TransAct Technologies Inc (TACT) 2012 Q2 法說會逐字稿

Good day and welcome to the TransAct Technologies second-quarter 2012 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. William Schmidt of ICR. Please go ahead, sir.

Thank you, Nancy. Good afternoon and welcome to TransAct's second-quarter 2012 earnings 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 Q&A.

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, 2011. The Company undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances that happen after this call.

At this time, I would like to turn the call over to Mr. Bart Shuldman. Bart, go ahead.

Thank you, Bill. Good afternoon, everyone, and thank you for joining on today's call. Before I begin speaking about what is going on at TransAct, I want to let our shareholders know that as I end my talk I will give you an update to the ongoing Avery Dennison lawsuit. But let's get started.

First, I am very pleased with our results given the continued difficult global economy. While the uncertainty continues especially here in the US with the potential fiscal cliff and the very difficult European economy, our results show the resilience our company has, given the strategic direction we took over the past several years. We are focused on bringing to the market technology that provides solutions to the markets we serve and to new markets we see as growth drivers for TransAct.

If you remember, we called it printers as a solution. We have added new markets to the ones TransAct serves, such as oil and gas, medical and emergency vehicles, which we believe have potential to drive revenue growth as well as expanding our margins. We are adding technology to our products to provide more sophisticated solutions for our customers.

A great example is the new color thermal oil and gas exploration printer we have recently launched, the Printrex 920. This printer and the associated highly-technical color thermal papal paper provides our oil and gas customers the capability to see more of what is going on in the down-hole while they drill and also when the well is performing.

The color images provide a new level of information, and TransAct now brings to this exciting and growing industry a new printing solution. Printrex has been a very good acquisition for TransAct, both from the growth potential but also from an operation and margin perspective. Steve DeMartino and our operations team are almost finished with the final integration of Printrex into TransAct, and starting this quarter, the third quarter of 2012, we will begin to see the synergies and expanding margins we expected.

We will also be looking forward to growing Printrex printer sales in both the data center offices within the oil and gas market, while also expanding into medical and emergency vehicles. All these provide the potential for continued revenue and operating profit growth for TransAct for years to come.

And finally, Printrex will provide a wonderful recurring revenue business for TransAct, now that we signed our exclusive paper deal with ZINK for the color thermal paper. We will be the exclusive supplier of the color thermal paper into the oil and gas exploration market. And once we get into full production and start selling the new Printrex 920 printer, we will begin to experience the positive effect of owning this recurring revenue.

In addition, we have the exclusive rights to the inkjet cartridges that go along with our new Printrex 980 inkjet printer for the data center offices of the oil and gas exploration market. If you remember, this is a high-speed inkjet printer that is designed specifically for the oil and gas market. This printer is used in the district offices of the large oil companies such as Halliburton, Schlumberger, Baker Hughes and Weatherford, as an example, where many reports are printed all at once for the owners of the wells.

Once we get a better understanding of the amount of volume of paper they print, we can see how lucrative this consumables business can be for TransAct. These color inkjet cartridges are custom-made for TransAct's new Printrex 980, and we are expecting healthy margins and volume once we start selling these printers.

In addition, as you know, we have expanded our presence in the point-of-sale market with our new Ithaca 9700 and Ithaca 9800 food safety and nutritional labeling terminal. We have combined our world-class engineering and manufacturing capabilities to bring this technology to our point-of-sale customers. From my perspective, the food safety and nutritional labeling market is just starting to grow, and our terminals are the best in the world.

We are almost done with the trial at McDonald's, and our expectations are for final release over the next three to six weeks. So far, the trials have gone flawlessly. We are finishing the final design features that McDonald's has requested for the 9700 and expect to be in production by September 1.

Just so you know, McDonald's is now using our terminal to enhance their operational efficiencies, and we have worked closely with them on the changes that they just wanted. We are very pleased by the response by McDonald's to our Ithaca 9700. It is meeting all the requirements and specifications.

But what has me also excited about the opportunity for revenue growth by the Ithaca 9700 is the potential growth of the nutritional label market. From the very beginning, I felt the nutritional labeling market could grow into a meaningful business for TransAct. As we have seen in places like New York City, not only are parents concerned with what their children are eating or drinking, but so is the government. The opportunity to print a nutritional label on everything that is prepared appears to me to be a very big opportunity for our new Ithaca 9700. There are so many applications for the Ithaca 9700 food safety and nutritional labeling terminal.

Just a final comment on our other terminal, the Ithaca 9800. Based on customer feedback, we are now adding more features and functions to this unit. We expect to have those features designed into this new terminal by the end of the year, and then begin the final work to move this terminal into production. This unit has gained major attention in the food safety marketplace, and we thank our potential customers for their input and guidance.

Next I would like to speak about our Epic Central print system and our worldwide gaming and casino market. As you can see from our results, we grew our worldwide casino and gaming printer revenue by 20%. Despite the issues in Asia and more importantly the economic problems in Europe, we continue to expand our business once again. But what is clearly an indication of our success and the preparation some casinos are doing to get ready to purchase our Epic Central print system, we grew our domestic casino business by 54%.

We are working every day on Epic Central deals, and while they have taken longer than we thought, we still remain enthused about the opportunities to sell many more systems. We remain tied to our story that the Epic Central print system is a great solution for casinos wanting to get personal with their slot players.

I am also looking forward to the G2E trade show in October as we launch more features and functions for our Epic Central print system. I hope some of you attend the show in Las Vegas and see what we are doing next.

So we had a solid quarter, a good solid quarter. Printrex became an integral part of TransAct's results and we are expecting more from this new business. And despite a very low amount of GTECH lottery printers in the quarter, we had solid results led by our casino and gaming market. And now as we move forward, we will begin to start shipping the new Printrex printers and our new food safety and nutritional label printers, and also the new Ithaca 9000 POS thermal printer. That is five new printers.

A quick note about the second half of 2012. We are expecting higher sales and earnings in the first half. This growth will come from the timing of lottery printer sales. GTECH took few printers in the first half and will take much more in the second half. In addition, we will start to see that the positive results of our new products adding to our revenue growth.

Also, our POS business should also see a boost in the second half of 2012, as McDonald's has developed a new application for our thermal receipt printer, the Ithaca 8000 at the checkout. Prior to this, POS sales had been declining in the US as the rollout of our Ithaca 8000 and 8040 had essentially run its course by the end of 2011. Now with this new application, TransAct has another significant opportunity to sell our printers into the largest fast-food chain in America.

We are projecting better results while we are also being conservative. The Illinois VLT market is starting, and we have added a conservative amount of printer sales to the Illinois VLT markets for our projections for the second half of the year. If the rollout is quicker and more jurisdictions come online sooner, then we should see upside to the growth we are projecting.

In addition, we have projected a limited amount of revenue from our recently launched new products. But once again, if the shipments of these new products begin to accelerate, then we should do even better. The one caution is clearly the ongoing issues in the US with the fiscal cliff and the European economic problems. If the worldwide economy got worse, then this could affect our growth in the second half. But you should know we have the GTECH orders and we also have some other orders already, and the third quarter is off to a much stronger start than the previous two.

And finally, I will end with the lawsuit by Avery Dennison. First, let me thank those shareholders who have called to give us support. We have previously stated that we believe we have done nothing wrong. The hearing or the trial, as we like to call it, just ended today at noon. We believe we put on a great case supporting TransAct, and I want to thank our team of lawyers from Ropes & Gray. They are true professionals in every way and they assembled a great rebuttal to this horrible lawsuit.

I will reiterate I believe we did nothing wrong. With the hearing ending today, we are hopeful that we will get a ruling sometime over the next three weeks. This is all I am permitted to say, other than to say once again, I emphatically believe we did nothing wrong.

I thank you for listening to me this afternoon, and at this time I will turn the call over to Steve for the details to our results. As normal after he finishes, we will open the call to questions. Steve?

Thanks, Bart. Let's go over the second-quarter financials. Our earnings per share for the second-quarter 2012 was $0.06 on revenue of $15.9 million, compared to EPS of $0.15 on $17.5 million of revenue in the second quarter last year. Excluding the legal fees related to the Avery Dennison lawsuit, our adjusted EPS for the second-quarter 2012 was $0.09.

Our net sales for the second quarter were $15.9 million, down 10% from $17.5 million in the second quarter last year. During the second quarter this year we shipped 45,000 printers, representing a 19% decrease in unit volume compared to the 56,000 units we shipped in the second quarter last year.

The decline in unit volume was driven primarily by lower lottery printer sales, as sales to GTECH were near historically low volumes in the second quarter this year compared to a near record high level in the prior-year quarter. The decline in lottery printer unit volume was somewhat offset by higher sales of casino and gaming printers, as well as the addition of Printrex printers.

The average selling price of our printers increased by 14% to $279 per printer in the second quarter this year, compared to $245 per printer in the second quarter last year. The increase in ASP was due largely to sales mix, as we sold substantially more lottery printers in the second quarter last year, which are and have always been at lower average selling prices than our other printers.

Now looking at sales into each of our individual markets. In our overall casino and gaming market, revenue was approximately $7.1 million for the second-quarter 2012, up 20% from the prior year's quarter. Digging further into these results, we experienced a 54% increase in domestic casino and gaming sales as a result of new casino openings and continued market share gains.

On the international side, casino gaming printer sales were down slightly by 4% from the prior year's quarter, due largely to a decline in sales from the Asia-Pacific region. Printrex contributed $1.2 million in printer sales during the second quarter 2012. Printrex remains a meaningful addition to our business, and it has consistently contributed to our overall gross margin expansion since we acquired it back in August last year.

Moving on to our banking and point-of-sale market, sales for the quarter were $2.7 million, down 5% from the second quarter last year. The decline came mainly from our POS market as a result of the substantial completion of the McDonald's US rollout at the end of last year, partially offset by an increase in our banking sales from the large order we completed filling in the second quarter this year.

Our lottery market generated revenues of $1.7 million, down 65% from the prior-year period, as lottery sales continued at a near historically low volume following the large order to GTECH that we filled in the first and second quarters of last year. As we always highlight, sales of lottery printers can vary widely from quarter to quarter due to the nature of the lottery business.

And as Bart previously mentioned, based on our backlog of orders, we expect to see a significant uptick in lottery sales in the second half of the year, especially in the fourth quarter.

Sales from TSG, our TransAct services group, decreased 16% in the second quarter of 2012, compared with the second quarter last year. The decrease was mainly driven by lower sales of consumables, partially offset by higher service revenue.

Now turning to our gross margin, our gross margin in the second quarter of 2012 was 36.9% compared to 38% in the second quarter of 2011, a decline of 110 basis points. The gross margin decrease was primarily due to the effect of lower sales volume that outweighed a more favorable sales mix. And as we continue through 2012, we expect to maintain a similar level of gross margin in the 37% to 38% range.

Operating expenses for the second quarter of 2012 were $5.1 million, an increase of 14% from $4.5 million in the second quarter of last year, mainly driven 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 about $0.5 million of legal fees related to the lawsuit with Avery Dennison. Excluding these legal fees, operating expenses were up just 3% from the prior year's quarter.

Operating expenses for the second quarter also included a restructuring charge of $63,000 for employee termination benefits and moving expenses related to the closing of the Printrex manufacturing facility in San Jose, California. As of today, we have substantially completed integrating Printrex into our TransAct operations. And I am proud to say that we successfully accomplished the integration in less than one year, an impressive feat for a company's first acquisition. And we are also on track 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 second quarter of 2012 decreased $800,000 or 4.9% of net sales, from $2.2 million or 12.6% of net sales in the prior year's quarter mainly due to lower revenue and higher operating expenses, including the legal fees related to the Avery Dennison lawsuit. If you exclude the legal fees, our adjusted operating margin was 7.9% in the quarter.

We recorded income taxes at an effective rate of 36% in the second-quarter 2012, compared to 35% in the second quarter last year. As a reminder, our effective tax rate for the second quarter this year is higher because it does not include any benefit from the federal research and development credit, which is normally included in our rate, as this credit expired at the end of last year. This will continue to negatively impact our tax rate for 2012 until the credit is reinstated.

If and when the credit is reinstated, we will record a favorable year-to-date catch-up adjustment in the period in which it is reinstated. If the credit is not reinstated, we expect our effective tax rate for 2012 to be approximately 36%. And on the bottom line, excluding the legal fees, adjusted EPS for the second quarter was $0.09 compared to $0.15 in the prior year's quarter.

And now let's take a look at the balance sheet at the end of the quarter. Receivables were $11.7 million as of June 30, 2012, down 9% from $12.8 million at the end of the first-quarter 2012. The decrease in our receivables primarily reflects the lower sales volume in the second quarter compared to the first quarter.

Our inventory balance decreased to $11.5 million at the end of the second quarter, down by 3% from the previous quarter. The decline was due to our continued effort to reduce inventory purchases and to fulfill sales during the quarter with existing inventory stock.

However, looking forward, we do expect our inventories to rise as we move through the remainder of the year as we place initial stocking orders for our newly-launched point-of-sale food-service and Printrex products. And we also increased stocking levels of existing products in anticipation of higher expected sales volume in the second half of the year.

Our accounts payable increased by $2 million to $4.9 million during the second quarter. The increase was mainly due to an increase in inventory purchases we made during the quarter to support higher expected sales volume in the second half of 2012.

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

And now looking at our cash flow, our cash balance decreased by $700,000 or 8%, to $7.2 million at the end of the second quarter from $7.9 million at the end of the first quarter. During the second quarter of 2012, we generated about $4.5 million of cash from operations, largely due to our net income of $0.5 million for the quarter, $600,000 in depreciation, amortization and stock comp expense, a $1.2 million reduction in accounts receivable, and a $2 million increase in accounts payable.

Our CapEx was approximately $295,000 for the second quarter of 2012. This compares to $390,000 for the second quarter of last year. And based on our pipeline of planned printer projects, IT projects and Epic Central software development, we expect our capital spending for 2012 the full year to be around $1 million.

Looking at some of our financial metrics, our EBITDA for the second quarter was approximately $1.4 million. Excluding the legal fees, EBITDA was $1.8 million for the second quarter. And this compares to EBITDA of $2.7 million for the second quarter last year. Our working capital decreased to $24.6 million at the end of June 30, from $28.8 million at the end of the first quarter. The decrease in working capital was mainly due to the decrease in accounts receivable and an increase in accounts payable during the quarter.

And lastly, during the quarter we repurchased approximately 596,000 shares of common stock for approximately $5 million under our stock repurchase program. Year-to-date through the end of the second quarter, we have now repurchased approximately 616,000 shares for approximately $5.2 million at an average price of $8.36 per share. The shares were repurchased under our 1 million share 10b5-1 trading plan that we announced in March. So to date, we have repurchased over 6% of our outstanding stock under this program.

In closing, we are pleased with our second-quarter results. Our casino gaming sales were once again up considerably this quarter. And as we mentioned earlier, we expect the second half of 2012 to be much stronger compared to the first half of the year. Our financial position remains strong with $7.2 million in cash and no outstanding debt. Overall, we remain optimistic for the back half of this year and are excited to begin seeing revenue contributions from our newest products.

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

Thanks, Steve. Good job. Operator, let's open up the call to questions, please.

(Operator Instructions). Todd Eilers, ROTH Capital Partners.

Hey guys, how are you?

Good, Todd. How are you doing?

Doing all right. A few questions. I wanted to start off on the casino and gaming segment. Obviously, domestic remains strong, and it looked like international was a little bit less than what we were looking for in the quarter. Can you talk a little bit about what your expectations are, I guess, for the second half?

You mentioned in general you expect that to be stronger for the Company, and I think you mentioned lottery sales picking up and then some of the new products. But aside from that, what are your expectations for I guess the core casino and gaming space, both domestic and international?

I think we expect to see the same type of sales in the first half as we did in the second. We had some casino openings in the first half. We won I think six out of the seven openings that occurred in the first half of the year. And in the second half of the year, we have added in some VLT business for Illinois, and there is a couple other projects out there that we are involved in.

So I think the second half of the year is going to look a lot like the first half of the year, both domestically and internationally. If you noticed, the international side, Europe was pretty strong for us. It was really just Asia. And Asia is really based on projects, you know, which casinos are opening up. We have got ongoing business there, but if you have a couple of openings, and we have won most of the openings recently in Asia, that could affect just the revenue by a couple of points.

So from a casino and gaming side, we are expecting to see the same type of results that we just saw. Of course, on the lottery side we are expecting some pretty significant uptick starting in the third quarter and then really adding into the fourth quarter.

Okay, great. And then wanted to ask on the Epic Central product, you guys had previously announced a deal I believe with Revel in AC. Any update on the timing of that installation?

Yes, the team is working with Revel. I can't get into the details of it, but they are working with Revel. Revel has opened up, going through typical opening issues, startup issues, and no sense putting our system in there while they work out the opening. But eventually, our system will get turned on at Revel.

Okay, great. And then I wanted to ask a few questions on the Avery Dennison lawsuit. I wanted to better understand, you mentioned in your comments that the trial or the hearing ended today. Was that the preliminary injunction hearing that ended today; is that what that was?

Yes. Todd, the trial started Thursday, and it went Thursday and Friday, and we took Monday off. And then it went all day Tuesday, and I actually left last night to fly home for the earnings call. And then both teams of lawyers, Avery Dennison's and ours, finished up today with final remarks. So it did end at around noon today.

And then so what are the potential outcomes, I guess, that we should be I guess looking for? And I think you mentioned over the next two, three weeks was the expectation for a ruling.

Yes. What happens now is final briefs go to the judge. I am told that that is going to happen by Monday, that the judge has asked for final paperwork by Monday, and we have asked for an expedited decision. Again, we believe we have done nothing wrong and we don't need this overhang on the Company, so we have asked for an expedited decision. It is really in the judge's hands how quickly he wants to make that decision.

He seemed to understand that we clearly wanted a decision quickly. And then we will wait. After we submit the final briefs on Monday, we will wait and get a ruling eventually over the next -- we believe over the -- anytime between Monday and say three weeks from Monday to get a final ruling. (multiple speakers)

Sorry go ahead.

I am sorry. (multiple speakers) Go ahead, you ask. I'm sorry.

Sorry, we've got a bit of a delay. What I was going to ask was is the ruling just the -- is it just a ruling on the preliminary injunction? I guess my question is let's say the judge ruled in your favor. Could there still be further legal actions after that, or would you anticipate this being the end of it?

I can only give you what my lawyers have told me. In a trade secret case, normally the trial or the bulk of the trial is the preliminary injunction. And depending on that ruling, it should end. If it is against us, we will have to stop producing the product. As you know, we are starting production and we are not stopping what we are doing.

If we win, our expectations would be that things would end, because at that point the judge will have said something about whether trade secrets were shared or not. So we are very hopeful that we have gone through the worst of it. Again, our lawyers have done a great job. This is a horrible lawsuit, but we are hopeful that this will be now the end of it.

Okay, and any estimate for legal fees I guess in third quarter?

Steve, I think we are thinking about $1 million --.

Yes, I think it is going to be probably somewhere in the neighborhood of $1 million in the third quarter, Todd.

Okay. And let's say you get a favorable ruling, how quickly could we expect to see some initial sales? Could we see some in the back half of third quarter, or is it more likely fourth quarter?

Well, we are not stopping, Todd. So we are not waiting for the ruling. We really believe we have done nothing wrong, and we live in a great country. You are innocent until proven guilty, and we believe we are clearly innocent.

So our expectations is to continue to work with McDonald's, as I said in my opening remarks. McDonald's looked at the terminal not only as a great label printer for them for their food safety, but they looked at ways to improve their operational efficiencies. So we have worked with them on adding some other features to the terminal to make that happen. Those features were added a couple of weeks ago, and we are starting our engineering production.

We do what is called an EP, which is engineering production, out of our facility in Asia. That is going to be -- it is just about completed. And then in September we are in production. And based on the work that we have done with McDonald's, we are expecting the final general announcement to go to the field sometime early in September, and then we will roll it out to the domestic market.

We have been approached by the McDonald's regions around the world, and we are working with them on trials. We have had some trials in other parts of the world. Those are ongoing and we are optimistic that the rest of the world will see some of the good results that the domestic people saw, and we will start taking orders for those jurisdictions or those areas around the world.

We are also working with other point-of-sale customers of ours that have seen the product, and we are going to get ready for production and then get units to them so that they can start testing and then take orders. We would expect that most of the orders will start really taking effect in the fourth quarter because of our production.

We have again made some changes to the unit for McDonald's, and those are just going through right now. So the production will start in September, so that we would expect to see the bulk of the orders start in the fourth quarter. Our thoughts of a better second half really have a limited amount of product in the September and fourth-quarter time frames. As you roll out a new product, you are unsure of how quickly it is going to ramp up. But as I said in my remarks, I think if the McDonald's response is as good as we think it could be, then we would see some upside to it. So we would see most of the revenue in the fourth quarter.

Okay, great. And then I wanted to move on to Printrex and I guess the new color -- or the new -- the 920 and 980, I guess, for that business. What do the backlog look right now at this point for those printers? And again kind of the same question, you know, when can we expect to see some of those units? Any in the third quarter or moreso in the fourth quarter?

We are going to finalize the production at the end of this month. We have bought all the parts and started -- this product will be produced in Ithaca. We have moved the production from San Jose to Ithaca. Production is scheduled to begin at the end of this month.

The way that this market works, this is a color technology. Ed and his team are working to get the software upgraded with the systems to accept our printer. That is in process right now. We would expect to ship some printers in September because we are in production.

But I would say the same thing, Todd, you will see the bulk of whatever we see this year in the fourth quarter and then clearly next year. The 980 is a custom printer designed for us by a very large printer manufacturer in Japan. That is complete. The first orders are in. We expect delivery shortly. Those printers will go into test with some of the large oil and gas exploration companies as I have mentioned, Schlumberger, Halliburton, Baker Hughes, Weatherford and some others.

The exciting piece of the 980 is these printers can print 24/7. You just won't believe in these data centers how many reports are printed out. This printer right now will be the fastest color printer in the market, and they are all about speed. It has also got some really good TCO, total cost of ownership. It is enthusiastic about how many he can sell.

Now remember, these aren't going to be thousands of printers. Let me tell you, if we sell 20 printers, the amount of consumables we will sell with these printers is huge. And there is just so many data centers and just so many printers, but one printer can definitely deliver a fair amount of consumable business to us on the inkjet cartridge side. So we would see those sales, maybe one or two in September, but mostly in the fourth quarter. So will you will see us ramp up our production of the new printers in September and then start take hold in the fourth quarter.

We are being quite conservative in saying that our revenue in the second half will be bigger, but we are quite conservative in the numbers that we've put together in looking at the new printers that we are going to be selling and still be able to say that the second quarter will be bigger.

And by the way, we have still got the 9000 which is another printer that we introduced that goes into production right now. And of course, I just announced that McDonald's is expanding the way that they do their point-of-sale and their preparation. And the potential is to add one new printer to every store in the US, which is another 14,000 printers of our existing 8000 printer, and that we just won a couple of weeks ago.

Okay, great. Congrats on that. And then one last question if I might. I didn't see any sort of free cash flow guidance in the press release. Can you maybe give us a little color on that? Could we possibly -- could there possibly be some inventory builds for some of the new products that might take away some of that free cash flow, or just kind of walk us through expectations I guess going forward?

We really took out the free cash flow guidance, Todd, because the stock repurchase program has become so large it really doesn't make sense to put that out anymore. We bought back over $5 million just in the first half of the year. So that is where the bulk of our cash is going. But actually Bart and I were looking at the cash position right before this call, and we are essentially at the same cash position now that we were at at the end of 2011, and we've bought back $5 million of stock. And we have still got half a year to go.

Yes, so we'll end up with a fair amount of cash on the balance sheet at the end of the year. So we will still have cash and no debt. And we are 616,000 shares into the buyback, so we have got about another 400,000 in our 10b5-1 program. So we will take our free cash flow and continue to buy back the stock and we will complete, hopefully. What happens with our stock buyback is by rules, we can only buy back so many shares a day. And in the second quarter there was a pretty big seller, and that drove the amount of shares being traded up, which allowed us to buy more shares.

It appears the seller is not there anymore, so the amount of trading is down. So we can't buy shares as quickly as we were in the second quarter. But you should know we are in the market every day with our 10b5-1 program, and if the share trading went up, then our share buyback would go up. So it is just going to be a matter of our cash will be based truly on how many shares are trading and how many shares we can buy back.

Okay, great. Thanks, guys, appreciate the help.

Thanks, Todd.

Jim Roumell, Roumell Asset Management.

Yes, Bart, actually this is Ted Crawford on for Jim.

Hi, Ted.

I have got a question. We have been contacted by a number of significant shareholders and actually including, I should point, out the founder of TransAct, Seth Lukash, who agree with our request earlier this year to have the Company form a committee to consider strategic alternatives, including the possible sale of the Company.

So given that we believe this represents a large percent of the shareholders who support such a request, I wonder if you could comment on the request.

Sure, sure. Thanks, Ted. First of all, Seth Lukash didn't found TransAct. TransAct was a spinout of Tridex after some of us worked on the spinout and put TransAct together. So Tridex was a family-owned company. (multiple speakers) But let's leave it at that. Let's leave it at that, Ted.

You know, the Company clearly looks at the opportunities in front of it and looks for what we believe will be the best way to increase shareholder value for our shareholders. And we think that we continually look at different options; the board continues to look at different options. And we have launched five new products, and those products seem to have some real life for the Company and real growth opportunities. So we will continue to look at that.

We are glad to talk to any shareholder that wants to talk about what their opinions are. Clearly we have heard from you, Ted and Jim, and we respect that. In fact, if I am not mistaken, we invited Jim in to meet with the board which he decided not to do. And we also know that while you are saying that we should do some strategic options with the Company, you have been selling the stock.

So we understand the position that you are in. But from a shareholders' standpoint, we will continue to look up what is best for all of our shareholders which is more important to us, and the growth opportunities for the Company, and continue to look at that.

Well, we still own 10% and we are not selling now, so we do believe that we have identified some interested parties. You have been in charge now for 16 years. The stock has done very little. If Epic Central turns out that it is not playing out to the degree that you originally anticipated, it is possible that this company remains a hardware company and may be better off in the hands of a larger strategic buyer. So I hope you can understand that our request is legitimate.

Ted, I appreciate your opinion. I do not believe this company is just a casino company. I think it is very important that TransAct explain that to its shareholders. I think we just launched the industry's best food safety and nutritional label terminal. We have not seen the success of that because we are just starting production right now.

I think that what would be best for TransAct is to -- when the time is right to get our shareholders together and to show our technology to our shareholders, to show our shoulders what we have done. I think it is wrong to just say this is an Epic Central company. I think the Epic central has driven significant increase in revenue with our casino printers. I believe the domestic market was up 20% or so in the second quarter. We were up 54%. I think that clearly shows the pull that Epic Central has.

I think it is wrong to hold onto Epic Central as the only success criteria for TransAct. I think you are wrong. I think that is unfair and I think it is shortsighted. I think that the products that we are bringing out, the new Printrex products, the color, the opportunity for the consumable sales, the office printer that we launched for the oil and gas market and those consumable sales, the 9700, the 9800, the new order with McDonald's; I think it is very shortsighted to say Epic Central is the product at TransAct.

But at this point operator, I'd like to take another question.

Well, I thank you for taking my question. I wish you the best of luck and I hope you will take our request seriously, Bart.

Thanks, Ted.

Douglas Pies, Douglas H Pies Capital Management.

Hi, Bart; hi, Steve.

Hi, Doug. How are you doing?

I am doing good. After that, I actually don't think you are too far apart from each other in terms of the strategic alternatives that are there, and maybe if you guys could all sit down and just talk about it. But I think we should leave that. I just have a couple of specific questions.

Do you have a business question, Doug?

Yes. Yes, I do.

Thank you.

We go back to the total number of slot machines in the US, Bart, on the casino floor is I think at one point we were talking 1 million, something like that?

It's probably close to 950,000.

Okay. And I was wondering if we could go back to the -- we discussed in several previous calls the replacement, the cycle and so forth. Are we close to that, or could you come up maybe with some more color on where we stand on replacement demand?

That's a great question. Todd would probably know better than I do because he does a great study in the marketplace called the Roth Santini survey. And I highly suggest that anybody who wants to get some good read on the market, Todd and Frank Santini do a great job, Todd Eilers at Roth.

You know, we believe that based on the tough -- it is an interesting market right now. One, you've probably got a depressed replacement market. There is no doubt -- I don't know if Todd would say it is 20 years or 25 years, but it is probably somewhere around there. But what you have is jurisdictional expansion going on.

So you have got Ohio that just put casinos in. We won a couple of casinos there. You have got Ohio looking at VLTs. You have got Illinois looking at VLTs. You have got Massachusetts that is now going to add casinos. You clearly have had Aqueduct at about almost 5000 slot machines.

So there is a real balance now between the replacement cycle which clearly has been somewhat depressed and very depressed, if you go back a couple years ago, but you have also got this jurisdictional expansion going on. So you have got a market. I think the domestic market probably grew by 20%, and that was some of the new openings or probably most of the new openings that drove that growth.

So that is what is really growing the market right now, than the replacement market. That is what we see. On top of that, what we also see is our market share is going up, our shipments are going up, because as we work with casinos on the implementation of Epic Central, they clearly have to make sure their whole floor have 950s.

And we were not first to the market, so when we talk to a lot of the casinos out there, the floors could be mixed. It could be us and our competitor. It could be 100% our competitor where that floor has then got to be replaced with our printer. So we have seen our market share grow almost double the size of the market because we are also gaining the benefit of those casinos starting to plan for Epic Central. I hope that answers your question.

Yes, it helps. We have got -- there is still a huge, what is it, six-year replacement cycle, used to be, and now we are at 14 or 15 or something like that?

No, I would say that the best -- we used to say seven-year replacement cycle. I could still walk on a casino floor and still see some red, white and blue machines and some double diamond machines that will always be out there. And you've got poker machines that tend not to turn over as quickly.

So I would say that the best we have ever seen is seven or eight years, but we -- at one point we were probably a 30-year replacement cycle, and now could be down to 20-year. So it is clearly nowhere near where it used to be. And with the uncertainty of the economic climate plus you have got these new jurisdictions opening up, be interesting to see where the replacement cycle ends as these news jurisdictions open up.

Okay. I guess, Bart, one more question on that. At one point we had a new casino printer, a 1080 -- or I can't remember the number -- but is that on the back burner at this point. The 950 is still our workhorse?

Yes, you know, it is interesting. We have a new printer that has been on the drawing board for a couple of years now. Our casinos and -- well, our casinos have really liked our 950. It works, it just doesn't fail, and it allows them an easy upgrade path to Epic Central. You add the server port and you are done, and the casinos just don't want another printer. They don't want to have two different printers on the floor.

At the same time, our slot manufacturers have really asked us not to introduce another product because they have got to go through every jurisdiction to get it approved. And given the state that the casino market is in, they just don't want to spend the money and we don't blame them. I mean if everybody is happy with the 950, let's just keep it going. I mean, the tooling is all depreciated. I mean it is just a great product for us, and we just keep making tens of thousands of them. So we don't expect to do anything with the 1080 in the foreseeable future.

Okay, that answers that. Off-premises gaming, Bart, in Europe, is that still going to be a growth market for us or is it right now growing, or where does that stand?

Yes, look, we had Italy; we definitely saw Italy happen and we shipped tens of thousands of printers into Italy. We have got a couple of other countries in Europe that are thinking about doing the same thing that Italy did. And then we have got countries that do gaming, not casino, where we sell either our 430 or our Epic 880.

Doug, we sell them every day. So that -- Europe has been okay for us, still. It was a pretty big growth driver last year with Italy and the year before, but it is holding steady and it still looks like given the economic climate there that they are looking at gaming and casino as ways to boost their budget issues. So we still -- barring any catastrophe in Europe, we still see it as a good business for us, both at the gaming side and the casino side.

Bart, have you got time for two more quick questions?

Sure.

Okay.

You know, why don't you do this? I don't know if there is another person that has got a question. Why don't you go back in line and let somebody else ask?

Okay, sure. Thanks a lot. Okay, thanks.

David Gorman, Empire.

Hey, Bart, how are you?

Hi, David.

Just a quick question back to the lawsuit. On July 19, you counterclaimed against Avery Dennison, the David and Goliath lawsuit here. I mean, obviously, it is costing us a lot of money for the -- to defend this. And assuming that we get a reasonable verdict, if that is what we will call it, you know, are we going to seek the damages for the legal fees? You said that you were going to do that. And are there potentially any other damages that could come from this?

We have filed our counterclaims, David, and it will be in the judge's hands now. We have filed counterclaims. We have.

Okay. So, in other words, if in fact we get a good ruling in our favor, will there be another trial for damages or that is the end of it?

I don't know. It's a great question. I don't know. I don't know how that whole thing works out. Right now, I know we filed our counterclaims. You know, I can't answer that, so I would have to get back to you on that, David.

This is a joke. I mean, these guys have got a $400 million stock buyback. This is -- I mean, so to go against them with something like that could cost even a lot more money. I just was curious.

David, look, we have defended ourselves against a very -- just a horrible lawsuit. And our goal is to win the hearing that we just went through. That is our goal. And what happens after that I can't say because we have got to get through this hearing and the judgment.

Okay, so we will find out hopefully in the next few weeks.

Yes, sir.

All right. Thank you very much.

Private investor, [Mark Glass].

Hey, Bart and Steve. A couple of little questions and then one that might be larger. You've bought $0.5 million (sic) shares, but the number of shares outstanding has not dropped by that. Is that because of option exercise?

No, you can't -- you just don't take it at the last day and then calculate your outstanding shares. You have got --.

The shares are actually purchased over the entire quarter, Mark, so it is averaged out for the quarter.

So now that we have bought that much back --

Now that many shares will be out of the next quarter's.

Yes, you have to take it on the average of how many we bought back. That is all.

Okay. Second little question, any particular reason the consumables on the service group are down? I wouldn't think consumables would be from the economy, but maybe.

Yes, we have got some low-margin consumable business. What we are doing is we are preparing our services group to get ready for the launch of our color thermal paper for the oil and gas market, and the color inkjet cartridges for the oil and gas office market. And there is a lot to do to get ready for it. There is a lot in the paper. There is a lot to understand.

Ed and his team are getting the consumables people educated on it, and we are kind of dropping off some low-margin business that will free up time for our sales people to concentrate. The consumable business for the oil and gas market will be at much higher margin, and we want them focused on that. So we are just dropping off some low-margin business that we don't care for.

Yes. The last question is one that really comes from some recent releases from IGT and others about online gaming, and I don't know if online gaming eliminates the needs for printers or changes the need for printers or --.

No, no. Look, the amount of casinos and machines in the field population is only going up, and online gaming is another expansion of our wonderful slot machine manufacturers to put their games online and to participate in the online world. But I don't think anybody believes that casinos are going away anytime soon.

When I first joined TransAct and put TransAct together, our death threat was the elimination of paper. And ever since I have been with the Company, we have sold more and more printers and there is more and more use of paper every day. So I don't think online gaming is going to affect the land-based casinos at all.

Thanks, Bart. And just know I have been a stockholder since Hi-G and Seth Lukash; I still am.

Yes, that name came up today. Thanks.

Bye-bye.

Yes, thank you.

Terry Frank, E.F. Trading & Co.

Hey, Bart.

Hey, Terry, how are you doing?

I am doing okay.

Terry, can you hear us?

I'm doing okay -- can you hear me all right?

Yes, we can.

Hello? Okay, because I am on a bad phone. Both of my questions basically have been answered already, but I have a comment. And that is I guess I was disturbed when I saw the reports that [Rumel] had sold 30% of their stock, and I was glad to hear that they were holding on to 10% a little while ago. And I have been -- as you know, I have been with you guys for probably more than 10 or 12 years.

I was a market maker for you guys in the marketplace when there were real markets, and I have been a shareholder with a lot of people who -- a group that owned a bunch. And you know, it has been a long time, and I mean a year ago when I with on this call -- (inaudible) Delaware now, the stock was $12; it's now $7. It is -- maybe it is time to think about -- maybe it is time to think of ways to do something for the shareholder.

And one of the problems that you have, and it is not your fault, and that is the structure of the marketplace. Until the SEC and Mary Shapiro and the other people decide that they are going to put a spread back in this marketplace so research and sales and institutional people can work together, so there is enough money involved to take care of trading, research and sales, until that happens and there is some real paperback in this market in terms of real orders and real customers, I don't think small companies have a chance to really do very much. And it is a sad thing.

Terry, let me step in. So, look, I appreciate your comments about Mary Shapiro and all that. One, I appreciate the fact that you have been a long-term shareholder. I have known you for quite a long time and we do appreciate it, and really appreciate your support.

We continue to look at shareholder value. There is not a day that the board doesn't get together with us and we look at shareholder value. We just launched five new printers, five new products. And when we look out at the opportunity for those products, the 9700 alone has an opportunity of, I don't know, 100,000 locations, 200,000 locations.

And when you look at that and then you look at where we are trading, what our EBITDA is, what the multiples are, what it could be sold for versus what the opportunity is in front of the Company, you look at it and say you have got one shareholder that wants what appears to be -- he is selling while he is talking about the opportunity, but he would like a short-term way to get out of the stock.

I have other shareholders that call me and say, you have got an opportunity to really grow this company. Let's get that opportunity through. We haven't even gone into production of these new units. (multiple speakers)

It's an exciting time and the products are -- I am continually impressed with the continuous improvement and enhancement of all the products. What I am saying is the market structure is a real problem here for companies like TransAct that have fundamental good things, but there is no marketplace for the stock. And it is a problem.

I appreciate your input.

It's not your fault.

I appreciate it.

It's a reality, however.

Okay, I appreciate it.

Okay, thank you very much.

Thanks, Terry. I understand what you are saying.

Douglas Pies.

Hi, Bart; hi, Steve. Well, my questions were just all answered. My questions were all just answered, so onward and upward from here, and thanks so much.

Thank you, Doug.

Thanks, Doug.

It appears we have no further questions at this time. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, operator, and thank you, shareholders, for attending today's conference call. I do hope that I see some of you at the G2E tradeshow in early October in Las Vegas. We do have plans on launching some new features to our Epic Central print system that are very exciting.

I also look forward to speaking with you on the next conference call. Thanks for attending tonight.

That concludes today's presentation. Thank you for your participation.