TransAct Technologies Inc (TACT) 2010 Q3 法說會逐字稿

Good day, everyone and welcome to the TransAct Technologies third 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, Corina. Good afternoon, and welcome to TransAct's third 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 risk factors inherent to the business in 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. Good afternoon, everyone, and thank you for joining us on today's call. Given an extremely weak domestic casino market, we were pleased with our results, including another quarter of strong gross margin improvement.

For the third quarter of 2010, our revenues totaled $16.4 million, which compared to $18 million in the third quarter of 2009, and earnings per share came in at $0.11 for the third quarter from $0.13 in the prior-year period. Our results in the third quarter of 2010 were once again led by the growth of our casino and gaming sales in the international markets. Our international casino and gaming printer sales were up 21% from the strong prior-year quarter we had, led by solid growth in our Asia Pacific market, where we won a new customer during the quarter, and our European market where we continue to ship printers for the new Italian DLT market. The increase in international casino and gaming sales more than offset the very weak domestic casino environment, where we believe the replacement market for domestic slot machines in the third quarter was down at least 20%, and even potentially as high as down 30%.

Even with the market share gains we have achieved, our domestic casino-only revenue was down about 7% compared to the third quarter last year. It does highlight the market share gains we have achieved, but also highlights how difficult the domestic market was in the third quarter. As the country's economy remains weak, and as we see many casino operators repair their over-leveraged balance sheets, we believe we are close to the bottom of this market and we look forward to when the upswing starts. For many quarters now, we have told you about our strategy to diversify our casino and gaming sales by entering and growing in the international markets.

As most of you recently learned, we also had internal plans to add to our diversification strategy with our intent to enter the software market in the casino business. And you've seen the fruits of this with the launch of our new Epicentral printing system. With our diversification strategy to move into the international markets, our gain in market share here in the US, and now with our newest project the Epicentral print system, we are very excited about what the future could bring for TransAct for 2011 and beyond.

To bring everyone up to date, in late October we announced the introduction of the Epicentral print system, our first software product, which we believe is a groundbreaking solution for casinos that will enable promotional coupons and other messages to be printed and distributed to casino patrons on a real-time basis while playing slot machines. The software system enables casinos to communicate directly with the customer to further enhance the player's experience. The system works by connecting directly to TransAct server port device inside the slot machine, and utilizes TransAct's Epic 950 printers to print out the promotional coupons.

Most importantly, the system works with all existing slot machines, and it is separate and distinct from the slot system itself, meaning the Epicentral system can be connected to any slot machine regardless of manufacturer or casino slot system. Every casino can utilize our system on every slot machine. All a casino needs to do to add the Epicentral print system is make sure that the slot machines are equipped with the TransAct Epic 950 printer and server port device. If their slot machines do not have an Epic 950 printer, the casino merely needs to replace their existing printer with the Epic 950 and server port. Thus the casino gains a fantastic, easy-to-use, and cost-efficient software system without having to replace its investment in slot machines, slot system, or its current transact printer.

I'd like to make a comment about our strategy and our product roadmap. From the beginning of the launch of our Epic 950, we designed this printer to be backward compatible with every and all initiatives we would take to drive coupon and promotional printing at the slot machine. We told our casino friends their investment in a TransAct printer would be protected, and we would provide an easy and very cost-effective avenue to promotional printing. And we have done just that. Now, through the use of the software system, casinos will have the ability to provide players with special drawing entries, real-time promotional coupons and marketing messages, restaurant meals, show tickets, and hotel rooms, among many other possibilities. This should enhance the customer experience and drive extended slot play, incremental purchases throughout the property, and improve customer loyalty.

It is also conceivable that other businesses, such as car dealers, retail establishments, and food and beverage companies may also want to advertise on the system alongside casino promotions, thus creating an additional revenue stream for the casino. Just imagine a coupon printing out to the slot player the notion of ordering an Absolut and tonic, instead of just a vodka and tonic. Your imagination can take this capability in so many different directions. Thinking about those types of coupons and messages, the Epicentral print system supports two-color printing and contains multi-language support for any casinos looking to take advantage of these additional features.

Last week, we announced our first customer, Foxwoods Resort Casino, one of the largest and preeminent casinos in the country, who will be placing Epicentral in 300 slot machines on a trial basis beginning in December. We expect a successful trial run and the possibility of a major expansion in the system at Foxwoods in the near future.

And a few days ago, we introduced a great new addition to the system. The Epicentral Mobile Host, which will allow casino hosts to walk through the casino with an iPad or smartphone-type device and through wireless technology connecting the device to either the Epicentral server manager, or directly to our server port, which provides coupons or messages or entries directly to players on the casino floor, thereby creating real-time person-to-person interface with the customer. This is something we believe will be a true competitive advantage. Just think, casino hosts can automatically and quickly enter a slot player in an upcoming slot tournament to begin sometime that day, that week, or in the future. We have learned over the last several years casinos do not want to spend money on new technology unless it creates, one, substantial cost savings, or two, and much more important, a competitive advantage. Our Epicentral is positioned to offer the casino operator a competitive advantage by continuing to help the casinos build the relationship with both the carded and uncarded player.

We look forward to introducing the Epicentral print system to the world at the G2E trade show in Las Vegas next week. If you are going to be attending this conference, please stop by our booth. We will have a full demonstration of all aspects of the Epicentral print system working in our booth. You will see how easily you can create a coupon (inaudible - audio difficulties) and any questions you might have regarding our new system once we finish our opening remarks.

Now, let's dive further into the results by market. Starting with our casino and gaming market, where total sales were up 7% from the prior year quarter. International casino and gaming sales were up 21%, led by a strong 23% increase in international casino printer sales from the prior-year period, and now account for over 63% of total TransAct casino and gaming revenue. The growth was led by orders for the Epic 950 slot machine printer from our Asian and European customers.

On the domestic side, revenue in our casino and gaming markets fell 10%, including the 7% decline in just domestic casino printer sales from the prior year, due to the continuing weakness in the domestic casino replacement market in the quarter. We cannot predict a recovery in the domestic slot machine market, but are clearly pleased to see the work the domestic casino operators are doing to repair their balance sheets, and also the recent positive notes coming out about the improvement in the Las Vegas market. Despite this tough market, we continue to do our best to gain market share, and we are excited to see the first reactions to the Epicentral print system. Internationally, there still appears to be plenty of wonderful opportunities in various markets, and we would be looking to take advantage of those opportunities going forward.

Moving onto our banking and point-of-sale markets, sales were down 13% in the quarter to $5 million from the third quarter of 2009. However, our point-of-sale market had another outstanding quarter with revenue growth of 97%. As we shipped meaningful volumes of our grill and coffee printers to McDonald's for their grill and combined beverage initiatives. As I've mentioned on our last call, the upgrade program is expected to last at least through the end of the year and continues into next year. Our POS team continues to deliver the goods in this difficult economic environment.

In terms of our banking sales, revenue was down 83% as we compared to Q3 2010 against a very big Q3 2009, when we shipped the vast majority of a large upgrade order of banking printers to our largest banking customer. Now that we have essentially completed this large order, we should see more normalized year-over-year comparisons in the sales numbers for banking going forward. In addition, while this market is mainly driven by specific projects, a positive note continues from our new BANKjet 2500 printers, which continue to see increases in orders, and we believe is slowly but surely becoming a material factor for TransAct.

Turning to our lottery market, lottery printer revenue declined 30% to $2.3 million from $3.3 million in the prior-year quarter, primarily due to the timing of orders. As we continue to mention on every call, lottery sales can vary significantly from quarter-to-quarter due to these timing issues. I would like also to make a special comment about the launch of our new printer for GTECH in the lottery market. This printer will go into production in early 2011, and the reaction by both GTECH and their customers has been actually wonderful. We are therefore expecting an unusually high amount of sales to GTECH in the first half of 2011, as they begin to deliver this world-class printer based on orders and forecasts we have already received. The first half of 2011 looks to be quite exciting in regards to our lottery printer business.

Now, let's move on to TSG, our TransAct Services Group business, which saw revenue decrease 3% in the third quarter of 2010 compared to the third quarter of 2009. If you remember, we saw very high sales of our inkjet consumable product in the third quarter of 2009 that matched a large amount of inkjet banking printers we shipped at that time. The decline we experienced was partially offset by higher service revenue from our new paper testing services program we now offer the market, as well as increased international consumable sales. As a note to our shareholders, as companies in most of our markets look to lower their paper costs, TransAct implemented a paper testing service for a fee to test all new paper varieties. This has turned into a nice little profitable business for TransAct, and a good way for our customers to try and lower their paper costs.

So, to sum it up, we were pleased with our overall performance, especially when considering the weakness in the economy and especially in the domestic casino environment. Our sales teams are doing a fantastic job in a challenging market, which is why we believe we are gaining market share in spite of the domestic weaknesses. We still have a very positive outlook on the international sector going forward, and believe it can be a driver for us in years to come. Further, our balance sheet remains very strong and we continue to track our inventory levels closely, and show we have the flexibility to respond to our customer needs. In terms of our guidance, we still expect stronger revenue and gross margin improvement in the second half of 2010 than the first half of 2009. We also expect similar or stronger earnings per share in the back half of the year compared to the first half of 2010.

At this point, I turn the call over to our President and 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 third quarter financials. Our earnings per share for the third quarter of 2010 were $0.11, on revenue of $16.4 million, compared to EPS of $0.13 on $18 million of revenue in the third quarter of '09.

Now, let's move to the details of the third quarter financial results. As Bart explained, our net sales for the third quarter of 2010 was $16.4 million, a decrease of 9% from $18 million in the third quarter of '09. During the third quarter of 2010, we shipped about 51,000 printers, which is about the same volume of printers we shipped in the third quarter of '09. The average selling price of our printers declined by 10%, to $245 per printer in the third quarter of 2010, compared to $271 per printer in the third quarter of '09.

The decline in ASP was a result of two factors, both related to unfavorable sales mix. First, we sold substantially more banking printers in the third quarter last year, which are at higher average selling prices than our other printers, compared to this year's third quarter. And second, we sold more thermal POS printers, which have lower average selling prices than our other printers, in the third quarter of 2010 compared to 2009. Both of these factors caused us to experience a decline in ASP.

Now, turning to our gross margin. Our gross margin in the third quarter of 2010 rose to 33.9% from 30.7% in the third quarter of '09, an increase of 320 basis points. The gross margin increase was due mainly to receiving the full benefits of lower product costs from the China manufacturing transition we completed in late '09. In addition, our gross margin benefited from an improved product mix, as we sold fewer lower-margin banking and lottery printers in the 2010 quarter compared to '09. Going forward, with our Chinese manufacturing transition now behind us, we expect our gross margins to begin to stabilize in the mid-30% range, with the potential to rise into the high 30% range if we achieve higher sales volume and a favorable sales mix. In addition, if we're successful in selling our Epicentral software product, we could see our gross margins rise even more, and meaningfully more.

Operating expenses for the third quarter of 2010 were $3.9 million, up 5% from $3.7 million in the third quarter of '09. The increase was primarily due to a rise in selling and marketing expenses from increased travel expenses during the quarter, as well as increased engineering and G&A expenses due to higher compensation-related expenses and higher state and local tax expense. Looking to the fourth quarter, we expect our operating expenses to be somewhat higher than in the third quarter, as they typically are every year, due to the G2E trade show expenses we incur in November each year.

Our operating income in the third quarter of 2010 declined 9% to approximately $1.6 million or 10% of net sales, from operating income of $1.8 million or 10% of net sales in the prior year quarter. Thus, despite a 9% decline in year-over-year sales in the quarter, we were still able to maintain our operating margin at 10%, same as in '09, as we successfully leveraged our higher gross margin in the 2010 quarter down to the operating margin line.

We recorded income taxes at an effective rate of 34.1% in the third quarter 2010, compared to 33.5% in the third quarter of '09. Similar to the first half of 2010, our effective tax rate for the third quarter 2010 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, as this credit expired at the end of '09. To date, this credit has not been reinstated, and likely will not be for the remainder of 2010. Somewhat offsetting this increase, our effective tax rate for the third quarter of 2010 was favorably impacted by about 240 basis points from the recognition of certain discreet tax benefits. Assuming the R&D credit doesn't get reinstated, we expect our effective tax rate for the full year 2010 to be around 36%. And finally, on the bottom line, diluted EPS for the third quarter 2010 was $0.11 compared to $0.13 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 in detail a bit more later. Receivables were $10.7 million as of September 30, 2010, down $800,000 or 7% sequentially from the second quarter. The decrease in our receivables were due primarily to the timing of sales in the quarter, as well as an increase in our days sales outstanding. This increase in our DSO resulted largely from the success we're having in the international markets, as we provide many of our international customers with somewhat longer payment terms than our domestic customers, due to the longer shipping cycles. Even with the DSO increase, the overall collectibility of our receivables remains solid.

Our inventory balance declined by $700,000 or 6% to $10.9 million at the end of the third quarter from the second quarter 2010, as we began to monetize our inventory build from the first half of the year. If you recall from last quarter's conference call, we consciously decided to stock up during the first half of 2010 for two reasons. First, we anticipate a stronger sales volume in the back half of the year. And second, we wanted to ensure we had an adequate supply of products on hand to guard against a supply issue for certain critical electronic component parts that have been placed on allocation where only limited quantities were available, or whose lead times had gone beyond nine months. We believe we made the right choice for our customers in doing this. Looking forward, we expect to continue to work our inventories gradually down as we move towards the end of 2010.

Our accounts payable also fell by about $1.8 million or 23% to $6.2 million during the third quarter of 2010. The decrease was directly due to the reduced level of inventory purchases we made during the third quarter, as well as payments made against the higher level of inventory purchases we made during the prior quarter. In terms of debt, we continue to have no debt outstanding under our $20 million revolving credit facility with TD Bank.

Now, looking at our cash flow. Our cash balance increased by $1 million to $9.6 million at the end of the third quarter 2010, from $8.6 million at the end of the second quarter 2010. During the third quarter, we generated approximately $1.4 million of cash from operations, mostly due to our net income and depreciation and amortization for the quarter. Our working capital, excluding cash for the quarter, remained about neutral, as the decrease in our accounts receivable and inventories were entirely offset by lower accounts payable.

Our CapEx were approximately $350,000 for the third quarter of 2010, compared to approximately $150,000 for the third quarter of '09. Based on our pipeline of plan development projects, we expect our capital spending for the full year 2010 to reach between $1.1 million and $1.3 million. Depreciation and amortization totaled approximately $385,000 for the third quarter of 2010, and $438,000 for the third quarter of '09. Non-cash comp expense totaled approximately $134,000 for the third quarter of 2010, and $152,000 for the third quarter of '09.

Looking at some of our financial metrics now, our working capital increased to $23.9 million at September 30, 2010, from $23 million at the end of the second quarter, an increase of $900,000 or 4%. The increase in working capital was largely due to the $1 million increase in our cash balance during the quarter. Our current ratio was a solid 3.6 as of the end of September 2010, up from 3.0 at the end of the second quarter 2010. The increase was, again, due to a significant decline in accounts payable and an increase in cash, somewhat offset by lower accounts receivable and inventory balances in the quarter. Our EBITDA for the third quarter of 2010 was approximately $2.1 million, a 10% decrease of EBITDA of $2.4 million for the third quarter '09.

And lastly, during the quarter we made our first stock repurchases under our newly approved $10 million stock repurchase program. During the third quarter, we repurchased approximately 22,000 shares of our stock for about $200,000, at an average price of $7.95 per share. Therefore, as of the end of the third quarter, we have up to an additional $9.8 million remaining available for us to repurchase our stock through May 2013.

And in closing, when you consider that the domestic casino environment continues to be weak, we are pleased with our quarterly results and our belief that we were able to continue to gain market share in the casino and gaming market during the quarter. It was another great job done by our entire TransAct team. Looking forward, we expect the domestic casino market in the fourth quarter to be about the same as the third. We continue to believe our revenue and gross margin for the second half of 2010 will be greater than the first half of last year. And we believe EPS for the second half of 2010 will be at least the same as the first half of 2010. Furthermore, our financial position is as solid as ever, with $9.6 million in cash and almost $24 million in working capital on our balance sheet. We look forward to continued success in the remaining months of 2010 and into 2011.

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

Thanks, Steve. Operator, we're ready for questions.

(Operator Instructions) First, we will go to Todd Eilers with Roth Capital Partners.

Good afternoon, everyone. Can you hear me?

Yes. Hi Todd.

Todd, were you able to get in okay?

I was. You did break up for a second there in the call, but came back.

Okay. Sorry about that.

Not a problem. Few questions. Can we start off maybe on international and specifically, Italy. Bart, can you maybe give us a sense for how much that contributed in the third quarter, in terms of -- maybe in terms of unit shipments? And maybe give us a sense for, at this point, how many printers you have shipped to date in that market? Very large opportunity. We'd kind of like to get a sense for how far along we are at this point in time.

You know, in the third quarter we had some shipments to Italy. But -- it continued from the second quarter to the third quarter. It gave us a little bit of sales in the third quarter and we expect, Todd, to continue into next year. We're actually expecting a pretty good second quarter of '11 based on the orders that we've received. If you think about it, the systems going in place, the operators are getting their systems in place. And based on what we've been told, we're expecting a pretty good second quarter of '11. So, it's going to continue at the rate it's been, but a pretty big pickup in the second quarter of '11.

Should we assume higher sales activity for the Italian VLT market in 2011 and 2010?

That going to be a great question. It could be. It's all going to depend on how they roll out the system, and how much revenue that the VLT is driving. Right now, in conversations with our customers, we're expecting a pretty good 2011 for Italy. There's been talk about some more machines going out. I think we have heard from some of our domestic OEMs that they are now looking to enter the marketplace. But most of our orders have been basically all international. Nothing really -- Steve, I don't think we've shipped any from a -- to a domestic supplier.

No, all internationally.

So -- they said 57,000 machines. We've probably landed a good 80% of that -- 70%, 80% of that. Overall, we have not shipped 57,000 printers yet. So, that will continue into next year, and then we will also try -- we'll also see, as you will, as to whether they expand the 57,000 to more machines.

Okay. Great, that 's helpful. And then Bart, also wanted to ask you, there was the news out that IGT had selected Future Logic as a preferred partner going forward. I was hoping that you could comment, to the extent you can on that, what sort of impact, if any, you would expect on your business going forward? And then in the same context or subject, can you talk a little bit about how much of your business nowadays comes from operator relationships and deals versus OEM providers?

Okay. Yes. Let me take that into two pieces. First, I thank you for the question, because clearly it's been a question on some of our shareholders' minds. First and foremost, Todd, IGT will be buying and selling our printer. Basically, nothing has changed. I want to remind you that the casinos make the decisions. So our decision was to put our resources and assets targeted toward the decision-makers which are the casinos. The casinos are making the decisions about what peripherals they want.

So, our decision was to put our resources and assets targeted towards the decision-makers, which are the casinos. The casinos are making the decisions wha peripherals they want. So, our decision was to put our resources and money behind that. We clearly appreciate the relationship with IGT, and our decision that we think we made, and the right one, will be to grow our business. Not to lose any business. And when you look at everything that we're doing, Todd, we are building the relationships with the operators. They are now asking for our printer. We've done trials of our printer at casinos. They've seen the difference, and now they're ordering our product.

Our relationship is to make sure that the slot manufacturers have our printer integrated and proved in all the jurisdictions, and we do that on a regular basis. What's more important to us is to have this casino relationships and for them to ask for product, because that is what has happened in the marketplace to all of the peripheral suppliers. This isn't just a TransAct thing or a printer thing. This is how the operators work. They want to know what product is going in the machine and that it works.

Now, the other part of our strategy with clearly our Epicentral announcement, because as we go and make our sales presentation to the casinos and show them the benefit of this system, it is also driving those casinos to start saying, you know what? If we want to go with this system, we better start ordering the Epic 950 printer from TransAct. So, our work is in the marketplace of the casino level where -- that's where the decisions are being made.

Okay. All right.

And to answer the question, we don't see any negative impact. If anything, again, we see only the market share gains that we've made and will continue.

Okay. Thanks, Bart. And then I guess the final question, kind of a follow-up on Epicentral. Can you give us a sense for what the revenue model might be for that new product -- software product? Are you looking at a subscription model there? You also mentioned that there could be some nice margin gains there if this really takes off. Should we expect similar software models from that sort of industry? And how much of a positive impact could we expect from that?

It is a daily fee model, Todd. So, it's going to be something that ties to how many server ports the casino decides to use. So, it's a recurring revenue model. Our goal and strategy is four-to-five-year agreements.

The fun part about this all -- I've attended a couple of meetings myself. What ends up happening is, you go into the casino, we have the relationship with the operations people. They invite the marketing people into the meeting, and the conversation is just controlled by the marketing people and all the different things they can do in regards to sending these promotions and coupons and messages to the player. Some of our casinos friends have told us they spend 15% of their revenue on marketing. They can spend $10 million, $50 million, $100 million on just blind mailings to their customers. They can save the paper, they can save the mailing costs by handing their players a coupon right at the slot machine reminded them to come back. More play, longer play. Your next level is gold. If you play another $100 you can get to that level. So, instead of mailing that out they can do it right at the slot machine.

So, it is a recurring revenue model. It's going to be based on how many server ports they want. That's how we'll control it. It's not wise for us to talk about the pricing of it. Clearly, most companies, when you talk pricing in the marketplace -- in all our discussions so far with the casinos, I think the pricing has been very favorably looked at by our casino customers.

It will have a meaningful effect to our top line. I think Steve said it. It will have a meaningful effect to our gross margin. It is software, it does come with higher gross margins. So, it has the potential of significantly changing the business model here at TransAct. Higher revenues, higher margin, higher bottom line.

Okay. Perfect. Thanks, guys.

(Operator Instructions) Next we will go to Jim Roumell with Roumell Asset Management.

Thank you. Hi, Bart.

Hi, Jim. How are you doing?

Good. I want to follow up on a question about Epicentral, and understanding how the product works a little bit. First question is, if the machine is sold with the server-based ready, which is how it is right now, is there any way that TransAct could be bypassed from a software perspective? Could someone else come in with software to basically activate the software gaming component without using TransAct?

Jim, your question is a little complicated. Let me try and help you understand what is going on in the industry. There is talk about server-based gaming in the industry. And the difficulty there is, you have a floor with machines up to 10 years old. Some are video, some are reels. And the ability to put server-based gaming on all those machines is impossible. So, the thought that you are going to network the floor and be able to -- and that maybe a casino would change up all their machines or be able to network through the video and drive server-based gaming turned out to be basically almost an impossible feat.

What we're doing, Jim, it's allowing the casinos to use their existing system. To take our printer and use our server port device, which becomes an IP addressable device. The server port goes into the slot machine, it gets an IP address, and it hooks to our printer. Then you step back and you have a server manager, which basically allows the casino to target messages to the player that is on that exact slot machine. And what we did, Jim, is in the whole package, we've decided that this system is going to be what is called an open system.

So, we're going to provide the industry with our APIs, which is the way to talk to our server manager, so that a casino that has a sophisticated player tracking system can literally tie into our server manager and allow that communication directly to the super port down to the printer. And the beauty of this is, we're not going through the game mains or the controller of the slot machine, thereby eliminating the need for [GOI] approval. What this allows the larger casinos to do is use their database, use their information systems, and drive down to ours server manager the ability to do any type of coupon promotions, registrations, whatever, directly to that player.

For those casinos that don't have very sophisticated machines, again, the server manager has an open API which we will work with that casino on. And either we can go in and write those rules engines, or whatever types of measurements that they want to make and then drive the coupons, or, like what we're doing with one of our customers right now is, we are going to work in tandem with them. Where they're going to take their information. We will help them connect to our system and drive that through. This is a very elegant, simple solution to driving coupons out of slot machines.

In all the years that we've been trying to do this, we realized really two major things, Jim. One, the casinos never had to lay out a coupon or promotion, didn't even know how to lay out on a ticket because they never had to. They get a slot machine, it's pre-programmed, and it can print a voucher. What we learned is, the casinos couldn't even figure out a way to really lay out a coupon. So our ticket layout generator does that for them. And if you're at the show, within five or ten minutes you could create a coupon that drives down to our server manager.

The other thing we realized is, as sophisticated as the floor is, they didn't have a way to communicate directly to the slot machine around the so-called central controller, because there just was no way to do that. And we sat back about a year ago and said, well, if that is the issue, we'll do it. And then we develop the software to be able to do that. So, it's a really elegant solution that marries up to their existing system without having to go through all this regulatory issues by going down through the central controller. You now can go around it from the server manager, directly to server port to our printer. Really elegant, simple solution to drive coupons and promotions right at the slot machine.

And again, we open up these APIs. We believe that there's going to be a group of people that are going to write software programs that tie our server manager to the casino's whole system. They can tie it to the point-of-sale system. They can tie it in to the ticketing system. So, if the show is empty at 6.00 at night and they want to just drive a coupon that says, if you show up at the ticket desk between 7.00 and 7.30, we'll give you 50% off the ticket. We can tie into that system, so that can automatically be done. It's really away from this so-called server-based gaming system that was proposed out there, and it's a simple, elegant solution that ties directly to the casino's system today.

Okay. I think I have got that. Let me -- as a follow-up then, is it fair to say that -- let's say I'm opening a new casino today, and I order 200 slots that have this Epicentral system. But let's say I don't want to deploy it today. Let's say I -- I know it's a feature that I have on my floor and in the future I may turn it on. Let's say a year goes by and I decide to turn it on. Is there any reason -- technologically could I turn it on without you? And secondly, if I could, would there be any reason to do that?

No. First of all, if a casino looks at the Epicentral system and says, you know what, I like it but I want to implement it a year from now, the best part of the conversation is, that casino is going to tell all their slot manufacturers that they want an Epic 950 inside their slot machines. Because once you have an Epic 950 in the slot machine, then when they're ready to go with Epicentral, then they come to us and for a daily fee model they get the ticket layout generator, the server manager, and the server port device. That is how we are tracking how many slot machines are going to be active.

So, if a casino is thinking about the system, clearly they would want to go with the 950. And let me explain one of the issues that's out there. If you take in any casino in the marketplace today, there are anywhere from a year-old game to probably a 10-year-old game on the floor today. Probably 15 years, considering we're probably in the 30-year replacement cycle right now. By buying our printer, or using our printer, our printer goes in every one of those slot machines on the floor. So it's backward compatible. Every slot machine on that floor can ge Epicentral, can get a server port device. Clearly, nobody else in the marketplace can claim that.

So, if a casino once to go and use -- and think about using our Epicentral technology, all they have to do is put a 950 in, and every slot machine on the floor can then be upgraded to Epicentral. So, they put the 950 in the machine and when they are ready to turn on the system or go with the system, then they come to us. We give them a software package for the ticket layout generator, the server manager, and they have to get a server port to make this work.

Now, the beauty of having the server port device not inside the printer is the IP address is inside the server port device. Remember, our printers is an electromechanical device, and they can fail. If it's 10.00 at night on a Friday night and a printer fails, the last thing the casino was to think about is not only what printer do I have to put in there, but what 's the IP address I have to re-program that printer to be?

So, we separate that. We put the IP address in our server port. Thereby, if a 950 should ever fail, you just replace the 950 and never lose the IP address of that slot machine. Which is critical, because once we IP address the slot machine, and a player puts their frequent player card in the slot machine and the system says, there's Jim Roumell. He's on slot machine XYZ. That slot machine has IP address ABC. Let's send Jim a happy birthday message. They can do it right to that particular slot machine because they have the IP address. That is how elegant this solution is.

Got it. Okay, so in the model then, the software package has a recurring maintenance stream to basically keep a hotline open 24/7. And is it also -- is the software itself being licensed as opposed to sold, so there's an annual renewal cost?

Yes. Jim, we're charging a daily fee for everything. So everything's included. So they get the maintenance, the software, and the server port device all in one fee.

But they don't own it?

No, no, we own it. That's right. We license the technology for the four or five years per agreement.

Right. So basically, if that payment was made, it's not like a piece of software I bought where a user can basically choose to stop using the maintenance and just kind of use the old version and not get the updates and whatnot?

No. It's a daily fee that includes the licensing and the technology that they need to make this run.

Okay. And then last question. I'll end here. In terms of technology, we shifted the ticket in, ticket out, coin went away 100%, essentially. I guess there's probably a few machines out there. So, it was a game-changing technology that essentially got 100% penetration.

So, when you think of something like this, and I know this is a very open-ended question. But at the end of the day, how do you view this in relationship to say, ticket in, ticket out. Is there any reason why, over the next five years, that penetration would not ultimately move towards 50% or better, because it's such a superior model for the casino operator?

You know, Jim. It's a great question. I appreciate the question. I can't say that it couldn't happen. I've spent three or four years personally in the marketplace, promoting couponing, promotions, messages to the player. When you go back to '06, '07, the casinos are building and building and building, and nobody wanted to hear about, how do I maintain my customers? Now we're in a total different market, where customer loyalty is critical to the success of the casino.

This is a very elegant, simple solution. And by making it open, making it available to everybody so they can use existing systems. Where we're not asking them for their database, we're allowing them to use their own database. We're not telling them it's proprietary. It's open. All they have to do is go with these three simple devices. Could it go into 50% of the casinos? Yes, it could.

Okay. Thank you.

We have no further questions at this time. I would now like to turn the call back over to management for any additional questions or remarks.

Operator, I want to make sure you have no other questions out there. Are you sure? Operator?

We have none at this time.

Okay. I thank everybody for joining us today, and anybody has any other questions, please give us a call. Tuesday of next week, we open up our trade show for the next G2E. We look forward to seeing those investors that are out there and giving you a great demonstration on our Epicentral system. Thanks for joining us today. Look forward to seeing you next week. Bye.

This does conclude today's conference. We do thank you all for joining us.