TransAct Technologies Inc (TACT) 2010 Q4 法說會逐字稿

Good day, and welcome to the TransAct Technologies' Fourth 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. Please go ahead, sir.

Thank you, Rica, good afternoon and welcome to TransAct's Fourth 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 and the Company, please refer to the Company's SEC filings including the Company's most recent report on the Form 10-K for the year ended December 31. 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.

Thanks, Garrett. Good afternoon, everyone. And, thank you for joining us on today's call. Well, what can I say about the fourth quarter 2010, other than we knocked the ball out of the park in our worldwide casino and gaming market. Despite our belief that slot machines into the domestic casino market were down between 15% and 20% in the fourth quarter of 2010, our domestic casino printer sales were up 73% from the prior year quarter. That's right, we are up 73%.

Based on our analysis using casino industry statistics of shipments of slot machines into the domestic casino market, we believe we've gained significant domestic market share in the fourth quarter of 2010, and we crossed over the 50% market share line for the first time in TransAct's history. These strong results can only lead us to even stronger slot machine printer sales in the future, as the domestic casino market begins to improve and grow.And, not to shortchange our international casino and gaming results for the fourth quarter 2010, speaking just about our international results, our international casino and gaming sales were up 68% for the quarter, compared to the fourth quarter 2009.

The strong results in our worldwide casino and gaming market led us to an excellent fourth quarter, where we saw overall revenues of $16.2 million, up 16% from the $13.9 million in the fourth quarter of 2009. While earnings per share came in at $0.11 in the fourth quarter, well ahead of the $0.02 we did in the prior year period. Our results in the fourth quarter 2010 were led, as I just mentioned by the growth of a worldwide casino and gaming sales. All areas of the world experienced sales growth in the prior year's quarter and we secured some new accounts in the different geographic areas we serve. Now, as I know, most of you would like to hear an update regarding TransAct's move into the software side of the worldwide casino and gaming market with the launch of our Epicentral print system.

First, let me say, I am excited today as I was on the day we launched the technology at the G2E show in Las Vegas just a few months ago. TransAct is creating a change in the worldwide casino market. A change that is just beginning, but will be part of this industry from now on. When we launched our Epicentral print system, we also announced that we had secured our first trial at the MGM brand of Foxwoods Casino. At the time, we had expected to launch our system on 300 slot machines with the goal of testing the system and all its capabilities. Just a few weeks ago we announced that the trial was going to expand to all of the slot machines the floor at the MGM Grand at Foxwoods, a real testament to the casino's desire to use the system for their players all the time.

Well, I'm happy to report, the system went live this past weekend. And, we are now printing coupons and promotions on about 600 slot machines. More than 17,000 coupons and promotions were delivered to the many players at the MGM Grand at Foxwoods, and having watched it myself, the smiles and appreciation by the slot players were easily seen.

Our goal is to get the remaining slot machines on the floor active over the next two weeks and by April 1, most if not the whole floor at the MGM Grand at Foxwoods will be communicating directly to the player, using the player data to drive incremental play and visits. We are speaking directly to the player, as our system works in concert with the MGM Grand of Foxwood's backend system, so we know exactly who was on a certain slot machine, their play, their visits, and the money they like to spend. Personally, having the vision for so many years that one day a slot machine will print out coupons and promotions to players, my visit to watch what was happening on the floor of the casino, as our system worked flawlessly, was wonderful.

Knowing TransAct created this technology, implemented this technology, and knowing the casino industry now has another media vehicle to drive more play is just fantastic. This leads me to let you know that we have been presenting the Epicentral system to many, many casinos in the US, and also in our international markets. The response has been extremely positive. People ask me if I am excited today as I was during the G2E show in November. I can say more excited. The casinos are responding, the interest extremely high, and we now had the opportunity to turn the system on, watch it print tickets, and see how all the technology works together. The future looks very promising.

Let me end my casino and gaming update by letting you know we received a letter from GLI, the testing surface for the worldwide casino industry, that our system does not need any more approval, and we are free to market it to every jurisdiction in the world. From the start, we knew we needed this letter, as it would be important for all casinos to know our system did not affect the accounting system within the slot machines. Our patented dual port technology, with its features separating the signals, along with the software we designed, allow GLI to issue this letter. We are thankful for the work GLI did and are excited that we now can go into the worldwide casino industry with this letter.

So now, let's dive further into the results of our other markets. Moving to our banking and point-of-sale markets, sales were up 9% for the quarter to $3.2 million from the fourth quarter of 2009. Our POS market had another strong quarter with worldwide revenue growth of 25%, led by significant sales of the thermal printers, McDonald's for their POS system and upgrade -- and to the POS system upgrade and grill and combined beverage initiatives. As I mentioned on previous calls, the upgrade program is expected to continue into 2011 and thus we do expect the McDonald's business to once again be a material contributor to sales this year.

Our POS sales team continues its stellar performance in the face of this weak economy. In terms of just our banking sales, domestic revenue was down 54% as we compare Q4 2010 against Q4 2009, when we shipped the final portions of that large upgrade order of banking printers to our largest banking customer. This was partially offset by further increases in sales of our BANKjet 2500 printers, which has become a revenue contributor to TransAct. With a large order now fully comped, we expect 2011 to see more normalized sales comparisons.

Turning to our lottery market. Lottery printer revenue declined 46% to $1.7 million from $3.2 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 2011, as we mentioned on our last call, we expect a significant increase in sales in the first half of the year from the backlog of orders we currently have for the lottery printer we designed, and are now manufacturing and starting to ship to GTECH. This new printer has now become TransAct's fastest revenue growth printer from its launch date ever in the Company's history.

Now, let's move onto TSG, TransAct Services Group business, which saw revenue increase 16% in the fourth quarter in 2010, compared with the fourth quarter of 2009. The increase was mainly driven by higher sales of consumables, due to mainly -- due to higher inkjet cartridge sales for our new and existing customers.

Before I turn the conference call over to Steve, let me just say how proud I am of the whole team here at TransAct. We faced what we called the great recession. We put into motion our strategy to focus where we could grow sales. We had a strategy of growing a worldwide casino and gaming market share. We focused on controlling our costs and driving cash. This team at TransAct performed and I am so proud of every one of them.

I also want to thank our Board for giving us the support to allow us to implement our market share growth strategy and I personally want to thank you, our shareholders, for the trust and support you gave us. It is a very exciting time at TransAct. Our balance sheet remains very strong with $11.3 million in cash and no debt, and our inventory levels allow us to have the flexibility to respond to the needs of our customers. The next 12 months will be fun and exciting for the company.

In terms of 2011 guidance, we expect solid increases in our revenue and earnings per share for the full year, and we are off to a fast start. At this point, I turn the call over to our President and CFO, Steve DeMartino, who will share the details of our financial 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 fourth quarter financials. Our diluted EPS for the fourth quarter 2010 was $0.11 on revenue of $16.2 million, compared to EPS of $0.02 on $13.9 million of revenue in the fourth quarter of 2009. Now, let's discuss the details of the fourth quarter.

As Bart explained, our net sales for the fourth quarter of 2010 were $16.2 million, an increase of 16% from $13.9 million in the fourth quarter of 2009. During the fourth quarter 2010, we shipped approximately 46,000 printers, which is a 12% increase in unit volume compared to the 41,000 units we shipped in the fourth quarter of 2009. This increase in unit volume was led by the casino and gaming market where our unit volume increased by 50%. In addition, unit volume of our point-of-sale and banking printers was also up 22%, due largely to increased printer sales for McDonald's.

Offsetting these increases, unit volume of lottery printers declined by 42% due to the timing of orders from GTECH. The average selling price of our printers increased by 3% to $264 per printer in the fourth quarter of 2010, compared to $255 per printer in the fourth quarter of 2009. The increase in ASP was due largely to a more favorable sales mix, as we sold more higher prices casino and gaming printers in the fourth quarter of 2010, as compared to 2009, somewhat offset by increased sales of printers for McDonald's, which are at a lower average selling prices than our other printers.

Now, turning to gross margin. Our gross margin in the fourth quarter of 2010 rose to 34.9% from 31% in the fourth quarter of 2009, an increase of 390 basis points. Our gross margin for the prior year quarter was lower, as we finished shipping our higher cost domestically sourced inventory and completion of our printer production to China. In addition, our gross margin for the fourth quarter of 2010 benefited from better sales mix.

Looking forward to 2011, we conservatively expect our gross margin to climb above 35%, as we continue to realize cost savings from Asian sourced products. And, if combined with a favorable sales mix, we could see a gross margin for 2011 reach even higher. Operating expenses for the fourth quarter of 2010 were $4.2 million, up 4% from $4 million in the fourth quarter of 2009, primarily due to an increase in selling and marketing expenses. Our selling and marketing expenses rose, as we consciously increased and expanded our sales staff at casino and gaming, and incurred higher travel expenses and sales commissions for these staff, due to the strategy we put in place to gain market share.

We believe this strategy has begun to pay off in the fourth quarter, and should continue to pay off into 2011. Looking into 2011, we do expect our operating expenses to increase from 2010 levels as we experienced a full year effect of the increase in our sales efforts we put into place during 2010 in the worldwide casino and gaming market, as well as providing annual pay raises to all of our employees. Our operating income in the fourth quarter 2010 increased five fold, to approximately $1.5 million, reaching 9% of net sales from just $300,000 or 2% of net sales in the prior year quarter.

Thanks to a notable 16% increase in revenue and an improved gross margin, we successfully leveraged both of these down to the operating margin line in the fourth quarter of 2010. We recorded income taxes at an effective tax rate of 24.9% in the fourth quarter 2010, compared with 32.1% in the fourth quarter of 2009. The lower tax rate in the fourth quarter of 2010 was the result of the reinstatement of the federal and research tax credit, retroactively backed to January 1, 2010. As a result of this, we recorded a full year catch up adjustment of approximately $150,000 for this credit, all in the fourth quarter of 2010. For 2011, we expect our effective tax rate to be around 35%. And, then, on the bottom line diluted EPS for the fourth quarter was $0.11, compared to just $0.2 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 $10.9 million as of December 31, 2010, up 1% sequentially from $10.7 million at the end of the third quarter 2010. The slight increase in receivables was due primarily to the timing of sales in the fourth quarter, as we had a very strong sales month in December. Both our overall collection effort and days sales outstanding both remain solid.

Our inventory balance rose by $1.9 million or 17%, to $12.8 million at the end of the fourth quarter 2010, from the third quarter 2010, as we begin to accelerate inventory purchases in anticipation of the strong start to 2011. Based on our current backlog of orders and anticipated customer demand for the first half of 2011, we believe using our strong cash position to ensure an adequate supply of inventory is the right decision. Furthermore, we believe our strong financial condition enables us to create a competitive advantage by having inventory available and on hand for quick delivery to our customers.

To that end, we expect our inventories for 2011 to continue to rise in the first quarter, but then to decrease as we move through the remainder of 2011. With the most significant decline expected during the back half of 2011, and, of course, as our inventory declines, we expect our cash position to rise. Our accounts payable rose by about $2.2 million or 35%, to $8.3 million during the fourth quarter of 2010 from the third quarter of 2010. The increase was directly due to the increase in inventory purchases we made during the quarter. In terms of the debt, we continue to have no debt outstanding on our $20 million revolving credit facility with TD Bank.

Now, looking at our cash flow. Our cash balance increased by $1.7 million to $11.3 million at the end of the fourth quarter 2010, from $9.6 million at the end of the third quarter 2010. And, I'm proud to say that our cash balance of $11.3 million at year-end, is the highest cash balance that TransAct has ever had. During the fourth quarter of 2010, we generated approximately $1.8 million of cash from operations, largely from our net income, and depreciation and amortization during the quarter. Our working capital accounts remain about cash neutral for the quarter, as a $2.2 million increase in accounts payable was almost entirely offset by cash used to fund $1.9 million increase in inventories and a $200,000 increase in accounts receivable.

For the full year 2010, we generated $2.1 million of cash from operations. Our capital expenditures were about $211,000 for the fourth quarter of 2010, compared to about $165,000 for the fourth quarter of 20009. For the full year 2010, our capital spending was about $1.1 million. Based on our pipeline of planned development projects, we expect our capital spending for 2011 to be between $1.5 million and $2 million. Our capital spending for 2011 is expected to be higher than 2010 as we expect it continues to develop and enhance our software system during 2011.

Depreciation and amortization totaled approximately $373,000 for the fourth quarter 2010, and $410,000 for the fourth quarter of 2009. Non-cash comp expense pulled approximately $131,000 for the fourth quarter of 2010 and $146,000 for the fourth quarter of 2009. And, total depreciation and amortization and non-cash comp expense was $2.1 million for the full year 2010, compared to $2.4 million for the full year 2009. And, looking at some of our financial metrics now, our working capital increased to $25.5 million at December 31, 2010, from $23.9 million at the end of the third quarter 2010. The increasing working capital was largely due to the increase in cash and inventory during the quarter, somewhat offset by higher accounts payable.

Our current ratio stood at 3.2 as of December 31, 2010, down from 2.6 at the end of the third quarter 2010. The decrease was due to a materially increase in accounts payable which more than offset the increases in both cash and inventory in the quarter. Our EBITDA for the fourth quarter of 2010 was approximately $1.9 million, which is more than double our EBITDA of only $800,000 for the fourth quarter 2009. For the full year 2010, our EBITDA was approximately $8 million compared to $5.7 million for the full year 2009. And, finally, during the quarter, we did not repurchase any shares under our stock repurchase program. Our $10 million repurchase program allows us to repurchase up to $9.8 million in additional shares through May 2013.

In closing, we're very pleased with our results in 2010, when you consider the weakness in the macroeconomic and domestic casino environments. Despite these factors, we increased our sales by 8% and improved our gross margin by 340 basis points for the full year 2010. The entire TransAct team really stepped up its game in 2010, which we believe will lead us into an even better 2011. In looking at 2011, we expect both solid revenue and EPS growth, beginning right out of the gate for the first quarter. We also expect another year of solid free cash flow generation. Our financial position is rock solid with $11.3 million in cash and $26 million in working capital on the balance sheet. And, we're excited in what the future holds to our company and with that I'll pass it back to Bart.

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

Thank you sir.

(Operator Instructions).

And, we'll take our first question from Todd Eilers with Roth Capital Partners.

Good afternoon, everyone. Hello, Bart, hello, Steve. Congratulations, first off on an excellent quarter. Wanted to start off first on the Epicentral trial on the Foxwoods. Bart, can you may be give us a sense for how long you would expect the trial to take here, and, then, also, with this GLI letter, could we expect may be additional trials with other customers, or will you wait until the completion of the Foxwoods trial before starting to go after other customers?

So, the trial of Foxes, we're going to let it run for a while. We're working very closely with them. We're all -- I've got to tell you, we're all thrilled and actually just the other day they called, and they came up with some algorithms that is going-- they're looking at things like play and frequent visits, and all that and we're going to do some things around that. So, the goal, Todd, is to test the system. It's impossible for TransAct to run a system on 1000, 1100 slot machines. There's just not way for us to do that. We're not even allowed to have slot machines in our offices and so we want to test the system and really tax it. We have 600 machines up and running. By next week or so, we'll have all 1100, mostly 1100, and we really want to tax it.

We want to try all different things on it. Cards in, cards out. No cards. This player data, that player data. All different types of promotions, bounce backs, daily, weekly games. So, we're going to run it for a while on both Foxwoods and TransAct are very excited about that. That is not going to prevent us from closing more orders. We will run the trial at Foxwoods as our trial. We do not plan on doing many more, if any, more trials. We needed a location to tax and test this system and that's what we got with our friends at Foxwoods. Our salespeople are out closing orders now and we don't need to do any more trials of the system.

The biggest challenge for us was to be able to run a system on that many slot machines. It was exciting to be in the back room and looking at the computer screen, and seeing which machines were getting card and which machines were printing out tickets, but we wanted to make sure that we could do it on 100 machines and 300 machines and then 600 and 1100. It's worked flawlessly. It's kind of exciting to watch them turn the switch and watch all of the next bank machines going on. Ben Wyatt was heading this project, was just elated with how things were going, but going forward, we've got our trial, we've got the system being tested and now we're out closing orders.

Okay. Great. Second question, sounds like you guys are obviously looking for some nice growth here in 2011 and also starting in the first quarter. Sounds like you're pretty bullish or at least for yourselves on the gaming or casino and gaming segment. Are you basically -- do you expect further market share gains to drive that or do you also look for maybe growth in the market either domestically or internationally to also help that. I guess I'm kind of looking for what the driver there. Is it primarily market share gains, domestically again, and then some international growth or do you also expect to pick up in the domestic market?

Todd, all of it. Really all of it. The market share gains that we've gained in the fourth quarter, we expect to hold and actually gain more market share. So, we expect to see more of the work that we put in place in late 2009, and all of 2010, to continue to drive further market share gains. We are expecting -- we are seeing the market pick up a little. Now, sometimes it's tough for us with market share gains. We're seeing significant market share gains. Remember, we were sitting at that 25%, 30% level and now we're over 50%. Sometimes it's hard to see which is the market share gain, and which is the market.

I think we would all agree the fourth quarter was down and down surprisingly, but from a low level, and I don't think any of us would believe that 2010 was going to be lower than 2009 on a total shipment basis, which it was. Clearly, we were not, we were up, but we are starting to hear from our customers that they're placing -- they're going to be buying more slot machines. I happen to read every sales report that our casino and gaming sales writes. Every one of them talks about the casinos buying more equipment this year. Now, it's not barn burner stuff. It's not going to light the fire, but it is nice to see finally that they're talking about the industry starting to pick up. We're going to see both domestically. We're clearly going to see market share gains.And, we believe we're going to continue to see growth in the industry this year.

International market is still just a wonderful place for us, Todd, we've been in Europe and Asia. What we call the Asia-Pacific rim. We've seen some significant growth.We still have the Italy to ship. Clearly, there are things like Greece being talked about.Asia's been just great for us. There's just been wonderful opportunity for us that we've closed. We just entered Latin America, and we've talked about that on the last conference call, and we're expecting to drive more revenue there. That's strictly a new market for us. So, you'll see a combination of all three throughout the year.

Okay. Great and then final question. What do you guys plan to do with the large cash balance that you guys have right now? Buy back stock? Is there some technology that you're interested in? Just some thoughts on that.

Todd, we're sitting in a great place right now and it's really nice to be here right now. We've got a lot of cash and Steve is planning on driving a lot more cash this year because we're going to see that inventory start turning into cash. But, we've built our building block. We're looking out three years, and we're building the building blocks that continue this growth now. So, we've put in the mechanism for growing our regular business. Casino gaming, POS, and all that, and all of that is in place now. So, we're going to take some of the cash and use it to buy back stock. No doubt about it.

We're going to take some of that cash and look for opportunities for acquisitions. Things that will add to our business that allow us to penetrate other markets, where we see wonderful opportunities for printers and things that we do, and we will look at those acquisitions. They must be accretive, and they must fit into our model. We'll also have some new product development going on in the Company that's also going to take us into new markets that we've researched that we believe can be significant growth opportunities for us, and that cash that we will use, could be $250,000, $500,000, about a half a million dollars to develop the printer, may be a little more, can turn into growth drivers two or three years from now in the $10 million to $20 million range.

So, we look at all three and then the last -- so those are three buckets that we've modeled to say how do we continue this growth for now? Not just one quarter, not just two quarters but two, three, and four years? The last bit of it is we have identified new modules that we could add to the Epicentral software package that will allow us to even offer more software to the casinos, and we'll use some of the cash to develop those modules and it's really exciting for us. Ben has done a great work in working with the casinos to uncover some other things the casinos would like us to do with the system, and those will also be developing, and that will all add to this plan that we put together to grow the business over the next two to three years and continue this growth.

Okay. Great, thanks, Bart. Congrats.

You bet.

(Operator Instructions).

We'll pause for a moment.

At this time there are no further questions or comments in the queue.

Well, we thank everybody for joining us on today's call. We will be attending the Roth Capital conference in next week in Orange County. We look forward to seeing those investors there, and we thank you, and we're really proud of our results in 2010, and look forward to a successful 2011. Thanks for joining us tonight.

And, that concludes today's conference. We thank you for your participation. You may now disconnect.