profitable at very competitive price points.

And, finally, turning to our results for the POS market in the third quarter compared to the third quarter last year, our newer thermal printer technology products grew in revenue in the quarter. In fact, our overall revenue in the quarter for just the POS printer sales was up compared to the third quarter of 2006. As I have discussed with you before, our older impact printer technology, we call it our legacy products, those sales were down compared to Q3 2006. We are replacing much higher average selling price impact printers with lower average selling price thermal printers, so while volume of shipments are up compared to the third quarter of 2006, the impact of the loss of legacy higher selling impact printers [naf] the total gain we achieved in the quarter.

Now, let me talk about our gaming and lottery sales. First, the transition that we are going -- doing this year is not just focusing on the casino market. And, yes, server based gaming is coming, and we're very well prepared for when it does, but sitting back, waiting for that technology change and the upgrade cycle to begin is just not something we are doing. So we entered what I call the "off premise gaming market." You might know that by machines called video lottery terminals, [Picks Are Betting terminals], Amusement with Prizes, and Skills with prizes.

We have already launched two new products for this market, the Epic 430 and Epic 630 receipt gaming printers, and have plans to launch more. Remember, we are focusing on growth opportunities, and while we are at the very beginning stages of this off premise gaming market, which is transitioning from coin drop to mostly receipts, not tickets, the revenue this market will drive for TransAct will eclipse in excess of $1 million this year. So TransAct will now be focusing on lottery, casino, and what we call gaming. We experienced nice growth in this part of the business in the third quarter compared to the third quarter of 2006.

Regarding the casino market, we would all agree the industry is about to go through a major transition as casinos turn to the wired world. The network casino floor, as some people call it, and as other know it by server based gaming. The lull we are experiencing in our domestic sales for the casino market will eventually end when the casinos start to move to this wired network environment.

We are very much looking forward to the transition as we have product and technology that will enhance the casino's experience when the move to server based gaming happens. Our patented dual port technology is positioned as a great addition to server based gaming as an example for those casinos that want to combine the slot, floor accounting system with their player loyalty and tracking systems. We are optimistic about our prospects and believe this will have a positive affect on our revenue as we go through the end of 2008 and into 2009.

Remember, when we went through the last upgrade cycle in the domestic casino market for ticket-in, ticket-out technology there were approximately 600,000 slot machines to get replaced. Now the size of the domestic casino market exceeds 800,000 slot machines with more casinos expected to open over the next several years.

I would like to also mention that we're also focused on the transition the worldwide casino industry is going through with the growth of casino openings around the world. In October we (inaudible) in Macaw and are now open for business. We have [one sales manager] and two technicians there, and for my last trip to Macaw just a few weeks ago the casinos are glad we are there. We will cover all of Asia from that office. Macaw is expanding, there are some very large casinos slated to open in 2009, and Singapore opens two casinos over the next few years. And the talk in Asia about the casino growth in other places like Japan keep us positive about the future for revenue growth for TransAct in this rapidly growing region of the world.

Now, in the third quarter of this year our international sales were lower compared to the third quarter of 2006 due to the lack of printer sales in Australia, as this market gets ready to transition to ticket-in, ticket-out. This transition has taken much longer to begin, and printer sales were clearly impacted by this. But eventually the transition will happen and our large market share in Australia will turn into drive revenue sales for TransAct.

In reviewing Europe with you, this is one bright spot in our casino business. Sales in the third quarter of 2007 remain strong, and we are tracking higher YTD, again, compared for the first nine months of last year. Our market share position in this market is also strong and the growth of ticket-in, ticket-out is occurring right now. Again, we're also targeting off premise gaming business in Europe, so our outlook is good for both casino and gaming printer sales in this region of the world.

So our third quarter of 2007 compared to the third quarter of 2006 for casino printer sales was affected by the slowdown in the domestic casino market as it waits for the server based gaming upgrade cycle to happen and the slow start of ticket-in, ticket-out slot machines in Australia.

Turning to our lottery sales, we had a tough third quarter. Sales to our lottery customer were at an almost historic low due to their timing of orders for our printers. This in no way (inaudible) or says anything about their business, just that they do not need many online lottery printers in the third quarter of this year. But, as you know, this lull does change, and we already have approximately $7.7 million of printer orders scheduled to ship in 2008. This is over 50% more orders than we will have all this year, and we are expecting more orders for 2008. Depending on how many more orders we receive, 2008 can be the single largest revenue year for us with our lottery customer.

Finally, sales in our TransAct Services Group, or TSG, was impacted by the declining sales of refurbished printers and spare parts for our legacy impact printers, compared to the third quarter of 2006. These printers are being replaced with our newer thermal and inkjet printers, which are much more reliable and do not need as much service and spare parts as our older legacy impact printers did.

In addition, our lottery customer continues to replace our legacy impact printers that they have in the market with our new thermal product once they win a new contract. The good news is we win more printer business. The bad news, out of the market comes an impact printer that would use lots of spare parts to keep running. Remember we have some impact printers in the market with GTECH that are over seven years old, some ten years old. When they're out in the market that long they are past their life expectancy and we sell lots of spare parts to GTECH to keep them running until they win their next contract.

Again, our TSG business is going through a transition at TransAct. While we are seeing the spare parts and service business decline for our older legacy impact printers, we are growing our consumable business which includes inkjet cartridges, ribbon, and paper. The consumable side of this business experienced sizable growth in the third quarter compared to the third quarter of 2006, and we are clearly focused on this. Our goal is to become the leader in the consumables business and the point-of-sale and banking market as our business model is clear in direction and opportunity.

That ends my discussion regarding the sales of our printer products, consumables, and service business for the third quarter of 2007.

Before I turn the call over to Steve, I'd like to make some brief comments about the ongoing litigation with FutureLogic. We know we are spending a significant amount of money on the lawsuit with FutureLogic, but I must say we are pleased with the progress of the case so far.

Just to clarify what is going on, shareholders need to understand that this lawsuit was not one that TransAct initiated to enforce our patents. FutureLogic filed the suit and accused TransAct of various bad acts, such as business defamation and unfair competition, and also attacked our 903 patent, submitting a claim for declaratory judgment of invalidity. Sometime later we advanced a claim against FutureLogic for patent infringement. Even if we had not done this TransAct faced significant legal costs to defend the Company against FutureLogic's claims.

Now the judge has set an expedited schedule for trial in June 2008, which we are very pleased with. As a result of this accelerated schedule, however, we had to incur higher legal fees as we prepare for the quick trial. We remain confident in our position and believe we will prevail, thereby benefiting TransAct and our shareholders. We remain committed to protecting our technology and will continue to take the appropriate actions to protect our patented intellectual property. We strongly believe that our ability to bring new and innovative technologies to the market has helped establish ourselves as an industry technology leader and will continue to protect our intellectual property, our patented intellectual property.

This is all I am allowed to say regarding the FutureLogic matter, and I want you to know I will not be able to answer any questions you might try to ask. I'm very sorry but I will not be able to. I ask that you please understand the position we are in.

And I will finish with the recent Board approval of the extension of our stock repurchase program to March 31st, 2010, which underscores the optimism we have in our prospects for 2008 and beyond and the strength of our debt free balance sheet. With this new authorization we are now able to repurchase up to 15 million of our stock, a 50% increase from the initial 10 million that was originally approved.

With that, I'd like to turn the call over to Steve, our CFO, Steve DeMartino, our Chief Financial Officer, for our financials. Steve?

Thanks, Bart.

Well, let's jump right into the numbers. Our net sales for the third quarter of 2007 were $11.7 million compared to $15.3 million in the third quarter of '06, down 23%. Gaming and lottery sales were $5.8 million in the third quarter '07 compared to $8.5 million in the third quarter of '06, down 32%. Our sales into the gaming and lottery market for the quarter were impacted primarily by lower casino printer sales due to continued softness in the domestic casino market, as well as another historically low quarter of lottery printer sales to GTECH.

We also experienced a $900,000 or 32% decline in international gaming and lottery printer sales, largely due to Australia, as Australia's conversion to ticket-in, ticket-out is occurring slower than anticipated. Keep in mind that we have significant market share in Australia through our OEM and distributor relationships so when the conversion does occur we stand to benefit significantly.

Banking and POS sales were $3 million in the third quarter of '07, down from $3.6 million in the third quarter of last year. The decrease was largely due to about $600,000 of bank teller printer sales to a large banking customer in the third quarter of '06 that didn't recur in the third 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 our legacy impact printers were also down. As we've said previously, we expect sales of these printers to continue to decline for the remainder of '07 but at a diminishing rate as these printers continue to be replaced by thermal and impact printers. Partially offsetting these decreases, sales of our thermal POS printers increased over the third quarter of '06.

Sales of after market products from our TransAct Services Group decreased by 7% to $3 million. TSG sales for the third quarter of '07 were impacted by lower service revenue from a service contract with a single customer in the UK. This service contract relates to repair services provided on approximately 40,000 printers that we installed at the UK post office beginning in 1997 and we've been servicing for the last ten years. Unfortunately, the contract has been phasing down this year and will finally come to an end this November, as they are replacing our legacy printers with new printers utilizing technology that we just don't have a solution for.

We also experienced a decline in the sale of replacement parts for legacy impact printers, as the installed base of these legacy printers in the market declined. These decreases were somewhat offset by increased consumable product sales, mostly inkjet cartridges, as our focused effort to growth this profitable portion of our business continues to pay off.

Our gross margin in the third quarter of '07 decreased to 33.1% from 35.6% in the third quarter of '06 due primarily to a lower volume of sales and a less favorable sales mix.

Operating expenses for the third quarter of '07 were $5.6 million, up $1.7 million from $3.9 million in the third quarter of '06. Operating expenses for the third quarter of '07 were higher due largely to approximately $1.5 million in legal expenses incurred related to the lawsuit with FutureLogic. We plan to continue to update you on the financial impact of this lawsuit each quarter.

In addition to the legal fees, we also incurred a severance charge of about $110,000 relating from the termination of certain employees as part of a cost reduction action related to our POS business. We expect to realize cost savings of approximately $600,000 in 2008 as a result of the action.

And on the bottom line we recorded a GAAP net loss in the third quarter of this year of about $1 million or $0.11 per diluted share. Excluding the legal fees and severance charge incurred in the quarter our proforma EPS were breakeven. This compares to GAAP net income of $1 million or $0.10 per diluted share in the third quarter of '06.

Now, looking at our cash flow, we generated about $1.7 million of cash from operations during the third quarter of '07. Our capital expenditures for the quarter were approximately $300,000. Even after funding our capital expenditures, repurchasing 1.3 million of our common stock, and incurring $1.7 million of legal fees our cash balance at the end of the quarter still stood at approximately $3.3 million, compared to $3.4 million at the end of 2006, and we continue to have no debt outstanding.

Our working capital decreased to $13.2 million at the end of the third quarter '07 from $16.6 million at the end of '06. Our current ratio also decreased to 2.5 to 1 at the end of the third quarter from 3 to 1 at the end of 2006. The declines were due largely to lower accounts receivable from lower sales volume and an improved collection effort. In addition, our working capital and current ratio were also impacted by approximately 1.3 million of stock buys under our stock repurchase program during the first nine months of 2007. Despite a challenging 2007 so far both our working capital and current ratio still remain strong.

Our EBITDA for the third quarter of 2007 was approximately a negative $1.1 million. Excluding the legal fees and the severance charge EBITDA was $600,000 positive. This compares to EBITDA of $2 million in the third quarter of 2006.

Depreciation and amortization for the third quarter of 2007 totaled about $475,000 and noncash compensation expense was about $200,000 for the quarter.

Now, let's take a look at our balance sheet at the end of the third quarter. Our total assets were $32.7 million compared to $33.7 million at the end of the year. As I've previously stated, we ended the quarter with about $3.3 million of cash which compared to $3.4 million of cash at the end of '06, so our cash balance only declined by $100,000 even after funding $2 million in capital expenditures, incurring $1.7 million in legal fees, and repurchasing $1.3 million of our common stock in the first nine months of '07.

Receivables were $7.2 million at the end of the third quarter of '07, down from $11.4 million at the end of '06. The decrease in our receivables reflects reduced sales volume for the third quarter of '07 compared to the fourth quarter of '06 and improved collection efforts. That said, our collection experience continues to be extremely good.

Our inventories increased to $90 million at the end of the third quarter from $7.6 million at the end of '06. Our inventories grew primarily due to the unanticipated slowdown of our business, combined with higher inventory stocking levels resulting from our continuing initiatives to move more production to China.

And, lastly, as an update on our stock repurchase program, during the third quarter of '07 we bought back 115,800 shares for a total of $745,000, and for the YTD 2007 we bought back 185,800 shares for $1.3 million. So as of September 30th, '07 our total buyback stands at just shy of 1 million shares bought back for a total of $7.8 million, representing over 10% of our total shares outstanding. And, as Bart previously mentioned, the Board just approved an increase in our buyback authorization to 15 million from 10 million and also extended the program for an additional two years through March 2010.

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

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

(OPERATOR INSTRUCTIONS.)

Our first question is from the line of Todd Eilers with Roth Capital. Please proceed with your question.

Hi, guys, how are you dong?

Hey, Todd.

A couple of questions here. First, you guys announced $7.7 million in thermal lottery or thermal printer orders that you expect to realize I think in '08, are those -- can you tell us how much of that is gaming and lottery, or is there any point-of-sale and banking? I guess where does that fall in your segment?

Yes, it's strictly lottery, it's the online lottery printer.

Okay. So it's all basically GTECH?

That's GTECH, yes, yes. If you look at this year it's -- like I said, it's going to be over 50% more than what we'll do all this year with GTECH. We actually, Todd, have -- now have two printers that we're selling -- well, actually, we have three printers we're selling to GTECH, but two that involve the online lottery printer and a new printer we've talked about that we're selling to them. So when we talk about the GTECH lottery revenue, this is strictly the GTECH lottery revenue, not the gaming side of their business, so this is strictly for their online lottery business.

So if you -- oh, yes, Steve is waving to me about -- it's actually if you look at the $7.7 million most of it will ship in the first half of the year. So that -- we have a certain lead-time with GTECH on when they can place an order and when we can ship. Due to those lead-times they had to place this amount of orders to make their contract, so this really takes us through July of next year but it -- there is an opportunity for them actually to place more orders in the first half of the year and, of course, in the back half of the year also. So this is strictly the lottery business, not their gaming side.

Okay. That helps. And then with the restructuring that you guys have announced, can you give us an indication of how much of your trailing revenue was POS revenue, just to kind of get a feel for what that was and it looks like the expectations are that that will be stable going forward, but just kind of wanted to get a feel for what that was?

Just the POS or the POS in banking?

Just the POS?

You know what, I don't have those figures in front of me, Todd, because we combined POS and banking together as one. You know, we'll try to call you tomorrow and see if we can break that out for you. But if you look at that whole business, we're expecting that at minimum to be flat next year if not up. The changes we made don't affect our growth opportunities in that business, especially on the banking side, but even in the POS side we're not expecting to lose any business based on the restructuring.

One of the things that we try to do with, over the last year-and-a-half with kind of what we call the pull strategy, really work with the end users to pull our printers through the distributors and VARs to grow our business. What we really found out is that that wasn't going to work, and what we really believe is that the channel controls the business a lot more than we thought that we could do in trying to do the pull strategy.

So what we did is knock that out and be able to use our global manufacturing to offer our channel partners very attractive pricing, maintaining our margins if not growing our margins based on our global manufacturing capabilities, and let them push the product to the end user where they control more of the relationship. So we're actually planning on not losing or seeing a decline in sales because of this, we're just changing the distribution strategy based on our manufacturing capabilities in China and our relationships in the channel, and actually growing those relationships, so we're going to be expanding those relationships.

The other thing that's really the unknown in the point-of-sale market is when our large customer that has had this point-of-sale operating system issue, when that comes to an end, you know, we've been told there are thousands of terminals waiting to go out once this ends. And we've also been told that we are the only printer that they're going to approve on this new platform.

So while it really hurts right now, and like I said in my speech, our POS revenue actually grew in the quarter so it's not that we're not growing it's just -- it's not -- when you have such a large customer that's really not doing much business right now because of this change, it really hurts and really stops you from growing more. But once they approve that system and that system gets out there and all those operators of theirs start to buy again, we're told we're the only printer approved on that system, and we should see a nice pick-up in business and, therefore, not only grow what we're growing today but see some pretty good growth out of it. I just can't predict when that approval is going to happen based on the issues that they've had of getting it through their lab.

Okay. How about with respect to the TransAct Services Group, you kind of indicated that what you've got, you've got two dynamics going on there with the legacy printer cartridges sales declining but yet your consumable products are increasing, can you maybe give us a feel for what the revenue mix is between those two items so we can get a feel for have we reached an equalization point here, a stabilization point, or should we, you know, is the legacy printer cartridge business still more a majority of that, and should we expect any further declines I guess in that?

Yes, yes. Now, what's happening is it's not our legacy cartridge business, it's actually our legacy spare parts business.

Okay.

And we really have kind of two dynamics going on there. We had a very large contract in the UK for printers that we sold in 1997, and the good news is we ran a service business with them for ten years, the bad news is when they wanted to change out the printer and go to another printer, they presented their needs with very different technology, and we just don't have the technology. Us and our partners, HP, and our thermal print head manufacturers, we just don't have the technology that they were looking for.

So they went with a very different printer and there was nothing we could do, so we got shut out of that. But the -- what happened is we had a pretty large service amount of business with them, and that will come to an end by the fourth quarter. So by the fourth quarter you'll get a pretty good read on what our run rate is going to be in our legacy business.

The other thing that's somewhat affecting our business is as GTECH wins these new contracts the -- it's an existing contract that they have, like the UK, which they just won, which is some 26,000, 27,000 new terminals, they're replacing their existing terminal that had an impact printer with our new thermal printer, which is good news, and we're going to have a fair amount of printer sales to them next year. The bad news is those legacy impact printers did provide us a fair amount of spare parts business, because it's an impact printer, much more likely to fail.

Now, we've made-up some of that business by doing almost all of their service for our -- for the new thermal printer business. We have worked with them very closely to basically taking over their service side of their printer business around the world, so as we put out these thermal printers, once they come out of warranty we've been growing that business with them because we're doing that business with them now, but we are seeing that decline, as they take those impact printers out that will have an affect on our sales. So I think by the end of the fourth quarter you'll get pretty much of a run rate of what our business will look like.

What we are focusing on is the cartridge business, the ribbon business, and the paper business, what we call consumable business. The existing cartridge that we buy from them is not only used for -- by us in point-of-sale and banking markets, but it's also used in other industries, and through our relationship with HP and through our knowledge of these other businesses we're going after the cartridge business that other printer manufacturers are selling the printers for in those markets, and we've done a pretty good job at gaining some market share and gaining some business from that.

We've also been growing our paper sales by now offering not only Ithaca -- paper for Ithaca printers but paper for Epson printers, Star printers, and everybody else, and we're very much focused on that. And actually what's very surprising is the margin of that business because we're dealing with end users in that case, the margin of that paper business is quite attractive for us. So we are replacing some of that, but what you will see is that legacy business will come down a bit more in the fourth quarter and should level out because we are replacing it with some spare parts and service business.

The one thing that did shock us, Todd, in our service business was back in 2003 when we looked at how many printers we would put in the gaming, in the casino industry we were really optimistic that our service business overall even with the decline of the impact business would grow and grow a lot because we are putting so many printers into the gaming business. You know, we've sold hundreds of thousand of printers into the casino business, our Epic 750, our Epic 850, and our Epic 950.

The interesting part that we're learning is those printers are just not failing, and while we knew our population of Epic printers would grow tremendously in the marketplace and had forecasted that our service business would go up, as they came out of warranty what we're somewhat shocked about is how well they actually are working and they're just not failing.

And, therefore, some of the projections, some of the thoughts that we had in our Company about how the service business would grow dramatically is not materializing because the printer is not failing. Now, that's good for our customers, and it's good for our relationships with our casino customers, but overall we're not seeing that spike that we expected to see, that's why we're looking more at the supplies business because there, our point-of-sales customers and customers that we don't have, they do need paper, they do need cartridges, they do need ribbons. Whether the printer fails or not they need these consumables, so we are focusing a lot on that, and in the third quarter we grew nicely with that business.

Sorry to be a little long-winded, but I wanted to give you a feel for what's going on in that business. And, look, there's no doubt about it that we thought that service business would grow more because of how many printers we put in the casino business. We're just a bit amazed that that printer is just not failing.

Okay. Well, that's helpful. How about can we talk a little bit about that gaming and lottery? I don't know if you guys provided it, but how much of it was gaming versus lottery, GTECH, and then also maybe domestic versus international? I know you guys break that out in the Q, but if you've got those numbers handy that'd be helpful.

Okay. We'll -- I mean they're going to try and see if we've got that in front of us. We -- the lottery business is strictly just GTECH. Steve, do you have those numbers, or should we call --?

Yes. The three-month numbers to -- GTECH is about $700,000.

Okay.

And that would be our lottery business, Todd, so that's strictly our lottery business. We don't have any other customers in the lottery business.

So then you did about $5.1 million for -- strictly for gaming?

Hold on.

You know what, Todd, should we call you back?

We'll probably call you back with it.

Okay. That's fine, I just -- that's the difference between $5.8 million and if you're saying GTECH was $700,000 and it would be $5.1 million for gaming.

It's [1, 1], Todd, sorry, 1 in the third quarter for lottery.

Oh, okay, okay.

The rest is casino and other gaming.

Okay.

Yes, but there's some in that 1, 1 there's some gaming and not lottery, because of the Canadian deal. So why don't we call Todd back with that?

Okay.

All right. And then, let's see, I know you can't really talk much about the lawsuit with FutureLogic -- your legal expense was $1.5 million in the quarter and I know, you know, that's been a very important lawsuit for you guys in protecting your IP -- I'm just trying to get a feel for it going forward, I know you have the trial date set in June of '08, you know, should we expect maybe legal expenses to taper off for the next couple of quarters until the trial starts or would you anticipate kind of a similar level of legal expenses? It just seemed a little higher than what we were modeling in, and I don't know if you can talk about it but --?

Yes, I think going forward at least for the next quarter or two you could probably figure for -- it's going to come down, so you probably, you know, $1 million to $1.2 million would probably be reasonable so it'll come down between $300,000 and $500,000.

Okay. And then --

You know, look, we're, you know, the expedited schedule by the judge, which we're actually very pleased about so we can, you know, get it over with by June, just caused us to really based on the way that the lawsuit goes, all the things that you have to do to provide documentation, all that, it just caused us to spend more money this past quarter.

Okay. No, yes, I understand. And then I guess, last, last question with Australia and the ticket-in, ticket-out there, should we expect some sales to start -- any in the fourth quarter or are you looking at first quarter '08 or second quarter '08, when do you kind of expect to start to see some of that happening?

You know, based on all the reports that I've read, the conversations we've had with the customer and, of course, you know, next week we'll get even more information, I think the second quarter of next year is fair.

Okay.

You know, one of the things that affected us in Australia is a lot of the printers going into Macaw come out of Australia for us, so last year we had a lot of openings of casinos that we were involved in, so our printer sales in Australia were pretty high last year compared to this year where there's not as many casino openings, and the next really big wave of casino openings is going to be 2009.

So what really impacted us was the slow-down in the openings in Macaw and the fact that while our customers in Australia were telling us that ticket-in, ticket-out got approved and it's going to happen, clearly even by their own press releases they're disappointed that it hasn't really perked up sales in Australia. You know, the Australian market is clearly a slower market due to some of the smoking [bans] that they've had and tings like that, and our customers were hoping to drive more machine sales because the customers, their customers would embrace ticket-in, ticket-out. They still believe that, it's just going to happen a bit slower than what they thought.

Okay.

But I would target the second quarter of next year.

Okay.

And, Todd, you're going to be out at [GGE], so as I get more information I'll be able to share that with you.

Okay. Thanks, guys. I'll see you out there, Bart, and --

Hey, Todd, I got that number for you.

Okay.

Online lottery printer sales to GTECH were about $800,000 in the third quarter.

Okay. And real quick then, I don't know if you have this handy, but the mix between domestic and international under your gaming and lottery?

Let's see.

Yes, I think I've got it in front of me, I think international gaming was about $2 million and domestic gaming was $3 million.

Yes.

Okay. Okay. And then I guess that begs the question, you know, you kind of highlighted the domestic gaming market is still being soft with kind of server based gaming, replacement sales kind of looming, you know. I guess can you add a little bit more to that? I mean should we expect those numbers to get any worse or do you think this quarter was kind of, you know, the bottom mark or just kind of what are your expectations just for the domestic gaming market?

Yes, I think we've hit the bottom. I mean based on all the conversations we've had with the customers and our salespeople, everybody kind of believes this is the bottom. Now, that doesn't mean it couldn't change, I mean, but at this point people, you know, our salespeople and our customers are telling us this is pretty much the bottom of what we've seen.

All right. Thanks, guys. I'll -- I don't want to take up any more time if there's other questions. I appreciate it, and I'll see you guys out at GGE.

Yes, I'll see you Sunday night.

Thanks, Todd.

Thanks.

Our next question is from the line of Sam Bergman with Bayberry Capital. Please proceed with your question.

Good afternoon, Bart and Steve. How are you?

Okay, Sam.

Hi, Sam.

A couple of questions. First of all, in the banking industry can you give us an idea of what the pipeline looks like for printer sales?

Yes, it's pretty interesting. You know, I wouldn't call the banking sector right now one of happiness. We've got -- we deal with banks all the way down from the local, small bank, all the way up to the very large commercial banks that everybody knows. And I don't think it's a mystery to anybody that the so-called credit crisis going on is having an affect on some of the banks that we're working with for upgrade programs. It's one of the reasons why we targeted the replacement market by coming out with the BANKjet 2500 because we can now offer the banks a solution where the printer, their existing printer breaks and they now have a more cost effective and higher technology solution.

Our banking pipeline of deals is actually quite strong, the problem is we can't get them closed. And the issue there is, or I don't think it's a mystery there's a credit issue going on in the marketplace and banks, while trying to understand their own issues, aren't really looking at these very large implementation projects that they had been talking to us about.

You know, when we looked at -- when we look at things like the Check 21 upgrade, that's a major project for them, that's not only the hardware but it's a major software and integration project. And what we're hearing is that some of these projects have been put on hold as the banks deal with their own internal issues. That's why I'm somewhat excited about our 2500, the new banking product, because now we can go back to those same banks and say, "Look, while you're waiting and you want to go to this new technology you can at least put in a replacement product instead while you wait." But our banking pipeline is as strong as it's ever been. We have been working on certain deals for two, three years, but we just can't get closed right now.

In regard to the POS system or Division with the printers, the large restaurant chain that you were talking about where there's some pent-up demand, I'm not sure when that's going to happen, if they were all, if those printers were allowed to be sold to them next year because of the software and everything else was up to where it should be what type of sales could transact, or get out of that?

$2 million, $2 million to $3 million.

$2 million or $3 million?

Oh, yes.

And that would be basically if they went for rollout?

No, no, full rollout, the Company has a lot of stores. No, that's just based on what we're told that is waiting to go, that's just what we've learned from our -- we have kind of a channel of customers, so based on hearing from the end user and the people that supply the end user that's about how many terminals that we've been told that they can sell pretty close to when the software gets approved.

And that, if there was a full rollout over a period of two or three years, what would the estimated dollar value be for all of them?

Oh, I don't -- $6 million, $7 million.

$6 million to $7 million?

Oh, yes.

On -- what's the pipeline look -- I know you cut-back a little bit on POS, but in terms of printer sales to restaurant chains, what does that pipeline look like?

It pretty much looks like the average that we've had. I would say, you know, we've won a good-sized one this year, it's been a nice rollout. So, you know, it continues to move along. You know, I don't see a dramatic change, and like I said our business was up in the third quarter versus the third quarter last year, and that's despite the legacy business going away. So it's almost a 1.5 to 1 replacement to make-up the sale of a legacy product with our thermal and inkjet product, we almost have to sell one-and-a-half printers to make-up the legacy printer loss.

And we grew that business, so the pipeline is fine. We are in the hospitality market, it's clearly where we focus, and we do have a customer, a large customer of ours going through a transition. That will end, but the pipeline has been fine.

In regard to the repurchase program that you just announced, the expanded one, what is the possibility of TransAct buying any more stock until the actual case is heard for FutureLogic? Because you're running quite a bit, quite high expenses for legal fees, and I'm just wondering --

I think our experience, I think, you know, the only thing I could say is you can go with what we did in the third quarter. We experienced pretty good sized legal bills, probably the largest quarter we'll have in legal bills in the third quarter, and we bought back stock. And, as Steve said, the cash is flat.

We -- I think we do a fair job at managing our balance sheet, and one of the things that we had -- what we did was move a lot of manufacturing to China which caused us to push-up our inventory a little to protect what I like to call the up side, so our inventory came up, we're now taking that down. As we transition more products to China and get used to the flow of products and all that, that inventory coming down drives cash in the business, and like in the third quarter we used that cash when appropriate to buy-back our stock.

And the last question I have is in regards to the -- you had a trade show in, I guess in Argentina a couple of weeks ago?

Yes, the South America Gaming Show.

What kind of feedback have you gotten from that?

South America is a good market. I mean, you know, we are -- you know, our domestic OEMs are supplying that market, and but it's a good market, but when you have -- when you look at markets like that that could potentially, you know, 5,000, 8,000 printers go into that South American market it's nice. It's kind of like Macaw, Macaw is nice, I mean it's nice to see these new casinos opening but Pennsylvania could be 25,000 printers. The new [Compaq] in California could be 20,000 new printers for us.

So the South America market is good, we're there, we've got a supply -- you know, we're working on the pull strategy, we call it, we have to have a relationship with the casinos, we have to be able to service that product, we have a great relationship with our partner, [JCM], that helps us to manage that market for us.

And we're hearing good things. Mexico could get some casinos, but that's not going to move the needle as much as server based gaming, as much as Florida finally agreeing that this whole issue between the Indians going from class two to class three happens, that California happens, that server based gaming happens. We've got some pretty good casinos opening up over the next year or two. We've got [Encore at Win], you've got [City Center], you've got the big, there's two other projects in Vegas, that's really what moves the needle.

I mean clearly server based gaming will move the needle at TransAct. You know, when we first got into the business of supplying printers to the casino industry, remember there was 600,000 slot machines in the market, but we started at zero share, so year -- month one we got 2% share, month two we got 5% share, and that finally got to 40% share, but we didn't start with that upgrade cycle with 40% market share. We'll now start the upgrade of server based gaming with at least 40% market share and a market that's 35% larger than what we had before. It's just the market is waiting for that to happen and, of course, I'm excited and looking forward to going to the gaming show next week to learn more about when this upgrade cycle is going to start.

And then the last question I have is in regard to -- I think several years back you did some business with Home Depot or in the home improvement market with printers; is that correct or not?

Wow, I don't -- not in the recent -- not in the last four or five years. I mean Home Depot, if we did business with them it would come through one of our VARs.

Okay.

So I'm just not sure what that is.

Were your printers used there in the past or not?

In Home Depot? In a kiosk, right?

I think we actually sold our old legacy impact product there, our Model 50, going way, way back.

And that's got to go back ten years ago.

Yes, in the '90s, probably the early '90s.

Okay. Thank you very much.

Thank you, Sam.

(OPERATOR INSTRUCTIONS.)

There are no further questions at this time. I would like to turn the floor back over to Management for closing comments.

Okay. We thank everybody for joining us on the call today, and we look forward to seeing anybody that goes to the Global Gaming Expedition which is occurring Tuesday, Wednesday, Thursday next week in Vegas. If not, we'll talk to everybody on our fourth quarter conference call or by telephone if you call in. We thank you for attending today.

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