TransAct Technologies Incorporated (TACT) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the TransAct Technologies Second Quarter 2019 Conference Call. At this time all participants are in a listen only mode. We will also conduct a question-and-answer session and instructions will follow at that time [Operator instructions]. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Mr. Jim Leahy of Investor Relations. Jim, please go ahead.

Thank you, Tiana. Good afternoon, and welcome to TransAct Technologies 2019 Second Quarter Conference Call. Joining us today from the company are Chairman and CEO, Bart Shuldman and President and CFO, Steven DeMartino. Today's call will include a discussion of the company's key operating strategies, progress against these initiatives and details on the second quarter financial results. We will then open the call to participants for questions. As a reminder, this conference call contains statements about our 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 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 Web site. At this time, I'd like to turn the call over to Bart Shuldman, Bart?

Thank you, Jim, and welcome to everyone joining us on this afternoon's conference call and webcast. For the 2019 second quarter, TransAct had net sales of $11.4 million, operating income of $300,000 and adjusted EBITDA of $600,000, delivering a quarterly gross profit margin of 50.3%. Diluted EPS for the second quarter was $0.02 per share. Steve will review these and the rest of our financial results in more detail in a few moments. The transformation of TransAct is underway as we demonstrated the potential of BOHA! throughout the second quarter in the form of new agreements with a number of prominent restaurant and foodservice operators. While our financial results for the 2019 second quarter reflect the transitional nature of our near term business, I believe the growth and success of our BOHA! ecosystem with our many apps and hardware solutions is underway. If you follow the news, you know that restaurant and foodservice operators have never faced a more difficult operating environment inside their store or establishment. Just a month ago, 21 states and municipalities, including New Jersey, Argon and Washington, D.C., raised their hourly minimum wage, bringing their total number of states with minimum wage loss above the federal minimum to 32. At the same time, the National Restaurant Association indicates that one of the primary challenges that members faced today is recruiting an employee retention, particularly for employees with back of the house roles. One restaurant chain announced they are experiencing a 140% turnover, think about that. With their manual processes, the training cost must be exploding. We heard loud and clear at the National Restaurant Association show back in mid-May when we launched BOHA! that restaurant and foodservice operators are actively looking for technology to address these challenges by driving efficiencies in their back of the house operations, all while simplifying task and work streams for all levels of our employees in order to reduce the need for expensive time-consuming training. With our early sale success since mid-May, we are now clearly demonstrating to the industry as well to our investors that BOHA! can be that technology solution. Our sales team as to date secured commitments with 14 distinct customers, which in aggregate represents the deployment of our BOHA! Terminal, along with at least one BOHA! SaaS app and the TransAct Enterprise Management System. These commitments also include the deployment of TransAct service and recurring sales of TransAct labels. Importantly, the commitments we've secured over a wide swap of the industry, including company-owned restaurant brands, restaurant franchises and foodservice operators, we even leverage the long-time casino and gaming relationship to secure a BOHA! deployment in Macau. During the second quarter, recurring revenue from our restaurant solutions business tripled over the prior year quarter, a trend which continue and accelerate as the installed base of BOHA! Terminals and BOHA! Software apps continues and expands. Furthermore, we estimate that our recently announced agreements carry with them annual recurring revenue of roughly $2.5 million. That annual recurring revenue, we did not have before we secure these new agreements, and I'm happy to report that some of these new customers have begun testing additional apps that they are considering adding to their operations. Our BOHA! apps easily work together, and it's not surprising to us to see if customers start with one app and then more over time. We also continue to make good progress in engaging new and potential customers. We have, we are actively pursuing sales opportunities that today, approximate $135 million, up 35% when we reported our first quarter results. Now let me take a moment to describe how we get this dollar amount and explain how it continues to grow. The $135 million represents engagement at various levels for each potential customer, but in all cases, is a qualified and defined sales opportunity. Each opportunity is carefully tracked as it progresses through our system. I've described this as having each qualified opportunity on a treadmill with defined milestones as it moves to the next level, such as location visits, product detailing, in-house and field trialing and ultimately securing an agreement. For each engagement that currently comprises the $135 million sales opportunity, not one has hit the stop button on the respective treadmill, each and every one of them continues to move forward to the next level of engagement. While they move forward at various speeds and various inclines, each has demonstrated consistent progression. And let's remember, as part of our on-boarding process with these new potential customer, we customize our app or apps to the way the restaurant, a foodservice provider performs their particular operational task, that gets us very close to the customer. It's this success and the growing level of industry interest that provides us with confidence that we are ideally positioned to address and even lead a total market opportunity that should easily exceed $1 billion. As I said last quarter, we remain in the early innings in addressing this opportunity, and we are in the midst of what will be a long sales cycle for the BOHA! ecosystem. As trials turn to agreements and then to roll out, there is a final implementation phase for our solution. However, this implementation phase is critical in ensuring our customers that everything will work in a secure manner. When we finalize and signed each agreement, there was one last step that must be completed before we begin to ship and have the customer install the Terminal and app. The last step is getting our technology onto their internal network system, which involves all the security of proxy servers and SSIDs and passwords. This process can take a few weeks or a month or two, and we work closely with our customer to ensure the security, but do not fear, it all happens, and then we begin to ship and install, which we have successfully done with customers already. With our long-term focus squarely on BOHA!, we are also intend to maintaining and building our foundational casino and gaming printer and software business. Our second quarter casino and gaming results were impacted by some comparability issues, the factors which Steve will address. However, I think it's critical to note that the underlying casino and gaming business remains healthy. And the market for both our Epic printers and Epicentral bonusing solution remains stable. We expect this business to remain a key contributor to our long-term success. With that, I'll turn the call over to Steve for a review of the 2019 second quarter results. After which I'll make some summary remarks before opening the call to questions. Steve?

Thanks, Bart. Good afternoon, everyone. Second quarter 2019 net sales were $11.4 million, which was down 23% from $14.8 million in the second quarter last year. Looking at our second quarter sales by market, restaurant solutions sales declined 34% year-over-year to $830,000. The decline was driven primarily by lower sales of our restaurant solutions hardware. As you may remember, we made initial shipments of what is now the BOHA! Terminal to 2 large customers in the year-ago period, and these shipments didn't repeat. While Terminal sales were again down in the quarter, it's important to note that our backlog of BOHA! Terminal and other BOHA! hardware products continue to grow. In our subscription revenue related to BOHA! software solutions is growing as well. Given the orders we announced over the course of the second quarter and into the current quarter, we expect BOHA! Terminal revenue to grow sequentially in the third quarter and beyond as deployments begin in earnest. Casino and gaming sales were down 20% year-over-year to $5.6 million in the 2019 second quarter. Domestic casino and gaming sales were down 16% from the prior year as the year-ago period included a large onetime shipment of gaming printers to IGT for use in the Swedish lottery installation. Broadly across the domestic casino and gaming industry, sales remained mostly stable, and we saw mixed performance across our OEM customers. Sales into the international markets were down 26% over the prior year as a large sale to an Asian customer last year didn't repeat in the second quarter this year. We also saw reduced sales to one of our larger European OEM customers in the quarter. POS automation and banking sales were down 27% to $1.6 million in the 2019 second quarter. As with the first quarter of the year, we saw the continued slowdown in sales of the Ithaca 9000 as well as the continued impact of the decision by one of McDonald's large POS system vendors to repair existing printers rather than purchase new ones. Like we noted last quarter, while the repair versus replace decision reduces new printer sales, it's driving an increase in service and spare part sales, which show up in our TSG business. Lottery printer sales of $134,000 were down 72% from the prior year quarter. This decline was in line with our expectations as we are no longer focusing on this market. We expect lottery printer sales to continue at about the same level for the remainder of 2019, as we phase out of the lottery market and IGT orders printers only on an as need basis rather than in volume going forward. Printrex oil and gas printer sales of $285,000 were down 15% from a year ago. We expect sales to continue at roughly the same level over the balance of the year. TSG sales were down 16% year-over-year to $2.8 million as declines in lottery spare part sales and sales of legacy consumables such as inject cartridges and ribbons were offset in part by growing TSG sales related to our new BOHA! ecosystem. Sales of TransAct labels and service revenue to new and existing BOHA! customers, which is important to note, are largely recurring in nature, almost tripled in the quarter. TSG also benefited in the quarter from higher service sales as a result of the increase in McDonald's printer repair activity that I mentioned earlier. Gross margin for the second quarter was 50.3% as our business mix continues to shift away from lower-margin legacy products in our POS in banking and lottery markets. We believe that continued strength in growth -- gross margin is the story of TransAct's future, particularly as our business transitions towards our revolutionary BOHA! ecosystem and the exciting recurring revenue opportunities this product offering presents. BOHA! will help to position TransAct as a technology first organization that delivers value-added hardware such as terminals, handhelds, temperature sensors and probes as well as recurring revenue-producing SaaS-based apps in food safety labels to customers throughout the restaurant and foodservice industries. Our total operating expenses for the second quarter of '19 were $5.4 million, up less than 1% year-over-year. Engineering design and product development expenses declined $68,000 or 6% on lower contract design and hardware prototype expenses. Selling and marketing expenses were essentially flat, up just $10,000 or less than 1% as increased spend to expand our sales staff and support more marketing activities for the restaurant solutions market was offset by equal reduction in marketing spend related to our other markets. G&A expenses were up $80,000 or 4% on a higher legal accounting and other professional service fees, offset by lower recruiting expenses. Operating income for the second quarter of '19 was $309,000 or 2.7% of sales compared to $1.6 million or 11% of sales in the year-ago quarter. We recorded net income of $186,000 or $0.02 per diluted share in the '19 second quarter compared to net income of $1.2 million or 16% -- $0.16 per diluted share in the year-ago period. Adjusted EBITDA for the second quarter of '19 was $616,000, and that compared to $2 million in the second quarter last year. And finally, turning to the balance sheet. We ended the 2019 second quarter with $4.3 million in cash and no debt. We returned approximately $700,000 of capital to shareholders in the second quarter through our quarterly cash dividend of $0.09 per share. And as of the end of the second quarter, our stock repurchase authorization remained at $3 million, as we made no share repurchases during the quarter. Our first half of '19 results reflect the ongoing transition of our business. We have largely completed the investment in the development of the BOHA! ecosystem and have built a dedicated team that will support ongoing sales of the solutions as well as its rollout across our growing customer base. We're also actively investing to support the growing level of trial activity, which we believe will help expand our BOHA! order backlog. All of this has been accomplished with the debt rebalance sheet and in a manner designed to maximize returns for shareholders as we expect to continue to steadily move towards the inflection point where BOHA! becomes a meaningful driver of our long-term success. As TransAct's year of transformation continues, we remain confident that our best days are ahead. At this point, I'd like to turn the call back to Bart for some closing remarks. Bart?

Thanks, Steve. We've been on the road to transforming our business to a recurring SaaS and software-based model, all while leveraging our industry-leading casino and gaming solutions to invest for growth. As we begin the second half of 2019, our team's confidence in our company's future is growing each and every day. BOHA! is, we believe, TransAct's largest-ever market opportunity, and each member of the TransAct team is committed to leveraging our position in this exciting new market to increase the scope and scale of our business and, of course, create significant long-term value for our shareholders. I'll let my comments as I do every quarter by thanking you, our shareholders, for your support and trust. I'll also take the opportunity to thank our TransAct team for the great work as we position our company for what we believe is a very bright future. At this point, operator, we're ready to take some questions.

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

So question for you on the $135 million opportunity. Is that including Terminal sales and recurring revenue? Is it just recurring revenue? And if so, can you kind of break those two things out?

Yes. So it's a combination. So what we do, Mitch, is we take every opportunity, and we break it down between the onetime sales of hardware, which will be terminals, tablets, handhelds, probes and sensors and gateways. And then we match that up with what we believe will be the recurring revenue piece, which is what apps are they going to buy? Are they going to buy service? And then, of course, they've got to buy our labels. So it's a combination of both. I actually did not break out the onetime versus recurring, but as you can see from some of our announcements, we've had a mixture of different levels of recurring revenue based on the Terminal, right? So when you look at what their ARPU is, the average revenue per unit, after we sell it, we've had numbers as high as 1,700 with the largest order we've received. So it's all in there, and that's a 3-year combined amount. So all of the, I should say, not all, but most of the deals that we're looking at are for a minimum of 3 years. I mean, one thing we do not put in there, Mitch, is the additional apps that the customer could buy. We have one customer right now, for instance, that we've closed and just began shipping and they're looking at if not 2, 3 additional apps. That does not go in that $135 million. These are within the $135 million is what we believe we will close, not an app that they might test afterwards and buy.

Okay. And then as I think about the customers that are taking the terminals and the apps. I know you've mentioned in your press release is there foodservice corporations. Can you give maybe a little bit better granularity to what types of customers are using it? Is it full service restaurants? Is it some of these convenient stores? Or is that too proprietary at this point?

Yes, it's kind of not in our best interest to get into too much detail about our customers. Being the only one out there with a full suite of apps, it's not in our best interest. If anybody is interested in going and meeting -- and selling something to these customers. I can tell you, though, it is across the spectrum and everything that we've -- I mean, look, we have a casino customer, so that we decided to tell because that's a market that we know quite well, but it does cross a lot of foodservice and restaurants. And if I look out at the projects that are near to closing, it continues the same path of different styles of restaurants, quick-serve, casual, won't see much fine dining, of course. And then foodservice operators, so -- and that breaks down into a bunch of different categories. So what I see and when I look out and meet with our sales manager about the opportunities that are near to us right now, it still is -- with -- I guess, the good news is, it's still hitting all of these different buckets that we've highlighted that our potential candidates for BOHA!

[Operator instructions] I'm showing no further questions at this time. I would now like to turn the conference back to you, Mr. Shuldman.

Sure. Thank you, 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 third quarter results in early November. Also, if you plan to be in Las Vegas in October for the Annual Global Gaming Expo, please stop by our booth, we'd be happy to provide a demonstration of our entire Epic and Epicentral solution set. And by the way, we'll also have BOHA! in the booth. We had early success in the casino market with BOHA! and plan to show the BOHA! ecosystem to the whole industry. I thank you for attending today and look forward to speaking to you in the future. Thank you.

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