TransAct Technologies Incorporated (TACT) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the TransAct Technologies' First Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] I will now like to turn the call over to your host Mr. Jim Leahy of JCIR.

Thank you, Natasha and good afternoon and welcome to TransAct Technologies 2019 first 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'll 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 the 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 everyone joining on this afternoon's conference call and webcast. For the 2019 first quarter, TransAct had net sales of $11.6 million; operating income of $800,000; and adjusted EBITDA of $1.3 million, delivering a quarterly gross profit margin of 52.7%, diluted EPS for the first quarter was $0.10 per share. Of course Steve will review these financial results in more detail in a few moments. It should not be a surprise that the first quarter of 2019 was a very important period for TransAct as we launched our BOHA! back-of-house ecosystem and recognized initial contributions from this new platform in our financial results. I spent quite a bit of time discussing the specifics of the BOHA! ecosystem on our 2018 fourth quarter call shortly after its launch. So, I will focus my comments today on our ongoing progress, go-forward strategy, potential results, and outlook. Since the official launch in March, our BOHA! sales team has been working diligently with our current opportunities and engaging with potential new customers to educate them about the many ways our unique new solution can benefit both their back-of-the-house operations, and their overall profitability. Restaurants and food service providers face an environment where labor is hard to find and labor costs are rising quickly. In a recent article, I read one restaurant company has experienced 120% staff turnover and rising labor costs, while they grew their topline, rising cost drove a decline in earnings. Add to this rising food cost and we have a market ripe for the BOHA! platform. In April, we announced that we had commitments from 10 distinct customers to deploy approximately 240 BOHA! terminals in their operations. These commitments carry revenues from hardware, software, label sales and even service. A portion of the sales related to these commitments will recognize in the 2019 first quarter. Rollouts will continue in the coming quarters and we are, of course, working to build on this initial business with these customers. In addition, as I have said previously that we are working with some specific large customers before we actually launch BOHA! I'm excited to note that each of these potential customers is still progressing forward in the sales process with TransAct and BOHA! and we believe that we can close one or more of these opportunities soon. With everything in front of us, we are beginning to gain traction for BOHA! in the marketplace. Much of the feedback we have received goes like this and I quote "We have been looking for a single platform solution for all we want to do in the back-of-the-house." We are currently working with prospective customers on potential BOHA! implementations that in total represent an opportunity approaching $100 million over the life of these agreements provided they become formal contracts. I provide this information not as an indication that this is the level of business that we have already booked or will book, but to provide context around prior statements we have made to the effect that BOHA! represents the single biggest individual market opportunity we have had in the company's history. In all, our sales teams' discussions with wide variety of restaurants and foodservice operators has solidified our belief that this is true. Our team is now preparing for the National Restaurant Association Show in Chicago, which begins later next week. The NRA Show is a wonderful opportunity for our sales team to interact directly with customers and drive awareness for what is the industry's only single vendor solution for back-of-house restaurant automation. As part of our NRA strategy, we started a program called project awareness where we are using both social media and ad placements to drive awareness for the BOHA! platform. We have seen good traction with project awareness and have already set up meetings with some of the company's that saw our placements and contacted TransAct. Our booth at the NRA Show will show cast -- showcase all of the BOHA! hardware and more importantly the many apps we offer that help restaurants and foodservice providers become more efficient and productive. We'll have one-on-one demonstrations of each of our purposely built hardware offerings and each of our nine SaaS-based apps and for one not yet announced app that we will introduce soon along with our entire lineup of TransAct labels. As we work to begin BOHA! deployments at customer locations, we expect recurring sales in the form of software subscriptions, maintenance and support contracts and our labels to grow initially at least on pace with hardware sales. Right now with the orders we have closed, the recurring revenue per unit ARPU is running at 100% of the initial hardware sales projected each year for the life of the contract. We expect to build our software app sales annually upfront and then recognize the sales evenly on a monthly basis over the course of the year. As our BOHA! Terminal, BOHA! Handheld and BOHA! Tablet rollout into customer locations and become critical components of their daily operations, we expect sales of maintenance and support contracts, which provide customers with a legendary service for which TransAct is well-known to be part of every contract we sign. Furthermore, we believe the TransAct label line up will be a significant generator of recurring sales as many customers we are engaged with are budgeting for label purchases at levels far or above our initial expectations. Results from the recurring sales of BOHA! already demonstrating the potential for a significant long-term growth as reflected in the six-fold year-over-year increase and nearly 50% quarterly sequential rise for such sales as reported in the 2019 first quarter and we have just started. This is yet another reminder of why we believe BOHA! is such a large market opportunity for TransAct and also a large recurring revenue opportunity. As we grow the penetration of BOHA!, we expect annual recurring revenue sales will begin to accelerate and could reach a few multiples at the upfront hardware revenue over time. With all that said, I want to remind our investors two key things. First, the sales cycle for new BOHA! opportunities take time given the nature of trials and rollout schedules as well as the need to on most instances customize the solution to take customers day-to-day needs. We want our customers to know that they are getting exactly what they need and believe that is worth taking the time to do just that. Second as is common with companies pursuing the SaaS-based business model you know that it takes time to sign contracts that turn into recognized sales. We will recognize hardware sales immediately, but our software and sales will be built upfront and then recognized into revenue over the subscription period. As a result, it will take time for our software-driven sales to ramp up even as we grow our book of business and order backlog. Turning briefly to our global casino and gaming business before handing the call over to Steve sales declined 8% year-over-year in the 2019 first quarter. In the U.S., printer shipments were broadly lower particular weakness in both January and February. Remember, there was a government shutdown in late December and early January, while the economy also dealt with rising interest rates. We believe this had a negative impact on our business at that time. And in March, we saw an improvement in printer shipments but this was not enough to offset the first two months of the year. We also had a one-time shipment of printers in the year-ago period, which did not repeat. That said, roughly 15% of our overall printer shipments to domestic customers with the Epic Edge as this next-generation TITO printer begin to demonstrate traction in the marketplace. Internationally, sales were up 18% over the prior year as a large order from our customer in Asia was more than to offset some weaknesses in Europe. Similarly to the U.S. we have seen, but shipments to Europe more recently. With that I'll turn the call over to Steve for a review of the 2019 first quarter results after, which I'll make some summary remarks before opening the call to questions and answers. Steve? All yours.

Thanks, Bart and Good afternoon, everyone. First quarter 2019 net sales were $11.6 million down 6% from $12.2 million in the first quarter last year. Looking at our first quarter sales by market restaurant solutions sales declined 11% year-over-year to $900,000. The decline was driven by lower sales of the AccuDate 9700 terminal to McDonald's in our forward distributor partially offset by higher sales of our new BOHA! Terminal. Both terminal sales were down, it's important to note that we recognized our first sales of other BOHA! hardware products such as handhelds and temperature probes as well as BOHA! software subscriptions during the quarter. As we moved forward restaurant solutions sales growth will reflect the rollout of new BOHA! Terminals and other BOHA! software as well as software subscription revenue, while TSG results will benefit from sales of TransAct labels and BOHA! service contract revenue. Casino and gaming sales were down 8% year-over-year to $5.5 million in the quarter. Domestic casino and gaming sales were down 18% from the prior year as the year-ago period included a large one-time shipment of gaming printers to IGT for use in the Swedish lottery installation. We also had one EPICENTRAL installation in the prior year period and done in the 2019 first quarter. Looking more broadly at the industry while we saw improved domestic printer sales in March, we experienced industry-wide weakness in both January and February that the March uptick just couldn't overcome. Sales in the international markets were up 18% over the prior year as increased sales to a large Asian customer in the quarter were somewhat offset by lower European sales. POS automation and banking sales were down 26% to $1.3 million in the 2019 first quarter. The decrease was driven by an expected continued slowdown in the pace of our sales of the Ithaca 9000 POS printer for McDonald's. In addition, one of the McDonald's large POS system vendors who we sell printers to made the decision to repair printers rather than purchase new ones as replacements. This decision is reducing our overall printer sales to this customer, but is driving an increase in TSG services and spare part sales. On the banking side, we've exited this market, but we will continue to recognize some limited sales to legacy customers this year until our printer inventory is exhausted. Lottery printer sales of $697,000 were up 9% from the prior year quarter. Our overall business trend in lottery remains as expected given our shift in focus away from this market and towards our higher growth restaurant solutions and casino and gaming business. As a result, we expect lottery sales to decline as we move to 2019. Printrex sales of oil and gas printers was $342,000 were up 24% from a year ago. We expect modest sales growth in 2019 as the recovery for the oil and gas industry continues. TSG sales were up 7% year-over-year to $2.8 million. While starting from a small base TSG sales related to BOHA! increased six-fold over the prior quarter and by nearly 50% over the 2018 fourth quarter thanks largely to growing TransAct label sales and a BOHA! maintenance and support revenue as our installed base of hardware expense. And it's also important to note that all of these sales are recurring in nature. Other key drivers of TSG sales in the quarter included increased service sales as a result of McDonald's printer repair activity I mentioned earlier as well as a 31% decline in domestic spare part sales to our large lottery customer. Gross margin for the first quarter reached 52.7%, thanks to the large part to the continued decline in sales of our lower margin products. As we've said over the past several quarters that we'll continue to emphasize, our gross margin demonstrates that TransAct's current and future business model is more profitable than our legacy business, as we continue our transition towards BOHA! and its technology-driven solutions, such as terminals and handhelds, SaaS-based software apps and software maintenance and support, all backed by our foundational casino and gaming business. We believe that gross margin could expand further as BOHA! gains traction and sales of the solution grow. Total operating expenses for the first quarter of 2019 were $5.3 million, up 6% year-over-year. Engineering design and product development expenses declined $56,000 or 5% on lower contract design expenses. Selling and marketing expenses for the first quarter were up $281,000, or 18%, due to hiring, as we staff up in sales, marketing and technical sales to support the anticipated growth of our restaurant solutions business. G&A expenses for the first quarter were up $78,000 or 4% and higher legal and accounting fees somewhat offset by lower recurring expenses. Operating income for the first quarter of 2019 was $777,000, or 6.7% of net sales, compared to $856,000 or 7% of net sales in the year-ago quarter. We recorded net income of $746,000, or $0.10 per share in the 2019 first quarter, compared to net income of $680,000 or $0.09 per share in the year-ago period. And adjusted EBITDA for the first quarter of 2019 was $1.3 million, which compares to $1.2 million in the first quarter last year. And finally, turning to the balance sheet. We ended the 2019 first quarter with $1.9 million in cash and no debt. We returned approximately $700,000 of capital to shareholders in the first quarter through our quarterly cash dividend of $0.09 per share. We made no share repurchases during the 2019 first quarter and have approximately $3 million remaining on our current stock repurchased authorization as of the end of March. Financially we remain very much on track to build BOHA! into the long-term growth driver we expect it to be. We believe our SaaS-based business model will drive increased profitability for the overall business and the continued stability of the casino and gaming business will provide the underlying foundation on which we can continue to invest in and grow BOHA!. As demonstrated by our strong gross margin in the first quarter of 2019, we expect the TransAct of tomorrow to be more profitable than the TransAct of yesterday and even today, and we look forward to benefiting from the hard work that has led us to this point. And at this point, I'd like to give the call back to Bart for some closing remarks.

Thanks, Steve. Nice job. We are very excited by the long-term prospects for TransAct as 2019 progresses and we make headway in aggressively pursuing the BOHA! market opportunity. Our sales and marketing team is actively working to convert customer interest into trials, active trials into orders and contracts and orders and contracts into full-scale deployment of BOHA! hardware and software. As I said earlier, BOHA! is far and away the most exciting and lucrative opportunity in TransAct's history and we are confident that our execution against this market opportunity will allow us to deliver strong financial performance and drive significant shareholder value. Before I open the call to questions, I want to highlight our proxy statement which was filed in mid-April. You may have noticed the two highly qualified candidates were nominated for election the TransAct's Board of Directors. Haydee Olinger has already served on the Board for nearly a year and her experience in McDonald's is an ideal fit for our go-forward operations and she has just been a wonderful contributor at the Board. Manny Hilario, current President and CEO of The ONE Group Hospitality brings with him extensive restaurant and foodservice operational experience, which the Board believes will be critical as we further develop our BOHA! opportunity. The Board believes both Haydee and Manny, if elected, will be great assets to our company for long-term growth. As the shareholders elect these two new wonderful board members, I want to thank Graham Tanaka, who is retiring from the TransAct Board for his 20-plus years of service. His insight into technology, his discussions, very deep discussions about digital deflation and the importance of patents and his push for TransAct to provide more and more technology to our customers was so important from me and the direction we continue to set for the company. Graham, on behalf of all of us at TransAct, we thank you. And finally, as I do every quarter, I'll end my comments by thanking our shareholders for your support and your trust and I also thank the TransAct team for their great work. It is your passion, it is your dedication and hard work that truly makes TransAct what it is. Operator, we're ready for questions.

[Operator Instructions] Your first question comes from Mitchell Sacks of Grand Slam Asset Management.

Hey, guys. Congratulations on the quarter earnings. You mentioned early on the call about the large customers you're working with and kind of the revenue opportunities those present. Can you repeat those numbers, because I kind of didn't quite grasp at all?

Yeah. So, what I did. Mitch, I think it's important for us to try -- when we say that BOHA! is the largest opportunity for TransAct, I thought it important to try to put some numbers on that. Why do we believe that, right? We're at a period right now where we starting to hit the inflection point and we expect to begin to close some of these orders. We run a sales force -- sales program -- sales management program and we log every opportunity into that program and we define it as we go through the phase gates of -- the phases of beginning with the customer to closing an order. And what we did is we decided to add up all those opportunities that we're working on. And it does take into account the hardware, the software and we try to -- the sales force tries to estimate how many apps they'll buy at the beginning. Now granted each one of these customers are also potential customers for more apps. But we try to put into the equation the sales force puts down how many apps they think they're going at the beginning and then we when put in the labels that we think we're going to sell based on the usage that they've given us and also whether we're going to sell the maintenance contract or not. That number is approaching $100 million, right now.

Okay. Wow. And then you talked about -- I guess you have nine apps in the BOHA! you're going to be putting a 10th. Can you guys talk a little bit about the interim process between TransAct and their customers in terms of how these apps are being created and the ideas for the apps?

Yeah. Yeah. So, great question, Mitch. Thank you. When we got into this, remember we started with McDonald's in kind a -- for better words an easy process of just labeling food as they used it and put it back and need it to label it for food safety. But as we got involved with more and more customers that's when we started to uncover the fact that -- we started to hear the issue of labor and rising food cost and if I'm going to put this technology in I wanted to do more and I in the cloud. So we started asking questions how much more would you like to do what would you like to do? Where do you -- where are your pain points? Where are your issues that you would like to see automation? A great example is things like temperature taking, I was talking to our sales manager today and one customer that we're working very closely with told us today that it would normally take him four hours a day to measure the temperature of the food as they cook it and with our solution its down to an one hour. So, the restaurant companies told us what their pain points were and then we went and worked on the apps around that. So, we identified eight, nine different issues that we believe that we could solve using automation and digital and apps and all that. So, it was really an interim process. And then at a certain point, we had certain customers that really wanted to move forward with us as we explored this opportunity of this -- they didn't know it was going to be called BOHA! at the time, but this platform of apps. And those -- there were some large ones that we've working with for quite a while now that we actually we believe we have a chance of closing one or two over a period of time now. But they were very helpful in not only further defining their needs, but also the customization that we had to do in regards to how we develop the app, allowing us to go in and work with them and understanding their process, so the fact that we had the app, we could then load in their process into that app, so they would get the exact solution to how they run the restaurant. And a very good example is one of these restaurant companies will work very closely with today, where we've been in trial for a good amount of time now and the question that we asked one of the stores was if we took away their technology today, what would you do? And the answer by the store manager and the people in the store was, you can't take the technology away. It would be horrible. We would fight to get it back. So we progressed over time, we developed the apps. Now the new app that's coming out actually came from one of our customers who said by the way we've got this other pain points and can you take care of it? And based on how we've laid out our apps, it wasn't difficult to create another app which we will launch soon once we kind of complete it. That also takes care of another pain point in the restaurant that was being done, but being done manually, being done in an analog fashion. So now we'll digitize it and we'll make it a lot easier. And actually, the restaurants that have -- company -- they ask us could we do it is actually trailing it right now and seems to really like it. In fact, we've got a nice picture of somebody smiling using the app. So that's how it's all kind of gone Mitch. As we deal with other restaurant companies, another pain point comes up, we'll decide whether we can write an app around that and automate it. Right now, we're pretty much touching every aspect of the back-of-the-house operations.

Okay. And then final question. Just with respect to inventory. I noticed you guys are have been building inventory a bit over the last few quarters. Is that geared towards the BOHA! units in looking to have it available in advance? Or can you just kind of walk me through that a little bit?

Yes. Yes Mitch. No doubt. No doubt. So we're working with some pretty good-sized companies. And one thing that we have to remember in the printer world, our cost on our books are a lot lower than the cost of our terminals. So when you look at sticking so many terminals versus so many printers, of course our inventory cost is going to go up just because it's a different cost structure. But the important thing for us Mitch was to able to have terminals that once we got the go-ahead that we could rollout terminals, right? We didn't want to have to say to our manufactures "hey ship a man and tell our customers to wait." So we did load up on inventory, we did and though that inventory will rollout as -- our plan is to -- Steve can talk about it is that inventory will rollout and as we close these orders and roll up the terminals.

We're also stocking up on the other hardware items that we're beating to offer Mitch. Like the handhelds and tablets and temperature probes and those other items.

And we have sensors, we have a gateway. Those are all things that we need in stock as we close. And there are certain aspects of certain part -- there are certain parts in there are common themes in a lot of the restaurant companies that we're working with that they want. There is certain things that are -- it's -- the payback is so easy and quick that a lot of the companies are looking at the same technology with the same app that they want to rollout with. So we're stocking up some of that hardware to make sure that if those rollouts do happen, we have enough inventory for everybody.

Great. Thanks very much.

[Operator Instructions]

Is it fair to say, there is no more questions?

At this time, I will like to turn the call back to your speaker, Mr. Shuldman for further comments.

All right. I thank everybody for joining us on the call this afternoon. We look forward to reporting back to you on further progress in our business when we report our second quarter results in early August. Also, if you plan to be in Chicago next week for the NRA Show, please stop by our booth, we'd be happy to provide a demonstration of our entire BOHA! software and hardware platform and as in the proxy, I also invite you to our annual shareholders meeting at the end of May. With that, I thank everybody for -- to being on the call and we'll talk to you in a couple of months. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and have a wonderful day. You may all disconnect.