TransAct Technologies Incorporated (TACT) Q1 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the TransAct Technologies First Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Richard Land. Mr. Land, please begin.

Thank you, Michelle. Good afternoon, and welcome to TransAct Technologies 2014 First Quarter Conference Call. Joining us today from the company are Chairman and CEO, Bart Shuldman; and President and CFO, Steve DeMartino. Today's call will include a discussion of the company's key operating strategies and progress against these initiatives and details on the first quarter financial results. We will then open the call to participants 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 risks inherent to the business and the company, please refer to the company's SEC filings, including its reports on Form 10-K and 10-Q. TransAct undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances that occur after the call. Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release, as well as on the company's website. At this time, I'd like to turn the call over to Bart Shuldman. Bart?

Thank you, Rich, and welcome to everyone joining us on this afternoon's conference call and webcast. This afternoon, we reported revenue of $13.6 million, adjusted EBITDA of $1.1 million and diluted and adjusted diluted EPS of $0.05 a share. Steve will review the financial results in detail in a few moments, but let me start the call by noting that the quarter, while continuing to reflect the headwinds discussed in our fourth quarter call, the first quarter financial results are modestly ahead of our expectations; we are well positioned to grow revenue, margin, EBITDA and diluted EPS going forward. Since the beginning of 2014, we have continued to make steady progress in the transition of our business from one that was focused primarily on the lower-margin point-of-sale printer market and also the casino gaming and lottery markets to one that is poised to capture growing share in expanded number of markets with large revenue opportunities for TransAct. Coupled with the large new market opportunities was our decision to enter these markets with value-added technology that should garner us higher-margin sales. In particular, with the introduction in March of our newest product, the Responder MP2 for the large machine-to-machine addressable market, I believe we have completed a multiyear path undertaken to transition TransAct into more markets with distinct high-value products. We now have finished the heavy lifting and created what I refer to as 4 legs of the TransAct table. For the casino gaming and lottery industry, we have our industry-leading products under the Epic brand, including the Epicentral system. For the food safety POS and banking markets, we have exciting innovative products under the Ithaca brand. For the oil and gas, seismic and well-logging market, we offer industry-leading printers under the Printrex brand. And as I mentioned, we are addressing a very significant opportunity in the machine-to-machine or M2M market with our Responder brand for which we recently launched our first product. We can address each of these markets with products that offer TransAct significant growth opportunities and higher margins. We plan to support our brands and focus on these markets through constant innovations, and we'll develop new products when specific market opportunities offer the appropriate additional demand and attractive returns on our investment, as seen with the recent introduction of our Ithaca 9800 food safety terminal. Identifying markets with a very significant total addressable opportunity has become a core competency for TransAct. In the last 3 years, we have identified such opportunities in the food safety, oil and gas, seismic and exploration market and machine-to-machine industries and have either developed new products to address these high-growth opportunities or, in the case of the oil and gas, seismic and exploration market, have acquired products, with which we can leverage our expertise in hardware, software and system development, to further extend features and functionality that will help our customers conduct their business more effectively and efficiently. Through the transition, we have also established and added to our infrastructure to grow our market share and continue growing our product line, as we provide higher-value integrated solutions. For example, we now have dedicated sales and technical support teams for each of our brand lines and have been able to attract top talent in the respective industries to lead our sales efforts. Another key strategy for TransAct is forming partnerships in our markets to pursue opportunities as quickly and as effectively as possible and grow market share as we further establish our products. Our strategy is not to reinvent the wheel, but to build on businesses that already exist in these markets. A great example of this is our relationship with Suzo-Happ for the gaming industry, which is clearly benefiting our performance in that market, highlighted by an 11% year-over-year increase in domestic casino printer sales in the first quarter. In launching our Responder MP2, we partnered with Printek, a leading integrator in the police car market, in an effort to accelerate our sales in the machine-to-machine market, which is quite fragmented across the different fleet types and geographies. We also partnered with CrunchTime, a leading back-office software provider, for the restaurant industry to bring our recently introduced Ithaca 9800 food safety terminal to a greater number of restaurants and food preparation locations such as casual dining restaurants. And for our Ithaca 9700 food safety terminal, we added Ecolab, the leading distributor of food safety solutions and on-site services to the global food service industry, as a second distributor. These are just some of the examples of the recent progress we have had in expanding our markets, brands and product lines while establishing an infrastructure around which we can address some very exciting market opportunities. I think the first quarter was a period of accomplishment for TransAct that furthered our foundation of what I referred to earlier as our 4 legs of the table. Now I'd like to review some of the recent developments in each of our brands. In casino and gaming, while the domestic market remains challenged, we continue to grow market share. If you look at the industry as a whole, the number of slot machines sold each quarter, which feature an Epic printer, continues to grow. We are clearly benefiting from the reliability and ease of use of our technology, as well from our new relationship with Suzo-Happ, as demonstrated by the 11% rise in domestic casino printer sales in the first quarter. We're also benefiting from Epicentral as it relates to Epic 950 sales because each Epicentral deployment requires that connected gaming devices have our Epic 950 printer. In the case of the recently announced international casino win for Epicentral, the Epic 950 printer is displacing what was once a 100% competitor casino floor. Today, we have agreements with 11 casinos to install Epicentral on over 15,000 devices. I mentioned on the last call that we are seeing increased interest in Epicentral from Las Vegas strip operators across the country and, in particular, international markets. I am very confident in our sales ability to execute on the opportunities for further penetration of Epicentral worldwide. That goes back to the comments I had earlier around our infrastructure and our dedicated sales organization. Let's look now at the food safety terminal market and the introduction of our Ithaca 9800 terminal. To be clear, we view the 9800 as a product that complements the Ithaca 9700 sales. The 9700 is primarily oriented towards restaurants focused mainly on quick-serve restaurants, which feature fixed-type menus. The Ithaca 9700 is designed more specifically for restaurants and food preparation locations, where menu items may change more frequently, such as: casual dining restaurants, hospitals and schools, and where these places use back-end software systems. Its many new advanced features and capabilities allow operators to deploy it for: training, inventory management and automatic menu and preparation updates, as well as restaurant cleanliness among other applications. The introduction of the Ithaca 9700 and our entry into the food safety market is what led to the development of the Ithaca 9800. Since entering the market, we have worked in partnership with restaurant and food service operators to identify additional value-added solutions that can be provided by a food safety terminal. As a result, our team developed the 9800, a device that is fully capable of interacting with existing back-office systems, as this creates a real and new opportunity for TransAct. We also believe the Ithaca 9800's ability to be seamlessly integrated with a number of industry-leading back-office and/or food safety applications, such as Neogen Sanitation Monitoring System, that will support our customer needs and drive further sales. In terms of where we are with the rollout of the Ithaca 9700, we have spoken previously about the large amount of trials with over 70 restaurant companies and representing an opportunity of over 100,000 terminals. While the pace of closing these restaurants takes time, we expect sales levels to begin accelerating in mid-2014. I can also say our relationship with McDonald's, who first asked TransAct to enter this market, is expanding on a global basis. I just attended the biannual McDonald's Worldwide Convention, and it was truly exciting to see how many potential customers we have all over the world. Quickly, I'd like to note in our results that in the POS market, we grew our sales to McDonald's in the first quarter, as they are focusing on customization initiatives across the chain to help reignite sales. This is good news for TransAct, as it should benefit POS sales in the second quarter and then the subsequent several quarters to come. Moving to the oil and gas exploration market. We are beginning to see a pickup in the business, which should provide a meaningful benefit to our Printrex 920 and 980 color printer sales, as well as our multiple black and white printers, including a 12-inch-wide solution in the second half of the year. Two large operators recently informed us of their decision to standardize around the Printrex 920 color truck printer, and we expect them to begin deployments in the second half of the year. Additionally, our progress with the Printrex 980 office color printer is clearly ahead of expectations. The good news is that as we sell more Printrex 920s and 980s, we grow our high-margin consumable revenue. In fact, our oil and gas consumable business was up 47% versus the first quarter of 2013, and our run rate is now exceeding over $500,000 a year and is growing, and I can say we have just begun. I mentioned our dedicated sales organizations early on the call, and I think it's important to highlight that an accomplished industry sales manager, who has led printer sales in the oil and gas, seismic and exploration market, joined TransAct last week and is now an integral part of our sales team for the Printrex brand. As one of the leading sales executives in the oil and gas industry, he had a number of very attractive opportunities around the world to pursue. His Rolodex is truly impressive, and we cannot be more delighted he is now with TransAct. In fact, many exploration companies told him to join us. And finally, during the first quarter, we introduced a new product and brand for the high-growth market opportunity with the introduction of the Responder MP2 mobile printing solution. The Responder MP2 was developed for installation in a wide variety of fleet vehicles, including: fire trucks, police cars, emergency medical vehicles, insurance fleets and delivery vehicles, among others. It capitalizes upon machine-to-machine technology while delivering full page printing from a fully integrated printer and paper source. With the continued rise and use of cloud-based systems and application, the Responder MP2 is a critical component for users looking for state-of-the-art device that will produce reliable, quality output while on the road. In early April, we premiered the Responder MP2 to a strong response at the FDIC conference, one of the world's largest shows for the firefighting industry. We're very pleased with our progress to-date in the transition of the businesses and are moving into the execution phase of our operating strategy with the expectation that we can achieve consistent growth and higher-margin revenue. With that, I'll turn the call over to Steve for a deeper review of the 2014 first quarter results, after which I'll make some summary remarks before we open the call to questions and answers. Steve?

Thanks, Bart. Good afternoon, everyone. 2014 first quarter net sales were $13.6 million compared to $15.1 million in the year-ago quarter. By sales unit, casino and gaming revenue was $6.5 million compared to $6.7 million in the year-ago quarter as the prior-year period benefited from a greater number of Epicentral installs featuring a larger number of units. As Bart mentioned, we continue to gain share in printer sales, as domestic casino printer sales were up 11% year-over-year. International casino and gaming sales also improved 6% year-over-year. Lottery printer sales of $800,000 were down about $0.5 million from the prior year period, reflecting GTECH's normal minimum contractual buy in the 2014 first quarter. Food safety POS and banking revenue was $1.8 million, which is down 10% year-over-year, reflecting a lower food safety terminal sales due to the timing of orders, partially offset by higher sales of POS printers to McDonald's, as McDonald's accelerates its rollout for several initiatives. Revenue from Printrex oil and gas and medical and mobile printers was approximately $1 million compared to $1.3 million in the prior year quarter, as sales for the current quarter were impacted by general weakness in the oil and gas industry. And finally, TSG sales were down 4% to $3.5 million in the quarter. The decrease is largely due to lower HP inkjet cartridge sales, reflecting a declining installed base as we continue to de-emphasize our focus on this low-margin legacy printer consumable. In addition, we experienced lower service revenue. These decreases were largely offset by higher sales of accessories and spare parts, primarily for GTECH's legacy lottery printers, as well as higher sales of Printrex color printer consumables. Our gross margin declined to 42% from 42.7% in the year-ago period. This modest decline reflects a less favorable sales mix due to lower year-over-year sales of our higher value-added food safety and Epicentral software products. Our operating expenses increased 1% in the quarter to $5.1 million. Excluding lawsuit legal fees in both periods, operating expenses were $5.1 million compared to $4.8 million in the 2013 first quarter. As a brief update on the lawsuit, in October 2013, Avery Dennison filed a motion asking the Ohio Court of Appeals to reconsider its decision that was made in our favor. In April, the Ohio Court of Appeals denied this motion, which means yet another win for TransAct in the lawsuit. In fact, we have now won 3 different rulings from the Ohio courts, one at the preliminary injunction trial court level, and two at the appellate court level. Engineering design and product development expenses were up $200,000 to $1.2 million, reflecting additional engineering staff and higher prototype expenses related to 3 new products, including the recently launched Ithaca 9800 and the Responder MP2. We anticipate launching the third product later this year. Selling and marketing expenses were also up approximately $200,000 to approximately $2 million due to the addition of sales and marketing staff to support our expanded product lines, as well as incremental commission expense associated with our distribution agreement with Suzo-Happ, which took effect late last year. G&A expenses declined 7% to $1.9 million in the first quarter of 2014, primarily due to lower depreciation and amortization, as well as lower employee recruitment expenses. Lawsuit legal fees were just $12,000 in the quarter compared to $200,000 in the year-ago period. GAAP diluted EPS for the 2014 first quarter was $0.05 compared to $0.13 in the year-ago period. Adding back the legal and other expenses associated with the Avery Dennison lawsuit, adjusted diluted EPS was $0.05 for the 2014 first quarter compared to $0.15 in the year-ago quarter, and adjusted EBITDA was $1.1 million compared to $2.2 million a year ago. Turning to the balance sheet. We ended the quarter with $3.2 million in cash, up from $2.9 million at the end of last year, and we continue to have no debt. We paid a $0.07 per share dividend to shareholders in the first quarter of 2014 for a total return of capital of approximately $600,000. And earlier this week, we announced an $0.08 per share dividend for Q2, which represents a 14% increase in the quarterly dividend, payable on June 13 to shareholders of record at the close of trading on May 20. I think it's important that we continue to highlight the consistent return of capital we made to shareholders through a combination of dividends and share repurchases, even as we've invested significantly to expand our product lines and market opportunities. In fact, since the beginning of 2012, we returned approximately $14.6 million to shareholders, at a time when we were simultaneously accelerating investments in our growth. As Bart mentioned, the first quarter of financial performance was modestly ahead of our internal expectations, and we continue to believe that financial results will improve throughout 2014. We remain very optimistic about our sales pipeline for our 2 food safety terminals, as well as for expanding sales of our color Printrex oil and gas printers. We also expect to further our market share gains in casino printer sales, including expected year-over-year revenue gains from Epicentral software sales, as we expect the number and pace of installations to increase in 2014 compared to last year. Each of our brands has a dedicated sales staff, and as such, we are well-positioned to exploit these high-growth opportunities. And since these products carry higher margins compared to our legacy products, revenue growth should allow us to deliver gross margins approaching the mid-40% range. And at this point, I'd like to give the call back to Bart for some closing remarks.

Thanks, Steve. Before opening up the call to your questions, I want to emphasize that this is a very exciting time for TransAct. I think about where our business was just a short few years ago and how we were so reliant on lower-margin products and on a less diverse revenue base by industries. When I compare that to where we are today with 4 distinct branded product lines and high-growth market opportunities, I am very proud of the pace of our transition and enthusiastic about our outlook for long-term growth. We have invested in our business. And even in our historical gaming market, we're very favorably positioned to consistently grow market share in casino printer sales and execute on a great growth opportunity with Epicentral. Our entire organization has done a tremendous job of executing on a long-term product development strategy, which is focused on identifying large, untapped addressable markets, for which we can lever our technology expertise to create products that deliver revenue and margin growth. We continue to move forward with this focus and have already introduced 2 new products in 2014, with the third new product introduction planned for later this year. We now have the organizational infrastructure focus and financial flexibility to execute on very unique growth opportunities, as we bring new value-added solutions to the market, which will help our existing and new customers enhance their profitability and efficiency. With that, let's open the call to questions. Operator?

[Operator Instructions] And our first question comes from the line of Phil Bernard [ph] with Eilers Research.

First question is going to be a broad one. You mentioned a lot about growing market share within the domestic casino industry. We're coming off of a pretty weak first quarter, and I'm wondering what your thoughts are on that market going forward.

Well, there's no doubt that the domestic market is weak. We think it's going to continue. The -- you've got macro events, and then you've got micro events going on. You've got both expansion which is cannibalizing some sales, and you've also got the macro kind of economic situation. I think the good news, Phil, is look at what we've done. I don't think anybody's going to talk about their business like ours being up 11%. There's 2 of us in the marketplace, and our business was up 11% in the quarter. We are optimistic about the future because we are starting to see better results in Las Vegas, which is always good to see. But I think, Phil, we'd all agree that the domestic market will stay pretty weak all year.

I think that you guys are doing some really interesting things with your product mix. So I have one question about the Responder MP2. Can you give us a sense for what you think the market opportunity looks like? And then past that, when do you expect to start seeing some sales come through the pipeline?

Yes. So when you look at TransAct, TransAct -- we like to look at TransAct as building blocks. So 3 years ago, we started -- 3.5 years ago, we started on the McDonald's adventure with food safety and introduced the product in pretty much late 2012 and started seeing some sales 2013. Of course, we'll see sales '14 and '15, and same thing with the oil and gas. When we introduce a product like the Responder MP2, we're looking out 2 years. We need -- because when we look at our growth, we could see growth in our business, '14, '15, '16, but then we need to add another product to continue to expand our growth. And when we do that, we need to introduce that product in '14 if we want sales in '16. So we're really looking at 2015, but really 2016. The market is quite large. We did a study on: how many police vehicles there are, how many firetrucks there are, how many ambulances there are, just in the U.S., and that's approximately about 200,000. We then looked at insurance car opportunities and things like that. We then looked at the market because there's really no integrated printer solution. And what I mean by that is we have paper and printer, all in one small device, that can literally either fit in the car seat or be installed in the armrest or somewhere in the ceiling of the car or in the truck or something like that. So when we looked at the market, there was no printer out there that could be a total solution. There were print sticks out there where integrators had to take the print stick and then mount the paper roll holder and then put a case and cover around it, which created, one, a poor design, an unreliable design, and an expensive design. And we realized that we could enter that market with an integrated design and really capture the market. And remember that when we bought Printrex, we already had a product that was sold in Europe. It's actually sold in the U.K. It wasn't a very good product in regards to its size and speed, but it already gathered a bunch of sales. And when we looked at that and heard from other customers that they wanted to see if we could do something more, that's how we started to look at the market. So we look at the market as a potential of a couple of hundred thousand printers or more, and I mean, that's just domestic, and then we would look at the international market. And our plan is once we get the product totally into production, we're working with one of our partners to be able to make sure that it's got all the right mulling [ph] aspects, we have WiFi and Bluetooth. It's really a cool printer, and it has to have the right lights on it and things like that. We'll be expending our partnerships by partnering with people that are already in the market that do some of the integration for police vehicles or ambulances or things like that, and then we'll expand internationally. But we would expect sales to really show up in 2015 but more like 2016.

That's great. My final question, this is more about your structure. I've noticed that SG&A is -- has been on an increasing trend over the last year. And that maybe coincides with your current, I would say, plan of adding more business and more products to your product line. Do you expect to see that increasing trend of SG&A as a percentage of revenue growing, or how do you see that going moving forward?

So I would say that it's going to flatten off in the second quarter. What we did is we looked at each one of our markets where we have our sales team. And let's take food safety, for instance. Food safety, banking and POS, but mainly food safety. The opportunity is very large for us, and we put on Ecolab as our second distributor. And those that know Ecolab, it's an $11 billion company that has almost 2,500 salespeople in the marketplace and offers us a huge opportunity for expansion. We've added another sales manager to really run that group. That whole group was reporting to me as we entered the marketplace. And now we've put a sales executive in place because we really look at the -- there's so many opportunities. Like I said, I was just at the McDonald's show, and we have truly taken the market. The 9700 is the product that they want. Our competitor is really struggling and trying to even get attention to their product. So we've added a sales executive now to just truly focus on food safety and drive that, both domestic and international, by the way. We had an opportunity to hire the leading printer sales manager in the oil and gas industry, and he came to us because our customers were telling him, "Hey, TransAct's the new guys in town, and they've got the best line of products. And you really should go work for them." He was working for one of our competitors. So we really fitted out our sales team, and we're done. We'll see a little increase in Q2 because one of the -- because the oil and gas salesperson just really entered in Q2, and the sales executive in the food safety business entered in the latter half of Q1. But then we'll be done, and then we'll have all the sales teams. The technical teams will have the right infrastructure and size to go attack these very large opportunities. I mean, still, the food safety opportunity looks like the biggest opportunity this company has ever walked into. And I think now we've got the right sales organization to really go after it. So -- and we have seen a little more in the marketing spend, too. We're probably going to do 60 trade shows this year. Some of them are small like the McDonald's show, or some of the other quick-serve restaurants have invited us to go to their national shows because of our work with them in regards to getting the food safety terminal out there. And then we'll be doing large shows like the oil and gas trade show that we did this week. It's actually ongoing right now. It's the largest show I've ever seen. It's 100,000 people in 2 or 3 buildings. We'll do G2E in Las Vegas, and G2E Asia, we'll be out there in 2 weeks. So you'll see that kind of level off in the second quarter, and that'll be it.

[Operator Instructions] And I'm showing no further questioners at this time.

Well, I'd like to thank everybody for joining us on the call this afternoon. We want to thank our shareholders for their support, and we'd also like to thank all of our team members at TransAct. Great job. We'd also like to take a moment to invite all of our shareholders to attend our annual meeting next Thursday, May 15 at 10 a.m. at our corporate headquarters here in Hamden, Connecticut. For those that can't make it, we look forward to reporting back to you on further progress in our business when we report the second quarter results in August. Thanks for joining tonight.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.