TransAct Technologies Inc (TACT) 2008 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the TransAct Technologies third quarter, 2008 earnings results conference call. (OPERATOR INSTRUCTIONS) And now I turn the conference over to Mr. William Schmitt of ICR Incorporated.

Thank you, Corine. Good afternoon and welcome to TransAct's third quarter 2008 results 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 some 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 full list of risk factors inherent in 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 31st, 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, please go ahead sir.

Thank you Bill. Good afternoon, everyone, and thank you for joining us on today's call. We were very pleased with our third quarter performance. We achieved a new record at TransAct for revenue in a quarter and we did this in spite of the very difficult economic environment that we saw in the quarter. I want to say from the start how proud and pleased I am with the management team and the employees at TransAct who drove these wonderful results during what can only be called very difficult and challenging times. What a great job they did.

You know, before I get started I do want to point out that we have positioned our company for growth and we will weather this current economic storm we find ourselves in. But perhaps more importantly, we are extremely well situated to participate in the next growth cycle. Just look at the results we just posted during these uncertain times. So let me take you through some of the highlights of the quarter. Revenues for the third quarter of 2008 increased 48% to $17.3 million compared to $11.7 million in the same period a year ago. This is the highest quarterly sales figure in TransAct's history. Net income in the third quarter of 2008 was $1.2 million or $0.13 per diluted share compared to adjusted earnings of zero dollars in the prior year period after excluding lawsuit fees and a one time severance charge from the prior year quarter's results.

Now turning to the details of our results, sales from our casino and off premise gaming market improved over 41% for the third quarter. Primarily driven by a strong 60% increase in international sales. In fact, international sales now represent close to 40% of our total casino and gaming revenues. Our strategy to grow our international (inaudible) truly came through in the third quarter of 2008. The diversity of our customers and markets is working. We are no longer just dependent on the domestic casino market any longer. I also want to highlight that our off premise gaming market which is primarily an international market opportunity for TransAct more than doubled in the quarter. And as I have said before, we grew this business a lot and we still have one more product to launch, which we will in January of 2009. We view this market as a large opportunity for TransAct that will take time to develop. However, our results to date continue to give us confidence in our strategy and goal. We are once again extremely pleased with our results in the worldwide casino market given the continued weakness here in the domestic casino industry. On another positive note, our revenue grew in the domestic casino market by over 21%, due to our default supplier agreement with IGT and growth with several other slot machine manufacturers. We believe the number of slot machines shipped into the domestic casino market dropped in Q3 compared to last year. Yet we grew our revenue by over 21%. A great performance by our employees and solid market share gain.

Turning to our lottery market, lottery printer revenue grew over 340% to $4.7 million from $1.1 million in the prior year quarter. Primarily due to increased sales to our largest customer. We expect sales for the remainder of 2008 on a year over year basis to increase, but also do expect fourth quarter sales to be lower than we saw in each of the previous three quarters. We want to remind our shareholders that the lottery business can and will be lumpy and that revenues in our fiscal quarters can be different. So once again our worldwide focus and our diverse product offering led another very successful quarter for our casino, gaming and lottery markets.

Now turning to our banking and point of sale markets. Sales were flat for the quarter at $3 million. In terms of domestic sales, I am pleased to report that sales to our banking customers increased due mainly to orders for our new Bank Jet 2500 printer. We recognize that growth in this sector will continue to be difficult given the credit and banking crisis and the significant changes going on with the banks over the last several months. Still we remain heartened by our efforts in this sector and would expect a benefit when growth returns. We will continue to focus on replacement sales with sales of our new Bank Jet 2500 in this market where we believe maintenance capital is more readily available for these types of purchases and where our orders are coming today. Again, our focus sales strategy and approach came through in the third quarter.

Now speaking about our POS market, our partnership with NCR to provide an integrated printing solution for McDonald's continues to hum along. We are now selling our Ithaca 8000 thermal printer to McDonald's on a regular basis, and as a result, we are seeing revenue growth from McDonald's new grill program. In terms of the second printer project with McDonald's, which I mentioned on our last conference call, we have nothing new to report, only that we received our first set of orders for this new printer. We call it the AD 40. This new transact printer product is under test at McDonald's right now and we should know more about the opportunity and rollout by the end of the year. But I can say I am very pleased with the amount of orders we have already received which is more than what we expected just for the test. Some franchise operators that have installed the equipment for the new coffee initiative have purchased our new AD 40 thermal printer even though it has not received the final approval from McDonald's. We view this as a very good sign of its success so far.

This win, if it happens, would be incremental to the one we already have announced. Once again our focus sales approach coupled with our strong relationship with NCR led us to this new project and it too can have a meaningful impact on both revenues and profits if and when it gets approved by McDonald's. In addition to the new coffee printer opportunity with McDonald's our success in partnering with NCR has led us to trials with the new product with potential new customers. We hope to say more about that later in conference calls. Finishing up the conversation regarding our POS market, we did see a decline in our regular non-McDonald's POS business as we believe the domestic economic issues impacted these sales in the quarter. The growth in our new banking, printer and growth with the new McDonald's relationship was strong enough to overcome the effect of the domestic economic crisis facing the U.S. today.

Now let's move on to TSG, our transact services group business. As we mentioned on prior calls our top line in this business is being 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, so we did expect to see a decline in our service revenue part of this business all year. In addition, as we have said many times before, the continued decline in our old impact printers continued to drive down our TSG revenues as spare parts sale end for this product line. These difficult year over year comparisons roll off at the end of this year. However, even with those two negative occurrences TSG sales in the third quarter of 2008 were only down 1% from the prior year quarter. And let me tell you I'm extremely pleased to report the one area we are focused on, consumable sales, grew by almost 50% in the quarter versus 2007. The sales growth in consumables was positively impacted by our web site, www.transactsupplies.com. Which has now been operating for three quarters. In addition, we are also starting to see some contribution from our new preferred partner agreement with NCR system media division, which we announced in early September.

Under terms of the agreement TSG will market and sell over 250 paper and linerless label products manufactured by NCR. The agreement will position TSG to aggressively pursue markets that include the financial, retail and hospitality sectors with a significantly expanded product offering. The paper and linerless label products offered on the agreement will cover the full range of paper products for point of sale, credit card, kiosk, ATM, bank teller and gaming applications. Concurrently TSG will be a dedicated partner to NCR through our wwwtransactsupplies.com. e-commerce web site which we invite you to visit, that will provide a well positioned web based distribution point for NCR products to address and penetrate the small to medium size business TransAct supplies market. Additionally the compliment of the NCR product portfolio will greatly enhance and leverage TransAct significant efforts in the e-commerce arena made over the past 12 months. In addition, our web site continues to grow, our consumable sales and gain new customers. We plan to increase product offerings by developing relationships with other TransAct supplies companies just as we have done with the new NCR agreement. We expect the NCR preferred partner agreement,coupled with ongoing enhancements to our web site, and the addition of new suppliers positions TSG business very strongly in what we believe is a $100 million market opportunity for TransAct.

On a different subject than sales, I want to update our shareholders on our Asian manufacturing initiative. So far we have moved approximately 30% of our products into full finish product production in Asia. The net results have not only been lower product costs, but increase in quality. In fact, we have reduced our ongoing warranty expense due to the high reliability and quality we are getting from our partners in China. Our new goal is to have approximately 70% of our products fully assembled in China by the end of 2009. This is a new goal for us given the solid results and confidence we have gained. During this transition you should expect our inventory to rise. This will allow us to have product for our customers and no delays in shipping as we achieve this new milestone. It is the benefit of running our company conservatively as we have cash and no debt. So increase in our inventory to achieve the strong cost savings in China is something we can do.

Now, before I turn the call over to Steve to discuss our financial results-- for him to discuss our financial results in detail, I want our shareholders to know once again how pleased I am with the results in the quarter. You know, this is a year where we are delivering solid results, we are winning new business, growing existing businesses and launching products our customers want. And our goal to diversify our revenues by growing our international sales is clearly taking hold. And the work we are doing to grow our e-commerce web site business with our enhanced consumable product line is working. However, I can personally say that I am frustrated with what has occurred on Wall Street and with our banking system. The economy here in the U.S. is weakening and markets difficult to predict as the net effect of all that has happened. Bailouts around the world are happening almost every day. How disappointing is all of this.

But you should know by looking at the results TransAct just posted that your company is winning and working hard. When all this nonsense ends we are and will be a stronger and better company than we have ever been. TransAct will weather this storm with a debt free balance sheet, a growing list of customers, expanding relationships with companies like McDonald's and IGT, and an expanding geographic footprint we are selling around the world. We will be solidly positioned to exploit the many market opportunities when the global economy turns. With that, I would like to turn the call over to Steve DeMartino, our chief financial officer for our financial summary. Steve?

Thanks, Bart. We're pleased to report another strong quarter financial results for the third quarter of 2008. Our earnings per share for the third quarter were $0.13 on record revenue of $17.3 million. Up sequentially from $0.10 per share in the second quarter '08 and up year over year from break even earnings in the third quarter '07 excluding legal fees related to the future logic lawsuit and a one time severance charge. Now let me discuss the details of third quarter financial results. Our net sales for the third quarter of '08 were $17.3 million, up 48% from $11.7 million in the third quarter of '07.

As Bart said, this was the highest quarterly revenue we have ever reported in our company's history. Casino and gaming sales were $6.7 million in the third quarter of '08, compared to $4.7 million in the third quarter of '07, up 41%. Our improved sales at the casino and gaming market for the quarter resulted from our third consecutive quarter strong domestic printer sales to our existing customers despite a weak domestic casino market. In fact we experienced growth in all portions of the market both domestic and international casino where our printers are used in slot machines and domestic and international gaming where our printers are used in off premise gaming machines such as video lottery terminals, amusement with prizes, skills with prizes, fixed odd betting terminals and the like. Lottery printer sales for the quarter more than quadrupled to $4.7 million from $1.1 million in the same quarter a year ago.

As we're having historically high sales year from G tech in '08. If you recall we had a near historically low sales year from G tech in '07. As Bart stated we do expect sales to G tech to be sequentially lower in Q4. Banking and POS sales were $3 million in the third quarter of '08 which is flat compared to the third quarter of last year. Although sales remain flat we did experience increasing sales of our new Bank Jet 2500 bank teller station printer during the quarter. In addition as Bart explained our third quarter sales included increasing shipments of our Ithaca 8000 printed stick it printer for use in McDonald's front counter and grill program, as well as the first shipments of our second printer product from McDonald's new coffee initiative. Sales from our TransAct services group decreased slightly about 1% to $.9 million for the third quarter '08. TSG sales for the third quarter of '08 were impacted primarily by lower service revenue from a service contract for our Legacy printers with single customer in the UK that ended in late '07 and was not renewed.

Despite the lower UK service revenue, sales on our targeted TSG growth area, consumables and TransAct supply products increased by almost 50%. Contributing to this increase was growing internet sales including our newly offered NCR paper products to our recently revamped TransAct supplies.com e-commerce web site. Our gross margin in the third quarter of '08 increased to 34% from 33.1% in the prior year quarter. The margin improvement was due primarily to a higher volume of sales and continued cost savings from the ongoing transition of production of our printers to our contract manufacturer in China, partially offset by less favorable sales mix. Operating expenses for the third quarter of '08 were $4 million, down from $5.6 million in the third quarter of '07. Operating expenses for the third quarter of '08 were lower due largely to approximately $1.5 million of legal expenses incurred last year related to the lawsuit with Future Logic which we settled in May of this year. Excluding these legal fees and the severance charge of about a $100,000 in '07 our operating expenses for the third quarter of '08 were flat compared to the third quarter of '07.

Our operating income in the third quarter of '08 increased to approximately $1.9 million from a loss of $100,000 in the prior year quarter on an adjusted basis excluding Future Logic legal fees and the severance charge. Our operating margin reached 11% in the third quarter '08 demonstrating the operating leverage we experience as our sales volume increases. So for the quarter excluding legal fees related to the Future Logic lawsuit and the severance charge in '07 our operating expenses remained flat even as our sales grew by 48%. Reflecting the benefit we continue to see this year from cost reduction actions taken late in '07. We also incurred a currency exchange gain of approximately $100,000 in the quarter. The gain resulted from transaction exchange gains recorded by our UK subsidiary due to the strengthening of the U.S. dollar against the British pound. The U.S. dollar gained on average approximately 10% against the pounds during the quarter.

We recorded income taxes at an effective rate of 39.9% in the third quarter '08. You should note that this effective tax rate does not include any benefit from the Federal Research and Development credit. As this credit was allowed to expire at the end of last year. However, last month the Federal R&D credit was reinstated retroactive to January 1st of this year as part of the passage of the Emergency Economic Stabilization Act of 2008. As a result we expect to recognize the full year 2008 income tax benefit from the Federal R&D credit of about $100.000 in the fourth quarter which will favorably impact our effective tax rate for the fourth quarter. We now expect our effective tax rate for the full year '08 to be in the range of 34 to 35%. On the bottom line, EPS for the third quarter of '08 substantially improved to $0.13 compared to break even on adjusted basis excluding legal fees and the one time severance charge in the third quarter of '07.

Now looking at our cash flow, we generated about $1.6 million of cash from operations in the third quarter of '08, largely due to our net income for the quarter. Our capital expenditures were approximately $200,000 for the third quarter '08. And our cash balance increased by $1.6 million to $4.1 million at the end of the third quarter '08 from $2.5 million at the end of the second quarter '08. And we continued to have no debt outstanding under our $20 million revolving credit agreement with TD bank north. Our working capital increased to $1.1 million at the end of the third 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 and higher cash balance. Our current ratio rose to 2.6 to 1 at the end of the third quarter from 2.4 to 1 at the end of '07. Our EBITDA for the third quarter of '08 was approximately $2.6 million. This compares to EBITDA of a negative $1.1 million for the third quarter '07 or a positive $600,000 excluding legal fees and the severance charge. Depreciation and amortization totaled approximately $400,000 in the third quarter '08 and approximately $500,000 in the third quarter of '07. Noncash compensation expense totaled approximately $200,000 for both the third quarter 2008 and 2007.

Now let's look at our balance sheet at the end of the quarter. Receivables were $8.2 million at the end of the third quarter '08, up from $6.1 million at the end of 2007. The increase in our receivables reflect higher sales volume as sales increased 49% from the fourth quarter of '07 to the third quarter of '08. Given these challenging economic times we have a heightened awareness of the potential for slowing collections and credit problems from our customers. You should know that we are making a concerted effort to stay in close communication with our customers as well as closely monitoring any adverse changes we may see in payment trends. I'm happy to say that even in these difficult times our day sales outstanding for the month of September stood at 39 days, our best since 2004. Due in large part to a stupendous collection effort by our receivable department. Our inventory was $8.7 million at the end of the third quarter essentially flat year end '07. We do expect our inventory levels to rise somewhat in the fourth quarter due to increasing stock levels of product sourced from China.

Lastly during the third quarter of '08 we did not repurchase any stock under our buyback program. To date our total buyback since the beginning of the program stands at over one million shares bought back for a total of $8 million. As average price of about $3.73 per share which represents about 11% of our total shares outstanding. Overall, even in these uncertain times, we had our third consecutive quarter of solid financial results. Although we cannot control the overall economic environment we can prudently and cautiously manage our capital, financial position and spending levels during these challenging times. I believe we have done and will continue to do just that. And with that, I'll hand it back to Bart.

Thanks, Steve. Before we open the conference call to questions, we would caution investors until the economy shows signs of growth including the ending of the global credit crisis we believe it is difficult for any company, no matter how well positioned, to predict or forecast the next six to nine months. Given our results in the third quarter of this year and also the first nine months of 2008 it is sad that we have to say that. That being said, we are extremely well positioned for when the economic conditions in our markets and the global economy improves. With that I'll open up the call to questions. Thank you. Operator?

Certainly sir. (OPERATOR INSTRUCTIONS) First question from Todd Eilers with Ross Capital.

Good afternoon guys.

Hay Todd.

Bart, can you talk a little bit about IGT integration, are you guys now-- were you fully integrated as the default printer for IGT in Q3. I know that you guys got placed on the bill of materials I believe in July, was there anything left to occur and are you guys now fully integrated.

Yes. The goal was to get that done by September and I think we reached that goal. So we-- we're fully integrated in every platform, in every jurisdiction around the world.

Okay, great. And Bart, you also made some comments or pointed out that, with respect to your customer G tech, that you're expecting sequential decline in the fourth quarter, but yet still higher than 4 Q of last year. With respect to IGT and maybe I guess just the gaming and casino sector in general, with integration of IGT should we still expect sequential growth in that sector for you guys in light of I guess the macro economic trends?

I think you answered the question. It's all about the macro economic trends. Todd, if you look at what we have been able to do, we grew over 21% in the third quarter and I think we would all agree that machine sales were down in the third quarter. So we clearly, clearly took significant market share in a very difficult time. So the question is what's the macro environment going to be like. And then, bring that down to, how many machines will the casinos buy. That also could get impacted as we know that global gaming exhibition is in November.

And we do tend to see sales slack off a little as our manufacturers, our slot machine manufacturers, get ready to introduce their new products and the casinos get ready to see those new products and decide on their purchases. So we do see a little slack off in the fourth quarter just because of the G2E. But I guess I would ask you as a gaming analyst , what do you think (inaudible) and what do you think MGM and Stations will do given what's happened to their business and the high debt loads that they have for the projects or the going private transaction. So we just don't know what the environment's going to look like going forward. We do know what we got accomplished. We won IGT's business, we're growing our market share in a very difficult environment and we're very proud of that. We just can't tell you what the macro environment's going to mean to us overall.

Okay, that's fair Bart. I guess maybe moving on to the-- to the point of sale business and the McDonald's contract,. You got really kind of two large opportunities it looks like right now one contract has been signed, maybe one pending here it sounds like. Can you maybe compare and contrast the two opportunities and maybe, can you kind of highlight which one you think might ramp up quicker than the other.

Yes. The coffee initiative is one to two printers per store that would occur in about 11,000 stores in the U.S., that's the initial rollout that McDonald's has talked to us about. Now, mind you, they haven't decided on the printer yet. But we're encouraged, because clearly we know what the test size was supposed to be and we have shipped many more printers than that. But the total available to us is those 11,000 stores with one to two printers per store. What we believe will happen is once -- McDonald's is rolling that out, there's no stopping the coffee initiative.

There's been all kinds of press about franchisees getting funding and all that, that's just noise. The franchisees got the funding, they're doing it, they're rolling it out, and from what our understanding is it's been quite successful. So it's just a matter of McDonald's making a statement that they have approved and will do a general release of the product. If and when that happens all 11,000 stores will get our printer very quickly, because McDonald's has said publicly that they want to get this coffee initiative done in 2009. So that will roll out in 2009. If and when McDonald's makes the decision. With the grill initiative, what's called the grill or sandwich initiative, that's approximately, six to eight printers per store, five to seven printers per store. Those printers go at the counter and they also go in the grill area where we print the special tickets that say okay, hold the mayo, hold the mustard, whatever. That's part of a rollout as McDonald's goes to their new point of sale system. That's not a situation where McDonald's is trying to get like the coffee initiative done, they want to get that done in a year. The franchisees have probably two to three years to get the new grill initiative done, because that involves the new POS system getting integrated. But that's six to eight printers per store, in approximately 14,000 stores in the U.S.

So the opportunity, if you really look the at it about the same size per year as it rolls out except the coffee will be done the first year, if and when they approve it, we will get a lot of printers next year for the grill initiative, but then we will get more in year two and more in year three as franchisees convert over to the new point of sale system. You don't have to do the coffee initiative and have to get the new point of sale system. So both of them will be done independently of each other. Then behind that we are optimistic that then all of this starts rolling out to the rest of the world, which McDonald's has about 37,000 stores total.

Okay, great, that's very helpful Bart. Just one last question Steve, you mentioned that you guys would need to increase your inventory a bit here to fund your growth and expansion, can you maybe highlight how much you're expecting to spend in terms of kind of working capital there.

Yes, I would expect probably about a growth of about a million dollars in the fourth quarter. Compared to the third.

Yes, Todd, let me take you through what we're doing, because this is -- our China experience has not only been great from the standpoint of our cost savings, but literally our quality has gone up and Steve has had to take down, which is wonderful, our warranty expense. What we were able to do-- , we told our investors we were going to make a major move into China this year and we got that accomplished. About 30% of our products are fully assembled in China and about 50, 60% of our sub assemblies are manufactured in China today. We got that done, we're complete and that's rolling. We have been so successful and we've been able to teach China that-- how to do smaller lot quantities.

We're able now to highlight the fact that we can do now 70% of our final, of our printer products and have them fully made in China and then shipped as a completed product. So that's what we're going to do over the next-- well probably take us through the summer to get that accomplished. So 70% of our products will be then fully manufactured in China. And then just about all of our sub assemblies will be made in China, except for our Legacy products. We will run out the Legacy products through our Ithaca plant until we're ready to discontinue that. To make that move we're going to take in more product and more sub assemblies from China and build up our finished goods so that when we make the final move to China for that remaining 40% of the finished goods, that takes anywhere from three to six months to make that final transition.

We will increase our inventory so we don't miss a beat with any of our customers from a shipping standpoint. That's just a cautionary on our part, we just don't want to get into any situation where we can't ship. We believe it's an about a million dollars of inventory, but given the fact that that million dollars is in cash on our balance sheet earning about 2%, the cost savings versus the cost avoidance that we're going to get-- or the amount of interest income we would get off that million dollars at 2% versus the significant cost savings that we will get from China, we believe is a good use of our cash so we will take up the inventory by this summer-- by summer of '09 we should have about all those 70% products in final assembly in China and we're off and running.

Okay, great Bart. And then Steve just one final question, I'm not sure if you mentioned it. Stock based comp in the quarter.

$200,000.

Okay, perfect, thanks guys, great quarter.

Yes, thanks Todd.

Thanks Todd.

Moving on to [Justin Sabastiano, with Morgan Joseph].

Thanks, hey guys. So you mentioned that you have more test centers or at least more test printers for the coffee initiative I think, I had heard a hundred test centers or Mac cafe what number is that now.

We can't by contract we just can't disclose all of the test locations and how many stores have one. What I can say is we have shipped many more printers. McDonald's and TransAct and NCR got together and they decided where to do the tests and how many locations would do the test so we could get our printer ready and NCR could get their paper ready. Remember, this is a much smaller width paper, what we call a 40 column versus an 80 column whip and the printer is different, the cutter is different. I can say that based on the orders that we have already shipped we have tripled the amount of printers we have sold McDonald's than what they told us they would do in their tests. And what happened was they're rolling very quickly the coffee initiative out.

I think you have actually seen some locations where there's coffee. The franchisees have all heard about the solution using the printer and they're not waiting for McDonald's to bless it, they're actually asking the so-called system providers to get them the printer. Clearly we're very pleased with that. McDonald's knows about it, they're not uncomfortable with it all, so they just want to complete the task, they want to dot the i, cross the t, make sure they have gone through all the testing, but they know the franchisees are asking for the printer. So we have shipped about triple what we thought we would ship through the test because a lot of the franchisees are asking for the printer.

Okay. I guess looking at the banking and point of sale segment, it was pretty much flat. With what I assume is increased sales to McDonald's during the quarter, so you said that the shipping of the Bank Jet 2500 was increased, so, where did we fall down in the quarter that we just saw flat rates.

Two areas really. Our Legacy printer business continues to come down. Over the next year or two it will eventually ride out at some very low level. So a lot of it is old legacy impact printers. We also saw our non-McDonald's POS business. The-- we're basically a lot in the hospitality market, we saw that business come down in the third quarter.

I've heard statistics that 5,000 restaurants will close this year, another 8,000 restaurants, not McDonald's, other restaurants, about 8,000 restaurants will close next year. I can only tell you in the town that I live in, two restaurants have gone bankrupt over the last,four weeks. One is definitely closing the other one trying to reorganize, So I think the economic times is hitting them. So what we're pleased about is our banks at 2500, McDonald's business is growing and we should see some pretty good growth next year. But, we're unsure about the non-McDonald's, and the non-banking Industry, what's going to happen to business within TransAct.

Okay. Is there any news from J.P. Morgan as far as possibly adding printers to the WAMU branches.

You can rest assured we are staying very, very close to that situation.

Okay. So it's a possibility, but right now nothing to report.

You know, if we had something to report we would definitely tell you

Got you, okay. Just for fourth quarter I mean you have been talking about visibility not really being there, but sequential growth in the banking and point of sale, I mean is that fair for us to model in or should we keep it closer to what you guys did in the fourth quarter of last year.

You know, Justin since we don't give guidance I'm going to stay away from answering that. The reason why we gave the lottery number what we talked about the lottery it's a big number and it's what we, we always talk about how it fluctuates quarter to quarter, so we thought it would be important for us to let our shareholders know that the fourth quarter will be different with G tech than it has been this year. But as for the other businesses we're not going to get into this is up, this is down, we just don't give guidance.

Okay. Since lottery you said it was going to be lower in the fourth quarter than the third quarter, which then in turn means lower in the second quarter. Is it lower than the first quarter as well at $3.6 million

I said it would be the lowest quarter of the year. It will be larger than the fourth quarter last year, that's right

Then I guess with gross margin, I mean you came in pretty high at 34%, at least higher than what I had anticipated. Is that a new floor that we can look to now or was that kind of a one off something that happened during the quarter that kind of kept --

We have been running in that range actually all year, we have been running between 33 and a half and 34.

Yes,

I think what you will see and look, we're volume dependent also now as you can see when we run our factory we get the higher gross margin, but just as important we get the higher operating margin. With the move to China and the final-- what we consider to be pretty much the final move to China next year by the end of 2009 I would be disappointed if we didn't see that go up another hundred basis points.

Okay. So you'll ramp toward that 35% number.

Yes. Our goal is that and higher.

Okay.

(OPERATOR INSTRUCTIONS) We will move on to [Douglas Pike with Douglas Pike Capital].

Hi Bart, hi Steve.

Hi Doug.

I had 37 questions, but some of them have been already answered so just kidding. Operating margin, I got that. Could you Bart, I don't know if you would want to do this or not, but maybe give us a guesstimate if we ever get to say a normal global economy what our total available market might be for banking, point of sale, casino and gaming off premise gaming and the services group if you could give us a guess. You may not want to do that, but if you could, that might be helpful to me and--

I guess Doug-- I appreciate the question and clearly we modeled that internally. We do look at what we call TAM, total available market, we do. It's something that we go over. And look at the opportunities. It's not something that I'm prepared to discuss on this call and, I'll discuss it with Steve and the board and see if that's something that we would want to get into. But it's not something we have ever discussed before. I can tell you it is something that we look at quite a lot-- what the total available market is to us.

Now mind you it does change, for instance if you look at the we call the casino and gaming market, the off premise gaming market is something that truthfully I coin the phrase of off premise gaming market. That was based on our growth and our move into Europe where we started seeing machines not in casinos. So we started looking at that and then we started putting some numbers and actually using some of the analysts reports on outside casino type gaming machines and came up with the opportunity what that could mean to us. But we really haven't shared that and I think we have to save that for another day.

We will take a follow up question from Justin Sabastiano with Morgan Joseph.

I actually had a 38th question for you guys. Steve you mentioned this, I missed it-- I apologize, but the cash flow from operation what was that in the quarter?

$1.6 million.

Okay, thanks a lot.

You're welcome.

And there are no further questions at this time.

Okay. Operator and Bill and Steve, we all thank you for joining us in the third quarter conference call. Clearly we were thrilled with our results. I do want to mention to our shareholders that TransAct will be at the Global Gaming Exhibition, November 18th through the 20th. For those investors that will be there please contact me, we will give you a tour of the booth and the products. Glad to spend time with you.

We will also be doing the Banking Technology Show in Orlando that same week and we will have a sales team there. If anybody goes to the BAI show in Orlando we would be happy to host you and show you around the booth. With that I look forward to talking to everybody on our fourth quarter conference call. Thank you for joining us tonight.

That does conclude today's conference. Thank you for your participation, and have a wonderful day.