TransAct Technologies Incorporated (TACT) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the TransAct Technologies first quarter 2017 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jim Leahy, Investor Relations. Sir, you may begin.

Thank you, operator. Good afternoon and welcome to TransAct Technologies 2017 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 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 would like to turn the call over to Bart Shuldman. Bart?

Thank you, Jim and welcome everyone joining us on this afternoon's conference call and webcast. Earlier this afternoon, we reported 2017 first quarter net sales of $14 million, operating income of $1.4 million and EBITDA of $1.7 million. Steve will review the first quarter financials in more detail in a few minutes, but I'd like to begin by providing some high level comments about the results and our business. We believe TransAct is off to a good start in 2017 as we laid the foundation for full year growth and continue to enhance the profitability of our business, thanks to the ongoing shift in our sales mix towards higher margin software driven technology solutions. We also made progress on two fronts in our restaurant solutions market during the quarter, which we believe positioned TransAct to take full advantage of what we see as a large and growing market opportunity. First, we made several strategic fine tuning adjustments with planned marketing campaign in our restaurant solutions market that we detailed back in March. The adjustments pushed our spending for these initiatives into the second and third quarters from the first and second quarters and we believe it better positions the program to have a meaningful benefit to our sales efforts. We call this type of move inaudible. We just recently initiated the extensive direct marketing campaign for AccuDate terminals, which is aimed at raising industry awareness for these solutions and elevating TransAct as the clear market leader. The start to the campaign was changed by about six weeks to better align it with the restaurant and food service industries’ largest worldwide convention, the National Restaurant Show, NRA, in May of 2017 which will begin in a couple of weeks. We believe by more closely tying together the marketing campaign and trade show, which attracts all leading restaurant and foodservice operators will benefit from a strong showing in NRA and from increased market awareness for AccuDate terminals. In addition, we are continuing our work to build out our direct sales team, a process we believe will take several more months. Second, we added the software capabilities of our flagship AccuDate XL through our recently signed Jolt partnership. As we have noted, Jolt is a very attractive cloud based software platform that allows restaurants and businesses of all sizes to leverage the power to the cloud as they manage all of their day to day operations. Thanks to this exciting partnership, which is additive to the existing relationship with Crunchtime Information Systems, we are allowing operators to utilize Jolt’s software directly on the AccuDate XL. The AccuDate XL with Jolt, the kitchen staff where the headquarters of a restaurant company can now easily manage their menu items for date code, nutritional and Gran N Go labels and by upgrading for the full Jolt suite, management can leverage the power of Jolt to monitor employee attendance, verify test compliance and even perform critical safety tasks like food temperature monitoring. Since the Jolt announcement, we have seen a number of our current and potential customers take a brief step back as they reevaluate their purchasing decisions and more fully weigh on just what our AccuDate XL can do as a key hub in their operations. We believe this is a good sign for our AccuDate XL sales and yet another reason why we are investing in our strategic initiatives. Overall, our entire AccuDate product line, including the AccuDate 9700 PRO and XL represents a full range of solutions that can be customized directly to a customer's needs. No other company has the breath and range of products for the back of the house and restaurant as we do. Our customers can easily handle the task the AccuDate terminals were first designed to do, create grab and go and food rotation labels, while now offering kids and staffs more powerful tool that can save restaurant and food service operators’ money, enhance operations and help drive business growth. To date, our AccuDate 9700 and AccuDate PRO are delivering on the promises we have made to the market and we believe our AccuDate XL was primed to follow in these footsteps. In fact, we recently signed our first AccuDate XL order and are excited to begin deploying these terminals in the coming weeks and months. Importantly, this sale includes a service component that we will -- what we believe will become a critical and recurring portion of many AccuDate XL sales over time. And one more bit of exciting news for our shareholders. With this first order for AccuDate XL with Jolt terminals, we also received our first order for TransAct labels. Yes. As part of our strategic initiative to be one stop shopping for AccuDate XL terminal, TransAct now offers a range of labels for our customers. TransAct is just starting the beginning of building our recurring revenue that will go along with our terminal sales that will include both service and labels. We look forward to benefiting from the growing momentum for AccuDate terminals over the balance of 2017 and beyond. The market opportunity exists. It is significant and TransAct will leverage our position as the industry leader for in-kitchen technology solutions to capitalize on the market potential. Moving onto our other key market, casino, gaming and lottery, we continue to benefit from the healthy results, thanks to our market leadership. While global gaming casino and lottery trends are likely to remain choppy for the foreseeable future, our customers value TransAct’s innovative suite of Epic printers as well as our unique Epicentral promotional and bonusing print system. During the quarter, TransAct was selected by ilani, the newly opened 100,000 square foot casino in Washington State, which was developed by the Mohegan and Cowlitz Indian Tribes, as their ticket in, ticket out printer of choice. We shipped our industry leading 950 to ilani and are proud to power each of the 2500 slot machines on ilani’s beautiful casino floor. We know that customers like ilani who are drawn to our world class customer support and the unmatched reliability of our products and we appreciate that they trust TransAct deliver what are critical components of their day to day business. In addition, we continue to believe that we are incrementally growing our market share for casino and gaming printers in North America and around the world, thanks to our industry leading innovation, reliability and service. Finally, just a quick note about our printer sales to McDonald's, which continue to be strong in our first quarter of 2017. With that, I'll turn the call over to Steve for a deep review of the first quarter results, which in turn I’ll make some summary remarks before we open up the call to questions and answers. Steve?

Thanks, Bart. Good afternoon, everyone. First quarter 2017 net sales were 14 million compared to 14.4 million in the 2016 first quarter. The 3% decline in net sales resulted from lower restaurant solutions and casino and gaming sales, partially offset by an increase in both POS automation and banking sales and TransAct services group sales. First looking at our sales for the first quarter by market. Restaurant solutions sales were $527,000, down 36% or $295,000 from last year's first quarter. Sales in the quarter were impacted by a decline in sales to our distributor and as Bart noted, a shift in customer interest towards the new AccuDate XL, particularly following the recent announcement of our partnership with Jolt. As Bart noted, this new relationship with Jolt has driven many of our existing and potential customers to re-evaluate their buying decision, as they consider moving up to purchase the AccuDate XL instead of the AccuDate 9700 or PRO to gain the additional features and benefits the XL offers. Though this is having a temporary impact on our sales in the near term, we believe this shift in customer interest to the XL will bear fruit for TransAct in the long run. POS automation and banking sales were up 6% or $143,000 to 2.5 million in the 2017 first quarter, as we continued to benefit from strong shipments of our Ithaca 9000 printers to McDonald's for their many new initiatives. Casino and gaming sales were down 6% year-over-year or $321,000 to 5.1 million in the first quarter of ‘17. Domestic sales declined 7% from the prior year as increased casino printer shipments, including 2500 Epic 950s we shipped for the new ilani casino, up in the Washington State. We’re more than offset by a decline in Epicentral sales. In the prior year period, we completed two Epicentral system installations compared to no new installations in the first quarter of this year. International casino and gaming sales were also down to 5% year-over-year as continued strength in the European and Australian sports betting markets, a key use of our roll fed kiosk printers were more than offset by a decline in international casino printer shipments. Lottery sales of 3 million were relatively consistent with the 2.9 million we recorded in the first quarter last year. Printrex product sales were $178,000 compared to $155,000 in the 2016 first quarter. Though our sales continued to be negatively impacted by overall weakness in the oil and gas industry, we did finally begin to see some signs of life in this business during the first quarter. TSG sales were up 2% year-over-year to 2.7 million, as declining consumable sales for legacy POS and banking products that we are deemphasizing were more than offset by an increase in spare part sales to IGT for our installed base of lottery printers. We expect spare part sales to IGT to continue to be strong this year, particularly in the second half of the year. Gross margins for the first quarter improved to 43.5% from 41% in the first quarter of last year. Our quarterly gross margin benefited from higher spare parts sales as well as lower manufacturing overhead expenses. As we've said for some time now, TransAct’s gross margins will continue to expand over time, as we transition our business towards higher margin solutions like our AccuDate terminals and away from our legacy products and this shift in sales mix takes hold as we move through 2017. Total operating expenses for the first quarter of ’17 were 4.7 million, down 5% from the year ago period. Engineering design and product development expenses for the first quarter were down 243,000 or 20% year-over-year. The year ago period included a higher prototype and other hardware development expenses as well as higher expenses related to the completion of software development projects for Epicentral as well as our line of AccuDate products, all of which will directly support our sales growth going forward. Selling and marketing expenses for the first quarter were down $121,000 or 7% to 1.7 million, mostly driven by lower sales commissions and lower travel expenses. G&A expenses for the first quarter were $2 million, up 5% over the year ago period on higher professional service fees. Operating income for the first quarter of ’17 was 1.4 million or 10.1% of sales compared to the operating income of $900,000 or 6.5% of sales in the year ago quarter. So even on a 3% decline in sales in the quarter, we were still able to achieve a 51% increase in operating income. Diluted EPS for the 2017 first quarter increased 63% to $0.13 compared to $0.08 in the year ago period and our EBITDA for the first quarter of ’17 was 1.7 million compared to 1.3 million in the first quarter of ’16, up 36%. Now, turning to the balance sheet. We ended the quarter with 2.4 million of cash and no debt. We returned a total of approximately $600,000 of capital to our shareholders during the ’17 first quarter to our quarterly cash dividend of $0.08 per share. We didn’t repurchase any shares in the quarter, leaving us with approximately 1.4 million remaining under the $5 million buyback authorization we announced February last year. Also, as you may have seen earlier this week, our Board of Directors announced a $0.01 increase in our regular quarterly dividend from $0.08 to $0.09 per share, beginning this quarter. This represents a 12.5% increase in our quarterly dividend, bringing the yield to 4%, based on today's closing stock price. We believe this is a strong indication of our confidence in the future outlook for TransAct, particularly as we pursue growth in the very exciting AccuDate restaurant solutions market. And finally, I'd like to discuss the timing and amount of the increased AccuDate related spend this year. Based in part on the updated timing of this plan spend, we now expect operating expenses, particularly selling and marketing expenses, to rise approximately 1.5 million year-over-year, compared to our prior expectation that such expenses will increase by about $2 million. Given the timing of hiring a direct sales force as well as the strategic decision to push the AccuDate marketing campaign closer to the start of the NRA show that takes place later this month, we now expect to incur the bulk of these expenses during the second and third quarters of this year. As a result, we expect this spend to have the most impact on our second and third quarter results. And at this point, I'd like to give the call back to Bart for some closing remarks. Bart?

Sure. Thanks, Steve. Great job. As I said, when we reported our 2016 fourth quarter results, 2017 is a year of significant opportunity for TransAct, particularly as we move -- as we more fully embrace our software driven solutions in several key markets. Importantly we have today a very large and growing restaurant solutions market opportunity, which we are addressing with our suite of AccuDate terminals. By pursuing attractive software partnerships with companies such as Crunchtime and Jolt, we’re also creating an ecosystem that is establishing the AccuDate XL as a must have solution for restaurant operations. Furthermore, we continue to innovate with Epicentral, the newest version 3.8 adds new features such as the ability to run multiple promotions concurrently, create games within games and/or promote these site promotions and even segment players. In addition, our unique new Epic -- Epicentral SE version allows operators to leverage the existing bonusing capabilities of their slot management systems along with several modules in Epicentral to offer bonuses as a printed coupon, while providing an upgrade path to a full Epicentral deployment. In closing, I want to extend my thanks to the hardworking team at TransAct for their efforts to expand our company into new high growth markets. And of course thanks to our shareholders for the continued support as we further transform and grow our business. But before I turn the call over to question and answers, I want to let you know about a couple of key dates coming up. The first one as we talked about is the National Restaurant Show, NRA, which will take place in Chicago, May 20 through 23. If you happen to go, please stop by our booth. On May 22, we’ll have our shareholders -- annual shareholders meeting here in Hamden. And on May 25, I will be attending the B. Riley investor conference and we’re doing one on ones in a presentation of the business. I hope some of you can attend. At this time, operator, we're ready to take some questions.

[Operator Instructions] Our first question comes from Kara Anderson with B. Riley. Your line is open.

Hi. Good afternoon. I’m hoping that you can help us get more comfortable with the lighter restaurant solutions revenues in the quarter. Specifically, what makes you comfortable to state that the lighter quarter is a reflection of, call it, maybe a delay to purchase the AccuDate XL, maybe some commentary around that would be helpful?

Yeah. Kara, there's a couple of things going on and one, the reason why I feel comfortable is we're using salesforce as our mechanism to track the activity of our opportunities in the restaurant solutions market and we've worked very hard as part of our program to do this major marketing campaign and of course have our own direct sales force. We've done a lot of work here at structuring sales force, so we can actually see on a daily basis what's going on with the business. In fact, in the middle of our office is a TV screen that literally scrolls through the sales people and their opportunities and we can literally see what the opportunities are, at what stage of the sales process they're in and the size of the opportunity. And what makes me comfortable is that I won't go into the details of it, but when we look at our reports, when we look at the TV screen, the amount of opportunities is significant. So this isn't done on a back of an envelope or guessing, this is a structured approach to sales process that we can track, where we are in the sales process, how many terminals that particular customer is looking at and where in the sales process we are. So I feel very good about the opportunity But a couple other things have gone on. One is with the XL, it just has so many more capabilities that it was important for us to go back to customers we are working with and show them what those capabilities are. For instance, if you have a national restaurant company, you can actually regionalize your menus. So that if headquarters wants to control the menu, but has regionalize types of menus, headquarters can literally section the regions and upgrade menus by region. You can’t do that with a Pro, you can send changes to menus directly to each Pro, but you can do what the XL in the Cloud can do. The capabilities of the Cloud are so much more advanced in being able to manage your grab and go, your nutritional labels, your food rotational labels, as you change your menu items that we felt it was very important for us to show the customers what those capabilities are. And some have told us look you know what, we were down the path of using and testing your Pro, we want to test the XL. And it was very important for us to do that, it has that much more capability that we felt it very important. In fact today, we actually have one of our largest customers up in our Ithaca facility literally going through a whole day sales presentation on the XL. Because what they're trying to do with their business more aligns with what the XL can provide them. So we feel, Kara, we feel very strong about it. I'll be honest with you, I'm very patient, when we have such opportunity with the XL and has so much capability. And in all fairness, our recurring revenue model with it that it's much more important for us to get the right product in front of the customer so when they make their decision that they've got the best technology in front of them and have seen it all. We have had certain customers that we're trialing our technology that started to ask could it do more and the XL does that. So it's very important for us to do that with our customers. And again the details that we have of where we are in the sales process gives me that confidence.

And then any additional color on the AccuDate XL with Jolt sale in the quarter, how many terminals that might be, yeah start there maybe.

We're not going to break out individual customer orders, this is not something we're going to do. We kind of launched the product in March. We already got our first order. The order is of a nice size order. It came with our first service contract, our ongoing work with that customer to support them and also came with our first order for TransAct labels. We will be a supplier of labels for the AccuDate XL which was one of our goals to build the recurring revenue piece of the AccuDate product line especially the XL. So we're really pleased with it, it happened pretty quickly as we launched the product. So that was a pretty big surprise to us in regards to how quick they wanted to roll it out considering it wasn't too far after we announced the integration of Jolt with the XL.

And then can you help me reconcile the solid gross margin growth despite I guess greater contributions from lower margin POS to moderate and then really fewer sales and higher margin restaurant products.

Look there's a couple things in the business that actually have really good margins for us. One, the AccuDate terminals. Another one is our spare parts and one of the things that is happening in TransAct that we've talked about now for at least two years is the fact that our commodity inkjet printhead business is declining as we walked away from the banking market and the POS market using inkjet printers [indiscernible] and substituting that business with spare parts business. As we said, oh it's got to be two years now, the lottery business is changing and it's actually changing that's helping us with extra sales in regards to the states and jurisdictions around the world keeping the terminals out longer which drive more spare parts business which has had some pretty good margin. So what you're seeing is a shift of our spare parts business growing, shift down of our low margin inkjet printhead business which will continue to decline, but be replaced as Steve said, the second half of this year should see some increase actually in spare parts business for a lottery business and also in the second half we will be seeing some more AccuDate terminal sales. So what you're seeing is this transition to TransAct over to a much higher gross margin business model and profile for TransAct.

[Operator Instructions] Our next question comes from Mitchell Sacks with Grand Slam Asset Management. Your line is open.

Hey guys I might have missed this. With the Ithaca 9000 printer, I know you are sort of expecting at the tail off at some point this year, do you have a better idea of when that starts to happen?

You know, Mitch, the first quarter was brilliant. Lot of printers were shipping, look there's a lot of things going on with McDonalds that continues to drive printer sales for us and we'll see, it looks like a pretty good second quarter for us and we'll go quarter to quarter. We would have expected to have dropped off in the first quarter but it didn’t and we're expecting a pretty healthy second quarter. We're quite impressed with the initiatives they're undertaking which drives terminal sales and printer sales.

And can you talk a little bit about the G&A cost and what's driving those up a bit?

It’s really just professional fees, Mitch.

And then the final question has to do with the label sales. Can you just kind of walk us through that a little bit, this is obviously a new business line for you guys. Can you kind of walk us through the thought process on it and how we should think about it going forward?

The thought process was pretty easy from a standpoint of, now that we're going away from our distributor who had labels could we capture that business. What would it take to capture the business, would it be profitable, would it add to our business, and then who would be our partner, who would help us. So this is something that actually, Steve, spearheaded it with the operations team because we knew if we could get the right price, if we knew we could get the right labels, we're in negotiating on the terminal. So it would be brilliant - it would be really nice if we could offer our labels instead of making it a jump ball and having others come in and bid on the label business. So the challenge was for us was finding the right label partner that could supply its labels at the right price so we can make the margins that we want to make. And it all came together, Mitch, and we know the customer, we're working with the customer, we're now going to be direct selling to that customer. And to us there are four pieces of the sale, right, there is the software, which both Jolt and CrunchTime will get. There is the terminal sale, we'll get. There is the support of the terminal both technology side and also the service side. And then there's the ongoing label business and the ongoing label business is large. We have a certain accounts that are using a lot of labels a day. So we didn’t want to give that up, and the question is could we find a partner that would allow us to make the margins that we wanted and we found a great partner, we’re in the process of going through a qualification process. There's a lot of different style labels, Mitch, if disposable, you have removable, you got dissolvable, day of the week labels. So we're going through the approval process internally testing it through our terminal, but truth we are really excited about this because the first time we had a chance to close an XL order, we offered the labels and they gladly bought into the whole program. So not only did we get the terminal sale but we're going to get the ongoing revenue from the service contract and the ongoing revenue from the label usage and the label contract.

Where will that revenue show in your income statements?

It will go into the TSG group.

From the sales side, you’ll see it in TSG. So you'll see that with our service contract, you'll see that flow through. So from a building block standpoint, Mitch, now we've got three out of the four, right. Jolt and CrunchTime are going to do their work, which they're out there very aggressively selling. And one of the things that I didn't mention with Cara question, which was a very good question, really appreciate the thought of okay, how do we feel good about our business. We talk to Jolt and CrunchTime also and they're very excited about their initiatives now that the terminal been released now that their software has been released. So they're out selling on our behalf. So we get three out of the four pieces now, Mitch, that is lucrative from the standpoint its ongoing revenue and the margins look very good.

It's obviously going to be hard for us to project the number for what it does to TSG, is there any way for us to think about it or to model it kind of going forward.

It's a great question, we call that the tie ratio, right for every terminal how many labels will we sell. We have not calculated that yet because customers will be different. There are different size labels, I mean we have one customer that's using the 12-inch long label, which sells for a lot more money. Now that's not one of our labels we're selling right now because that was sold with our older terminals. So you got to give us a little time, Mitch, to try and figure that out. But the good news is we know that labels are sold for every terminal and we're now with the XL going to be offering the label solution.

Thank you. [Operator Instructions] Our next question comes from Phil Bernard with Eilers & Krejcik. Your line is open.

One quick question on the casino gaming side just switch to another vertical really quick. On the international casino, looks like there are a few decent sized projects coming in the next year, two in Macau MGM Cotai, potentially [indiscernible]. Wondering if you guys have seen any developments there or can provide any color on international.

We feel very good about our Macau situation.

Okay good, great. That's it from me. Thanks.

The other thing Phil that we are seeing and I don't know if you guys are seeing this in some of your reports is the gaming side of the business seems to be picking up, not the casino. In Macau, clearly we've got a couple openings and that you know we all know what they are and we feel very good about our position in Macau. But in the European market, we're seeing a lot of interest in the different countries for what we call gaming machines either sports betting machines or a AWPs and things like that. And that appears to be more of a growth market then the casino market in Europe. I don't know if you guys are hearing anything about that.

We do a little bit of work in that space, and yeah, we’re seeing that. And also domestically some resistance to - with respect to the replacement market as well, I don't know if you guys are feeling that domestically.

It’s ongoing, there's nothing good or bad in the domestic market other than the Epicentral SE is getting a lot of attention from the system suppliers which has been good for us as they look to figure out ways to enhance their sales and do more with their systems. That's been a real active part in our business. But the pockets that we're seeing is clearly Macau, no mystery, there are two big openings coming. But the European gaming side is been interesting to us because of the activity that we're seeing.

Thank you. I'm showing no further questions at this time, I'd like to turn the conference back over to Bart Shuldman for closing remarks.

So thanks everybody, thanks for attending our first quarter 2017 conference call. Again, three events over the next couple of weeks, we have NRA, we've got the Annual Shareholders Meeting and I do invite you on behalf of [indiscernible] to come see us at B. Riley, should be a great day in California. Thank you for your interest and your support at TransAct and we'll talk to you on the next call. Thanks.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.