TransAct Technologies Incorporated (TACT) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the TransAct Technologies First Quarter 2016 Conference Call. [Operator Instructions] I would now like to introduce your host for today’s conference, Mr. James Leahy, Investor Relations. Sir, please go ahead.

Thank you, Iya. Good afternoon, and welcome to TransAct Technologies 2016 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, 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 maybe 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 would like to turn the call over to Bart Shuldman. Bart?

Thank you Jim and welcome to - welcome everybody joining us on this afternoon's conference call and webcast. This afternoon we reported first quarter revenue of $14.4 million, EBITDA of $1.3 million and diluted EPS of $0.08 a share. While Steve will review the financials in more detail, I'd like to start by noting that our 2016 first quarter results demonstrated our successful strategy of diversifying TransAct's product portfolio and shifting our sales mix toward higher new margin products. Products like our Epicentral promotion and bonusing print system and our growing line of AccuDate food safety terminal solutions. In particular, progress with these newest products helped drive an 80 basis points gross margins expansion to 41% in the quarter. We also made further investments in the faster growing segments of our business and believe that the progress we're making has positioned us to execute on what we see as a multi-year revenue opportunity for TransAct. Before I had the call to Steve, I want to review our ongoing efforts in the markets we serve as well as our outlook for the balance of 2016. First with our AccuDate food safety terminals, we continue to benefit from the notable shift across the business landscape with regards to how operators view the connection between food safety and their internal processes and workflows. We entered 2016 with the growing potential book of AccuDate business and that growth continued in the first quarter. Internally, we measure our success through wins where restaurant and food service companies approve our terminal for using their establishments. These wins lead to a customer doing a full roll out over time in all their establishments or they give us the opportunity to sell directly to each franchise, what we call a license to hunt. As our shareholders have inquired about our progress with our sales efforts in the food safety market, we have decided to share some data points we review and measure. As of March 31, 2016 we have wins to sell terminals into 44 distinct restaurant brands or concepts, which together represents an addressable market of over 80,000 terminals. We believe it will take several years to fully execute against these wins and hope that TransAct is still very much in the early stages of selling into this 80,000 plus initial base. At the same time, our sales team is working tirelessly to further increase the number of wins and therefore grow the number of potential terminals we can sell as we create a long-term business for our AccuDate solutions. Going forward, we plan to periodically update our investors on the number of restaurants brands we have wins and the growing potential terminal opportunity. Please understand we will not be updating the information I just shared with you on a quarterly basis. As the industry just saw with a major fast casual restaurant brand, even a relatively minor issue can lead to large liabilities. Damage to hard earned brand loyalty and customer defections. In particular, we are seeing much more focus from restaurants and food service companies on the ways they can improve their food rotational labeling processes. Additionally, they are looking to better align these processes to a more technical and automated solution that can tie into other areas of their back of house operations. If we take a step back and look at the ongoing changes within our food safety market opportunity, some customers asked us to evolve our solution, so that it could play a far more integral role in their operations. Based on this feedback, we launched the AccuDate Pro in early 2015 to first address this feedback and thus provide customers with a more comprehensive solution. The Pro has met the needs of these potential customers and many trials are underway. Now, as some of our customers further define their needs for an integrated solution, we are leveraging our ongoing technology investments to develop an all new terminal which we expect to bring to market this year. This terminal will address the needs of software developers seeking to provide custom solutions in certain segments of the restaurant and food service market and will provide TransAct with the strong three pronged product approach to a rapidly evolving business opportunity in food safety. We believe it will also help to open up a wealth of new opportunities for our products within the restaurant or the kitchen and can drive restaurants that have multiple terminals in their kitchen. Now on to our casino and gaming business which continues to benefit from its growing share - from our growing share of the domestic casino market even as the challenges impacting the international market persist. During the fourth quarter, TransAct completed two Epicentral deployments in the US led by the rollout of our innovative system across 1,900 gaming devices at Foxwoods Resort Casino in Connecticut. This win with Foxwoods is exceptionally pleasing to me as they were the casino that allowed us to trial our system once it was first developed. It is fantastic that they are now running it and using the system to grow the revenues. I send my sincere and personal thank you to Foxwoods. Today, we are working on two additional deployment of Epicentral and expect those to go live over the next quarter or two. At the same time, our sales team are leveraging our increased investment in Epicentral to further enhance the features and functionality of the system. And in casino environment where competition is at its highest and consumers are increasingly mindful of their incremental dollars spend; we believe that Epicentral's differentiated ability to deliver real-time bonusing and promotions to players directly at the slot machine will garner increased interest from operators worldwide. Now we also saw strong sales of our Epic 950 gaming printers to domestic customers and believe that 29% year-over-year increase in domestic sales of our printers will vastly outpace slot machine sales in the domestic market in the same quarter. This impressive performance indicates that the Epic 950 is again taking share in the US thanks to its unmatched features and unbeatable reliability. Now, regarding lottery sales, they did decline year-over-year during the first quarter of 2016 to more normalized levels. IGT which is what we call it now from GTECH, our primarily lottery customer satisfied their minimum contractual buy during the period while the year-ago quarter benefited from an additional large order which did not repeat. We believe our lottery business has the opportunity however to attract new customers as we demonstrate to operators worldwide the benefits of our new Epic 3000 lottery printer and brought in the global exposure and customer base of our leading lottery printers. Now onto our Printrex business, which includes printers for the oil and gas exploration market. That remains extremely challenged in the near term. The weakness in oil and gas prices on the global market has had significant dampening impact on the outlook for new supply growth. We continue to profitably manage Printrex and have actively shifted our near-term focus away from this business towards other near and midterm opportunities. However, we believe the oil and gas market will rebound over time and TransAct be ready to take advantage of any long term growth as this market comes back. Finally, as I said last year, we are not currently focusing sales and engineering resources on the RESPONDER MP2 mobile printer given the numerous near-term opportunities for our AccuDate and Epicentral solutions. Throughout the 2016 first quarter, TransAct build and expanded its foundation for what we see as a successful 2016. We invested strategically to support ongoing growth of our Epicentral and AccuDate businesses, adding new engineering personnel, particularly in the increasingly important area of software development. As these two key businesses become a larger percentage of our overall sales, we will also deliver further gross margin expansion that we believe could reach well into the mid-40% range and higher over time. I am confident that TransAct is well-positioned for long-term growth and believe we have the right team in place to deliver continued improved financial performance and strong returns for our shareholders. And finally, I would like to take this time to thank the entire team at TransAct, whose efforts have enabled our company to innovate, expand and drive growth in some exciting new markets. I also want to thank our shareholders who continue to support our ongoing efforts. With that, I will turn the call over to Steve.

Thanks, Bart. Good afternoon everyone. 2016 first quarter net sales were $14.4 million compared to $16.2 million in the year-ago quarter. As Bart pointed out earlier, our ability to deliver year-over-year gross margin expansion of 80 basis points in the quarter clearly demonstrates the benefits of the company’s strategy, which is now focused on high-margin high-growth products such as Epicentral and AccuDate. We also continue to position the company for further growth in 2016, thanks to our continued investment and the development, sales and support of these newest product lines. Looking at our sales by market for the first quarter, food safety POS and banking sales of $3.1 million, grew 41% or $900,000 over last year’s first quarter. Sales in the period largely reflect McDonald’s undergoing rollout of our Ithaca 9000 printer throughout their stores. Important, the Ithaca 9000 has become an integral part of McDonald’s technology solution and supported their multiple new product initiatives such as customized burgers and other cook while you wait items, which should lead to strong sales for us throughout 2016. On the food safety side of the business, sales of food safety terminals were essentially flat compared with the year-ago period, as we continue to build a foundation for long-term growth. As Bart mentioned earlier, we have now won 44 distinct restaurant brands and concepts that together represent a total potential addressable opportunity of over 80,000 terminals, and we expect to execute on these initial opportunities over the next several years. Casino and gaming sales were down slightly by approximately $200,000 or 3% year-over-year to $5.4 million. However, as we have seen in the past four consecutive quarters, this business continues to benefit from strong domestic sales of our Epic casino and gaming printers, evidenced by a 29% increase in domestic printer sales in the quarter. Given the sluggish domestic market, TransAct is clearly taking share in the domestic gaming market as our Epic 950 printer further solidifies its industry-leading position. First quarter results also benefited from the rollout of two new domestic Epicentral deployments in the period, including Foxwoods Resort Casino right here in Connecticut. The increase in domestic printer sales and the two Epicentral rollouts was offset by weakness in sales of our casino and gaming printers to international markets. Lottery sales were down 27% to $2.9 million from $4 million in the first quarter last year. The year-ago period benefited from unusually high GTECH sales volumes, including a significant one-time order for a custom printer that did not repeat. We continue to believe that our recent ability to market our Epic 3000 lottery printer to the global lottery market positions TransAct to grow our overall base of lottery customers. Printrex products generated revenue of approximately $150,000 compared to approximately $700,000 in the year-ago quarter as severely depressed oil and gas prices continued to have a negative impact on our oil and gas drilling activity. We believe Printrex printer sales will remain under pressure throughout 2016. And as we mentioned over the past several quarters, we have taken the necessary steps to align our cost structure for this business with the current revenue level. And finally, TSG sales were down 26% year-over-year to $2.7 million. The TSG business was negatively impacted by lower lottery spare part sales to IGT, as well as continued weakness in sales of Printrex consumables related to the ongoing weakness in oil and gas prices. Gross margin for the first quarter improved to 41%, 80 basis points higher than our first quarter 2015 gross margin of 40.2%. Our gross margin continues to benefit from a favorable sales mix of higher margin food safety terminals in Epicentral software sales, as well as the decline in sales of our lower margin lottery printers. As we look to the balance of 2016, we believe that executing against our current AccuDate opportunities of over 80,000 potential terminals will grow this product line as a percentage of our overall sales and that higher sales of these terminals in concert with further deployments of our Epicentral promotion bonusing software system will enable us to further expand our gross margin. As we said last quarter, overtime, we believe gross margins can climb to the mid-to-high 40% range and even touch 50% given the right sales mix. Total operating expenses were $4.9 million for the first quarter, compared to $6.3 million a year-ago. Excluding $1.7 million of legal fees related to the now settled Avery Dennison lawsuit in the prior year period, our operating expenses in the quarter increased approximately $400,000 or 9% year-over-year as we made targeted investments during the first quarter in support and development of our AccuDate and Epicentral product lines. Engineering design and product development expenses for the first quarter were up $368,000 or 42% year-over-year as we continue to invest in the development team supporting our key Epicentral and AccuDate product lines. Selling and marketing expenses for the first quarter were down slightly by $30,000 or 2% to $1.8 million as our recent efforts to reduce expenses across the business were partially offset by investments in support of our newer products. And G&A expenses for the first quarter were $1.9 million, up 4% from the prior-year period. Operating income for the first quarter of 2016 was $939,000 or 6.5% of sales compared to operating income of $217,000 or 3.3% of sales in the year-ago quarter. Operating income in the first quarter of last year included approximately $1.7 million of legal fees related to the Avery Dennison lawsuit. Both GAAP and adjusted diluted EPS for the 2016 first quarter were $0.08 compared to GAAP EPS of $0.02 and adjusted EPS of $0.16 in the year-ago period. Adjusted EBITDA for the first quarter 2016 was $1.4 million compared to $2.5 million in the first quarter last year. And turning to the balance sheet, we ended the quarter with $2.9 million in cash and no debt outstanding. We returned a total of approximately $1.1 million of capital to shareholders during the 2016 first quarter to our quarterly cash dividend of $0.08 per share and the repurchase of approximately $510,000 of TransAct shares at an average price of $8.09 per share. The repurchases we made during the quarter were pursuant to our new $5 million authorization that we announced in late February, under which we have about $4.5 million remaining as of the end of March. As Bart mentioned a few minutes ago, TransAct remains focused on 2016 and driving Epicentral and AccuDate sales and further augmenting these products through the introduction of new features in the case of Epicentral and the introduction of a new third AccuDate food safety terminal. While we expect Printrex to remain a drag on our overall business and we continue to de-emphasize our legacy products, we still expect gross margin to expand as our new higher margin products growth represent a greater percentage of our overall sales. 2016 remains a year of opportunity for TransAct and we are well-positioned financially to exploit these opportunities. And at this point, I would like to give the call back to Bart for some final remarks. Bart?

Thanks, Steve, great job. Before opening up the call to your questions, I want to again emphasize that we see a great number of opportunities for TransAct to grow. Epicentral continues to gain traction with casino operators worldwide. Our Epic 950 gaming device printer is taking share in the domestic marketplace and our AccuDate food safety portfolio continues to be an exciting opportunity for TransAct as it focus restaurants and foodservice operators on a technology solution to a growing issue of food safety. TransAct has been dramatically transformed over the past several years and our efforts to inject high technology, software-driven solutions into markets where our printer expertise is valued and can be coupled with software and terminal technology can happen. Finally, before opening the call to Q&A, I wanted to mention that Steve will be presenting at the 17th Annual B.Riley and Company Annual Investor Conference in California on May 26 and will be available for one-on-one investor meetings that day. For anyone attending the conference, if you are interested in meeting to hear more about TransAct and the exciting opportunities we are executing on, we just want to meet Steve. Please reach out to our IR firm JCIR at 212-835-8500. We’ll be happy to work with conference coordinators to schedule time for you to meet with Steve. Also, we will be having our Annual Shareholders Meeting in Las Vegas this year. So please join us our expanded Las Vegas office on Thursday, May 12 the 10 A.M. And finally, for anyone traveling to the Global Gaming Show in Macau for May 17 through Thursday May 19, please stop by our booth and say hello, I will be there. With that, operator, let's take some questions.

[Operator Instructions] Our first question comes from Phil Bernard from Eilers & Krejcik. Your line is now open.

Hi, guys, thanks for taking my call.

Hello, Phil, how are you.

First quick question – I am doing great. Thanks for asking. First question on restaurants. I know you mentioned the 44 brands and 80,000 terminal potential, and that this is still a nascent area for you guys. What is the penetration of that 80,000 so far if we are able to get some color there?

Yes, we knew you would ask that question.

I had to ask.

Look, it's not well penetrated. Look, McDonald’s is in that number, so we've penetrated some McDonald’s and some are ones we actually closed at the end the last year and some in the first quarter. So there is a lot go and look, we feel - I attended the ROTH Capital Investor Conference and the investors were asking good questions. How do we get more color on what the opportunity is because we talk about this 500,000 to 600,000 terminals out there, the investors are asking where are we in the process. So between us and our friends at JCIR who helps us investor relations we decided to do something like this where over time we will continue to update you on how many venues we've closed and what the potential of those venues are. And just to clarify, for instance, we've won McDonald's now not just in the US, but we've won McDonald's in other countries, but we only call that one restaurant company. So we don't put McDonald's in the different areas of the world and add that up as - add to our number, that's just one. So these are really 44 separate companies, but it's important for - we feel it's important for us to share with you because we have made success. Early, a couple years ago we talked about that we were in trials with a bunch of restaurant companies that added up to close to 100,000 terminals and that was just trials, not closed, not wins, what we define as wins. Well, now we can say to the shareholders out of that 100,000 that we were trialed at, we now have won 44 and it’s 80,000. So over time we will update you, but we are going to stay way for the exact number and what the penetration is. We will give you color to what – we will give you some information as to how many more we've closed over time and what the available is. But it at least shows you the success that we are having and a lot of this by the way is just happening over the last couple of months because of the issue that this one company and I don't think I need to say the name had in the marketplace and the impact that that has had on their company and when we were making the presentations and telling them that we've got an automated solution one that takes away human error, somebody that needs to be trained, handwriting issues, language issues, we can automate it, now they are calling us and saying, hey you got come back and show it to us. And in addition, the other thing that's really interesting is the questions that were being asked because in certain restaurants, the way that they label is not just for food rotation, but they are labeling for other things and can our terminal help in that solution. And they have some technology that does that, but if they could buy one terminal from us, they can take care of not just food rotational labeling, but other labeling they are doing, then the benefit to the restaurant will even be greater. And that's really exciting to us because when they're looking at the cost and they are looking at should they implement it, should they force it on the franchisees, should they not, the conversation that was – is occurring where they are starting talk about, you know what, if you really can do all this, we might enforce that the franchisees do it or as a company we might buy it for them. So it’s really evolved and Chipotle helped us, the Food Safety Institute is helping us, all these different organizations are really helping. And it’s going occur over time, but the opportunity looks stronger and stronger and better and better.

Got it. Okay, well then I look forward to getting those updates in the future and that all sounds pretty good. I guess one more question in order to maybe give us a better idea on the value of some of these contracts. What percentage is McDonald's of your POS revenue? Would you be able to provide a ballpark there? Is it half of the POS, more than that?

Of our total POS, we don't break that out.

Okay. All right, great. Well, thank you. Let's move on to casino gaming, you mentioned Foxwoods Epicentral 1,900 units there and that there was another property that you're able to sign up during the quarter. Would you be able to mention who that was or how many additional units?

No, the Fox was, we mentioned because way back when we were doing the trial, we were trialing our system and announced that Fox was willing to do that for us. As some of our shareholders will remember, the market turned – the major downturns, we ran into a great recession and Foxwoods while trialing it and helping us out and helping us to work through what it was like to implement it and seeing where our bugs were and the rest, they ended up pulling it out. And I think that we asked Foxwoods if they wouldn’t mind if we announced their name, because I think it’s personally for me a great win, given the fact that they were involved with the company years ago and we're willing to come back and buy the system once they got healthier and implement it with a great testament to not only the system, but the relationship between the two companies. So we really stay away from announcing where the system is running and that's because our customers asked us to.

Got it. Okay. One more question on the top line. TransAct Services Group, is most of that revenue related to lottery implementation or lottery? Is most of that rate related to lottery sales, we should say, with IGT?

TSG breaks out into really three areas, so the biggest piece, but spare parts for of our GTECH printers of which we have 5 and 50,000 [ph] in the marketplace. The other part is service contracts, so where we go in and have signed up extended warranty service contracts with not only our printers but our terminals and you should know that we're selling extended service contracts for our terminals. And then the other piece is consumables, a lot of that being our oil and gas business. So when you see our TSG sales come down, one of the components is clearly oil and gas consumables, there is nothing we can do, right. They are not printing out as many reports as they were, so the consumable sales come down. We did see our lottery spare parts as Steve mention come down. Not typical of the business, so we are still working through what could be going on there. We still have that many printers out there and maybe it's just a quarter where they just decided to buy less for whatever reason, but it's really no indication of our relationship or the amount of printers we have out there, we still have well over 0.5 million printers out there. So what you’re seeing is really an impact of the oil and gas business in there and we are selling service contracts, so that would add to the revenue, but we also saw our lottery and spare part sales come down.

Okay, got it. And then my last question on product development, you guys are working on developing new channels and new products within Food Safety and PoS as well as on the Casino Gaming side, enhancing the Epicentral product, do you anticipate R&D spend at current levels throughout the remainder of the year?

Yeah. It will come down a tiny bit. It should come down a tiny bit. We’re in an expedited mode on the new AccuDate terminal. As I said in my talk, the opportunity that has been handed to us, we are -- people should know that we are the company that is really opening up this marketplace. We are talking to every major and minor restaurant company and people have now many different ideas of how they want to use the terminal. McDonald's has one idea, a fast casual has a different idea, a casual restaurant has a different idea and we are blazing that in. We've got what seems to be a very integrated technical solution that's been asked of us and we’re in an expedited mode to get that done. We see this is a wonderful opportunity and again we want to be first to market. We don't believe anybody else is out there, but it’s important for us to be first out there and it looks great. So we are spending a little extra money in the first half of the year. Epicentral is the same way. We've got a fair amount of customers that are asking us to do some different things with the system, a little better user interface, some ways to integrate into their process of couponing and so we’ve added some engineers to get that software done. I think this year, we’re going to have a fantastic G2E Las Vegas show with some of the things that we’re going to be able to show. So we are working pretty hard on those. If you look at the company, Phil, we were in this PoS banking market that for better word, just collapsed, right. I mean, banks are not putting printers in their branches and in fact they are closing braces, they are spending all their money on cyber security. The PoS market clearly going away from printing technology and that’s a legacy business that we have and quickly we're trying to get AccuDate and Epicentral as fast up as we can as we watch the PoS and banking business go away and our oil and gas business is down and down even more. This first quarter, this year, it was down more than the first quarter last year. We're probably at the bottom, I don't think it can get any worse, but look, that's the reality of being in the oil and gas market, it's a boom and bust industry, but it is important for us to get these AccuDate technologies done and Epicentral done. So we see the opportunities, we’re excited about them and we need the product. So you’re seeing us spent a little bit more in the first half of the year.

Got it. Great. Well, that's it for me and good luck developing those new products and winning new clients.

Thanks, Phil.

[Operator Instructions] Our next question comes from Kara Anderson from B. Riley & Company. Your line is open.

Hi, guys. Thanks for taking my questions. Let me start with Epicentral, how many are installed as of today?

It's 11 or 12, Kara.

And then just wondering on the two installations in the quarter, did you see any incremental printer sales as a result of those installations?

Well, not at Foxwoods.

Last year, for one of them.

Yeah. Last year, for one of them, we did. And that's one of the positives about Epicentral is driving incremental 950 sales.

Do you expect to see any printer sales out of the two installations that are in the pipeline?

I think they’re done. Yeah. I think they have done all the work that they needed to do with their printers.

So it's something that is done upfront ahead of installations, it sounds like?

Yes. But we have, like, we have customers right now that we are talking to, Kara, that are in the what we call the serious category about signing up for Epicentral and we know that they’re starting to buy the 950 over our competitors product because with incremental slot machines that they are buying, they’ve changed from being our competitors’ printer house to buying our printer in their new slot machines because they are getting ready to eventually go with Epicentral. So which is driving casino is the change from being a house that uses our competitor’s product to a house that now uses our product. So we see that, hence why we think the 29% increase in the first quarter. I’m curious I think it’s is tomorrow that Scientific Games comes out with their numbers, I'm curious to see what they say about the market, about how much it grew and whether it grew 29% or not.

And then you guys may have said this on the call, and I might have just missed it, what do you expect will happen with your mix for you to get to this mid-40% gross margin expectation this year?

Epicentral has got to grow even more.

Beyond the two that you have in your pipeline?

Not only in Epicentral, but AccuDate. I mean AccuDate continue, if it continues to rollout and if it grows in the year, the margin on AccuDate is higher than the company average and if you think about it, that one terminal sells for about three times of GTECH lottery printer or a PoS printer that we might sell to McDonalds, so the impact is not only on the gross margin percent, but the gross margin dollars.

[Operator Instructions] I'm showing no further questions. I would now like to turn the call back over to Bart Shuldman for any further remarks.

Sure. Thank you everyone for joining us on the call this evening. We clearly thank our shareholders for their support and I also want to thank my employees at TransAct that have just done a fantastic job of really changing the direction of the shift and getting us into these high-technology solutions and also the fact that these customers are asking us to do some much more for them, and how wonderfully they’re responding both on our engineering side or manufacturing side and the fact that our sales guys are bringing in the opportunities. So I thank the whole team at TransAct and I look forward to our next conference call after the second quarter ends. So thanks for joining us tonight.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect. Everyone have a great day.