TransAct Technologies Inc (TACT) 2010 Q2 法說會逐字稿

Good day and welcome to the TransAct Technologies second-quarter 2010 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Garrett Edson of ICR. Please go ahead, sir.

Thank you, Melissa. Good afternoon and welcome to TransAct's second-quarter 2010 results conference call. Joining us today from the Company are Mr. Bart Shuldman, Chairman and CEO, and Mr. Steve DeMartino, 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 the 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, 2009. 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, and good afternoon, everyone. And thank you for joining us on today's call.

We are very pleased to say today that TransAct is now on a winning streak and we feel very confident on where our business is heading in the second half of 2010, even despite the slow rebound of the global economies. For the second quarter of 2010 our revenues increased 16% to $16.4 million compared to $14.2 million in the second quarter of 2009. And earnings per share increased over 70% to $0.12 for the second quarter from $0.07 in the prior-year quarter.

Our results in the second quarter of 2010 were once again led by the growth of our casino and gaming sales in both the international and domestic markets, but especially in the international casino market. Our international casino printer sales were up 226% from the prior-year quarter. That is not a misquote. We had a fantastic quarter in the international casino sector, led by solid growth in our European market. Part of that growth was due to shipments for the new Italian VLT market.

As we have said on many of our calls in the past year, one of our growth strategies and drivers was to focus on growing our international footprint in both the gaming and casino markets, as we believed those markets were ripe for expansion and new printer sales opportunities. This has worked out extremely well for us in two respects -- one, generating strong overall growth and, two, diversifying our revenue stream away from the current difficult domestic casino market. As you can see from the first quarter, and now in the second quarter, that focus is now paying off for TransAct in a major way. To that end we recently expanded our office in Macao and added a new partner in Latin America as we continue to see strong growth potential in the international markets going forward across all geographic areas.

Although our growth strategy was primarily to focus on new international markets, we have not let our guard down here in the domestic casino market. In fact, our domestic casino business continues to grow despite what appears to be negative growth in slot machine shipments into the US. For the second quarter we did see a 20% increase in revenues from Q2 2009, which translates into a larger market share with our US slot machine customers. We believe this increase in market share is a direct result of our superior product offering and excellent sales and service. When the domestic market starts to improve, we'll be in a much stronger position than ever before to capitalize on any new orders or expansion, given our continually improving market position. But unlike in previous years, we are not reliant on a domestic turnaround to improve our casino and gaming business. It should only add to it.

Before I continue I would like to congratulate Steve DeMartino for his promotion to President. Steve and I have worked for many years together, and I know most of you have had a chance to talk to him as you have worked to get to know TransAct. I know I represent the Board and all the employees at TransAct in congratulating Steve.

In this regard, I will focus my talk in the markets we serve and Steve will talk about the Company's financial and operational performance.

So now let's dive further into the results by market. Starting with our casino and gaming market, where total sales were up 82% from the prior-year quarter, we continue the torrid pace of growth we saw in the last quarter. International casino and gaming sales were up 149% led by the 226% increase in casino printer sales from the prior-year quarter and now accounts for over 66% of total TransAct casino and gaming revenue. The growth was led primarily by orders for the Epic 950 slot machine printer for the new Italian VLT market. As we look forward, we do expect to see the positive impact from our new distribution agreement in Latin America with Hanco Technologies, which we signed in April, which should continue to add to our international gaming and casino sales.

On the domestic side, revenue in both our casino and gaming market grew 19% from the prior-year quarter. This was in spite of the continuing weakness in the overall domestic casino market in the second quarter of 2010. With the recovery in slot machine orders uncertain in the near term, we are very well positioned, thanks to our growing market share and our top-shelf ServerPort technology for casinos that are moving to server-based gaming.

Now, as we look ahead over the next few years we believe we will continue to see wonderful opportunities in the international gaming and casino market as well as the US. Just looking at Greece, Brazil, Canada, Illinois, Ohio, and maybe even Massachusetts, just to name a few, gives us confidence in the future growth of our worldwide gaming and casino business.

We also continue to stay very positive about the opportunities we see for TransAct with the move by casinos to server-based gaming. Over the next six months or so, we will have much more to say about that.

Moving on to our banking and point-of-sale markets, sales were down 28% for the quarter to $4 million from the second quarter of 2009. However, I am extremely pleased to report that we had an outstanding quarter in our POS market, with solid revenue growth of 43% as we began to ship in meaningful volumes to McDonald's for the grill initiative, which is now included in their major POS system upgrade program. Most of our investors know this has been a project we have been working for almost four years and we are now really starting to see meaningful sales volume driven by the POS system upgrade project. Let me explain.

McDonald's has made it mandatory for their stores to upgrade to their new POS system, which must include at least four to six TransAct model 8000 thermal printers per store. There is a serious upgrade program underway which should last at least through the end of the year. Adding to this upgrade program, we also continue to see ongoing volume of our coffee and combined beverage printer too, all adding to solid growth for our POS business.

Despite the difficult US economy, we also saw growth in our standard POS business in sales, which included a significant order from a large retail chain in the quarter. I cannot tell you how pleased I am with the success our POS sales team is having in this difficult economic environment.

In terms of just our banking sales, revenue was down 89% as we compared Q2 2010 against a very big Q2 2009 when we shipped a large order of banking printers to our largest banking customer. While this market is mainly driven by specific projects, we did tell you that we launched the BANKjet 2500 inkjet printer just to go after the everyday bank teller printer replacement market. Banks replace broken or old printers every day and we developed and launched this printer to be a drop-in replacement for banks -- for banking teller stations that currently use a competitor's product, but where we believe the bank wanted a better and newer technology.

So with that said, on a positive note in the second quarter of 2010, we did see an increase in orders for our BANKjet 2500 printer, which we believe is starting to become a big sales producer for TransAct. While banks continue to work through the issues they experienced in 2009, we feel very positive about our decision to go after the bank teller replacement printer market in the meantime.

Turning to our lottery market, lottery printer revenue rose 25% to $2.5 million from $2 million in the prior-year quarter, primarily due to the timing of orders. As we mention on every call, lottery sales can vary significantly from quarter to quarter due to these timing issues.

Looking at the rest of 2010, with our GTECH extension that we received at the end of last year, we are expecting revenues in the back half of 2010 to be higher than the first.

Now let's move on to TSG, our TransAct Services Group business, which saw revenue increase 13% in the second quarter of 2010 compared with the second quarter of 2009. The increase primarily was due to rising consumable sales, mainly from higher inkjet cartridge sales to new customers. This was a nice surprise. As we mentioned on our first-quarter investor conference call, comparisons for our consumable business would be a bit difficult this year, due to a large amount of inkjet cartridge sales that were made to our largest banking customer in 2009. In addition, TSG revenue was aided by higher service revenue from a new paper testing services program we now sell and we now offer the market, as well as increased international consumable sales.

So, to sum it up, I can say it was a fantastic quarter for TransAct as the strategies we put in place over the past couple years are paying off in a major way in 2010 for our company. Our revenue continues to increase and we are in a solid position for future sales volume increases in the back half of 2010. I'm thrilled with the work all our sales teams are doing, where we are putting up excellent numbers thanks to our focused efforts built upon our strategy to the build the business in the many markets we are in, even in these uncertain economic times.

And while we wait for the domestic casino market to rebound, we have very high expectations for the international gaming and casino market going forward and believe it can be a driver for us for years to come.

At the same time, I am very happy with the work being done by our domestic gaming and casino team, which continues to gain market share in the face of very difficult domestic casino environment. With Illinois coming on line next year, Ohio in 2012 for casinos and possibly earlier for racinos, and the other potential jurisdictions like Massachusetts, and our work in server-based gaming, we look forward to our market share growth driving solid revenue increases from our domestic market in the next few years coming.

So looking forward, we do expect stronger revenue in the second half of 2010 than the first half. With that, we also expect stronger earnings per share in the back half of the year compared to the first of 2010.

At this point I turn the call over to our new President, and of course CFO, Steve DeMartino, who will share the details of our financial and operations results with you. Once finished, we will both be glad to answer any questions you have. Steve?

Thanks, Bart. Let's go over the second-quarter financials. As Bart explained, our net sales for the second quarter of 2010 were $16.4 million, an increase of 15.5% from $14.2 million in the second quarter of '09.

During the second quarter of 2010 we shipped approximately 51,000 printers, which is a 30% increase in unit volume compared to the 39,000 units we shipped in the second quarter of '09. This increase in unit volumes was led by the casino and gaming market, where our unit volume increased by 99%, which is quite impressive given that the domestic casino market continues to struggle.

The average selling price of our printers declined by 10% to $252 per printer in the second quarter of 2010 compared to $280 per printer in the second quarter of '09. The decline in ASP was due largely to sales mix, as we sold substantially more banking printers, which are at higher average selling prices than our other printers in the '09 period compared to the 2010 period.

I'd also like to mention one other revenue statistic. During the month of June our sales reached over $8.2 million, an all-time monthly record high, as we produced and shipped close to 30,000 printers in the month.

Now turning to gross margin, our gross margin in the second quarter of 2010 rose to 37.4% from 34.1% in the second quarter of '09, an increase of 330 basis points. The gross margin increase was due mainly to two factors -- first, we sold a greater percentage of contract manufactured products that have lower overall product costs in the quarter as we reaped the full benefits of the China manufacturing transition we completed in late 2009. And second, we experienced a more favorable sales mix as we sold more higher margin casino and gaming printers and fewer lower margin banking printers in the quarter compared to '09. Going forward, we expect our gross margin for the back half of 2010 to remain strong and relatively consistent with our gross margin reported for the second quarter.

Operating expenses for the second quarter of 2010 were $4.4 million, up 14% from $3.8 million in the second quarter of '09 for a few reasons. First, engineering and G&A expenses were up, largely due to higher compensation-related expenses. You may recall that in '09, due to the uncertain economic conditions at the time, we decided to forego annual salary increases and reduce incentive compensation for our employees. For 2010 we've now reinstated the annual salary increases and incentive compensation levels for our employees, which led to an increase in these expenses.

Second, selling and marketing expenses rose from the prior-year period primarily from higher sales commissions and travel expenses resulting from higher sales volume. And lastly, we incurred an increased severance charge in the second quarter of 2010 of about $100,000 related to the termination of production employees due to the move of our production to China.

Our operating income in the second quarter of 2010 increased 73% to approximately $1.8 million, or 10.9% of sales from operating income of $1 million or 7.3% of sales in the prior-year quarter. So our operating income increased 73% on only a 16% increase in sales, clearly illustrating the powerful operating leverage in our business when our sales increase.

We recorded income taxes at an effective tax rate of 36.6% in the second quarter of 2010 compared to 33.4% in the second quarter of '09. Similar to the first quarter of 2010, our effective tax rate for the second quarter was again unusually high because it does not include any benefit from the federal research and development tax credit, which is normally included in our rate. And this credit expired at the end of '09. As a result, we will continue at this tax rate during 2010 until the credit is reinstated. If and when the credit is reinstated we will record a favorable year-to-date catch-up adjustment in the period in which it is reinstated. If the R&D credit is not reinstated we expect our effective tax rate for 2010 to be consistent with the second quarter at between 36 and 37%.

And on the bottom line, diluted EPS for the second quarter of 2010 was $0.12 compared to $0.07 per diluted share in the prior-year quarter.

Now let's take a look at our balance sheet at the end of the quarter. Cash I'll talk about a bit later. Receivables were $11.5 million as of June 30th, 2010, up from $8.2 million at the end of the first quarter 2010. The increase in our receivables reflects the higher sales volume we saw in the second quarter of 2010, as well as the timing of sales in the quarter. Keep in mind, our receivables at the end of June included our record June sales of $8.2 million. Despite the sales increase our collection effort and days sales outstanding both continue to be good.

Our inventory balance rose to $11.6 million at the end of the second quarter of 2010, up $3.1 million from the first quarter of 2010. And let me explain. We consciously decided to increase our inventory levels during the first half of this year for two reasons. First, we decided to stock up in anticipation of stronger sales volume in the back half of the year.

And second, as you may not be aware, due to the recovering global demand for electronic products and the lag time of suppliers to ramp up production to meet this demand, certain electronic components have become difficult to get. For example, lead times for some critical parts have reached over nine months, and some parts have been placed on allocation where only limited quantities are available.

Recognizing this situation could result in parts shortages or a delay in fulfilling customers' orders, and given our outlook and customer forecasts, we made the decision to order as much ahead as possible and stock up on the products we believed could be impacted. We think this was a prudent use of our cash. I'm certainly glad, as I'm sure you are too, that we have the strong balance sheet and a war chest of cash to do this. Looking forward, we expect to work our inventories gradually down as we move through the remainder of 2010.

Our accounts payable also rose by about $1.8 million, or 28%, to $8 million during the second quarter of 2010. This increase was directly due to our higher inventory purchases during the quarter. And in terms of debt, we continued to have no debt outstanding under our $20 million revolving credit facility with TD Bank.

And now looking at our cash flow, our cash balance declined by $2.1 million to $8.6 million at the end of the second quarter from $10.7 million at the end of the first quarter of 2010. Our cash balance declined as we used some cash to fund working capital, including increased inventory levels, as I just explained. During the second quarter of 2010 we used approximately $1.9 million of cash from operations largely to fund working capital, including a $3.4 million increase in accounts receivable and a $3 million increase in inventories, partially offset by higher accounts payable and accrued liabilities.

Our capital expenditures were approximately $340,000 for the second quarter of 2010 compared to approximately $225,000 for the second quarter of '09. Based on our pipeline of planned development projects, we expect our capital spending to ramp up during the remainder of 2010, with expectation for the full year to reach between $1 million and $1.5 million.

Depreciation and amortization totaled approximately $400,000 for the second quarter of 2010 and $475,000 for the second quarter of 2009. Noncash comp expense totaled approximately $125,000 for the second quarter of 2010 and $175,000 for the second quarter of '09.

Looking at some of our financial metrics, our working capital increased to $23 million at June 30th, 2010 from $21.5 million at the end of the first quarter 2010. The increase in working capital was largely due to the increase in inventory and receivables from the previous period. Our current ratio was a solid 3.0 as of June 30th 2010, down a bit from 3.5 at the end of the first quarter. The decline was due to a proportionally higher increase in the accounts payable and accrued liabilities than in accounts receivable and inventories during the period.

Our EBITDA for the second quarter of 2010 was approximately $2.3 million, a 42% increase over our EBITDA of $1.6 million for the second quarter of '09.

And lastly, at the end of May, our Board of Directors approved a new stock repurchase program effective immediately, authorizing us to repurchase up to $10 million of our common stock from time to time in the open market over the next three years, depending on market conditions, share price, and other factors. We did not make any purchases of our stock during the second quarter of 2010 as our trading window was closed.

In closing, the second quarter and first half of the year were a testament to the outstanding work done by the TransAct team, as well as our top-of-the-line products, which led us to double-digit increases in sales volume and a sizeable improvement to our gross margin, aided by the completion of the Chinese manufacturing transition. For the back half of the year we expect to continue increasing our sales, operating margin, and EPS over the prior-year periods based on our current backlog of orders and forecasts of order flow.

Furthermore, we remain in excellent financial position, with $8.6 million in cash, no debt, and $23 million in working capital on our balance sheet. We look forward to an even better second half of the year.

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

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

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

Congratulations on another strong quarter. And, Steve, congratulations on the promotion. Well deserved.

Thanks, Todd.

Just a handful of questions here. Number one, obviously international sales up big in the quarter; Italy a big driver there. Bart, can you maybe give us a little more color there on how much contribution came from Italy in the quarter? And were those just units shipped to Lottomatica/Spielo or did you also ship some units to other third-party game providers?

Yes. I would say a lot of the international increase was due to Italy. Europe was the main driver. There was some other business that there is in Europe, but a good driver was Italy. We had a good chunk of business from there.

We saw business across the board. So we're selling not only to Speilo but other manufacturers in Europe. So what you see is our business flowing through our European partners into Europe to the slot manufacturers that are in Europe that are providing games into Italy.

Okay, great. And do you still expect a higher volume of shipments in Italy in the second half of this year versus -- or I guess on a quarterly basis should we expect a higher volume of shipments in the third and fourth quarter versus the second quarter?

Yes. We're just getting into the shipments for Italy. As you know, there's been some deals recently announced out there between the concessionaires and the operators. And so we're expecting a good flow-through of orders coming in through the third and fourth quarter. That's why we're talking about -- it's one of the drivers of the second half of the year being so big, bigger than the first half, is we are seeing the flow-through of those orders including other business around the world. But that just adds to it.

Okay, great. And then on the -- with respect to McDonald's and the grill initiative and the POS upgrade there, you mentioned that that had a positive impact on the quarter. Can you give us a sense for how you expect that to continue throughout the year as well? Do you also expect on a quarterly basis that volume to pick up in both the third and fourth quarters over the second quarter? And can you give us kind of sense for maybe how many stores have upgraded already?

Yes. You know, Todd, we were pleasantly pleased with McDonald's decision to make it mandatory that the new POS system go out to all 14,000 stores and that, as part of that, the new printer, our printer, has to go out with that. It's a whole upgrade to the store experience. They're upgrading the stores; they're upgrading how you actually order the food. And so not only is now the grill printer part of it, but our 8000 in the front of the house is also part of it.

This just happened. Basically it was pretty much announced in April and May. Late April was the franchisee show that McDonald's had in Orlando. And they announced to their franchisees and their company stores that they were going to roll this out countrywide and make it mandatory.

So we're just seeing the tip of this business. There are a lot of printers to go out. We started shipping basically in June. But they have a -- if you think about 14,000 stores and four to six printers minimum going out, some more, there's a pretty good roll out schedule coming. They are trying to get it done quickly. I think they're going -- they've got to do the installation, so we'll see it, we really will see it in the third and fourth quarter pick up compared to what we saw in the second quarter.

The other thing that we're very pleased about is they're also making the coffee printer, which we now call the combined beverage printer, also mandatory as part of the 14,000 stores and this so-called combined beverage business. For those that haven't noticed, there's a big frapuccino move by McDonald's in offering a kind of a cold coffee drink. They're adding more drinks to this and as part of that, they know that the customer service is really important that they get the drink right. So they're now making it mandatory that -- and we don't even call it the coffee printer anymore; we call it the combined beverage printer be also installed. So we even have some more combined beverage printers to go out through the end of the year.

Okay, great. And also wanted to ask a question regarding the relationship with IGT. Has had that default contract. Is this a relationship or contract that you guys need to renew or extend or anything like that? And can you maybe just give us an update on that and what should we look for going forward?

You know, Todd, we've really grown the market share. I mean, I think if you look at the results that are out so far, really we've been able to look at two slot manufacturers, IGT and WMS, that have put out the results and we can see the units shipped. And clearly the market is down in the second quarter. Just if I look at the -- if I kind of look at your spread sheet that you've used to look at the shipments domestically, we would say the domestic market in the second quarter was down 20 to 25% in shipments. There are some things in sales where something could have shipped six months ago and then the OEM can call it sales in this quarter, but we look at straight shipments, we were up over 20%. So clearly we're gaining market share and most of that is done by the product acceptance and our sales.

While we really have enjoyed the relationship with IGT and actually expect to renew our default position with them, I don't think it's really going to have any effect to the market share growth that we're experiencing. The casinos, the amount of new casinos -- we measure our market share, we measure our results not only through the push through the OEMs, but the pull-through with the casinos. And based on our statistics and our reports that we've generated, we are gaining considerable ground in the casino market.

So once the casino makes that move to the TransAct 950, they -- the good chance they're probably not going to ever go back to the FutureLogic printer. So we feel very good about our position in the marketplace. And whether there's another default position or not, it really is going to have minimal impact to the growth that we're experiencing right now and will maintain.

Okay, great. Thanks, guys.

Larry Haverty; GAMCO.

One, I thought your comments about service-based gaming were a little amorphous. Things seem reasonably slow on that front and I'm curious if you're seeing anything that indicates that that's not the case. And then I have one other question.

Yes, good point. What we see domestically, Larry, and we have been a big proponent of one side of server-based gaming, which is the ability to communicate to the player directly at the slot machine. And we believe the printer is the way to do that. And it's an unattended transaction. The slot machine, for better words, is a kiosk and there's a way to communicate. And through the growth of '06, '07, '08 while the industry was expanding and kind of if they build it they would come, the casinos were growing and having a good time.

And then we hit '09 where the recession hit, deep recession, and clearly the domestic market is still feeling that. And the result is showing at -- so now the casinos are really starting to focus on how to drive more business at the casino. Not, "Can I build more?" "How do I get more players either in or how do I keep them on the slot machine longer? How do I make them feel better?" So we are experiencing a lot more, I'll call it discussions, but it's a lot more than that, regarding technology that we have and technology that we're developing. And we really see the movement of the casinos from a kicking the tires to, "Let's talk in more detail and let's see what we can do in regards to driving more play and more things at the slot machine."

So while we're being a little amorphous because we want you to know that we are seeing it. I was actually, as you know, not as bullish about server-based gaming because I wanted to understand what the value to the casino or the player was. With the promotion conversation and the coupon conversations that we're having, I now see that the casinos can see the benefit of it. And clearly it's going to come with our technology. So we will have more to talk about. And we just want you to know, as our investors, that we are starting to have much more in-depth conversations with the casinos about this and feel very good about the potential of what this can mean to TransAct.

So are you -- would you take the three-to-nine month end of the equation or the two-to-three year end of the equation? (Inaudible -- multiple speakers.)

Yes. I would -- yes, that's a -- let's try to pin it down. So I think that there's some things that we'll be showing and I think we're talking within 12 months, of showing and possibly installing. The benefit of what we can offer the casinos, I don't think it's two to three years out. I think it's less.

And these are not installed in Aria at this point?

No. No, I think what you see in Aria is what you have today. And there's going -- look, there's going to be different systems and different solutions out there. There's not going to be one cookie-cutter solution for the industry. So they'll be different opportunities for all of us to participate in and we believe one of those options is going to be very beneficial to TransAct.

Now, you announced that you had opened an office in Macao. And it seems to me that what's happened in Macao, especially on the slot end, has mostly happened. Stanley Ho opened a number of stores and the Venetian is now fully up there. And you do have Galaxy and maybe sites five and six. But it looks to me like Macao in terms of potential for a company like yours is sort of yesterday's story. And I'm wondering what you're seeing there that I'm not seeing, or -- ?

Yes. So we were already there. We were actually sharing an office and decided to not only open our own office, but to expand, and for many reasons. First of all, Macao is not done yet. And there are other -- there are many opportunities in Macao still to come. And I think we just heard today that MGM wants to expand in Macao. And Galaxy has got to open up.

Macao is the center of our Asian business now. So the reason why we stayed in Macao is we were there. We had already set up our infrastructure there. And looking around Asia, where else we can move to open up our headquarters was much more expensive. I mean, we looked at Singapore, for instance. I was there about six weeks ago, or eight weeks ago, and we seriously looked at should we be more central. And it turned out that it's easy in and out of Macao. You've got the Macao airport. You've got Hong Kong. And there are many opportunities in Asia, not just in Macao. But Macao does offer new opportunities that are coming.

The one thing that impressed me the most out of what's going on in Asia was my trip into Singapore and having the opportunity to meet with the senior management at Resorts World. And while I got a tour I noticed an area of the casino floor that had been emptied. And I asked the senior official what was going on and he said, "That's where table games used to be. We're putting in slot machines instead." And I said, "Wow, that's music to our ears. What's going on?" And he said, "The Singapore player likes the slot machine." And they're doing quite well with it.

That's, that's the multiplayer, the rapid roulette, Bart.

No, no. These were slot machines. No, these were slot machines. The rapid roulette was in the back. And clearly -- look, they are -- the Singapore player is not just a baccarat player. Rapid roulette is selling wonderfully there. A lot of them have our printers in the kiosk. So when you play at your individual station our printer is in there. But these were truly slot machines that they were putting in. So we were really pleased with that. And the results of the slot machines even in Macao have gone up.

So Macao is our center of Asia; it is not all of Asia. And I think once you look around at what's going on in the Philippines, what you hear about Taiwan and some of the other jurisdictions, maybe even Japan, we will sell and service out of Macao. That's where our headquarters will be, but that -- in order -- allows us to branch out. It also allows us to get into China quite quickly where we have a lot of relationships, not only from our manufacturer, but other manufacturers that are manufacturing for our customers there. So it allows us to cross the border very quickly and attend to their needs.

Okay, great. That's helpful. Thanks a lot, Bart.

Jim Roumell; Roumell Asset Management.

Hey, just stepping back for a second and understanding the international and domestic gaming market, if I understand correctly there are estimated to be about 1.5 million slot machines domestically and about 1 million abroad for a rough total pool of 2.5 million?

Okay.

Is that -- do those numbers make any sense to you?

You know what? I would almost flip it. I would say 1 million domestically and 1.5 internationally.

Oh, that's -- you know what? Yes, that's what I meant to say. Right. Okay. Here's what I'm trying to get at. You don't break down on the casino side of the $6.3 million in sales for instance, what percentage came internationally and what came domestically.

Yes, I think we just did.

Yes, we do in our Q, Jim.

Oh, you did? Okay. Okay.

We said that 66% of our casino and gaming sales is now international.

Is now international.

Yes, so the $6.3 million of total sales, $2.1 million was domestic, Jim, and $4.2 million was international.

Got it. Okay. So directionally, where do you expect -- I mean, when you kind of model out the next few years, is that likely to -- it's just very hard to handicap because you don't know when the turn domestically will happen on the replacement cycle? Or even when you kind of model what you expect in terms of domestic replacement that international will basically go from here? In other words, 63%-plus. How's that --

Yes. Great question, Jim. And the way we model it is, when we look at the domestic replacement market, I think we're at a new level. And we look at that and say that's going to continue for another year or two. But what we add into that is the new jurisdictions. For instance, Illinois is next year. And that's, let's guess, between 30,000 and 50,000 units. We then add into that Ohio. We add into it Washington. So we start -- and then we add into it -- because we really look at it, some of it in Canada as almost North American business. And Canada becomes 25,000 to 50,000.

So what we're focused on is where are the opportunities domestic going to come from. We know that the replacement market is soft. But we've got all this new jurisdictional stuff coming in and that's clearly going to increase domestic sales over the next couple of years, even if the replacement cycle stays flat. Now, nobody believes it's got to stay flat only because these machines are getting old. So as the casinos get healthier they -- we believe they'll start buying again. But even when we hold it flat, you've got all of these new jurisdictions, which, if you think about it, Illinois alone is, I don't know, 30,000 to 50,000 machines. That's probably more machines than our shipped into the US today, even in replacement and new openings.

So we've got something that big coming in. So we look at that and say, that's important to us. We need to go after that, just like Ohio, just like Washington. So we look at those opportunities and say we feel pretty good domestically even though when people normally look at the market they go, "The replacement market is soft." No doubt about it. But you've got these very large jurisdictions coming on.

And we like to say in times like this we do actually well, because if you think about it, while the domestic casino market's hurting a little, you've got these states that are trying to drive revenue by using gaming or casinos to do that. And that means all new placements out there. So when we model it, we look domestically at that and say, okay, where are those opportunities coming from and how big are they. And they're quite big when you look at what's going on in the market today.

Then you look internationally and you've got expansion going on in Macao. You've got expansion going on in Singapore in adding new slot machines. You've got new countries coming on board in Asia. And I think everybody could read the press releases about what's going on in places like the Philippines and all that.

But then you've got something like Greece, which just popped up three, four months ago. In fact, if you think about the conference calls that went on in the gaming industry in the first quarter this year, basically nobody talked about Greece. Yet all of a sudden Greece could be 50,000 units and that could happen quite quick. We're not even sure -- it could actually happen this year. Now we're not modeling it for this year, but they're in dire straits. They're looking at gaming at helping them out and they've announced it could be as much as 50,000 units. Well, again, that's more than what we shipped domestically this year, or the whole market, not what we did, what the whole market did.

So then you start looking that and modeling that in, and we feel -- we're kind of almost at an inflection point up considering we're even having this good of a time in a very difficult environment. Then you start thinking about Brazil. Now, Brazil has kind of pushed it off. We had to get through the World Cup. We had to get through the summer. But Brazil could happen. Well, is that 100,000 machines? Is that 200,000 machines? You start talking about Japan. So now, not all of them will hit, but one or two will hit and then they'll just add to the available opportunity for us, not in a replacement market, but in a new market for us, which again, if you think -- as large as what we're doing.

We focused a lot on Italy. We talked to the investors and said, "There's a lot going on in the international market. We're going after it." And I think people said, "Okay, well what does that really mean?" And then you look at the domestic market. You look at the replacement side and say, "Wow, probably wasn't a good quarter for TransAct." Yet, we had a phenomenal quarter I think. And that's because we looked at that opportunity and said, "That opportunity in total is as big as the whole market in the US could be this year." So we strategize. We sit -- we analyze it and then we go after it.

So when we model it, Jim, we truly see some big opportunities the next couple of years. And that's even holding the domestic market flat. I mean, just think if that -- we've got 900,000 machines out there. We're probably at some 25, 30, 40-year replacement cycle. Just imagine if it dropped to a 15-year replacement cycle. And think about what happens if our server-based gaming technology takes hold and people want to really use that. So the opportunities for us going forward to us look very promising.

Okay. So terrific. That sounds fantastic. Do you have any concerns about component constraints?

No. You know what, Jim? If you had asked me that four months ago I probably would have said yes. Now, we saw this starting in October, November of last year, when our manufacturers were starting to complain. So we got together, actually Steve and I got together, and we knew we had a good balance sheet. And we went to our purchasing department and said, "Just buy everything you can. Just don't stop." And we have a very, very good inventory position right now, where we don't -- with all that we see out there, and even if Greece was to hit, we can meet the demand. We used our cash to protect ourselves.

And you talk to other companies, and we talked to other companies out there. We talk to [bill acceptor] companies out there that are talking about how difficult it is to get product out the door. We're in very good shape.

We talked to McDonald's. I mean, McDonald's came to us and said, "We're making this mandatory." And we said, "Okay, give us your rollout schedule because there are parts shortages out there." And Steve actually, when I was away in Asia, went and ended up approving buying even more printers than we had forecasted because of this new news from McDonald's.

So we are in a very good inventory position right now. We used our cash to do that.

Excellent. Okay. Thank you.

Debbie Slater; Slater Financial.

Nice quarter. Thank you, Steve, and thank you, Bart. Thank you on behalf of all my investors. I have two questions and the first is, do we still feel that off-premises gaming markets could be potentially as big as the casino market?

Great question. Because Italy is really an off-premise market. I mean, Italy is a VLT business where they're putting machines on the street. So it's starting to blur, because while we thought Italy could actually be a roll printer, which would more fit into our typical gaming environment, Italy ended up using our 950, which is the ticket printer.

So when you look at Italy and you look at Greece, that's basically off-premise gaming, that we coined -- we coined the phrase. But that's -- or the VLT market as some people have called it, but it's a little more than the VLT market because it actually is two slot machines. So it's blurring together. So when you look at Italy, when you look at Greece and some of the other opportunities just in Europe, that's basically all off-premise gaming.

Okay, thank you. And my second question, I wondered if we are still exploring acquisitions and, if so, would we ever consider an acquisition which would be outside of our core printer business?

Well, we are aggressively looking at acquisitions because, based on our manufacturing model, we think we know what we're doing and we'd love to add more volume to our business. I think you got a good sense of a 16% sales increase drove, what, 70% earnings increase. So you can see what we can do when we put more through our system.

I can't comment on what we're looking at. But we know what we do for a living. We know what we like to do. And we'll focus on that and once we have something to announce, we'll let everybody know. But we like the idea. We are very prudent in our analysis. We're not doing it just for the sake of doing an acquisition. It'll only happen if it's accretive. And we know what we're doing. But Ben is working very hard on that for us and we'll let you know once we have found something and want to announce it.

Thank you so much.

(Operator instructions.)

Okay. It seems like we're done. Operator, we appreciate it. Shareholders we very much appreciate your joining us today. We're thrilled with the results. We're pleased but we're not going to stop here. Our sales forces are working extremely hard. And we'll talk to you on our third-quarter conference call. We thank you for joining us tonight.

That does conclude our conference for today. Thank you for your participation.