TransAct Technologies Inc (TACT) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to this TransAct Technologies Second Quarter 2008 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time. As a reminder, today's conference is being recorded. At this time I would like to turn the conference over to Mr. William Schmitt of ICR. Please go ahead, sir.

Thank you, Lisa, and good afternoon and welcome to TransAct's Second Quarter 2008 Earnings Conference Call. Joining us today from the Company are Mr. Bart Shuldman, Chairman, President and CEO, and Mr. Steve DeMartino, Executive Vice President 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.

As a reminder, this conference call contains statements about future events and expectations which are forward-looking in nature. Statements on this call may be deemed as forward-looking, and actual results may differ materially. 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 10-K for the year ended December 31, 2007. 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. Bart?

Thank you, Bill, and first I'd like to welcome ICR as our new investor relations firm. We're very glad to have you and your team onboard.

Good afternoon, everyone, and thank you for joining us on today's call. The second quarter saw another positive performance from TransAct, which continues to achieve strong results despite the difficult macroeconomic environment. The cost reductions and the focused sales initiatives we implemented in 2007 continue to benefit the Company.

Revenues for the second quarter of 2008 increased 17% to $16.3 million compared to $13.9 million in the same period a year ago. This is our third-highest quarterly sales in the history of TransAct. Excluding the $1.1 million for legal fees related to the litigation with FutureLogic, adjusted net income in the second quarter of 2008 was approximately $941,000, or $0.10 per diluted share, compared to adjusted net income per share of $0.05 in the prior year period. As you know, we settled the litigation against FutureLogic in May of this year and expect no further attorney fees related to this issue.

Now, turning to the details of our results, sales from our casino and gaming market improved over 8% for the second quarter, primarily driven by a strong 19% increase in domestic sales. We are very pleased with these results, given the overall weakness in the domestic casino industry. As we announced in April, we have been chosen as the default supplier for IGT, which positively impacted our results in the second quarter but which will fully ramp up in the second half of 2008.

Even with the overall domestic casino market being weak, we believe our business will remain solid as several new casinos come online, both domestically and internationally, and expansion in certain states such as California and Pennsylvania take hold. Longer term, we believe our recent win with IGT will position us well for the next slot machine upgrade cycle for server-based gaming.

As we discussed in our first quarter earnings call, IGT selected our Epic 950 thermal printer as the default ticket-in/ticket-out printer for all new IGT games. 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 are already seeing the benefits to our top and bottom line.

International casino and gaming sales declined 7% in the quarter. This decline was primarily the result of a very large order we received in the second quarter of 2007 that did not repeat in 2008. However, I'm extremely pleased to report that our international off-premise gaming sales once again had a very strong quarter. Sales in this part of our business grew by over 400%. The off-premise gaming market is one of the focused sales initiatives we have spoken about, and the results of this effort is really coming through. We will continue to drive this business forward and be launching our next product early in 2009.

As we have termed this market "off-premise gaming," we want to remind our shareholders that this business is primarily international, and we believe this market could grow over time to the same size that the worldwide casino thermal printer market is today.

Turning to our lottery market, lottery printer revenue almost doubled to $4.8 million from $2.5 million in the prior year quarter, primarily due to increased sales to our largest customer. We expect strong sales to continue into the third quarter of 2008.

So being diversified with product offerings within our gaming, lottery, and casino markets, with a worldwide sales focus, has helped TransAct grow in what I am sure you would define as a difficult domestic casino market. Our gaming, lottery, and casino revenues continue to be a bright spot within TransAct.

Now turning to our banking and point-of-sale market. Sales declined about 2% for the quarter but remained flat for the six-month period ended June 30, 2008, as compared to the same period in 2007. While the macroeconomic conditions are difficult for both our banking and POS markets, I am very pleased to report our domestic sales to our banking customers increased significantly in the second quarter, driven by one of our larger bank customers as well as our first order for the new BANKjet 2500 printer. We are pleased with our efforts in the banking market despite the fact that the United States banking industry remains impacted by the credit crisis. We continue to focus on replacement sales in this market, where we believe maintenance capital is much more readily available for these types of purchases.

Our strategy for the launch of our new BANKjet 2500 is to focus on bank teller station replacement printers. The 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. The price, performance, and features of this printer, we believe, make it the leading product offering in the bank teller replacement market. Again, the market size for this printer and our BANKjet 1500 is about 500,000 printers that exist today in the domestic banking teller station market.

Now speaking about our point-of-sale market, our recent partnership with NCR to provide an integrated printing solution for McDonald's is moving as planned. As we described in our first quarter conference call, 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 represents compelling future opportunities. Our strategy is to leverage this success in working together with NCR to drive future sales to new customers. We look forward to continuing to work with NCR as we both continue to market our combined solution to other food service establishments and retailers.

Similar to our IGT contract, we experienced some initial sales from McDonald's win in the second quarter of 2008 but expect the full sales effort to begin to ramp up in the second half of 2008.

I would like to let our shareholders know that we have begun a second printer project with McDonald's through our partnership with NCR. This new TransAct printer product is under test at McDonald's right now, and we should know more about the opportunity and rollout in about three to four months. This win, if it happens, would be incremental to the one we have already announced. Once again, our focused sales approach, coupled with our new relationship with NCR, led us to this new project. And it, too, can have a meaningful impact on both our revenues and profits if and when it gets approved by McDonald's.

Now let's move on to TSG, our TransAct Services Group business. As we had previously said, we expected our top line in this business to be negatively impacted by the end of a large international service contract we had for many years. The end of this contract took effect at the end of 2007. In addition, we have told our shareholders that the continued decline in our legacy impact printers would also drive down our TSG revenues as we end spare parts sales for that product line. We expect this decline to end at the end of this year.

The results of these events led to a sales decline of 9% within TSG for the second quarter. However, our domestic sales improved by 11%, partially offsetting this loss. The strong sales in the US were mostly driven by higher sales of consumables having been positively impacted by our new website, which has now been operating for two quarters. Our consumables sales grew by over 30% in the second quarter compared to the second quarter of 2007.

Our new website continues to grow our consumables sales and gain new customers. As I have explained before, consumable sales is one of our major focus sales and growth initiatives, and I ask you again that you visit our ecommerce website, www.transactsupplies.com. What you will see is an exciting ecommerce website where we offer many new products to the point-of-sale marketplace. We have increased the product offerings over the last several months and will continue to do so for the rest of the year. We are selling consumables and other products for all types of point-of-sale applications, not just for our printers. We believe the market size of this potential business to be approximately $100 million. This is a solid margin business that is very scalable and uses limited working capital. Our expectations are to continue to grow revenues from this business to drive incremental operating income and generate solid cash flow.

And finally, we have favorably settled the patent lawsuit with FutureLogic. This should be the last time we will need to discuss this matter. Although this was a costly and time-consuming process, it highlights how strongly we value our intellectual property and that we will vigorously defend our intellectual property when necessary. We believe our patents are critical to our long-term success and the competitive position we enjoy in the marketplace. We view this intellectual property as a key asset of our business and for our shareholders.

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

Thanks, Bart. I'm pleased to report another strong quarter of financial results from core earnings for the second quarter of '08. On an adjusted basis, excluding legal fees related to the FutureLogic lawsuit, our earnings per share for the second quarter were $0.10 per share, double the $0.05 per share we reported in the second quarter of '07, and up from $0.06 per share in the first quarter of '08.

Let's take a look at the details of the second quarter. Our net sales from the second quarter of '08 were $16.3 million, up 17% from $13.9 million in the second quarter of '07. As Bart said, this was the third-highest quarterly revenue we've ever reported in the Company's history. Casino and gaming sales were at $5.4 million in the second quarter of '08, compared to $5.0 million in the second quarter of '07, up 8%. Our improved sales into the casino and gaming market for the quarter resulted from the second consecutive quarter of strong domestic printer sales to our existing customers, despite a weak domestic casino market. Also keep in mind our second quarter '08 casino and gaming sales only included a partial effect, and not the full effect, of our default printer win at IGT that we announced in April. We expect sales to IGT to continue to ramp up during the third quarter, with the full sales effect expected in the fourth quarter.

Lottery printer sales for the quarter almost doubled to $4.8 million from $2.5 million in the same quarter a year ago as we experienced another strong sales quarter to GTECH. Sales to GTECH were $3.6 million in the first quarter '08. If you recall, we had a near historical low sales year from GTECH in '07.

Banking and POS sales were $3 million in the second quarter of '08, down slightly by 2% from the second quarter of last year, as lower legacy impact printer sales were almost entirely offset by higher bank teller printer sales from a follow-on order from an existing top 10 banking customer.

I'm also pleased to report that our second quarter sales did include the first shipments of our Ithaca 8000 printed ticket printer to McDonald's. You may recall that in April of this year, we announced that McDonald's 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 increasingly ramp up during the remainder of '08.

Sales from our TransAct Services Group decreased by 9% to $3.1 million for the second quarter '08. TSG sales for the second quarter of '08 were impacted primarily by lower service revenue from a service contract for legacy printers with a single customer in the UK that ended in late '07 and was not renewed. Despite the lower UK service revenue, sales in our targeted TSG growth area--consumables and transaction supply products--increased by over 30%.

Our gross margin in the second quarter of '08 was 33.5% compared to 35.4% in the same year-ago period. The decrease was due primarily to a less favorable sales mix. Looking ahead, we do expect our gross margin to improve in the second half of '08 as we complete the transition of production of our printers to our contract manufacturer in China.

Operating expenses for the second quarter of '08 were $5.1 million, up from $4.5 million in the second quarter of '07. Operating expenses for the second quarter of '08 were higher, due entirely to approximately $1.1 million of legal expenses incurred related to the lawsuit with FutureLogic, which was settled in May '08. Excluding these legal fees, our operating expenses for the second quarter of '08 were approximately $400,000, or 9% lower than the second quarter of '07, reflecting the benefit we continued to see this year from our cost reduction actions taken in late '07.

And on the bottom line, excluding legal fees related to the FutureLogic lawsuit, adjusted net income per share for the second quarter of '08 was $0.10 per share compared to $0.05 in the second quarter of '07. This represents a $0.05 per share improvement from a year ago. And on a GAAP basis, we recorded GAAP net income for both the second quarter of '08 and second quarter of '07 of approximately $300,000 or $0.03 per diluted share.

Now looking at our cash flow, we generated approximately $700,000 of cash from operations in the second quarter of '08, largely due to reductions in our inventories despite a 14% increase in our sales volume from the first quarter of '08. Our capital expenditures were approximately $150,000 for the second quarter of '08. Even after funding these capital expenditures and incurring $1.1 million of legal fees, our cash balance increased to $2.5 million at the end of the second quarter of '08 from $1.9 million at the end of the first quarter. And with the FutureLogic lawsuit settled and the related legal fees now behind us, we expect to build our cash balance for the remainder of '08.

I'm proud of the fact that we prudently and effectively managed our cash flow throughout the entire litigation period, enabling us to fund 100% of our legal fees without having to borrow. As a result, we continue to have no debt outstanding under our $20 million revolving credit agreement with TD Banknorth.

Our working capital increased to $11.6 million at the end of the second quarter from $11.2 million at the end of '07. The increase in working capital was due largely to higher accounts receivable resulting from higher sales volume. Our current ratio was 2.4 to 1 at the end of the second quarter of '08, the same as at the end of '07. Our EBITDA for the second quarter of '08 was approximately $1.1 million. Excluding legal fees related to the lawsuit, EBITDA was $2.2 million for the second quarter of '08. This compares to EBITDA of $1.1 million for the second quarter '07 or $1.3 million excluding legal fees.

Depreciation and amortization totaled approximately $500,000 in both the second quarter '08 and '07. Non-cash compensation expense totaled approximately $200,000 for both the second quarter of '08 and '07.

Now let's take a look at our balance sheet at the end of the quarter. Receivables were $8.4 million at the end of the second quarter, up from $6.1 million at the end of '07. The increase in our receivables reflects higher sales volumes, as our sales increased 41% from the fourth quarter of '07 to the second quarter of '08, and our collection experience continues to be superb.

Our inventory decreased to $7.2 million at the end of the second quarter '08 from $8.7 million at the end of '07. Our inventory decrease is primarily due to a concerted effort to reduce inventory levels. We do expect our inventory levels to rise somewhat in the third quarter due to increasing sales volume.

And lastly, as an update on our stock repurchase program, during the second quarter of '08, we did not repurchase any stock. To date, our total buyback since the beginning of the program stands at over 1 million shares bought back for a total of $8 million at an average price of $7.73 per share, which represents about 11% of our total shares outstanding.

Overall, we had our second consecutive quarter of solid financial results. And with that, I'll hand it back to Bart.

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

Thank you, sir. (OPERATOR INSTRUCTIONS.) And our first question will come from Todd Eilers of Roth Capital Partners.

Hi, Bart. Hi, Steve. How are you?

Good. How are you doing?

Doing okay. Some questions here for you. Congrats on a very strong quarter. Did you guys--I'm not sure, Bart--did you guys give a, on your gaming and casino business, did you give the mix between domestic and international, what the absolute dollar is or the percentage?

We didn't. I can give it to you, Todd.

Okay.

Domestic was about $3.5 million, and international was about $1.9 million.

Okay. And then you mentioned that IGT started to contribute a little bit in the quarter. Can you maybe give us a little more color on how much it might have contributed? I'm not sure if you can give the total dollar amount or how many printers or maybe how many days the default status was available, but any additional color there would be helpful.

Yes, the detail--as you know, we announced it in late April, so the default status started right when we announced it. What we needed to see from IGT, or what they needed to do, was basically change the bill of materials to reflect that our printer would replace the FutureLogic printer when nobody specified a printer. What we were pleasantly surprised about was we saw some, clearly, some incremental business in May and June. So we started to see more orders coming in and expect that to continue to come up as we go through the rest of the year. We're told that the bill of material, though, was not changed until the end of July. So even though we needed--and that was our understanding with our customer, that they would take about three months, and that's what we explained to you on the last conference call--the bill of materials actually wasn't changed until the end of July, as scheduled. But we were pleasantly surprised by the extra orders that we got in the quarter.

And can you maybe tell us how much? How many customers typically identify a printer versus not identifying? Can you maybe help us understand it a little better?

Yes, the way to look at it, Todd, is in most of the cases, when you look at participation games or the game operations that are defined as the games that IGT owns, our expectation is those games will go out with our printer. And that's the business we never had before. There are certain casinos that are clearly TransAct houses, and there's certain casinos that are clearly FutureLogic houses, but that's just on purchased games. On games that IGT owns, we expect to see our printer in those games.

The other thing that we're starting to see as our printer goes out with more and more games, we're clearly seeing casinos talk to us about our printer. In certain situations, it's the first time they've seen our printer on their property, and we're starting to get a lot of positive feedback about their feelings about our printer, how it's working, and the potential for us to pick up even more market share than just the participation games and things like that. So we're expecting to see this continued increase in our casino market share due to the IGT contract.

Okay, great. How about, maybe let's move over to the McDonald's contract as well. It looks like that started to contribute in the quarter. Can you maybe give us a little bit more color on that as well, just how much contribution and how we should expect that to kind of ramp?

Yes, I think we'll see a--clearly, we're going to see a ramp-up in the second and third quarter. What happened was the trade show, the internal McDonald's trade show, went on in April, where they announced the new point-of-sale system, and our printer is the only one on the system with both the front and the back end. Some of the franchisees started placing orders right at the show, and they started to roll out. We do expect that roll-out to be clearly stronger in the third and fourth quarter, though. It had a nice impact to the second quarter, but we really do expect a bigger increase in the third and fourth quarter.

And we are now working on this new project, and depending on when McDonald's decides to approve that--and if they approve that--that will just add to what we would see probably in the fourth quarter.

So you would expect that some sort of decision would be made on that new product later this quarter or early fourth quarter?

Yes, exactly. Yes, we've been working pretty closely with them. There is a rush on their part to see that this project goes a lot quicker than the last project. It is solving an issue that they have with a certain type of new product line that they've come out with, and there is a rush on their part to see if they can put this through their system and get it in place. So this one, the first McDonald's project we probably worked on for three years. This one we'll probably work on maybe six months and get it released.

Okay. And does this new opportunity, would it have anything to do with McDonald's launch of specialty coffee? Would that be something that you guys might participate in?

Yes. Yes, it clearly will. Oh, yes. Yes.

Okay. How about, so you mentioned that you settled the FutureLogic lawsuit. Should we start to see any sort of royalty, licensing payments or royalties start to show up? And if so, do you expect that to be any sort of meaningful amount?

Yes, the way I like to answer the question, Todd--clearly, we've gotten a lot of phone calls about the licensing agreement, what does it entail, and all that. And the agreement we have with FutureLogic, which we will clearly abide by, is we cannot discuss it. It's an agreement that we're very pleased. We protected our technology. We won the lawsuit. But we just cannot discuss the details of it. And I think it's time to move past it, and you can think of a licensing agreement the way you would normally think of a licensing agreement, and that's all I can say.

Okay. That's fine. How about just, in looking at the lottery business, obviously you guys have had a very strong first half with orders from GTECH improving year over year. I think you mentioned that you expect fairly healthy orders for GTECH for the remainder of the year. Should we expect something similar to this quarter, or how should we kind of expect GTECH to look for the next couple of quarters through the back half of '08?

Yes, I think it's going to be nice. The way we see it, clearly, the third quarter, what we said in our press release is the third quarter's going to be strong. So we expect to see some sizable revenue in the third quarter, and we'll see how it rolls out after that. We have orders in the fourth quarter so that the second half of the year is going to be good.

What you're seeing, Todd, from us is the diversity of TransAct. You're seeing lottery sales come up. You're seeing domestic casino sales. You're seeing the work that we did in the off-premise gaming market. Even though the banking sector is having problems, we've got a lot of new products there. What you're seeing is, as customers come in and out, the business grow because of the diversity of our business. So you're getting a sense of how we separated the business and went after these focused markets, focused sales opportunities, so that we don't have to rely on just one customer for orders anymore. And clearly, GTECH will be strong in the third quarter. But what you're seeing is that the business has got many legs to it, and that's what we like about the business now. The diversity is a good thing for us.

Absolutely. I think you guys are doing a great job, Bart. And I think that does it for me, so I appreciate it.

Okay, Todd. Thanks a lot.

Take care.

(OPERATOR INSTRUCTIONS.) We do have another question in the queue. It comes from Jonathan [Tanaka] of Wachovia Securities.

Hi, Bart and Steve.

Hi, Jon.

I was wondering what was your market share of IGT business prior to your award of the default status?

Oh, boy. Probably in the 10% to 15% range.

Oh. And then your dual-port technology for the Epic 950?

Yes, sir?

Will that, basically, that technology come with the printer, with the roll-out of server-based gaming? Or will you actually benefit from that technology in the sale of your Epic 950 before that?

I think it's going to be a combination of both, Jonathan. I think that there's a--in talking to some experts in the marketplace, clearly there were some benefits to server-based gaming such as changing the denomination of the game. There are 10 days in Vegas where play is, where the casinos are packed, and taking a penny machine to a nickel or $0.25 machine will clearly benefit the casinos.

But with the promotional capability, with things like the iView and the service screen that IGT has, the casinos are really starting to see the benefit of a promotion at the slot machine. And with the domestic market in the condition it is today, promoting at the slot machine is now being looked at as one of the drivers of server-based gaming, and the techies like to call it one of the key apps. So we believe that, over the next couple of months, as people continue to look at server-based gaming, continue to analyze it for the benefit of themselves at the casino level, that they're going to look at the promotional aspect, the ability to not only have the promotion on the screen, but to press a button, and out come a coupon or a promotion as a key application of server-based gaming.

So not this year, but as we get into '09 and '10, we believe it's going to be a key portion, a key part of server-based gaming. And we will clearly benefit from that.

I see. And then I know you can't say much about the FutureLogic settlement, but I would imagine if you received a cash reimbursement for legal costs, you would have to report that. So in the absence of that, can we assume that there was no cash settlement or reimbursement?

No, and I think--no. You can't look at it that way. There's certain ways that we recognize what we take in. I can't get into details, but I can say that the answer to your question is no.

Okay. Thank you.

Next up we'll hear from Peter Kaplan, private investor.

Hey, Bart. Congratulations on the quarter.

Thanks, Peter.

I actually pushed the button and tried to unpush it. My question's been previously answered, so just once again, congratulations.

Thanks, Peter.

Okay.

And at this time there are no further questions. I'd like to turn the conference back over to management for any additional or closing remarks.

Well, of course, as always, we thank everybody for attending the Second Quarter 2008 Conference Call. We're extremely pleased with our results and look forward to talking to you again with the announcement of our third quarter financial results. Thank you, and have a good evening.

Everyone, that does complete today's conference. Thank you all for your participation, and have a great day.