TransAct Technologies Inc (TACT) 2008 Q1 法說會逐字稿

Greetings, and welcome to the TransAct Technologies first quarter 2008 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Tyler Wilson of the Ruth Group. Thank you. You may begin.

Thank you, Operator. Good afternoon and welcome, everyone, to TransAct's first quarter 2008 results conference call. Joining us today from the company 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 by Steve providing details on the financials. We will then have time for 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 one at TransAct's website.

Before we begin the formal remarks, the Company's attorneys advise that this conference contains statements about future events and expectations which are forward-looking statements. Any statements this call that are not statement of historical facts may be deemed as a forward-looking statement. Actual results may differ materially, depending on a number of risk factors.

For a full list of risk factors inherent to the business and the Company, please refer to the Company's SEC filings, including the Company's most recent report on Form 10K. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that happen after the call.

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

Thank you, Tyler. Good afternoon, everyone, and thank you for joining us on today's call. We are very pleased with our results for the first quarter of 2008. Thanks in large part to the initiatives we put in place in 2007, we were able to navigate through a weak domestic casino market and difficult greater domestic economic environment and significantly improve our revenues and margins.

Revenues for the first quarter of 2008 were $14.3 million compared to $11.5 million in the same period a year ago. Excluding a $1.9 million fee for legal fees related to the ongoing litigation against FutureLogic, net income in the first quarter of 2008 was approximately $532,000 or $0.06 per diluted share. This is significantly higher than the same period last year.

Steve DeMartino, TransAct's Chief Financial Officer, will go into the financial details of our results once I finish with an overview of our market results and business.

Now, turning to our business, one of the primary catalysts for our much-improved results in the quarter was the success of our casino and gaming business. During the quarter, we improved sales in our domestic gaming market and continued to grow in our new international off-premise gaming market. We are extremely pleased with the progress we are making in both of these markets.

Even with the overall domestic casino market weak, our sales in our global casino and gaming market was up over 17%. What makes us increasingly excited is our domestic casino market was up over 18% over the same period last year, and we believe the domestic market will begin to improve as we enter the second half of this year. As new casinos are built, expansion in certain states take hold, and existing casinos begin to purchase new slot machines for the upcoming server-based gaming technology.

Industry reports have indicated progressive growth will begin in the second half of 2008 and continue to at least 2010 or 2011. Given our refined focus of our business and recent win with IGT, we believe that we are in an excellent position to capitalize on this. One of the highlights I'd like to point out in our first quarter results, they do not include any positive impact from our recent win with IGT.

In early April, IGT selected our Epic 950 Thermal Printer as the default ticket-in/ticket-out printer for all new IGT games. Effective immediately, the default status will extend through June 30, 2010, and our Epic 950 Thermal Printer will be installed as the standard ticket printer in all new IGT slot machines and video platforms.

This is a historic win for TransAct and we should begin to -- and it should begin to positively impact revenues in the second quarter and continue to have an increasingly positive effect in the rest of 2008. Again, I would like to note that IGT's decision was made in April, and as a result, did not have any impact on our strong revenues in the first quarter.

Further, while we are pleased with the quarter's results, we are optimistic about our domestic gaming business for the rest of 2008.

We are also encouraged by the progress we made in the international gaming and casino markets this quarter. International casino and gaming sales were up 16% from Q1 2007 due primarily to increased sales of our off-premise gaming printers, which targets off-premise gaming opportunities such as amusement with prizes and skills, skills with prizes, video lottery terminals and fixed-odds betting terminals.

In the beginning of this quarter, we extended our agreement with Eurocoin, a leading supplier of products for the amusement, gaming and casino industries, to serve as our exclusive distributor and service agent for the gaming and casino market in Europe and Africa. Under the terms of the agreement, Eurocoin will continue to distribute TransAct's line of gaming printers through January 31st, 2010.

We believe there is significant opportunity to further penetrate the European and African markets and our long-term sales partner, Eurocoin, will help us continue to expand our global reach by building customer relationships enabling us to improve sales.

As part of the strategic initiatives we instituted in 2007, we are focusing on targeted growth opportunities. As such, we are devoting a lot of our efforts on our off-premise gaming. We are still at the very beginning stages of this off-premise gaming market, which is now transitioning from coin-drop to issuing receipts, not tickets, but believe the total market could eventually approach the size of our existing worldwide casino market.

We have already launched two products for this market, the Epic 430 and Epic 630 Receipt Gaming Printers, and have additional plans to launch more. We experienced solid revenue growth in our off-premise gaming business in the first quarter of 2008 compared to the first quarter of 2007, and expect that to continue throughout the rest of the year.

As you probably noticed in our earnings press release this time, we have decided to separately highlight casino and gaming revenues from lottery revenues. This should help you understand these markets in more detail and given the magnitude of each, highlight how our revenues break out for these markets.

So speaking about our lottery revenues, we also had an excellent quarter. Sales more than tripled from the same period a year ago due to improved sales to our key customer and we expect strong sales to continue for the remainder of 2008.

Turning to our point-of-sale and banking markets, we also had a strong quarter in banking, despite the fact that the United States banking market continues to be impacted by the credit crisis. Bank printer sales were up due to increased orders from existing top ten banking customers.

As I spoke about in our last conference call, we are focusing our intention in this market on replacement sales, where banks need to purchase a new printer for one that is old or broken. Despite the banking crisis that exists in the United States today, banks still need their teller stations to work.

Our revenues in the first quarter reflect our sales focus in this new area for TransAct, and we believe that we are positioned well to continue to grow our presence in this market with the launch of our new BANKjet 2500, bank teller station replacement printer. This printer is a drop-in replacement for their older existing printer and it provides banks a new fully-featured printer solution without performing a full upgrade to their system.

I would like to highlight the market size for this printer is about 500,000 printers that exist in today's domestic banking teller station market.

Additionally, we were pleased to announce in April that our previously discussed point-of-sale customer that was going through the development of their new point-of-sale operating system in 2007 has begun its upgrade. Together with NCR Corporation, we will be supplying an integrative printer and paper solution for the same customer, who is one of the world's leading quick-service restaurant companies.

This integrated solution we are providing includes the Ithaca 8000 Printer and unique linerless label solution from NCR Systemedia Division. The solution will provide a single printer solution for two applications -- one, printing receipts at the front of the store when you order and get a receipt; and two, printing receipt labels in the kitchen for special orders. Alone, this upgrade in itself is a significant win for TransAct, but combined with the successful collaboration with NCR, it also presents compelling future opportunities.

By working closely with NCR on this integrated solution, we were able to seamlessly integrate two different types of paper with our single-printer solution to deliver a world-class product to our customer. Our success in working together with NCR will lead to future sales to new customers. We look forward to continuing to work with NCR, as we both continue to market our combined solutions to other food service establishments and retailers.

Again, I would like to note that success in the banking and POS market in the first quarter did not include the beginning of this upgrade.

Similar to IGT, we expect revenue from this to begin phasing in during the second quarter of this year, and expect the full sales effect of these orders to begin in the second half of 2008.

Finally, I'd like to speak about our TSG, TransAct Services Group business. As we have previously said, we expected the revenues in this market to be affected by the decline in our legacy impact printer spare parts sales, along with the ending of a very long service contract in Europe that we had. Our customer in Europe decided to replace a printer that they had for over 10 years with technology we just did not offer.

However, what is masked in these results is the solid growth we are experiencing in our consumables and special service products we offer here in the U.S. We have said we will be very focused in these areas for growth and I am pleased to report that both U.S. consumables and service product revenues were up by over 30% compared to the first quarter of 2007.

To get a clear understanding of what we are doing to grow our consumable sales, I strongly suggest you visit our much improved website, www.TransActSupplies.com. What you will see is many new product offerings in a very user-friendly and helpful website.

Since we launched this improved website at the end of 2007, we have continued to gain new customers every month, with March reach over 140 new customers, and our sales per customer using our website is growing. Again, this is the area of focus for growth for our TSG business.

Now, before I turn the call over to Steve, I'd like to make a brief comment about the ongoing litigation with FutureLogic. We know we are spending a significant amount of money on the lawsuit with FutureLogic, but as I have said before, we cannot discuss anything going on with the case. This is all I'm allowed to say regarding the FutureLogic matter, and I want you to know we'll not be able to answer any questions you might want to ask.

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

Thanks, Bart. We're happy to report that we had much improved financial results from core earnings for the first quarter of '08. In fact, on a pro forma basis, excluding legal fees related to the FutureLogic lawsuit, our earnings per share for the first quarter '08 were $0.06 per share compared to a $0.02 loss per share in the prior year's quarter.

Now, let's look at the details of the quarter. Our net sales for the first quarter of '08 were $14.3 million, up 25% from $11.5 million in the first quarter of '07. Casino and gaming sales were $4.8 million in the first quarter of '08 compared to $4.1 million in the first quarter of '07, up 17%. Our improved sales into the gaming and casino market for the quarter resulted from strong domestic printer sales to our existing customers, despite a weak casino market, as well as strong international sales in Europe for both casino printers and new off-premise gaming printers.

Also keep in mind our first quarter '08 casino and gaming sales did not include any effect from our recently announced win at IGT, where IGT selected our Epic 950 Casino Printer as its default ticket printer for all IGT games worldwide through June 2010.

Lottery printer sales for the quarter more than tripled to $3.6 million from $1.1 million in the same quarter a year ago, as we experienced improved sales to GTECH. If you recall, we had near historic low sales year from GTECH in 2007.

Banking and POS sales were $2.7 million in the first quarter of '08, up 3% from the first quarter of last year. This increase was largely due to higher sales from the existing top 10 banking customers. And as Bart previously mentioned, our first quarter's banking and POS sales did not include any revenue related to the announcement we made in April, where one of the world's leading quick-service restaurant companies chose our Ithaca 8000 Thermal Printer to provide a single printing solution for both receipts at the front of the store and receipt-labels in the kitchen for special orders.

We expect revenue from this customer to being phasing in during the second quarter of this year, and the full sales effect of these orders to start in the second half of '08.

Sales from our TransAct Services Group decreased by 12% to $3.1 million for the first quarter '08. TSG sales for the first quarter of '08 were impacted primarily by lower service revenue from a service contract for our legacy printers with a single customer in the UK that ended in late '07 and was not renewed. You should note that this was a service contract covering 40,000 legacy printers that they've had for nearly 10 years and the customer simply went with a different printing solution that we just don't have.

Despite the lower UK service revenue, sales in our targeted TSG growth areas, consumable products and U.S. service, both increased by over 30%.

Our gross margin in the first quarter of '08 increased to 33.5%, up from 32.7% in the same quarter a year ago. The increase was due primarily to increased sales volume, somewhat offset by less favorable sales mix.

Operating expenses for the first quarter of '08 were $5.8 million, up from $4.2 million in the first quarter of '07. Operating expenses for the first quarter of '08 were higher due entirely to approximately $1.9 million of legal expenses incurred relating to the lawsuit with FutureLogic. Excluding these legal fees, our operating expenses for the first quarter of '08 were approximately $300,000 lower than the first quarter of '07, reflecting the benefit we are now seeing from our cost reduction actions taken in late '07.

And on the bottom line, excluding legal fees related to the FutureLogic lawsuit, our pro forma net income per share for the first quarter '08 was a positive $0.06 per share, compared to a pro forma net loss per share of $0.02 in the first quarter of '07. This represents an $0.08 per share improvement from a year ago.

On a GAAP basis, we recorded a GAAP net loss for the first quarter of '08 of approximately $700,000 or $0.07 per diluted share compared to a GAAP net loss of approximately $200,000 or $0.02 per share in the first quarter of '07.

Now, looking at our cash flow, we used approximately $300,000 of cash from operations in the first quarter of '08 largely to fund growth in accounts receivable and inventory, as our sales volume increased 23% from the fourth quarter of '07.

Our capital expenditures were approximately $400,000 for the first quarter of '08. Even after funding our capital expenditures and incurring $1.9 million of legal fees, our cash balance at the end of the first quarter of '08 still stood at approximately $1.9 million compared to $2.6 million at the end of '07.

And we continue to have no debt outstanding under our $20 million revolving credit agreement with TD Banknorth.

Our working capital decreased to $10.5 million at the end of the first quarter of '08 from $11.2 million at the end of '07. Our current ratio also declined to 2.1 to 1 -- 2.1 to 1 at the end of the first quarter of '08 from 2.4 to 1 at the end of '07. The declines were largely due to increased accounts payable, resulting from higher inventory purchases and the timing of payments and higher accrued liabilities due to legal expenses.

Our EBITDA for the first quarter of '08 was approximately a negative $400,000. Excluding legal fees related to the lawsuit, EBIDTA was a positive $1.5 million for the first quarter of '08. This compares to EBITDA of $200,000 for the first quarter '07.

Depreciation and amortization totaled approximately $500,000 for the first quarter of '08 and $400,000 for the first quarter of '07, and non-cash comp expense totaled approximately $200,000 for both the first quarter '08 and '07.

Now, let's take a look at our balance sheet at the end of the quarter. We ended the quarter with about $1.9 million of cash compared to $2.6 million of cash at the end of '07. Receivables were $7 million at the first quarter '08, up from $6.1 million at the end of '07. The increase in our receivables reflects higher sales volume, as our sales increased 23% from the fourth quarter of '07 to the first quarter of '08. And our collection experience continues to be excellent.

Our inventory increased to $8.9 million at the end of the first quarter '08 from $8.7 million at the end of '07. Our inventory increased primarily due to higher inventory stocking levels resulting from our continued initiatives to move more production to China and the increase in sales in '08 compared to '07.

And lastly, as an update on our stock repurchase program, during the first quarter of '08, we did not repurchase any stock. To date, our total buybacks since the beginning of the program stands at over 1 million shares bought back for a total of $8 million which represents about 11% of our total shares outstanding.

Overall, we had a solid first quarter of 2008.

And with that, I'll hand it back to Bart.

Thank you, Steve. Operator, we'll now open the call to questions.

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question is from Todd Eilers with Roth Capital Partners. Please go ahead with your question.

Hi, Bart. Hi, Steve, how are you guys?

Good, Todd.

Hi, Todd.

Thanks for taking my call. Just a handful of questions here. Congrats on a solid first quarter, by the way.

Thanks.

Thank you.

First, you guys gave some -- I think some growth rates under your gaming and lottery for domestic and international, but can you -- do you have maybe the absolute dollar amount between the mix between domestic and international for gaming and lottery combined?

Yes, for the first quarter '08, Todd?

Yes.

Domestic casino and gaming sales, $3 million; international, 1.8 million, and then for the first quarter '07, domestic, $2.6 million, international, $1.6 million.

Okay. And can you -- does the off-premise printer revenue, does that show up in the gaming or the lottery portion of your -- how you break it out?

Now gaming and casino.

Gaming and casino, okay.

That's right, and really, the only thing in lottery is our GTECH business.

Okay. Can you tell us how much the off-premise contributed to gaming and casino?

I don't have that breakout, so -- I don't have that in front of me, but --

It had a sizeable effect though in the quarter.

Yes, it was a strong growth from Q1 '07 to Q1 '08.

Okay. And then moving to lottery with GTECH, I think you had -- prior to the quarter, you had indicated that you had a backlog of orders of about the $7.7 million, I believe. Given the strong first quarter, how should we expect GTECH to roll out through the rest of the year and specifically, next quarter? Would you say there's a little bit above average activity in the first quarter and maybe should we expect that to dip a little bit in the second quarter, or how should we look at that?

I think it's going to stay as strong as we're seeing it basically almost through the year. Seasonally, we -- the fourth quarter is always a little slower, but it's going to be strong for the foreseeable future, Todd.

Okay. And in general, just an outlook going forward, you talked in your comments about -- obviously, you've got the new IGT status, default status award. You've got the large deal on the POS side that you mentioned would drive kind of the back half results for '08, and you kind of indicated that both might have a partial contribution in the second quarter.

So if we're looking at just the second quarter though, should -- how should we -- should we look at that in terms of -- I guess I'm trying to figure out if we should expect something at least along the same lines of first quarter, a maybe slight improvement over the first quarter, and just maybe what your expectations are for the rest of the business?

Yes, let me take you through what's going on with both customers and clearly, we're excited about both wins. Let's start with -- and it's McDonald's, so the fact that we can't put it in a press release, we are allowed to mention the customer's name and it is -- the way that McDonald's -- this whole thing is going to work, McDonald's launched their new point-of-sales system at their trade show, at their franchisee trade show in mid-April, and just a couple of weeks ago. And so that was launched at the trade show and all the franchisees came in to see it.

At the trade show, they're allowed to purchase new equipment and start the refresh of their point-of-sales system. So that's what occurred at the trade show. The franchisees were there; about 13,000 people were at the trade show. I happened to get invited. It was a great, great experience. We were the only printer approved on the new POS system and our printer was everywhere. And even our printer was in their future store, which looked phenomenal and actually, there's more printers in the future store than there is in the existing store.

So what's going to happen now is the franchisees will now start placing the orders for the new equipment and it's just going to take time for the vendors, the two vendors that supply the terminals, to ramp up their sales and start shipping the printer out. We are the only printer approved on the new McDonald's system. It's the only printer that they'll allow, so the 8000 will be the receipt printer and will also be what's called the grill printer.

So we'll see some of that. Already we've gotten some orders from the two VARs that supply McDonald's and that's kind of a feedstock to get them going, but as we roll out of Q2, it will start rolling out heavier in the second half of the year, but we should expect to see some incremental sales in Q2.

How many total stores are we looking at and does that include -- will you guys be selling domestic and international and corporate and franchisees? Can you help us understand it?

Yes, yes. Clearly, the relationship with McDonald's is both corporate and franchisees. So it's the only printer that they approved with the new system that they worked on in the lab at the IGT headquarters. So it's the only printer that they're going to allow to work with the new point-of-sales system.

The first major rollout is really domestic and that's 14,000 stores. Without a doubt though, the international customers have all seen the new systems and the new terminals and the new printers. So they will also roll and eventually, as part of this new point-of-sale system.

On top of that, as a new store opens up in the international markets, it will probably open up with the new software, which means we're the only printer approved with the new terminal and the new software. So our printer will go out with that. So as McDonald's expands in the international markets, we'll see that impact to our sales -- to the growth of our sales.

So this is the only printer that's been approved for the corporate and the franchisees. There's no other printer approved on the new point-of-sales system.

Okay.

And now I'll take you through IGT.

Okay.

The IGT win was clearly historic for TransAct. You've got to think of what goes on though at IGT. IGT has their bill of materials; they've got their sales materials out there. Their salespeople are out there. All of that system work has to be changed now from their previous default printer supplier to now the TransAct Epic 950. As part of the agreement that we have with IGT and our understanding, it's going to take them about six to eight weeks to redo all of their systems, whereby if a customer doesn't request a certain printer, the only -- the printer that will go out will be the TransAct printer.

That all goes through their system work and they actually have a person dedicated to make that change. So that's going to take about six to eight weeks, Todd, so if you think about the agreement in the middle of April, by the end of June, that's going to take hold. So the second half of the year, we'll see that.

We are having a good year in our domestic casino market. We're expecting that to continue clearly into Q2. The order rate is there. We're already seeing those orders come in and that IGT effect will really be felt as we get into the second half of the year.

But I wanted to explain to you how that's going to work inside of IGT because some people think it's a simple thing. Okay, they just went over to TransAct. They've got a whole system to change out now as part of their decision to make this change, which was quite big for them. That's a huge change, to change their systems, their MRP, their ERP, their sales systems. They had to change all of that to now the Epic 950 and they've told us it will take six to eight weeks.

Okay, great. That's very helpful. Could you also maybe just -- to try to get our hands around the magnitude, can you give us a rough estimate of maybe what your market share was with IGT prior to winning the default status?

Well, I don't think it's a mystery that our market share was very low. Clearly, we had to do the pull and our competitor had a big share of their -- of the IGT business. It's our expectation that will now switch; that will now swap. We'll take the big market share and they'll take the littler market share.

Okay. And it does -- you said all IGT games, so it must -- obviously, that includes international?

Worldwide, this is a worldwide agreement, that's right. This will take effect in Europe; it will take effect in Asia. This is a worldwide agreement, that's right.

Great. On the expense side, just moving to that area, I know you can't talk about the lawsuit, but can you help us understand maybe what the legal -- what your expectation for legal expense might be next quarter? And then also maybe is there a trial date set at this point?

Yes, yes, and I think everybody's got to remember, we're defending our technology. We were attacked by FutureLogic. We were sued by FutureLogic, so this isn't really a lawsuit that we created. We're defending ourselves, so the one thing that I need to remind our investors is, we're defending a lawsuit versus starting a lawsuit. So there is a trial. This thing will all come to an end this summer and the legal fees will stay about the same as we see, but it will all come to an end this summer. And as that ends, of course, our second half looks very bright, so it'll all end this summer and we'll go on and keep growing our business.

Okay. So for kind of modeling in some legal expense, should we expect kind of around $1.9 million, similar to first quarter and then maybe that should -- shouldn't really have much of that in the third quarter, maybe a little -- maybe --

No, we'll see some of it in the third quarter.

Okay.

But clearly, you can model the -- no, the $1.9 million for the second quarter is fair.

Okay.

Yes.

Okay. And then just one final question kind of goes to the IGT default win and the McDonald's deal -- obviously, both very large deals for you guys. With regards to where your cash balance is here as of the last quarter and how you're going to have to ramp up to support the demand, will we -- do you feel that you have enough cash for working capital investments here initially or might we see you guys borrow a little bit off your credit line? Can you maybe talk about that a little bit?

Sure. I'm going to answer some of that and maybe Steve wants to pipe in with a couple of answers. The big working capital increase that we saw actually occurred in the first quarter as we ramped up our production getting ready for the increased sales. Because we've got to bring product over from China and load up certain distribution points around the world, we've already done that. We're actually expecting our inventory to actually drop now, even though we're expecting sales to increase.

So our big move in the working capital area is pretty much over with, with our inventory. We'll see some receivables growth, but our inventory should actually start coming down as we flush out some of the increased inventory that we took in. We set some pretty tight inventory goals for our operations people, even though we grew it in the first quarter to load up our distribution points. And these distribution points are either our factories, our sales offices or our partners' office either in Europe or in Asia.

So that will -- we should see that inventory starting to flush out and some of that cash to come in. I think our projections is we will not have to go into our credit line in the second quarter.

I think we're going to make it through, Todd, without having to borrow, but the good thing to know is that we have a $20 million line that's there if we need to temporarily tap into it.

Okay, perfect.

Yes.

All right. Thanks, guys. Great quarter.

Thanks.

Thanks.

(OPERATOR INSTRUCTIONS). I'm showing no further questions in queue. I'd like to turn the call back over to Mr. Shuldman for closing remarks.

Thanks, Operator. I'd like to thank everyone for listening to today's call and looking forward -- and actually, Steve is looking forward to seeing some of you at the upcoming AEA Micro Cap Financial Conference in Monterey, California, May 5th. We thank everybody for joining us and we'll talk to you on the next call. Take care.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.