TransAct Technologies Inc (TACT) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to the Transact Technologies fourth 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 your questions. As a reminder, today's conference is being recorded. And now I'd like to turn the conference over to Garrett Etkins. Please go ahead, sir.

Good afternoon and welcome to Transact's fourth quarter 2009 results conference call. Joining us today from the Company are Mr. Bart Shuldman, Chairman. President and CEO. and Mr. Steve DeMartino, EVP and CFO. The format of the call will be a brief business review by Bart followed by Steve providing details on the financials. We'll 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 maybe 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 companies 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 the call. At this time I would like to turn the call over to Mr. Bart Shuldman. Please go ahead, sir.

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

Well, I'm one who is glad 2009 is over. What a year it was, but while it was rough, totally uncertain and unpredictable, scary at times and a great challenge to any senior manager, I believe Transact performed extremely well given the significant and serious worldwide financial crisis throughout the year. I'm very proud of the entire Transact team.

Looking back to February of last year, customer order rates collapsed, Markets froze and the future was unpredictable. During this turbulent time, Transact focused on reducing costs, producing as much free cash flow as possible, and completing our move to manufacture more products in China. Our sales efforts were focused on the international gaming and casino market, our new relationship with McDonald's, and various banking opportunities. The hard work of our sales team helped Transact overcome a number of market adversities, including a dismal domestic casino market where the slot machine replacement cycle virtually collapsed in what could be said as the worst recession the casino industry ever, and ever is a long time, and a very difficult point-of-sale market.

We continue to grow a Transact Supply business which has provided a study recurring revenue base, helping to offset lower printer sales. Our efforts over the course of 2009 have placed our Company in the best financial position it has ever been in, despite lower revenue, with cash and cash equivalents of $10 million, well ahead of what we projected no debt, and 4 million less inventory on our books than the previous year, thanks to the successful completion of our manufacturing transition to China. We came out of 2009 stronger than we entered, putting us in great position for 2010.

In addition, we continue to generate big wins for the Company. In the fourth quarter alone, the Epic 950 was selected exclusively by Spielo Manufacturing for the new video lottery terminals and by Resorts World Casino at Sentosa in Singapore for its entire casino floor. We also signed a new exclusive agreement with GTECH for their Next Generation thermal lottery printer and I might add one of the best designs I've seen this Company ever do. Those wins, along with the ramp up in the McDonald's Grill initiative throughout this year from the expanding relationship with them, which should continue to benefit Transact for years to come, and our continued success with the consumable segment of the Transact Services Group, and recurring revenue from servicing the bank printers we delivered in 2009 should lead to what we believe will be a better 2010 for Transact on the top line, and with the Chinese transition complete, we expect better flow through to our bottom line this year through improved gross margins.

So let's go through some highlights of the fourth quarter. For the fourth quarter 2009, we generated net income of $200,000 or $0.02 per diluted share compared to net income of $600,000 or $0.07 per diluted share in the prior year period. Our gross margin in the quarter dropped 270 basis points from 33.7% in the prior year quarter to 31% as the Company worked to use a substantial portion of its existing higher cost inventory as the Chinese manufacturing transition was just getting completed. As well as selling a higher percentage of low margin products in the quarter.

In 2010, we should see a ramp up in gross margin with the higher cost domestic inventory essentially depleted. I will let Steve explain this in more detail later in the call, but as an overall comment to the fourth quarter of 2009, the one item that affected revenue the most was the continued downturn in the domestic casino replacement market, which drove our domestic casino printer sales down. I believe we performed well in every other market we serve.

Now let's dive further into the results by market. Starting with our banking and point-of-sale markets, sales were down 7% for the quarter to $2.9 million. We saw solid results in our regular point-of-sale market business, despite the ongoing recession. Sales into McDonald's had mixed results, as shipments of printers used in their coffee and beverage initiative declined as they near completion of this initiative. In addition, due to the holiday period, McDonald's slowdown purchases of our grill and point-of-sale printer as stores focused on sales during the holiday season and not on refreshing or replacing hardware; however, we are expecting the grill and new POS system initiative with McDonald's to pick right up and looking into 2010, we expect the main contribution throughout the year to be from the grill and new point-of-sale system initiative, which will likely be a multi-year project that can go into all 37,000 McDonald's worldwide by the end of the program.

In terms of our banking sales, revenue was up 124% in the fourth quarter 2009 compared to the fourth quarter 2008 as our $4.9 million order for the Bankjet 1500 to our largest banking customer completed in the quarter. As we said on previous conference calls, the banking market presents us with project oriented business and orders can fluctuate from quarter to quarter. Still, now that these printers are in place, they will be driving a significant amount of recurring revenue in the future, with regard to our service contracts and future Inkjet cartridge sales, with approximately 90,000 Inkjet cartridge positions from the 45,000 two cartridge Inkjet printers installed from this one customer loan, that will need to be consistently refilled over time.

Sales from our casino and gaming market were down by 16% for the fourth quarter compared to last year as the domestic casino market remained stagnant as anticipated. On the plus side, we have heard some positive indications from certain casino customers early this year that casinos are beginning to step up the replacement of their older slot machines, which means there could be a need in 2010 for more printer than what we experienced in 2009. International casino and gaming sales now account for almost 60% of total Transact casino and gaming revenue. We are now selling more printers internationally than domestically. Just think what happens when the domestic casino market fully comes back.

Our move into the international markets and our leadership position in the international gaping market is clearly coming through. In the fourth quarter, international casino and gaming sales rose by 77% over the prior year quarter, another excellent performance from our rapidly expanding international market. This market was lead by orders for the Epic 950, the Epic 430 and also from the introduction of the new Epic 880 printer which has already begun to have positive revenue impact, and we expect this product to continue to grow for years to come.

Overall for 2009, I believe we grew our market share in the domestic casino market, continue to make excellent progress in the international casino and gaming market that I believe could become as large if not larger than the domestic casino market. We launched our latest printer for the international gaming market that we have already received orders for, and made significant progress introducing and marketing our new server port technology for the worldwide casino market.

Now let me spend a couple minutes talking about our server port technology. Given the weak casino market, we see a distinct need for Operators to be more efficient and aggressive in marketing to their customers at the slot machine, and I can truly see the opportunity in front of us to sell our server port device to casinos to allow them to print coupons, promotions, player information, basically anything the casino wants, at the slot machine, and the best news, the casinos that have purchased our Epic 950 slot machine printer now realize they can easily upgrade to coupon printing by just purchasing our server port device. They can easily upgrade their floors by connecting our server port directly to our printer, and then to their database or server, to print realtime promotions and coupons.

Why do I mention this? Because we believe we have a significant competitive advantage, and the casinos that purchase our Epic 950 over the last several years have a competitive advantage over those that have not. We believe our Epic 950 product already installed in slot machines over the last several years are the only ones 100% that can be upgraded in the field by just adding this device. We believe casinos that use our Epic 950 have the competitive advantage that allows them now to go ahead and buy our server port device and implement their marketing and promotional strategy at a substantial savings to what a casino will have to do with other competitors' products, and again, I believe the future is here now, promotional printing is upon us. We are engaged with a number of casinos who are looking to our server port technology.

Now turning to our lottery market. Lottery printer revenue rose 21% to $3.2 million from $2.6 million in the prior year quarter, primarily due to the timing of orders as we ship the majority of thermal printers for a recent $3.6 million order in the quarter. As we mentioned regularly, lottery sales can vary significantly from quarter to quarter due to these timing issues.

Now let's move on to Transact Services Group, which had a 6% increase in revenue for the fourth quarter 2009 compared to the fourth quarter 2008. As we call it, TSG, was aided by the increased service revenue resulting from new service contracts primarily in the banking market. Overall, TSG is experiencing the result of fewer transactions that are recurring, and therefore less consumable products needed by our customers. I'd like to remind our shareholders that we are very focused on this business as we like the recurring revenue model. We just recently made more improvements to our web store and I ask that you visit it and give it a look. I think you will find the changes we made meaningful.

So we enter 2010 in great financial shape. We have succeeded in expanding our gaming and casino business around the world. We have launched new products and have more on the way for 2010, and our costs to manufacture continue to come down, as we have now completed our move to China. I'm excited about our future in 2010 and beyond.

Let me spend just a few minutes giving you examples why I believe we have these opportunities in 2010 and beyond. First, in our international casino and gaming market, the Italian VLT market that is moving to printing looks very promising in 2010, with more than 56,000 machines projected to be sold into this market. We believe we will see the positive impact on our revenue starting in the second quarter of 2010. I believe in 2010, we will also see a better domestic casino market as casino operators improve their balance sheets and start to upgrade an aging population of slot machines. As I've said previously in my talk, we are already starting to see that increase and our server port technology is gaining traction. Add to that our McDonald's relationship and the next few years looks truly promising for Transact.

I do want to remind you that we remain cautious even with the opportunities we see due to a worldwide economy that seems to be struggling to come out of recession, which continues to suppress employment growth and essentially consumer spending, which indirectly impacts our Company, but Transact has positioned itself as a leader in the markets we serve and we will only continue to improve on our pristine balance sheet, and finally, we see opportunities for acquisitions and partnerships that will help grow our top line revenue. With the addition of our Vice President of Business Development, Steve and I see the work being done, and know eventually is going to pay off and benefit our shareholders.

At this point I'd like to turn the call to Steve who will share the details of our financial results with you. Once finished, we will both be glad to answer any questions you have. Steve?

Thanks, Bart. Let's go over the fourth quarter financials. Our EPS for the fourth quarter of 2009 was $0.02 on a revenue of $13.9 million compared to EPS of $0.07 on $14.3 million of revenue in the fourth quarter of 2008.

Now let's discuss the details of our fourth quarter financial results. Our net sales for the fourth quarter of 2009 were $13.9 million, down 2% from the fourth quarter of 2008. Casino and gaming sales were $4.5 million in the fourth quarter of 2009, down 16% compared to the fourth quarter of 2008. On the positive side, our international casino and gaming sales continued to grow, increasing by 77% from the fourth quarter of 2008. This increase was lead by 132% increase in sales of casino and gaming printers in Europe, which included yet another strong sales quarter from our line of off premise gaming printers that print receipts instead of tickets. Still, even with the increase in international sales, we could not overcome continued weakness in the domestic casino market, where we experienced a $2.1 million or 56% decline in sales as weakness in North American replacement slot machine sales persisted in the fourth quarter of 2009.

Lottery printer sales for the fourth quarter increased 21% to $3.2 million from $2.6 million in the prior year quarter due to the timing of orders from GTECH. On a sequential basis, sales to GTECH were down slightly from $3.3 million in the third quarter of 2009. Banking and point-of-sale sales were $2.9 million in the fourth quarter of 2009, down 7% from the fourth quarter of last year. Banking sales for the fourth quarter of 2009 were solid, up 124% from the fourth quarter of 2008. Our banking sales again benefited from shipments against the $4.9 million order we received for Bankjet 1500 Telestation printers in February 2009, as well as some additional follow on orders we received from one of the largest banks in the US. We fully completed shipments for this customer's project during the fourth quarter of 2009.

Sales of our point-of-sale printers decreased by 20%. The decline was mainly the result of lower sales of our McDonald's point-of-sale printers for two reasons. First, retail hospitality stores, including McDonald's, typically reduced purchases of new POS equipment during the fourth quarter, due to increased transaction of volume during the holiday season, and second, McDonald's is nearing completion of its rollout of our Ithaca 8040 printers for the combined beverage initiative in the US, and correspondingly, our sales volume for this printer began to decline during the fourth quarter; however, looking ahead, although the combined beverage initiative is getting close to finishing, we expect to see a strong upturn in sales during 2010 for our Ithaca 8,000 printer, which is the printer used in McDonald's other initiative, the grill and point-of-sale system upgrade initiative.

McDonald's is currently increasing the pace of it's rollout of the point-of-sale system in its stores and we expect this to result in our ramping sales of our Ithaca 8,000 printer as we move through 2010. Also, keep in mind that the McDonald's point-of-sale system upgrade initiative represents a much larger opportunity for us than their combined beverage initiative, as each McDonald's store has on average, six to eight printers to be upgraded as part of the POS system initiative, compared to only one to two printers per store for the combined beverage initiative.

Sales from our Transact Services Group increased by 6% to $3.4 million for the fourth quarter of 2009. TSG sales for the fourth quarter of 2009 were lead by a 38% year-over-year increase in replacement part sales as well as increased service revenue from new service contracts, primarily from customers in the banking market. Our gross margin in the fourth quarter of 2009 fell to 31% from 33.7% in the fourth quarter of 2008, a decrease of 270 basis points. The gross margin decline was due mainly to unfavorable sales mix as we sold a higher percentage of lower margin products than we did in the prior year quarter, as well as the continued depletion of higher cost domestic inventory as we completed our move of production to China.

Going forward, we now source more than 70% of our printer production from our lower cost contract manufacturing in China. As a result, we expect our gross margin in 2010 to steadily improve as we realize the full benefit of lower product costs resulting from the completed move of our production to China, and we expect a more favorable product mix throughout 2010. Operating expenses for the fourth quarter of 2009 were $4 million, down from $4.2 million in the fourth quarter of 2008, due primarily to lower selling and marketing expenses.

Looking at 2010, we do expect our operating expenses to increase from 2009 levels as we increased our sales effort in the worldwide casino and gaming market, reinstitute pay raises, and raise incentive compensation to more normalized levels. As a reminder, we froze salaries and temporarily reduced incentive compensation and other spending during 2009 given the difficult economic environment. Our operating income in the fourth quarter of 2009 was approximately $300,000 or 2% of net sales compared to operating income of $600,000 or 4% of net sales in the prior year quarter. Our operating income and operating margin were lower due to the lower gross margin and resulting gross profit on 2% lower sales, partially offset by lower operating expenses in the fourth quarter of 2009 compared to that of 2008.

We recorded income taxes and an effective tax rate of 32.1% in the fourth quarter of 2009 and 33.4% for the full year of 2009. We expect our effective tax rate for 2010 to be between 34% and 35%. And then on the bottom line, diluted EPS for the fourth quarter of 2009 was $0.02 compared to $0.07 in the prior year quarter.

Now, looking at our cash flow, we had another strong quarter. We generated approximately $4.4 million of cash from operations in the fourth quarter of 2009 largely due to a $2 million decrease in accounts receivable, a $0.5 million decrease in inventories and a $1.4 million increase in accounts payable resulting from higher inventory purchases as we come off near historically low inventory levels at the end of 2009. For the full year 2009, we generated $8.4 million of cash from operations. Our Capital Expenditures were approximately $165,000 for the fourth quarter of 2009 and approximately $650,000 for the full year of 2009. 2009 was an unusually low capital spending year for us. We expect our capital spending for 2010 to be at more typical levels of between $1 million and $2 million.

Our cash balance increased by $4.5 million during the fourth quarter to over $10 million at the end of 2009, a near record high level, and we continue to have no debt outstanding under our $20 million revolving credit agreement with TD Bank. Our working capital increased to $20.5 million at December 31, 2009 from $19.2 million at the end of the third quarter 2009. The increase in working capital was due largely to an increase in cash and accounts payable and a decrease in receivables and inventories from the previous period. Our current ratio remained at a solid 3.7 to 1 at the end of the year, down a bit from 4 to 1 at the end of the third quarter 2009.

Our EBITDA for the fourth quarter of 2009 was approximately $800,000. This compares to EBITDA of $1.5 million for the fourth quarter of 2008. For the full year 2009, our EBITDA was approximately $5.7 million compared to $4.9 million for the full year 2008. Depreciation and amortization totaled approximately $410,000 for the fourth quarter of 2009 compared to $458,000 for the fourth quarter of 2008. Non-cash comp expense totaled approximately $146,000 for the fourth quarter of 2009 compared to $194,000 for the fourth quarter of 2008. In total, depreciation, amortization and non-cash comp expense was $2.4 million for the full year 2009, compared to $2.7 million for the full year 2008.

Now let's take a look at our balance sheet at the end of the quarter. Receivables were $9 million as of the end of 2009, down from $11 million at the end of the third quarter 2009. The decrease in our receivables primarily reflects lower sales volume on a sequential basis. Overall, our collection effort and days sales outstanding continued to be solid.

Our inventory balance fell to just below $6 million at the end of the fourth quarter 2009, a near record low, down $0.5 million from the third quarter 2009 as we work to deplete the remaining domestic inventory we had stocked up earlier in the year in anticipation of the completed shift of our printer production to our contract manufacturer in China. As mentioned on previous calls, during this transmission period we decided to temporarily increase our domestic inventory stocking levels as a cautionary measure to minimize any potential disruption to our customers as we made the change. And we worked this domestic inventory down substantially during the third and fourth quarters of 2009. Going forward, we expect our inventory levels to correlate with our expected order flow and sales volume.

You may recall on last year's fourth quarter earnings call, Bart and I explained we expected a difficult year in 2009 given the state of the economy at that time. In addition, I reassured you during this challenging time by quoting an old baseball adage, that we would not take our eye off the ball in 2009. Well I'm very pleased to report that we most definitely did keep our eye on the ball in 2009 and we're now ready to do the same in 2010. Overall, from a financial standpoint, Transact is in the best financial position it has ever been in. We enter 2010 with over $10 million in cash, no debt, and over $20 million of working capital.

With our higher cost domestic inventory sold off and our printer production transition to China now complete, we can now take full advantage of our lower cost Chinese sourced product which we believe will lead to higher gross margins and continued positive free cash flow in 2010. We've solidified and extended several of our best customer relationships during the past year. We are in prime position to capitalize on new opportunities should the economy begin this long awaited recovery. We're very proud of the entire Transact team.

We thank them for a successful 2009, and look forward now to an even better 2010. And with that I'll pass it back to Bart.

Thanks, Steve. Operator, we're now open for questions.

Certainly. (Operator Instructions). We'll go first to Todd Eilers with Roth Capital Partners. Todd, are you there?

Yes, can you hear me?

Yes, we can hear you.

Sorry, guys. Bart, can you talk a little bit about, a little bit more about Italy and the deal you guys signed with Spielo? Did you ship any of those printers in the fourth quarter, and then how should we anticipate the rollout of that order in 2010?

The Italy is part of this Comba 6 B project and 56,000 machines are going to Italy we believe all this year. We shipped no printers in the fourth quarter to Spielo for that project. We'll ship some in the first quarter but it will really ramp up in the second and third quarter so we kind of said our first quarter would be on the revenue side, the first quarter would probably be our lightest quarter even though we see growth all year, the results are going to be pretty good all year, but with the Italy kicking in and some of the McDonald's kicking in, the second quarter is really where things will pick up and we expect that with the Spielo order.

And Bart will you also be shipping printers in the Italian market to suppliers other than Spielo as well?

Yes, good question, Todd, and thank you for that. Yes. Steve mentioned that our sales and marketing expenses are going to be up a little in 2010 and a lot of that is for the work that we've done in Italy. We are expecting, I'd be disappointed if we ended up with less than 60 or 70% of the market share in Italy. There are many customers, most of them international, that are shipping into the marketplace, so our work in Europe, our work in Canada, our work in Italy at introducing our product to the Italian market because it goes through the operators, it goes through the license holders, has really worked in our favor and I think we would be disappointed if we got less than 60 to 70% of that market.

Okay, great. And then Bart, wanted to talk a little bit about the server port technology, you mentioned that on your remarks. Do you guys currently have some trials out there right now and if so, any feedback that you could provide would be helpful and then also just in terms of timing, can we expect to start to see some sales of that product in the current quarter or would you expect more Q2 and onward throughout the year?

Well, Todd, it's funny. We kind of titled you Sherlock Holmes, because clearly your write up this morning surprised us and you found us which was okay. Clearly, we're impressed but yes, we are really excited about the server port technology, and what's happening in the marketplace is we don't think there's going to be a lot of building of new casinos. The casinos are all going after market share. A lot of the casinos that we're talking to want to do promotions at the slot machine. It also enhances their efficiency, local casino, Monday morning thousands of people line up to find out what promotions they get for the week, they go to a booth, they don't even go into the casino, and now we send them into the casino and they can put their frequent player card into the slot machine and get that information so we're quite excited about it.

Timing, I can't give you the timing because a lot of it is being worked on, and there's a lot of technology going into the work that we're doing, but I think the really good news is that there's a lot of discussions going on with multiple casinos, and clearly it appears you found one of them, and the feedback has been nothing but positive. The server port device allows you to do one of two things. You could either hook it up inside the game and have all of the information flow through the game to our server port to the printer, or in certain cases that we're working on, the casino that owns their own data is tracking the play, has the player data, can actually send that data directly to our server port, and right to our printer, so it provides amazing flexibility to the casino to decide how they want to implement their promotion and coupon. Some of it is going to be the traditional way through the game, and I believe some of it is going to come the way we're testing it right now, which is right from the server right to our server port device into our printer.

The server port device allows us to do a lot with it. We can have an IP address, we can handle the fact that the server port is not tied to the printer inside the printer, it's tied to the slot machine, so the IP address stays with the slot machine, not the printer. It allows us to house as many coupons as they want, and it allows for the transmission to come down very quickly, because we're using ethernet. There's a lot of technology going into it. There's a lot of conversations going on with our customers, how we can even provide more technology, and actually services of how we can provide services in regards to selling them coupon systems and the like, so it's an exciting opportunity for us, one we've been talking about for a while but we are starting to see the real fruits of that and we will see things this year.

Okay, great. And then let's see, one last question as it relates to the McDonald's initiative. Looks like you're obviously expecting the grill initiative to pick up this year, but looking back at the coffee initiative, looks like the majority of the domestic sales there have shipped but can we also expect some international placements on the coffee side as well or is that not really an opportunity?

No, we are talking to McDonald's. They have brought us into some international opportunities. The difference is coffee in the US is different than the coffee that you see in the international markets. In most situations, coffee is already served in the international markets, so there are pockets that McDonald's has brought us into where we've presented the technology and they're looking at it, so we will see somewhat we call 8040 sales this year. Clearly the bulk of it was 2009.

We will see some this year. We've already got some on the books already but I think the most exciting thing is their move with this new POS grill initiative and as Steve said, we go from one to two printers per store to six to eight printers per store, and even if we did all of the international market with coffee, which clearly we won't, the grill and POS initiative is just that much larger because it's more printers per store and McDonald's is through the coffee initiative. I think we said on the conference calls many times last year in 2009 that we thought the coffee would go first because as much as they want, we started by the way the project with McDonald's with the grill POS initiative, but because of the recession, most of the Operators, most of the owners, wanted to put coffee in first because that drove revenue where the POS grill initiative really drives efficiency.

Now we're seeing them come back and drive the POS grill initiative, which one way is great for us. We had a nice 2009 with them, shipped them a lot of 8040s and now we're expecting to ship a lot of 8000s in 2010 and that's going to probably go around the world and that's going to probably rollout for a couple of years. It's a fair amount of printers.

Okay, great. Thanks guys. Appreciate it.

Sherlock Holmes, you did a pretty good job there.

Every once in a while I'll stumble across something interesting on my casino visits.

I'll see you next week.

Thanks, Bart.

Okay.

(Operator Instructions). Gentlemen, there are no further questions at this time. I'll turn the conference back over to you.

Operator, I just want to make sure because we know there's some people on the call. You might ask if there are no further questions?

(Operator Instructions). [Milton Chewansky], please go ahead.

Yes, hi, Bart. You mentioned the new casino breakthroughs in Macao and in that area. Are we doing anything there?

Well, you know what? The big openings, I mean we won City of Dreams, and that was the big opening for 2009. There's talk that Fans will open up parcel six and seven in Kotai, and that's not going to happen this year. The big move is clearly Singapore, the Philippines, Taiwan. There's much more business around Asia than most people realize, and so we're very focused, and in fact, I'm pleased to let you know that one of the trade magazines in Europe, in Asia, a magazine called Inside Asian Gaming, just named us Best Electronic Gaming Peripheral for 2010 so we just won that award in Asia, so there's a lot.

Clearly we opened up resorts. There's another casino to open up in a couple months in Singapore, but there's a lot of things going on around that that most people don't even know, things in Thailand and Philippines and Vietnam and all that. We also see some pretty good business in Australia. Our business in Australia was pretty strong in 2009 and we expect that to continue in 2010. The Australian market clearly feeling the pain of all these Asian beautiful casinos opening up, and Australia deciding that they need to upgrade their slot machines, so all in all, we're expecting some pretty good growth across all of our international markets in 2010.

Thank you.

(Operator Instructions). We'll go next to Andrew Weiner with Burnham Asset Management.

Hi, good afternoon, Bart.

Hi, Andrew.

Hi. Just wanted to make sure I heard something correctly. Did you say that international gaming and casino was 70% of the revenues this year?

International casino and gaming sales was 60% of our total gaming and casino sales.

Okay, so that would make it a little over $10 million, which means that domestic was about $7 million?

If you've got the math right, I can't disagree with you.

Okay, and if I remember correctly, last cycle, the peak of the domestic casino and gaming revenues was somewhere in the $20 million to $25 million?

Yes. What you're seeing, Andrew, is the effect of a dismal domestic casino market in 2009 and actually, in our 2010 numbers, despite a report that came out the other day saying 3% growth, we are seeing significantly more than that. But yes, if you go back what we were seeing in the peak of the market, yes, we did $20 million $25 million in the domestic alone.

Okay, and so if I think about it obviously not trying to put a timing around it but if I think about the differences, assuming we've bottomed this cycle and at some point you'll see an improvement in replacement demand, the way to think about it domestically is there's a larger installed base today than there was last cycle, and our market share should be better this cycle than last cycle.

Yes. Let me help to quantify that. When we got involved in the domestic casino market there was approximately 600,000 slot machines in the US, and we started with zero market share. We were second to market as everybody knows. Today, there's somewhere around 925,000 slot machines, and that's today's market and our market share is approaching 40%, domestically but internationally our market share is higher, but domestically about 40% so we've gone from zero to 40%. Add into that the potential of Illinois coming on board, which is not in our numbers this year. We don't believe Illinois is until next year, which could be 20,000, 30,000 more machines, you got Ohio, you got all these states looking at using gaming and casinos to get them out of their budget.

We could approach a million, 950,000 to a million machines when the full upgrade cycle comes back. We're somewhere around the 30 to 40 year replacement cycle in 2009. Some people say 40 years, some people say 30 years. Clearly, we think the replacement cycle this year is going to be better than that. Our numbers are showing that already but we're know where near the seven year replacement cycle we were close to during the good times. Even getting to a 10 year replacement cycle would be significant compared to where we are today.

Okay, so but the point I was trying to get at is which I think you put the numbers around is that the installed base is somewhere between this cycle is going to be somewhere between 50 to 60% larger than last cycle so even if you don't shrink the replacement cycle as aggressively from a standpoint of what percentage of the floor gets replaced, you could still end up with the same absolute type of numbers.

No doubt about it. Clearly.

Okay. My second question was if you could maybe put some color around the economic impact of server port if you're successful, meaning if a printer is X per machine, server port is what percent of X, and how should we think about it from a margin contribution perspective?

Margin is going to be great. It's going to be very good for the casinos and very good for us. It's clearly, with our couple of hundred thousand printers out there, every printer could get a server port device, so it's, you start looking at the dollars and it's in the tens of millions of dollars for us.

It's a great technology. Clearly the casinos are looking at it from an economic standpoint for them. There's efficiency gains, literally, I've been to casinos and I'm not kidding where Monday morning there are hundreds of thousands of people lining up, they go to a booth outside the casino, not even inside the casino, hand an operator their player card and they look it up and say oh, you get such and such promotions this week, we could eliminate that whole thing, make them go right into the casino, sit at a slot machine, put their player tracking card in the slot machine, and get all of the information and then hopefully what the casino wants is for them to play.

The economics to the casino in talking to them, knowing that most of the casinos are wired with the ethernet, whether the bridges are there or not is the question, but we've talked to certain casinos that we're working with right now and the economics look very feasible to them. It's not a very big upgrade. The good news compared with our technology compared to some other technologies, our competitors printers, you don't have to replace the printer. You leave the printer, you just have to buy our server port device, so the economics for the upgrade is very favorable to the casino, and there will be trials, there will be a lot of work that goes on, but from what we can see in the things that we're talking about doing, the casinos are very excited about the communication they can do with their player, and also like I said, these efficiency gains, by not having everybody line up outside the casino waiting to get their promotions, bring them in the casino, let them sit at a slot machine and get the information. Let them get the promotion, so it's all very positive. Everybody we've shown it to, I personally have been involved with one of them and it's all going very positive right now.

I mean, is it double the margin potential per machine?

It's very favorable to us and it's very favorable to the casinos. It's not in my best interest knowing my competitor is on this call, to give out any of this information but I think our shareholders should know that we're making significant progress. Our technology allows them to upgrade to our server port, that we don't believe our competitor has that opportunity, and the casinos that have used our technology are just thrilled that they don't have to replace the printer, and be able to go and do this, but it's not in our best interest to share the price of this.

Okay. And it wasn't quite clear to me, is this a 2010 opportunity internationally as well?

We are talking to people internationally. There are people that would like to do this. I think our focus is going to be due to the technology and the amount of work we're doing is to get a couple of them running in the US where we can monitor it, we can work very closely but actually one of the key points in some of the discussions we've had is due to an international casino asking for it.

Okay, and then my last question was perhaps I realize it's very project oriented but can you talk at all about pipeline or proposal activity in the bank sector?

We had a good 2009. Clearly one of our banks went and bought a lot of printers, actually bought a lot of cartridges, actually stocked up extra cartridges, and we clearly have a pipeline of projects we're working on. I can tell you that one of them or a couple of them involve our new 2500 that we launched about a year ago as you know, and we think we've closed that one if not two of them, so we're starting to sell the 2500 and as you know, that was going right after our competitors' business and it's project oriented, we do have a fair amount of projects in the pipeline and what we look at Andrew, we believe the top line is going to grow, we believe the bottom line is going to grow.

We look at the ins and outs of everything. Our business has ins and outs, GTECH up, GTECH down, banking in, banking out, but overall we believe the revenue is up, we're pleased with what we're seeing in the domestic casino market, clearly pleased with the international market. We do have banking projects we expect to close and overall the revenue is going to be up. We did have a nice year in 2009 with one bank and our guys are out trying to close more, and I'd also say it looks like a couple of them are going to use our new 2500 which is a great product for us.

Great. Thank you.

Thanks, Andrew.

Next we'll hear from Beth Lilly with GAMCO.

Good afternoon.

Good afternoon, Beth.

I just wanted to spend a minute and talk about as you look at the business model three years from now, Steve and Bart, where do you think you can drive your gross margins to and your operating margins to?

Look, we took a lot of time in 2009 to get China right and Steve and I were talking about it today. By the middle of this year, some time this Summer almost 90% of our product will be made in China and that has a good effect to our gross margin growth. We're actually looking to expand our Asian operations because of the success we have, so our goal is mid 30s or better and our operating goal has always been to get it over 16 to 18% and if you look at the math and do the top line growth and grow the gross margins in that 35, 36, 37% rate, and realize that our operating costs as much as we've added, we have raises and bonuses and all that, but our operating cost clearly don't grow in the rate that our revenue grows, you can easily equate to getting to 16 to 18% operating margins over the next two or three years.

Okay, so but clearly, you need to leverage, you need the top line to grow to get there?

We're a manufacturing Company and we know what we're doing and so it's clearly top line growth and with top line growth comes margin expansion, not only look, we did the margin expansion by moving our products overseas and that's wonderful. It takes out a lot of extra cost. You don't have all of these manufacturing engineers, you don't have all of these quality engineers because you are working closely with your partners but what grows our bottom line is revenue growth, no doubt about it. And when you look at what we're doing as a business, we look at two initiatives.

We've got our organic growth so we moved into the international gaming casino market and I still believe it's happening, our gaming and casino revenue is now 60% and I think it's going to hold at 50 or more, even with the domestic market growing and we're looking at using our cash to add from an acquisition standpoint, we're looking at using our cash to do an acquisition or two that we can integrate into our business, drive their costs out, and add the revenue to our business, and the $10 million of cash that we have in the bank gives us a little war chest to go do that so we're looking at both the organic growth which we think is going come from the casino markets around the world, the gaming markets around the world, some of the other initiatives we've got going internally plus our acquisition strategy.

So as you think about, it's interesting because you've been talking in terms of just qualitative nature about 2010. Are you willing to quantitatively talk about do you think your revenues can grow 10%, 15% this year?

Yes, and I appreciate the question, Beth. Our Board has asked us not to give guidance so we struggled because we want our shareholders to know that we expect 2010 to be better top line better bottom line, but giving absolute numbers, our Board has asked us not to do and I don't think it benefits, so we can't.

I understand. Okay, great. Thanks so much.

Yes. Beth you should expect we talked about gross margin expansion in 2010. You should also expect some operating margin expansion as well because although the operating expenses are going to go up you heard me talk about that they aren't going to go up as much as the gross margin is going to go up so we will get operating margin expansion in 2010 as well.

Well obviously the thing for the year granted you had low margin business in there, your operating margins were 5.6% so if you think you can get them from 16 to 18% in two to three years, that's a significant jump up so I'm imagining 2010 is going to look pretty good in terms of an operating margin.

You'll see it starting in 2010.

The initiative we took in China was in a very difficult market mind you, as Steve said, we went into 2009 not really, I don't think as really as we exited 2008, never did we see the significant downfall that was going to come so we added inventory to make sure that our Chinese move would go smoothly. Well, it did, but we ended up with a lot of extra inventory because we planned on a certain year that didn't happen, so we spent a lot of time not only getting rid of the domestic inventory, but as we said in the third quarter, we also took time to take whatever we could and turn it into a printer, so if we had a POS printer that we can turn into a McDonald's printer we did, and that added some extra cost too, so that's all behind us now. I mean, it was our goal to get it but we thought we would get it done by the third quarter but clearly with the downturn we got it done by the end of the fourth quarter and you will start seeing that as this year goes on what that benefit is.

Wonderful. Thank you very much.

Thank you for the question, Beth.

We'll go with [Peter Caplan], a private investor.

Hi, Bart, how are you?

Peter how are you doing?

Bart just a quick question. Your server port technology sounds like a wonderful idea. Is it possible that could take away from business for the full printer and replacement of the slot machine, the casino might say this is a great technology at a small cost and not bother to upgrade for some time?

No, no, no, no. The casinos are going to upgrade their slot machines because they know that a Wizard of Oz or Sex in the City is a great machine driving more play and they are going to pull an old Red White and Blue or Double Diamond off the floor because they know that new slot machine is going to drive more play, so the two are totally separate. When we talked to a casino and ones that actually have 100% of our product and we talk to them about the opportunity, they aren't going to upgrade the whole floor with new slot machines, so the fact that they are going to upgrade to whatever they want to upgrade with different slot machines, they know that no matter what they purchased over the last couple of years, that slot machine, if it's got a 950 in it, it can get a server port, so they are just thrilled that they don't have to look at replacing printers in the other slot machines.

Got you.

So no, the two are totally separate.

Okay, that makes perfect sense, thank you.

Yes.

We'll go back to Andrew.

Hi, Bart.

Yes, Andrew?

I wanted to sort of take a swipe at sort of the analysis we were talking about on the domestic gaming casino markets with international. How penetrated do we think that market is right now, what does your applicable installed base look like and details on what type of runway do you think you have to sort of continue a period of sort of one off categorizes hyper growth?

Well, what I do, Andrew, is spend time in the marketplace and I spend time talking to the business leaders or in the local gaming people. I think the runway in front of us is long because right now, you've got casinos in Singapore too, you've got a couple of casinos in Macao, they're talking about clearly Sands adding two month, Wynn is talking about a casino in Kotai, you've got Thailand, all these countries, Australia is coming on, Italy. I mean out of nowhere Italy comes up and says we want to put 6,000 Coma-D machines out there and then I've talked to people in China that keep talking about 750,000 VLTs out there, so it's a matter of which countries go, what's going on.

I mean, Japan, a country that clearly is talking about 10 casinos. Does it happen next year or three years from now? So when you look at the population of the world and where the population is growing and what's going on in those areas, Asia just stands out as a wonderful opportunity for us and I don't think we've penetrated 5% of it from the true opportunity out there.

The interesting thing about Asia if you think about it like Macao, Steve Wynn went into Macao and decided to put feel fancy slot machines with printers in them. He was really the first one. He's hitting the cover off the ball with slot machines in Macao right now and he's adding slot machines to his floor, not taking them off the floor, so the first thought was well would Asians accept the slot machine, and now they're adding slot machines and they like them and they are doing more, so from a market side, the US is easy, because we look at 912 casinos out there, we got all kinds of reports, how many slot machines and we see what's going on in the States, from the international market especially Asia, you just got to look at country by country and see who's doing what, what are they thinking and when will something like that happen.

Clearly, Europe is struggling with budget deficits. I mean Italy and Greece, and they're looking at gaming and Italy came out and a year ago this time we didn't even talk about Italy. Now it's a huge growth driver for Transact in 2010, so the market size overall is bigger than the US, and it's just a matter of time of all of these different jurisdictions coming online and nothing better than having them come on line once or twice a year than having them all come on line in one year, so you look out, Andrew, and it's just I don't see it stopping for a while. Our projections this year continue to see some pretty significant growth, and we don't see that stopping.

Bart, yes, so if I think about it as being a larger opportunity from an installed base over time and when you install base/expansion, and I think about us having bigger market share internationally than domestically, again, not trying to put a year, a specific year around it, you think that international in a sort of normal to peak environment could be a $20 million plus business?

Yes. We entered it and you can't look at 2009 as anything but it was a difficult year in the international markets. There were just a couple of openings and we still did the numbers that we did. You've got a lot of, and it's different types, it's also, it's not just casinos. You've got six odd betting terminals, FOBTs, you've got AWPs, amusement with prizes, all of this off premise and then you've got casinos and you've got the small casinos, the large casinos, so it's all of that, Andrew, and it's not like I said, it's not just slot machines.

We had a pretty good year in fixed odd betting terminals, we had a pretty good year in amusement with prizes and those are our 430 and 880s. That's not even our 950s and we're expecting that to continue to grow also, so it's a multitude of different opportunities that add up and that's why we put gaming and casino together and not just casino or gaming separate, because in the international markets it gets kind of blurred. Italy once talked about roll printers before they decided to go with ticket printers, so it could have been our 430 or 880. They ended up settling on the 950, so it's kind of, there's multiple applications and multiple opportunities, so yes, wouldn't surprise me then in a couple of years that international is $20 million. I mean look how fast it's grown so far.

And to the prior caller's question, is there a revenue number around that target operating model and can you share it on the call?

No. But you know it's a math equation though. I actually think that you can actually do it. It's a math equation, right? You know what our gross margins are going to be and you just play with the revenue and then just look at our operating expenses, and the nice thing about the gaming and casino market, even McDonald's business and all that, is it doesn't take a lot of extra cost to drive that business higher.

It's the same slot manufacturers that are doing the business. I mean clearly, we are spending a little more money because of Italy and making sure that we get that business, but it's not a lot of money, so if you play with those operating expenses, and then look at and then play with the top line, you'll see. We're a leverage manufacturing business, more revenue drives clearly, and look, if you look at saying that our gross margins are go to be 35% but what is the incremental margin once we get through breakeven.

Some of our products generate 50 to 60% incremental gross profit, so the blend becomes 35%, but when you start looking at driving 45%, 50% incremental gross margin on the incremental sales, you can see what the margin expansion is, so it is a top line game and that's why we're so focused. That's why we decided to put a little more sales and marketing expenses out there because it's driving that much more profitability. That's why we're looking at some of these companies to buy, because we believe we can take out their manufacturing and then drive this top line growth.

So it is, the nice thing about Transact is it's now positioned. It's got a great balance sheet. We know how to manufacture. We've got our manufacturing running up in China. We've got expanding markets and it's just, it's driving cash and we're driving cash to the balance sheet and it's allowing us to do things like look at acquisitions that will even drive more sales and then more cash.

Great. Thank you.

Yes.

We'll next go to Debby Slater with Slater Financial. You may be on mute.

Yes, I am, can you hear me?

Yes, how are you doing?

Good, good, how are you guys?

Okay.

Great, great. I'm sorry, I had a bit of a disruption here in the beginning of the call and I just wanted to know, can you give us any color on the stock repurchase program and that is slated to end this month, will that continue?

Well, it does end this month and clearly the Board will look at whether they want to keep it going but from what we see the opportunity for acquisitions looks really promising and we look at what's going to give us the biggest return to the shareholders and it's clearly earnings per share, and we think that we can accelerate earnings with an acquisition or two and it's got to be right, and we're conservative and we're thorough, but so from a cash standpoint, the larger cash position gives us a better opportunity to do some of these acquisitions, so we like having the cash for the acquisitions we're looking at, but what we're going to do Debby is we continue to analyze what's going to bring us the biggest return, buying back shares or if we do an acquisition what is that going to drive and accelerate the earnings even more.

Thank you so much.

Yes, thanks for the question.

Gentlemen, there are no further questions at this time.

Well Operator, I'm glad we decided to stay on the line. I really appreciate the questions, shareholders. Wonderful and we're very pleased with the fourth quarter. We are going to announce that we're going to do this Roth Capital conference as we always have. Todd, we are very glad that you're doing it next week versus a couple weeks ago so we can talk about our fourth quarter so we thank the guys at Roth Capital for moving the conference out a little and I'm sure it's not on our behalf but it actually helps us. I'd like to thank the shareholders for joining us today and we look forward to the next conference call with you. Thanks for joining.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.