TransAct Technologies Inc (TACT) 2012 Q1 法說會逐字稿

Good day, and welcome to the TransAct Technologies first quarter 2012 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the call over to Mr. Garrett Edson of ICR. Please go ahead, sir.

Thank you, Melanie. Good afternoon, and welcome to TransAct's first quarter 2012 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 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.

Thank you, Garrett. Good afternoon, everyone, and thank you for joining us on today's call. Wow, it's been a truly exciting and rewarding time at TransAct. The response by both the hospitality and oil and gas markets to our new product launches was very positive. It was lots of fun. Add to that the record gaming and casino sales in the quarter, and we are quite pleased at TransAct.

But given all that is going on, I feel it best just to speak briefly to our shareholders about the overall results and spend more time speaking about the recent new product launches, as I truly believe they will drive meaningful revenue and profit growth over the years to come.

Therefore, I'm going to change my presentation a bit and let Steve talk about the numbers.

First, a bit about the results. What you see is the new TransAct, the higher margins, the lower revenue from our point-of-sale printers, less emphasis on our results from revenues from GTECH, which is highly volatile, and more revenue coming from our worldwide gaming and casino market, both printers and software, and our new oil-and-gas printer business.

And let me tell you, you will start to see the positive effects from our new food safety and prep terminals and the new color printers we just launched into the oil-and-gas exploration market towards the end of the year.

Now, our gaming and casino market showed the results of casinos around the world embracing our Epic line of printers, and you see the results of having our first contract for our Epicentral print software system. And just as important, you see the positive effect of those domestic and international casinos getting ready to implement our Epicentral system as they buy replacement printers for their existing slot machines that have our competitor's product.

Clearly, some of the revenue gain in our casino and gaming market came from the new domestic casino openings in the first quarter, and clearly some of the gain was also due to increased domestic and international market share. But a portion of this growth also comes from casinos looking to implement our Epicentral print system who need to get their casino floors ready by replacing competitors' printers with ours.

It was a strong quarter for our domestic casino sales. We grew by 63%. Add to that the 21% growth in our international casino and gaming sales, and we can say we are pleased with our results in the first quarter of 2012.

But as I just said, I'd like to spend some time speaking about our new product launches. Our initial outlook for the success of these products is positive and can have meaningful impact to both our top and bottom line.

The first launch was our new food safety and prep terminals, the Ithaca 9700 and 9800. Each one addresses different verticals in the restaurant or hospitality markets.

The Ithaca 9700, with list prices of $1,299 and $1,499, addresses what we call the fixed menu market. We launched the Ithaca 9700 at the McDonald's worldwide convention just two weeks ago, as the quick serve market utilizes a menu that does not change that frequently. This terminal can be purchased in a one- to two-printer configuration and can print both the labels for items that need to be put back on shelves, refrigerators or freezers after a prep chef uses some of the ingredients, such as a bag of lettuce. We call that use-by labeling.

Our new terminal replaces the manual use of day-dot peel-and-stick labels and other manual means, which eliminates mistakes, written notes that cannot be read, and other issues, which creates food waste and food safety issues. The market clearly showed us they want and need this terminal.

All the restaurant food items can be easily loaded into the terminal, including the shelf-life data, which they already have, and the terminal uses an internal clock to print out clearly and accurately the necessary information to maintain a safe food environment. In addition, the terminal can use English as well as other languages for both the screen and print.

In addition, the terminal will print what we call grab-and-go labels for those items quick serve restaurants like McDonald's makes for sale. An example of that would be a parfait or cookie that is premade in its entirety and then has to be sold by a certain time. That is what we call enjoy-by labeling.

Both terminals have an active color-touch screen and a very small footprint, designed especially to the hospitality market that has limited space. The terminals are simple to program, come with a TransAct software program that makes programming simple, and is totally programmable so every restaurant, no matter who they are, can have a terminal that fits their exact needs.

Now the Ithaca 9800 takes food safety and prep to another level. This terminal, listing for $1,699, includes a processor allowing for Internet access and connectivity to the restaurant's back-end software system. It has Ethernet and Wi-Fi capability and can show a video of how to make a menu item, including the audio. It allows the restaurant to show the chef the ingredients and the recipe and even a video of how to make those items. It allows the restaurant to have the prep chef open and close the food prep transactions, so inventory is managed real time. And it can print both the use-by labels, grab-and-go labels, and also the nutritional labels all in one decide.

This unit will be mainly integrated into the back-end software systems that restaurants use, and we believe this terminal will attack the casual dining space along with cruise ships, universities and colleges, basically anywhere food is prepped. There is no product like it in the market today. And just so you know, some restaurants will want to have this terminal at every food prep station at the restaurant.

We believe the food safety and hospitality markets provides a large opportunity for TransAct, especially with the need -- with the passage of the FDA Food Safety Modernization Act to ensure food products are properly labeled by restaurants and food service preparers. And we will be marketing the new printers to restaurants, casinos, colleges, hospitals, cruise ships and more.

By helping to cut waste, reduce the risk of spillage -- spoilage and, in the case of the Ithaca 9800, actually showing employees how to properly prepare the meals, we are leading the way in innovations and providing significant value and convenience to a whole new customer base, all at new price points for TransAct.

As we have mentioned in previous calls, in order to grow our revenues and not be reliant on a single market, our strategy has been one of diversification. Here at TransAct, we are a Company constantly seeking to expand, thus not being reliant on any one particular market and allows us to grow our revenues and profits when a specific market or economy remains weak for several periods. We have continued that vein in 2012 with the recent launch of the five new Ithaca and Printrex products, the most in TransAct's history

In addition to the launch of our new Ithaca products, we recently launched two new Printrex branded printers that we believe will greatly enhance printing for the multi-billion dollar oil-and-gas industry. We introduced the Printrex 920, which takes advantage of our recent agreement with ZINK and prints in color without using ink cartridges or ribbons, an amazing new thermal paper technology of which we are happy to be a part.

It's also the most rugged printer out there, able to withstand the rigors of trucking and offshore platforms. This printer lists for $5,495. And at the end of the oil-and-gas show, we received our first order for one printer by one of our wireline customers. We expect this product to be in full production by the end of July.

As part of our agreement with ZINK, TransAct will own the color paper sales that will occur once these new printers are sold and installed in the field. We will have the paper rights for the worldwide oil-and-gas market and expect to see this new consumable revenue to begin to contribute to our revenue stream later this year.

And we also have unveiled the Printrex 980, which is the fastest well log color printer in the marketplace at a plot speed of eight inches per second, while also ensuring there are no gaps in printing even when the printer temporarily lacks data.

This printer is much different than anything we have been involved with before. First, it was custom designed for TransAct, and we will be selling a full-fledged inkjet high-speed office printer. It was designed just for the oil-and-gas market, so it prints fan-folded paper at a whopping eight inches a second. The list price for this printer is $19,995, and it targets those offices -- not rigs or trucks -- where loggers and analysts bring back logging reports electronically from the field.

The market size is limited, but the consumables that will be sold for this product can be very lucrative. These office printers can run 24 hours a day, and they print a lot and they use a lot of ink, as the logging reports have over 50% ink coverage on a sheet of paper and a typical logging report is 30 feet long. To give you a perspective of what that means, a typical page being printed on an office printer has only 5% coverage. And once again, we have the exclusive for selling of these large inkjet cartridges for this printer. It will be keyed just for TransAct.

We were very pleased with the customers' response to the new Printrex printers at the Offshore Technology Conference in Houston last week, and we believe all the new printers can begin contributing to our results in the latter half of the year.

At this point, I'll turn the conference call over to Steve, who will take you through the financial numbers. But to sum up my feelings, we had another strong quarter at TransAct, delivering record quarterly casino and gaming revenue while delivering excellent gross margins, notable when you consider the muted economic recovery.

As we continue into 2012, we maintain our expectations of another year of revenue and earnings per share growth in 2012 compared to 2011, as well as further improvement in our gross margins due to a continued favorable sales mix as well as generating significant cash flow from operations.

Our balance sheet remains very strong, and we continue to use some of our excess cash to repurchase shares and for product development. In the last few weeks, since the end of the first quarter, we have repurchased over 400,000 shares, returning over $3.5 million to our shareholders.

And finally, I would like to thank our shareholders, who continue to stand by TransAct and support our work and efforts. Your support is truly appreciated by everyone at TransAct, and we don't take it lightly.

And I also want to thank the entire TransAct team for their constant commitment and effort. Five product launches in two weeks -- job well done.

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

Thanks, Bart. Let's go over the first quarter financials. Our EPS for the first quarter of 2012 was $0.13 on revenue of $17.6 million, compared to EPS of $0.19 on $20.7 million of revenue in the first quarter last year.

Let's discuss the details a little further. Our net sales for the first quarter of 2012 were $17.6 million, a decline of 15.1% from $20.7 million in the first quarter of 2011. During the first quarter of 2012, we shipped 49,000 printers, representing a 31% decrease in unit volume compared to the record 72,000 units we shipped in the first quarter last year.

The decline in unit volume was driven primarily by lower lottery printer sales, as sales to GTECH returned to a more normalized level in the first quarter 2012 from a near record level in the prior year quarter. The decline in lottery printer unit volume was somewhat offset by record quarterly sales of the casino gaming printers as well as the addition of Printrex printers.

The average selling price of our printers increased by 20%, $283 per printer in the first quarter of 2012, compared to $237 per printer in the first quarter of 2011. The increase in ASP was due largely to sales mix, as we sold more casino and gaming and Printrex printers in the first quarter of 2012, which have higher average selling prices, and fewer lottery and McDonald's printers that have lower average selling prices than our other printers.

In the casino and gaming market, revenue reached a record $9.4 million in the first quarter, up 35% from the prior year's quarter. In fact, we experienced a 63% increase in domestic casino and gaming sales as a result of several new casino openings and continued market share gains given the domestic market grew by only around 20% in the quarter. In addition, we saw our first contribution of sales from our Epicentral print system during the quarter.

On the international side, casino and gaming printer sales were up 21% from the prior year quarter, led by a strong performance in Europe and a resumption of printer shipments into Italy as the pace of installations of VLT gaming machines there increased.

Printrex contributed $1.2 million in printer sales for the first quarter 2012. Since TransAct acquired Printrex in August last year, the business has been a significant contributor to both our sales and gross margins, and we've been extremely pleased with the results so far from the Printrex line of products.

Moving on to our banking and point-of-sale market, sales for the quarter were $2.3 million, down 5% from the first quarter of last year. The decline mainly came from our POS market due to the substantial completion of the McDonald's rollout in the US. However, this decline was largely offset by an increase in banking printer sales as we shipped the first half of a large order from a new customer win for bank teller station printers in the quarter. We expect the remaining half of this order to ship during the second and third quarters this year.

Our lottery market generated sales of $1 million, down 86% from the prior year period as lottery sales returned to normalized levels following a near record level in the prior year. As we always highlight, sales of lottery printers can vary widely from quarter to quarter due to the nature of the lottery business. With that being said, we expect lottery printer sales to continue at about this level for the next couple of quarters.

Sales from TSG, our TransAct Services Group, decreased 5% in the first quarter of 2012 compared with the first quarter of 2011. The decrease was mainly driven by lower sales of consumables partially offset by higher service revenue.

So to sum up, we had another solid sales quarter, and although our record quarterly casino and gaming revenue was unable to offset the large decline in lottery printer sales, we had excellent gross margins, notable when you consider the continued muted economic recovery.

Now, turning to gross margin, our gross margin in the first quarter of 2012 was 38.6%, compared to 33.5% in the first quarter last year, an increase of 510 basis points. The gross margin increase was primarily due to a more favorable sales mix, as there were more sales of casino and gaming printers in addition to Printrex oil-and-gas printers, which sell at higher margins, and lower sales of lower-margin point-of-sale and lottery printers. As we continue through 2012, we expect to maintain a similar level of strong gross margins.

Operating expenses for the first quarter of 2012 were $4.9 million, an increase of 17% from $4.1 million in the first quarter of 2011, driven mainly by the addition of ongoing operating expenses and amortization of intangible assets from Printrex, which we acquired in August last year.

In addition, we incurred higher product development expenses as we prepared for the launch of five new products in April and May this year.

Operating expenses for the first quarter of 2012 also included a restructuring charge of about $54,000 for employee termination benefits and moving expenses related to the anticipated closing of the Printrex manufacturing facility in San Jose, California, during the third quarter.

We expect to incur an additional $100,000 of restructuring expenses, mostly in the second quarter, in connection with the closing of the facility. Once the facility is closed, we expect to realize approximately $800,000 of annualized cost savings, or about $200,000 per quarter beginning with the fourth quarter of 2012.

Our operating income in the first quarter of 2012 decreased to $1.9 million, or 10.9% of net sales, from $2.8 million, or 13.5% of net sales, in the prior year quarter, primarily due to increased operating expenses.

We recorded income taxes at an effective tax rate of 36% in the first quarter of 2012, compared to 35% in the first quarter last year. Our effective tax rate for the first quarter this year is higher because it doesn't include any benefit from the federal research and development credit, which is normally included in our tax rate, as this credit expired at the end of 2011. This will continue to negatively impact our tax rate for 2012 until the credits reinstate.

If and when the credit is reinstated, we'll record a favorable year-to-date catch-up adjustment in the period in which it is reinstated. However, if the credit is not reinstated, we expect our effective tax rate for 2012 to be between 36% and 37%.

And on the bottom line, diluted EPS for the quarter was $0.13, compared to $0.19 in the prior year quarter.

Now, let's take a quick look at our balance sheet at the end of the quarter. Accounts receivable were $12.8 million as of March 31, 2012, up 34% from $9.6 million at the end of the fourth quarter 2011. The increase in our receivables reflects a higher concentration of sales in the latter portion of the quarter compared to the end of last year.

Inventories decreased $2.3 million, or 16%, to $11.8 million at the end of the first quarter 2012 from the end of last year. The decline was due to a concerted effort to significantly reduce inventory purchases and to fulfill sales during the quarter with existing inventory stock. We expect our inventories to continue to decline throughout the remainder of 2012, but at a slower pace.

Our accounts payable decreased by about $200,000, or 6%, to $2.8 million during the first quarter of 2012. The decrease was mainly due to lower inventory purchases as well as the timing of payments.

In terms of debt, we continue to have no debt outstanding on our $20 million revolving credit facility with TD Bank.

And now, looking at our cash flow, our cash balance increased by $1 million, or 15%, to $7.9 million at the end of the first quarter of 2012, from $6.9 million at the end of last year. During the first quarter of 2012, we generated approximately $1.2 million of cash from operations, largely due to our net income of $1.2 million for the quarter, as a $3.2 million use of cash to fund accounts receivable was almost entirely offset by a $2.3 million decline in inventories and $0.5 million of depreciation, amortization and noncash stock comp expenses.

Our capital expenditures were just $54,000 for the first quarter of 2012, including $10,000 of software development costs for our Epicentral system. This compares to $440,000 of capital expenditures for the first quarter of last year. Based on our pipeline of planned printer projects and Epicentral software development, we expect our capital spending for the full year 2012 to be about $1.5 million.

Looking at some of our financial metrics, our EBITDA for the first quarter of 2012 was $2.5 million, compared to $3.3 million for the first quarter last year. Our working capital increased to $28.8 million at the end of the first quarter of 2012, from $27.2 million at the end of last year. Our current ratio also improved, to 5.8 as of the end of the first quarter 2012, up slightly from an already very strong 5.7 at the end of last year.

And finally, during the quarter we repurchased 20,155 shares of our common stock for about $100,000 under our stock repurchase program. However, year to date through yesterday, May 8, we repurchased approximately 441,000 shares for approximately $3.75 million at an average price of $8.55 per share. These shares were repurchased under our 1 million share 10V51 trading plan that we announced in March. So we have already repurchased almost 5% of our outstanding stock in just two short months.

In closing, we're pleased with our first quarter results, led by record quarterly casino and gaming sales and significant expansion of our gross margin. However, we remain a bit more cautious about the second quarter given there will be fewer new casino openings.

Still, we continue to expect to achieve overall revenue and EPS growth in the full year 2012 over the prior year. We also believe we'll be able to see contributions in the latter half of 2012 from our newest Ithaca and Printrex products, including the associated consumable products, which we just launched, as well as further contribution from our Epicentral print system.

From a balance sheet standpoint, our financial position remains solid with $7.9 million in cash and no outstanding debt. And because of our strong financial position, we expect to use our positive cash flow this year to continue with our aggressive stock repurchase program, which we believe will benefit all our shareholders over the long term.

And with that, I will pass it back to Bart.

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

Thank you. (Operator Instructions) We'll go first to Todd Eilers with Roth Capital Partners.

Good afternoon. Hi, Bart. Hi, Steve. Nice quarter, guys. I wanted to see if I could ask -- I guess talk a little bit about the new printer launches just in terms of the market opportunity. It might be helpful if you could kind of give us a sense for what you feel the market opportunity is for both the food safety and prep printers as well as oil-and-gas -- the new oil-and-gas printers with Printrex. That would be helpful. Thanks.

Yes, so let's start with the food prep. Domestically, there are at least 500,000 terminals that can get sold into the marketplace. There are about 400,000 restaurants and -- that are not what we would call the big franchisees of Yum and McDonald's, and then you add in Yum, McDonald's and some of the others, you got another about 100,000. So about 500,000 locations in the US alone, and some of those locations could get multiple terminals each.

The market response, Todd, was somewhat overwhelming at both McDonald's and NRA. But we had planned to start production of the 9700 in September, but we've moved that up by a month to August. The demand seems to be real, and we've moved up the production to August. And we actually plan on starting to take orders over the next week or two to start lining up the customers because of the backlog that we believe is going to start, and we want to see what we can get out the door and get to these customers.

That's mainly the 9700. The 9800 is more of an integrated product that will go on people's software systems. And actually, we expect to be partnering with software companies that provide the back-end systems that'll either sell the device for us as part of an upgrade to their system or they'll bring us in as their peripheral supplier, their terminal supplier, and then we'll just take the order. And that's probably an easy another 100,000 domestically.

What really got our attention at just McDonald's worldwide was the initial launch and the initial work we did with McDonald's, we believed that we would just sell the terminal domestically. We had more inquiries for the terminal from their international franchisees. We had people from all over the world -- Brazil, Europe, Switzerland, Australia. In fact, I just got an email yesterday from a gentleman in Australia who's asking how he can buy it.

So really you're starting to look at about 37,000 stores in McDonald's, of which we could probably sell the terminal, and that's just McDonald's -- realizing that this terminal is available and can and will be sold to every restaurant chain out there. It's not just for McDonald's. McDonald's just worked with us while we started designing it to give us their input on what it's going to be like.

So if you think about the average selling price of the unit and you think about the list price between $1,299 and $1,695 -- $1,699, you're looking at quite an opportunity for the Company. And truthfully, the gross margins are going to be higher than the Company average, so this is going to have a meaningful impact to the Company over the next couple years. And again, I'm working with Steve and our operations guys to see about starting production in August and not September.

The Printrex is kind of an interesting story. We're replacing an existing product. This is an upgrade. It's a new product called the 920. It basically replaces our 820, our 822 and our 843. It's a black-and-white and color printer. It goes in the trucks and the rigs, so it goes out when they do what's called MWD, measurement while drilling, when they're drilling they're looking and we're printing out those reports. And then we're also, with the wireline trucks, when the hole is drilled and they want to see what's going on.

The opportunity is for at least 100,000 printers. That's probably as many printers that Printrex has sold. Based on the fact that it can do black-and-white and color, we believe that we'll be able to sell it as not only for the new trucks that get sold, the new rigs that are built, but also as a replacement. It's going to take some time. We've got to get the color paper in production, but we are scheduling the production of this printer for the end of July. We already took our first order right at the show, which was quite amazing.

Again, its list price is $5,495, and it's got some pretty good margins, higher than the Company average. So we're quite excited about its opportunity and really excited about the consumable sales because we own the paper to it. And like I said in my speech, 30 feet per report, and in some cases, the analyst prints three or four reports before they leave the rig.

The 980 is much less, probably could sell 100 or 200. Again, the list price of that is $19,995. Those go in the district offices. Basically, these reports are for the 10 doctors that own the oil well and want to see how the rig is doing. But these data centers tend to print 24-hours a day when these reports are needed. The consumables will list for over $1,000 on a four-pack, and there are places that use $30,000 a month in consumables.

It's the only printer that's truly been designed for the oil-and-gas data center market. It's the fastest color printer in the market at eight inches per second. It's designed just for logging paper, which is about eight inches wide and fan-fold. Think of your office printer that's printing a page at a time. You put 500 sheets in a drawer, close the drawer, and it prints. We're actually dropping about, what, I don't know, it's 800 sheets of paper that's fan-folded in a box in the printer, and it will print it out. It's quite fast, it's quite good, and it's targeting that office market.

That product is actually available now. There are some drivers that we're working on that will probably take another couple weeks, and we'll probably start expecting to see some orders hit by the beginning of July. But it's been manufactured. We actually have a couple. We actually showed one in the booth.

And again, it's going to be one of those things we'll sell 10 or 20 of in the beginning, but the consumable sales per printer is extremely high.

Okay. Great, guys. Thank you. Just one quick question on expenses. Obviously, R&D ticked up with the large amount of new printer launches. Should we expect that to decline sequentially over the next couple of quarters, or is this kind of a good run rate going forward?

I think it's about what it's going to run at, Todd. It's about the run rate, high 4's.

Okay.

Yes.

All right. Perfect. Thanks, guys.

Okay. Thanks, Todd.

(Operator Instructions) And at this time, it appears there are no other questions.

Well, once again, we thank everybody for joining us on this conference call today. We are having our annual shareholders meeting on May 30th, here at Hamden, Connecticut, at 10 o'clock. We'll have some of the new printers here, so -- and terminals. So if you want to come and see it, we'd be glad to show it to you and go over it with you.

Outside of that, we'll talk to you after the end of the second quarter. Thanks for joining us. Bye-bye.

This does conclude today's conference. We thank you for your participation.