TransAct Technologies Inc (TACT) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the TransAct Technologies second-quarter 2009 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 for you to queue up for questions. As a reminder, this conference is being recorded.

And now, I would like to turn the conference over to William Schmitt with ICR. Please go ahead, sir.

Thank you, Cynthia. Good afternoon and welcome to TransAct's second-quarter 2009 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 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, 2008. The Company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that happen after this 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.

It was not difficult for us to anticipate that the global recession would have a negative impact on our casino market and our domestic point-of-sale business. Knowing that, we focused our efforts on markets and customers within our business where we saw upside opportunity this year, mainly our banking relationships, where we saw an urgent need to upgrade printers, and also at McDonald's, where the new growth initiatives in their coffee and beverage business, along with the implementation of their new point-of-sale system that they were embarking on, were starting to ramp up.

In addition, we kept our focus on the international gaming business, that continues to show us opportunities for growth. And we added a new focus, targeting the domestic gaming market, as we now have two printers these customers. As states continue to battle budget shortfalls, there appear to be additional opportunities for sales growth that will use a thermal receipt printer instead of a thermal ticket printer.

Our results show the success we had with the focused effort we put forth to drive the results in the second quarter of 2009. So in the face of an extremely difficult economy, we are very pleased with our second-quarter performance, as we generated earnings per share of $0.07 in the quarter. In addition, as in prior quarters, we were able to increase our gross margin in spite of the top-line decline we experienced versus the second quarter of last year. This quarter saw our gross margin increase by approximately 60 basis points, even with the 13% revenue decrease, primarily due to our decision last year to ship more of our manufacturing to China, as well as further cost reductions we implemented as we continued to diligently review our cost structure on an ongoing basis. This location shift to China is almost complete and shortly more than 70% of our current products will be manufactured overseas.

In addition, our operating expenses declined versus the second quarter of last year, excluding those expenses associated with the FutureLogic lawsuit. This also adds to the elimination of expenses that we completed as we embarked on this challenging time. And while the first half of 2009 saw some rough going, especially in the first quarter, we believe the back half of this year will be much better for TransAct. With a considerable backlog of business already booked and customer order indications growing, we are expecting stronger results in the second half of 2009 compared to the first half.

So let me take you through some of the highlights of the quarter. Revenues for the second quarter of 2009 declined 13% to $14.2 million compared to $16.3 million in the same period a year ago. Net income in the second quarter of 2009 was $600,000, or $0.07 per diluted share. The $0.07 per share compares to adjusted earnings per share of $0.10 in the prior year period, after excluding legal fees related to the lawsuit with FutureLogic. Including these expenses, GAAP net income per share in the second quarter of 2008 was $0.03.

Now turning to the details of our results, let's start with our banking and point-of-sale markets, which was a highlight for us, as sales were up 83% in the quarter, to $5.5 million. We achieved solid growth in sales from our McDonald's coffee and beverage printer, as well as strength through our partnership with McDonald's. That one we call the grill initiative. We expect this increase to continue the rest of the year, as we expect 11,000 US McDonald's franchisees to implement the coffee initiative and the grill solution has the potential to go into all 37,000 stores worldwide over the next several years.

In terms of our banking sales, revenue was up over 800% as the second quarter of 2009 included the initial sales from our $4.9 million order for the BANKjet 1500 to our largest banking customer. Shipments of that printer are continuing in the third quarter and should continue to help alleviate the negative effects of the global recession which is having on our regular point-of-sale business.

In addition, this bank order will drive a significant amount of recurring revenue, as the printers were sold with a service contract and future inkjet cartridge sales. This bank purchases our printer utilizing two-color printing, which in turn is two inkjet cartridges per printer. On average this bank buys between four and six inkjet cartridges per year, once installed. By the time we finish shipping the orders we have today with this large banking customer, we estimate we will have approximately 45,000 inkjet printers installed at their teller stations. Each one of these printers drink ink and we sell them the cartridges.

Sales from our casino and gaming market were down by 36% for the second quarter compared to the second quarter of 2008. Since we know we are in a slow worldwide casino market, I will speak about the difference in sales from Q1 2009 to Q2 2009. Our international casino sales declined approximately 44% sequentially from the first quarter of 2009, mainly due to a decline in European sales. We believe this to be the effect of the global recession, and the good news is we have this business start to rebound in July.

Our revenue in the domestic casino business was up slightly from our first quarter of this year, even though we experienced much lower shipments in April. This one-month situation recovered in May and has stayed steady, if not improved a bit, since then, also including what we have experienced in July. April was just a month we saw a real downturn, only to see it rebound back in May.

As we mentioned on our previous call, while we believe we have grown our market share, the lack of slot machine replacement sales is clearly impacting our domestic casino business. Let me some color on what this domestic slowdown means. Industry executives believe the slot machine replacement sales are running at about a 40-year cycle. That means only 2.5% of the total number of slot machines in the domestic market are being replaced per year. This compares to the industry average of about 15 to 18% per year. In slot machine numbers, only about 25,000 slot machines are being replaced this year, compared to what would normally have been approximately 150,000. This coiled spring will eventually pop.

While we expect continued difficulty in the domestic casino market for the remainder of 2009, we are optimistic for the longer term, as several new domestic jurisdictions look to legalize gaming in the near future, which would open the door to a potential large number of slot machine sales in the domestic market. Ohio and Illinois are considering major expansions of gaming, and possible new licenses in places like Iowa and the expansion in other jurisdictions offer the potential for new growth in a stagnant industry. We are mindful that these programs will take time to implement and we will watch the situation closely as they evolve. In addition, casinos will eventually start to replace the old machines on their floor as the asset wears out and also as server-based gaming becomes more of a reality. Like I said, this coiled spring will pop.

With respect to our international market, I am extremely pleased to report that we experienced another quarter of increased sales from our international off-premise gaming market, once again, essentially done without the material revenue from our recently launched new printer for this market, the Epic 880. The international off-premise market continues to become an increasingly important source of revenue for TransAct, as that is a market going through the transition to printers and governments are in need of revenue to improve their finances. We believe the Epic 880 will only continue our upward mobility in this market in the near future. I can say we are continuing to see significant sales opportunities for the international gaming market ahead, despite the global recession.

Turning to our lottery market, lottery printer revenue fell 59% to $2 million from $4.8 million in the prior-year quarter, primarily due to the timing of orders. As we have mentioned previously, lottery sales can vary significantly from quarter to quarter, due to the timing of iss- -- due to timing issues. However, as we announced back in April and on last quarter's conference call, we have received a $3.6 million order for our thermal lottery printers, which we will begin delivering in the middle of third quarter and expect to complete by the end of the year. We believe this will contribute to a significant sequential increase in lottery printer sales for the rest of 2009.

Now let's move on to TSG, or TransAct Services Group. We are pleased to report another solid quarter, with a 7% increase in revenue in the second quarter of 2009 compared with the second quarter of 2008. Our main area of focus, our consumable sales, had another strong quarter and was aided by our increased internet sales from our website, www.transactsupplies.com.

One thing I should mention regarding TSG sales, timing of orders for our banking customer will cause some lumpiness to the business. For instance, the first quarter saw strong orders for inkjet cartridges, as the bank got ready for the installation of many more printers. The second quarter did not have as many cartridge sales, as they used the ones that were loaded into the market. We do expect the third quarter to see a sales increase compared to the second quarter, as those cartridges we shipped in the first quarter get used and replacement cartridges sold as needed.

Once again, industry executives tell us that sales of consumables, such as paper, are down over 20% in the domestic retail and hospitality markets, as there are fewer transactions occurring. It only makes sense. Despite this serious decline, we grew our consumable sales. This is a testament to the work and success our TSG team is having as they focus on this market.

Now, updating you on the operations side of our business, I want to briefly comment about our Asian manufacturing initiative. The benefits from this move continue to be evident in our results, as the second quarter of 2009, even with the 13% revenue decline, we managed to increase our gross margin by approximately 60 basis points from the prior-year quarter. We have almost completed this initiative and expect to do so by the end of the third quarter, which will mean 70% of our products will be fully assembled in China. We expect to see our gross margins to continue to improve as we end 2009, once the final move to China is completed and we exhaust the inventory we have today.

Finally, a quick update on our outlook. As we stated in today's earnings release, we expect strengthened results in the back half of the year, due to an increasing backlog of orders, such as further sales from our BANKjet order and the lottery order, which is about to begin to be filled, and forecasts of order flow provided by some of our customers. In addition, we continue to expect free cash flow, which we define as cash provided by operations but less capital expenditures, for 2009 to exceed $3 million.

Now, before I turn the call over to Steve to discuss our financial results in detail, I want our shareholders to know that, even with the economy in the doldrums, we are winning. The second quarter was another profitable quarter for TransAct and we are gaining more confidence about the rest of 2009. Over the course of the next few quarters, we will continue to look for ways to diversify our revenues, given the difficult domestic casino environment. But in the meantime the success we had in obtaining orders in the first half of the year should manifest itself in our results over the next few months.

Our balance sheet remains as solid as ever, with no debt and nearly $2 million in cash on hand, which leave us in a nimble position for when the economy begins to show signs of life. We are also aware that we cannot rest on past success and continue to spend a significant amount on engineering and product development to keep us at the leading edge of the industry.

I thank all the employees at TransAct Technologies for once again delivering solid results during a very difficult time.

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

Thanks, Bart.

Let's get right into the numbers for the second quarter of '09. Our earnings per share for the second quarter '09 were $0.07 on revenue of $14.2 million, compared to EPS of $0.03 on $16.3 million of revenue in the second quarter '08. Excluding legal fees related to the now settled lawsuit with FutureLogic, our second-quarter '08 EPS was $0.10.

Now let me discuss the details of the second-quarter financial results. Our net sales for the second quarter of '09 were down 13% from the second quarter of '08. Casino and gaming sales were at $3.5 million in the second quarter of '09, down 36% compared to the second quarter of '08. On the positive side, we saw continued strong sales of our off-premise gaming printers, which increased 16% from the second quarter of '08. We also saw an over 200% increase of sales of casino printers in Australia. However, even with these increases, our overall international gaming and casino printer sales were still down $200,000, or 13%, due to weakness in the overall worldwide casino market.

On the domestic side, we saw a $1.7 million, or 49%, decline in our domestic casino and gaming printer sales, as our sales continued to be substantially impacted by the downturn in the overall domestic casino market. However, on a sequential basis, domestic casino sales improved slightly.

Lottery printer sales for the quarter declined 59% to $2 million from $4.8 million in the same quarter a year ago, due to the timing of orders from GTECH. On a sequential basis, sales to GTECH were up from $1.1 million in the first quarter of '09. We expect sales to GTECH to sequentially improve for the rest of '09, as compared to the second quarter of '09, as we begin shipping the $3.6 million order we received in April, as well as other orders we received from GTECH.

Banking and POS sales were $5.5 million in the second quarter of '09, up 83% from the second quarter of last year. Banking sales for the second quarter of '09 led the increase and were up over 800% from the second quarter of '08, as we began to ship in volume against a $4.9 million order we received for BANKjet 1500 printers in February '09 from one of the largest banks in the US. And we expect sales from that banking order to continue into the third quarter.

Sales of our POS printers increased by 5%, led by increasingly strong sales of our two printer products for McDonald's, the Ithaca 8000 for the grill initiative and the Ithaca 8040 for the coffee initiative. Combined sales of these two printers for McDonald's increased by more than 250% from the second quarter of '08 and we expect continued strong sales into the second half of '09, as McDonald's continues the pace of its rollout of printers used in its combined beverage initiative to approximately 11,000 US stores.

Sales of our non-McDonald's point-of-sale printers declined, almost entirely offsetting the increase in sales of our McDonald's printers, due to the impact, we believe, the economic slowdown is having on capital spending of a number of our retail and hospitality customers.

Sales from our TransAct Services Group increased by 7% to $3.3 million for the second quarter of '09. TSG sales for the second quarter of '09 were led by a 29% year-over-year increase in sales of consumable and transaction supply products, which is our main targeted growth area for TSG. Included in this increase were strong sales of inkjet cartridges and growing internet sales, including paper products, through our web store, transactsupplies.com.

Our gross margin in the second quarter of '09 rose to 34.1% from 33.5% in the second quarter of '08, an increase of about 60 basis points. Our gross margin rose despite a 13% decline in overall sales, as we continued to benefit from a shift in manufacturing more of our products in China at lower costs, as well as the cost reduction actions we took in the first half of '09.

Operating expenses for the second quarter of '09 were $3.8 million, down from $5.1 million in the second quarter of '08. Operating expenses for the second quarter of '09 were lower largely due to approximately $1.1 million of legal expenses incurred last year related to the lawsuit with FutureLogic which we settled in May of last year. Excluding these legal fees, our operating expenses for the second quarter of '09 decreased by about $100,000, or 3%, from the second quarter of '08, due in part to cost reduction actions we took in '09.

Our operating income in the second quarter of '09 increased to approximately $1 million, or 7.3% of net sales, from operating income of $400,000, or 2.4% of net sales in the prior-year quarter, which includes FutureLogic lawsuit legal fees. Excluding these legal fees, adjusted second-quarter '08 operating income was approximately $1.5 million, or 9.4% of net sales.

We recorded income taxes at an effective tax rate of 33.4% in the second quarter of '09 and we expect our effective tax rate for the full year '09 to be between 33 and 34%.

And, finally, on the bottom line, EPS for the second quarter '09 was $0.07 compared to $0.03, or $0.10 on an adjusted basis, excluding lawsuit legal fees in the second quarter of '08.

Now, looking at our cash flow, we generated about $800,000 of cash from operations in the second quarter of '09, largely due to a $1.7 million decrease in inventories, which I'll talk about a bit later, somewhat offset by higher accounts receivable due to higher sales, and lower accounts payable resulting from reduced inventory purchases.

Our capital expenditures were approximately $225,000 for the second quarter of '09, compared to $150,000 for the second quarter of '08. We expect our capital expenditures for the full year of '09 to be in the range of $800,000 to $1 million.

Our cash balance increased by $600,000 to $1.9 million at the end of the second quarter of '09, from $1.3 million at the end of the first quarter '09. And we continued to have no debt outstanding under our $20 million revolving credit facility with TD Bank.

Our working capital increased to $17.2 million as of June 30th, '09 from $15.6 million at the end of the first quarter '09. The increase in working capital was due largely to an increase in receivables due to higher sales, and a decrease in inventories and accounts payable, as we continued to reduce our inventory purchases and work down our existing stock of on-hand inventory. Our current ratio reached an impressive 3.6 to 1 as of the end of the second quarter, increasing from 3.1 to 1 at the end of the first quarter of '09.

Our EBITDA for the second quarter of '09 was approximately $1.6 million. This compares to EBITDA of $1.1 million for the second quarter of '08, or $2.2 million excluding the lawsuit legal fees. Depreciation and amortization totaled approximately $475,000 for the second quarter of '09 and $450,000 for the second quarter of '08. Noncash compensation expense totaled approximately $200,000 for both the second quarter of '09 and '08.

Now let's take a look at our balance sheet at the end of the quarter. Receivables were $8.8 million as of June 30th, '09, up from $6.9 million at the end of the first quarter '09. The increase in our receivables reflects increased sales volume on a sequential basis. And even in this difficult economic environment, our collection effort and days sales outstanding continue to be good.

Our net inventory balance fell to $10.4 million at the end of the second quarter, down $1.7 million from the first quarter '09, as we downshift from our temporary increase in stocking levels with our China manufacturing shift nearly complete. As we explained in past calls, we're in the process of increasingly moving full production of our printers to a contract manufacturer in China, with a goal of producing 70% of our total unit volume in China by the end of the third quarter. During the second quarter we continued to make good progress on this initiative and we still expect to reach our 70% goal by the end of the third quarter.

During this transition period we decided to temporarily increase our stocking levels as a cautionary measure, to minimize any potential disruption to our customers as we make the change. With the transition nearing completion during the second quarter we began to deplete inventory we purchased in the first quarter. And we expect our inventory levels to continue to decline towards more historical levels during the second half of the year as we reduce new inventory purchases and work down our existing inventory on hand.

Overall, looking ahead, despite the difficult economic environment we remain confident in our position in our markets. Our balance sheet remains pristine, with $1.9 million in cash, no debt, and increasingly strong working capital levels. And we plan on keeping it in solid shape, as we still expect to generate at least $3 million in free cash flow during '09. As we wait for a turnaround of the global economy we will continue to maintain tight control of our capital, financial position, and spending levels in order to keep us in prime position from a financial standpoint to exploit new opportunities when the market does eventually rebound.

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

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

Thank you, gentlemen. (Operator instructions.) Todd Eilers; Roth Capital Partners.

I wanted to start off with on the McDonald's, or the point-of-sale business. Clearly you (technical difficulty) from the coffee and grill initiatives there. Can you maybe give us a sense of how many stores, I guess, for each of those have gone that route yet? How many orders or how many stores have already implemented those initiatives, just to give us a sense of where we're at this -- through the first half of the year?

Yes. Approximately 4,000 stores have gone with the coffee initiative, so we've got at least another 7,000 to go. And that's based on only one printer per store, Todd. One of the things that we are hearing is that the printer is really helping them with their operational issues, as they really try to sell these specialty coffee drinks. So we're not sure if some of the stores are actually going to go to two printers. So right now, that would be 4,000 in 4,000 stores and another 7,000 just for the coffee.

From the grill initiative, it's hard to say because there's at least six printers that go for the grill initiative, two to four in the front, because the same grill printer not only handles the grill with the special orders, but also at the checkout area. So it's hard to determine how many stores have gone, but that one is clearly lagging the amount of effort that McDonald's is putting behind the coffee initiative.

Okay. That's helpful. And then --

So it leaves a fair amount of upside for the grill initiative to go.

Okay. And then, let's see, on -- with respect to the banking side, or the large banking order that you guys have. You mentioned that that should start to ship in the middle of third quarter, be completed in the fourth quarter. Should we expect that to kind of be split evenly along both quarters, or is -- will one have a little bit more than the other?

Yes, third quarter will be heavier than the fourth quarter on the banking.

Okay. And then, along the same lines on the gaming side, second half for you guys, how should we look at -- I mean, is there -- should we look for some seasonality? I think typically in the fourth quarter is usually a little bit weaker than the third quarter. Is that a safe assumption? Is that what you're planning for for the rest of the year? Or how should we look at the mix, I guess, for the next couple of quarters?

Yes, let's look at the difference between casino and gaming. In our feeling of the strong change to the business in the second half of the year we are modeling in not much change to the domes- -- in fact, we're modeling no change to the domestic casino market. So we're modeling in this very low level of sales and still seeing this strong change or increase to our business. Any upside to the domestic casino market will clearly flow through and be even stronger than the numbers that we're projecting or talking about.

Normally the fourth quarter is slower, or lower, than the third quarter because of G2E. As you know, the casino companies get ready to start looking at the new machines at G2E and hold back some purchases until G2E is over. So the fourth quarter tends to be lower than the third quarter in the domestic casino market.

On the gaming side, however, we're still feeling that that's going to be strong throughout the year, third and fourth quarter. That doesn't get affected by the G2E trade show. And we are -- as I said in my little speech, we are seeing more and more opportunities for our gaming printers, not only, by the way, for the international markets, but for the domestic, or what I'll call North American market where there's a lot of discussion about using gaming printers or thermal receipt printers, not ticket printers.

So the way that we've modeled it, Todd, is not much growth in the domestic casino market at all, in fact no growth at all. It stays where it is. And the international gaming market, our overall gaming market, continues at a good pace. And that still gives us this good uptick to the business.

Okay. That's helpful. And then, Bart, when you refer to the thermal receipt market opportunity in North America, are you referring to these VLT slot route opportunities, you know, like a Ohio and Illinois that have recently passed, or something else?

Yes. And more. Definitely looking -- definitely trying to understand how things like Illinois are going to go. When you put three or four slot machines in a gaming parlor or back room of a place, are you going to use a ticket printer or are you going to use a roll receipt printer? So we're looking at that, and now that we've got two great printers for that I'm actually really glad we rolled out the 880 because it could be the printer of choice for that market.

But we're also seeing other jurisdictions that aren't making the headlines like Illinois and Ohio are. I mean, clearly Illinois, being so large of an opportunity, is making the headlines. But there are other jurisdictions around North America that are looking to expand their VLT-type, what we call gaming, applications. So it includes Ohio, it includes Illinois, but also includes these other jurisdictions.

Okay. All right. That's helpful. Thanks a lot, guys.

Justin Sebastiano; Morgan Joseph.

What would you say your share of the North American casino market is now?

Oh, around 40%.

Okay. And do you think you'll be able to basically continue to take share from FutureLogic? Is there a lot of upside there?

You know, it's -- yes and no. It's going to depend on our relationships with the casinos. It's going to depend on who's buying. Long term, yes. Short term, it's hard to say. And the only reason why I say that is, who's going to buy slot machines? There's no doubt about it that FutureLogic has certain casinos that like their printer, or would ra- -- have standardized on the printer. So they'll keep buying that printer. So it really is going to depend on, over the next couple of months, which casinos are buying and which casinos are not buying. But overall, we think that our share gain has been sustainable and could grow.

The interesting thing about our business has been how the mix of domestic and international has been going. Where we spent a lot of time in the international markets and have considerable more share in those international markets -- for instance, after six months international casino sales are over 50% of our total sales, 49% in the second quarter, but over 50%. And those are markets where, you know, Asia, Europe, where we have much stronger position than our competitor.

So domestically, it's about 40%. Overall I think, as the international markets become bigger, that market share overall is going to continue to grow.

Okay. So what would you say your international market share is then?

Oh, it's got to be north of 50, 55, 60%.

Okay. And the TransAct Services Group, I know it's a small part of your business but certainly growing. Are you looking to -- still looking for some small tuck-in acquisitions or are you kind of just waiting for maybe a better price? Or what's your thoughts there?

Well, you know, we like to say that there's a real disconnect between the seller and the buyer today.

Right.

And I think if you talk to an investment banker today they'll probably laugh when you make that comment to them. We are clearly taking share in that business. Overall market's down about 20%. Our business is up 29%. So we're growing basically at almost 50% compared to the market. People are noticing us out there.

We will look for acquisitions that we can tuck in, but we're very mindful of what any acquisition is going to do to our performance and we'll wait for the right opportunity. We're very pleased with what Jim is doing with that business. Our relationship with NCR on the paper side -- the banking business is providing us significant amount of cartridge sales -- 45,000 printers doing four to six cartridges a year is going to be wonderful recurring business. We would like to do a couple of acquisitions, because we know who they are and we'll wait for the right opportunity.

Okay. And on the margins, I mean you did a good job of getting above 34% this quarter. You think -- I know you said that's sustainable towards the end of the year. Are we going to go much higher than where we are now through the end of the year, do you think?

It's going to happen in '10. It's going to happen in 2010. We've got inventory, so we're going to have to get through the remaining inventory to really see the next pop. And we will see another level up based on the move that we've made to China. But given the amount of inventory we have and our projections of how that's going to flow out, Justin, I think the next pop is going to come in 2010, probably early in 2010. But it will come in 2010.

Okay. Is it fair, then, to model, though, to stay above the 34% gross margin for the rest of this year, even though the inventory is going to pick up?

I think we're probably going to be in the 34% range, Justin. Of course, it all depends on sales volume and mix of product. But I think it will be generally in that range --

Yes.

-- for the rest of the year. Yes.

Okay.

And mix can have an effect plus or minus, but our model shows it right where you're talking.

Got you. Okay. Thanks a lot, guys. I appreciate it.

Larry Haverty; GAMCO.

The MGM Casino was scheduled to open I think on December 16th and you've got a relationship with ITT, as --

Yes.

I'm kind of surprised. I mean, that's a pretty sizeable lump there. Are you participating in that?

We'll know within the next couple of months, once the orders are placed.

So your guidance doesn't assume any orders from that at all?

You know what? What we did is, we looked at -- there were -- if you look at the openings that have occurred this year, there's more than just MGM.

Yes, I mean, like Bethlehem.

We had Bethlehem. We had a couple of Indian casinos open up. So our model says that all of that stays the same. I mean, you've got some in, some out. Even with CityCenter opening, that doesn't move the needle when you're talking about -- you know, CityCenter opens up with 1,800 slot machines, or 2,000 slot machines. That doesn't move the needle when we're talking about 150,000 slot machines that normally get replaced in a year. That's 40- -- 37,000 a quarter. We're seeing business with some of our OEMs in a quarter that we used to do in a week. And that's all based on the replacement cycle.

So when we model it, Larry, we actually look at every opening that's going to happen this year. And we model that in. We model our share. We model what we think we're going to get. In certain cases we've got 100%; in certain cases we get 20%. I mean, I think we put out some press releases this year that talk about the 100% deals. I mean we modeled in CityCen- -- I mean, City of Dreams for instance. There's going to be openings in Singapore coming up. But that doesn't move the needle when you've got a replacement market that's anemic. And that's the difference between -- you got some openings.

Now, clearly you get Illinois to open up and that's going to move the needle because that could be 50,000 machines. That's not 1,800.

Okay, now there is some -- I'm very interested in this "moving the needle" issue. And there are some tests of banks of these server-based gaming things that are out. I think there's one in Barolo. Monte Carlo has one or --

Yes.

Have you heard back anything there, that -- from these tests that could start the ball rolling on these floors going to server-based?

We are hearing that the tests are out there and we are hearing from the casinos that they're much more positive about the benefits that server-based gaming is going to present to them. I think you've got a casino market, though, domestic, that has been put on hold with capital spending. So the question is, how do they roll it out? How do they -- who pays for it? How does the model work? How does it get financed? In the short term -- and for us the short term is the next three to six months -- we don't see that having an effect right now.

Now, clearly that could change. I mean CityCenter can open up. It'll open up with server-based gaming and kind of what happened with ticket in/ticket out, one casino opened up and then they all had to go. But our modeling doesn't show any of that taking place this year. We're trying to be conservative, because we've got what we consider to be very good numbers in the second half of the year where we don't have to model in any of that, because it's speculation at this point. We are --

(Inaudible - multiple speakers.)

I'm sorry. Go ahead, Larry.

No, no. Go on. You are hearing --

We are hearing from the casinos that they're positive about server-based gaming. Does capital -- one, they've got to get capital to do it. And two, they've got to see the benefit. What is the ROI on it? Now, one of the things that we believe is going to happen is, since you don't need server-based gaming system to drive new machine sales, because the machines are server-based-gaming ready. We are seeing all the machines that are going out are server-based-gaming ready machines.

Okay. That's helpful.

(Operator instructions.) Peter [Kaplan]; private investor.

The gentleman before me asked the question that I was going to ask. But I do have one other question. There's been some positive comments the past couple of weeks from IGT and just the other day from WMS. Do you think perhaps that, based upon some of these comments, that the worst may be over and things might get better hopefully sooner rather than later?

We are -- look, we listen to the same conference calls as everybody else. And I clearly listened to IGT and WMS and was pleased to hear them starting to talk positive- -- we have definitely bottomed out. We like to say, it's not getting worse. In fact, we do believe it's going to get a little better, but -- so we do believe it is starting to get better. What we need is, for it to really get better -- I mean, when we -- even if we got to a 10-year replacement cycle, that would be 10% of the floor. That would be 100,000 games versus the 25,000 games we're seeing today. That would be 4x, so that would have significant impact to us. What we need to see is the casinos start getting better, healthier.

Or, what we are starting to see, which is encouraging, is deals between the slot manufacturers and the casinos where the slot manufacturers are helping the casinos to take in new equipment by helping them on the financing of the equipment. And we're seeing more of that. In fact, we're talking to casinos ourselves about how we can help and participate with that, given our pristine balance sheet. So that could also help the momentum.

We are encouraged that people are talking about a better market. So we're not modeling in a down; we're modeling in the same, if not an uptick. But we really -- when you see somebody say that they've shipped more than 3,000 replacement machines in a quarter, when you see people say they shipped 3,000 or 4,000 replacement machines in a quarter, when they used to do that monthly or sometimes weekly, that'll be the big change.

Bart, do you see -- some of the new games, like the Wizard of Oz, are they that much better than the old generation that the casino operators will almost be pressed to put them into play at some point?

Yes. You know, the Wizard of Oz is a phenomenal game and been very successful. What we are seeing is the manufacturers limiting how many of those machines get out into the marketplace. So there is a bit of keeping that as a hot game and making sure it doesn't get overplayed. But you -- look, I was just at Foxwoods the other day. You can go over and see the new machines. And it's not just the Wizard of Oz. It's Monopoly and some of the others, some of the communal games where if one person wins a bonus, everybody that's on that communal game, there could be six or eight of them, all get to enjoy the bonus round. Those machines are packed and the other old machines are empty. So there is a desire to move to getting these better games on the floor.

And I think as the economy improves, as more people get to the casinos, as the casinos start making money -- I think the big change is going to come, Peter, from the expansion. You're not going to see the casinos overbuild like they were. So they're going to start building their balance sheet and instead of spending it on building new mega-resorts, they're going to start spending it on the floor of the casino. And I think that's going to be the dramatic change that we're going to see. We're not going to see the new buildings going up, but I think what we're going to see is, the casinos get healthy, use that better balance sheet and buy more equipment, because they know that the player is using and playing those machines.

All right. Thanks so much.

Justin Sebastiano; Morgan Joseph.

Sorry if I missed this. I'm pretty sure you guys have said this already. But the coffee initiative began to ship in -- is that mid-second quarter?

Yes. It started -- actually we shipped our first printers last year, but we started seeing that pick up at the end of the first quarter. And then it was pretty much a full second quarter event.

Okay. And that should finish the end of the third quarter, then?

No. I think it's going to continue into the end of the year. And then it's all going to depend. They're starting to test it in Europe. They're starting to test it in Japan and Australia, Canada.

Oh, worldwide, sure. But I mean, just for the 11,000 stores?

Yes. I think they'll get done by the end of this year, if not, the very beginning of next year. I mean, their goal was to get all 11,000 stores up and running by the fall of this year. I think I'd be more cautious and say by the end of this year.

And that was more the franchisees kind of dragging their feet based on what the economy was doing more than McDonald's the parent kind of dragging their feet?

No, I think it's just a matter of how quickly they can get the store rebuilt. It -- I mean, the results, we hear, are -- what we've heard is McDonald's is now the second largest seller -- taking their recent results and extrapolating it out, McDonald's is now the second largest seller of coffee in the US. So clearly it's been successful.

And the interesting thing that we've heard, Justin, is they are having operational issues because of trying -- they do volume amounts of specialty drinks. You know, the Starbucks is very easy. Two people walk in. You smell the coffee, you listen to the music and you get your cappuccino five minutes later. Sixteen contractors aren't going to put up with that. So the printer has been very instrumental in getting them to get all these issues resolved. And so it's just a matter of getting these buildings built. They build them out. It's about $110,000 project. If you've seen one, they build out the front area, the coffee area. They've got to put in all new equipment. It's just a matter of getting that done.

Okay. And then the grill initiative, on the last call you guys would say -- said that that was going to begin to ship after the coffee initiative was kind of wrapped up and clearly that's not the case. Right? I mean, are they shipping this quarter? Did they -- I mean, in earnest, I mean.

Yes, well, they're shipping. They're shipping. And the -- one, it goes with the new point-of-sales system, so if a franchisee decides to do all of the upgrade, the coffee and the new POF, then clearly we'll get all eight or ten printers. If a franchisee decides just to do the new POF, then we'll get six printers from that. But normally what the franchisees are doing is the coffee first. But we did see some good orders for the grill printer in the second quarter.

Okay. So you don't know, then, when that will probably finish shipping, the grill initiative printers?

Oh, that will go for years, two to three years.

Okay.

Oh, that'll go for two to three years. That's a lot of upgrade of the POF (technical difficulty) and all that.

And the lot -- the $3.6 million lottery, that should go -- that should finish through the end of the year? You should start to get that out in mid --

Oh, yes.

'Cause we're kind of -- we're already pretty much in, I guess, almost mid-3Q. So you haven't shipped those, though?

We've -- we're just starting. But we've got other orders. I mean, the lottery business, you know, we got that $3.6 million order. But we've got other orders for them. We announced that 'cause it was one single order that was that large. So we've been shipping printers to them. We'll be shipping printers to them all third quarter and all of fourth quarter. It's just that's one big order that came in.

Okay. And so that has begun to ship, though, that big $3.6 million order?

Yes. And it'll go Q3 through Q4.

Got you. Thanks a lot, guys. I appreciate it.

At this time there are no further questions. I will now turn the conference back over to Management for any closing comments.

Thank you, operator. Again, we're pleased with the performance that TransAct had in the second quarter. Clearly, this recession has been deep and challenging. And I really appreciate the work that the employees at TransAct did. We had a solid second quarter and look forward to a much stronger second half of the year.

With that, I say goodbye and look forward to hearing from you and talking to you again at the end of the third quarter. Thank you for attending.

Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may disconnect at this time.