TransAct Technologies' (TACT) CEO Bart Shuldman on Q1 2018 Results - Earnings Call Transcript

TransAct Technologies Incorporated (NASDAQ:TACT) Q1 2018 Earnings Conference Call May 3, 2018 4:30 PM ET

Executives

Jim Leahy - IR, JCIR

Bart Shuldman - Chairman and Chief Executive Officer

Steven DeMartino - resident, Chief Financial Officer, Treasurer and Secretary

Analysts

Kara Anderson - B. Riley FBR

Operator

Good day, ladies and gentlemen, and welcome to the TransAct Technologies First Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, there will be a question answer session and instructions will follow at that time. [Operator Instructions] As a reminder this conference call may be recorded.

I would now like to turn the conference over to Mr. Jim Leahy of JCIR. Sir, you may begin.

Jim Leahy

Thank you, Shannon. Good afternoon and welcome to TransAct Technologies’ 2018 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 measures 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?

Bart Shuldman

Thank you, Jim, and welcome to everyone joining us in this afternoon's conference call and webcast. Today, we announced our 2008 first quarter results which included net sales of $12.2 million, operating income of $900,000 and adjusted EBITDA of $1.2 million. Our results also included gross margin of 47.9%, which reflects the benefit of our ongoing sales mix shift.

Steve will review the results in more detail in a few moments, but I’d like to begin by providing some high level comments about our business. During the first quarter, we made significant strides in our Restaurant Solutions business with growing terminal shipments including shipments of our flagship AccuDate XL, initial sales of our proprietary labels for AccuDate terminals and ongoing product development work which led to this week’s announcement of the debut of a new terminal.

In addition, we made good progress in establishing our casino and gaming direct sales team in Europe. All this work and an ongoing shift and mix towards high-value, technology-driven solutions enable TransAct to deliver strong gross margin growth of 440 basis points in the first quarter and set us up what we believe will be a good 2018.

You know roughly six weeks ago, when we announced our full year results for 2017, I highlighted several opportunities with large national multi-brand restaurant companies and large-scale food service operators that our sales and technical teams were working to close.

I am happy to report today that shortly after our March call; we did indeed secure one of those customers and began shipping AccuDate X terminals to that customer in support of what we expect to be a full scale multi-quarter rollout.

Importantly, this customer has also agreed to purchase our support and maintenance contract offerings which represents the start of a very attractive recurring revenue opportunity. Building on these first quarter shipments of the AccuDate XL, we recently began shipping the AccuDate XL to a second large national customer.

We expect these shipments to ramp up over the coming quarters and this customer is adding to our service and maintenance support while adding the purchase of our labels which will drive additional recurring revenue label and consumable sales.

TransAct has been at the forefront of establishing an entirely new market that addresses the back of the house in restaurant and food service operations that will now include Internet of Things, devices commonly known as IOT devices and software for production and operational needs and our sales team is working with many potential customers in the market at integrating our solutions into their highly complex enterprises and back to the house operations.

While the nature of this sales cycle leads to near-term peaks and valleys in quarterly shipments, based on our ongoing conversations, we remain very confident that we are well positioned to capitalize on what is a sizable opportunity for our technology-driven AccuDate solutions.

To that end, we are looking forward to the National Restaurant Association Show later this month in Chicago as we debut an all-new AccuDate terminal, the AccuDate XL2e. This restaurant management solution is a natural evolution from the AccuDate XL as it introduces for the first time a true enterprise-class offering for large multi-site restaurant and food service operators.

The AccuDate XL2e leverages our latest software feature. The TransAct Enterprise Management System, which we refer to as TAMS to provide a fully controlled operating environment for the terminal which will ensure increased data security in the large enterprise while also providing security updates as they become available.

Our customer interactions have made it clear that IT and operation teams in large organizations demand a high-level of control over deployed devices, particularly as more and more companies establish their data and central system functions in the cloud and on their company-wide internet.

The need for a secure and lockdown environment is paramount to many of our new potential customers and our AccuDate XL2e with TAMS is a perfect solution to address this need.

Furthermore, the development and rival of connected Internet of Things devices, which can enable additional back of the house technology features and functions makes it critical that our AccuDate XL2e play a central role in managing its safe usage throughout the back of the house processes. Our team is excited of what we have to show at NRA in a few weeks and we hope to see you there.

Now moving on to our casino and gaming business, overall sales grew 16% in the first quarter driven by some signs of a pickup in the domestic gaming market and what we believe is our growing domestic market share. We take this as a very good sign to the continued long-term growth of our domestic business.

Furthermore, an existing EPICENTRAL customer installed the new system in the recently opened property during the quarter as they continue to leverage the power of our revolutionary promotion and bonusing print system to drive growth in their business.

Moving over to our international market, casino printer sales were up 5% in the first quarter in Europe as we saw the initial benefit of our decision to implement a direct sales model for this market. Our sales commitment throughout Europe continue to rise and we are confident that shipments to customers in Europe will grow in the coming quarters, particularly as our sales team further establishes their presence in the market.

We cannot be happier with our progress in the European casino and gaming market, particularly as we already ahead of where we thought we’d be at this time.

Now looking briefly at the balance of our business, we noted last quarter that ongoing trends in the lottery business driven by the longer length of time of our printers remain in the market before replacement will likely result in lower printer shipments this year. While our first quarter results clearly demonstrate evidence of this shift, we believe 2018 will continue to benefit from lottery printer spare parts sales.

We are also working towards closing the first sales of the Epic 3000 lottery printer to two new lottery system providers, which would provide an attractive upside potential for this business. Now our Printrex sales strategy remains focused on being opportunistic but signs of life in the domestic oil and gas industry are likely to result in growth of this business in 2018, which again would represent attractive sales and margin upside.

Finally, TransAct Services Group is a vital piece of our 2018 strategy and we are already seeing the benefit of our launch of TransAct branded labels along with our software maintenance agreements and warranty support contracts for our AccuDate terminals.

In fact, AccuDate consumable and service contract sales largely offset declining legacy consumable sales in the quarter, a trend that will only grow over time.

I cannot stress this enough. Our TransAct Services Group business is a critical component of our recurring sales model which will help improve our visibility and drive attractive profitable growth for TransAct going forward.

With that, I will turn the call over to Steve for a deep review of the 2018 first quarter results, after which I’ll make some summary remarks before opening the call to questions and answers. Steve?

Steven DeMartino

Thanks, Bart. Good afternoon everyone. First quarter 2018 net sales were $12.2 million, down 13% from $14 million in the first quarter last year. Looking at our first quarter sales by market; Restaurant Solutions sales were $1 million, roughly double last year’s first quarter.

The significant increase in the quarter was primarily driven by higher sales of the AccuDate 9700 to our primary distributor as well as initial shipments of the AccuDate XL to the large corporate customer that Bart highlighted earlier.

This customer began receiving AccuDate XL terminals late in the first quarter and is now in the midst of what will be a large-scale, multi-quarter rollout of the terminal along with recurring revenues from our service and support offerings.

To-date, in the second quarter, we have continued shipments to this customer and have also begun shipping AccuDate XL terminals to a second national customer as Bart mentioned. POS automation and banking sales were down 30% or $742,000 to $1.7 million in the 2018 first quarter as we saw a decline in sales of our Ithaca 9000 POS printer to our large quick serve customer who was ordering this product at record levels last year.

In addition, we continue to see declining sales of our legacy banking printers as we further deemphasize this product line. Casino and gaming sales were up 16% or $822,000 year-over-year to $5.9 million in the first quarter of 2018. Domestic casino and gaming sales grew 36% over the prior year on a continued relatively broad strength of printer sales across the domestic casino market as well as the new EPICENTRAL installation.

International sales were down 14% over the prior year, as growth in sales of casino printers were more than offset by a declining in gaming printer sales. But importantly, we saw 5% year-over-year growth in sales of international casino printers in the quarter driven by early success of our new direct sales team in Europe as customers increased their orders of our industry-leading EPIC 950 printer.

I’d like to also note that sales growth in Europe is pacing ahead of our expectations and we believe shipments will continue to increase as we move through 2018. Lottery printer sales of $635,000 were down from $3 million in the prior year quarter as we saw a decline in shipments to our largest lottery customer compared to significant shipments to them in the prior year.

Printrex product sales were 275,000 up 55% from 178,000 a year ago, as the oil and gas industry continues its recovery. While these sales remain modest, we believe Printrex is a potential source of upside for TransAct over the balance of the year.

TSG sales were down 4% year-over-year to $2.6 million on lower domestic spare parts sales to our large lottery customer, as well as the continuing decline in the consumable sales for our legacy banking printers. These declines were offset impart by increased AccuDate label sales for our growing Restaurant Terminal Solutions business.

We expect sales of our AccuDate labels will grow in concert with increased shipments of our AccuDate terminals over the coming quarters. We expect this product set to become a meaningful recurring revenue generator for us as our installed base of terminals grows over time.

Gross margin for the first quarter rose 440 basis points to 47.9%. The significant increase in the quarter was again driven by our favorable mix shift towards higher value, technology-driven solutions such as our AccuDate restaurant terminals and away from legacy lower margin products like our lottery, banking and POS printers. As we’ve said for some time now, overall gross margin should continue to expand going forward and we will also benefit from sales of our AccuDate labels and service and software maintenance contracts related to the terminals.

As we look across the balance of the year, building momentum for the AccuDate XL2e should continue to support a similar level of strong gross margin going forward.

Total operating expenses for the first quarter of 2018 were $5 million, up 7% year-over-year. Engineering, design and product development expenses grew $228,000 or 23% as we added both hardware and software engineering staff to support new product development initiatives, particularly for the restaurant solutions market.

Selling and marketing expenses for the first quarter were down $99,000 or 6% as increased staffing for our European direct sales team was more than offset by cost savings from the termination of our worldwide casino and gaming distribution agreement with SUZOHAPP at the end of last year, as well as the lower corporate selling and marketing spending.

G&A expenses for the first quarter were $2.2 million, up 10% over the prior year and higher severance and incentive compensation expenses. Operating income for the first quarter of 2018 was $856,000 or 7% of net sales, compared to operating income of $1.4 million or 10.1% of net sales in the year-ago quarter. Though our gross profit margin was again extremely healthy in the first quarter, our operating margin declined due to 13% lower sales and continued investments in engineering, sales and marketing, and sales and marketing to support our long-term growth initiatives.

We recorded net income of $680,000 or $0.09 per diluted share in the 2018 first quarter, compared to net income of $943,000 or $0.13 per diluted share in the year-ago period. As we indicated last quarter, the Tax Cuts and Jobs Act resulted in a nice benefit to our effective tax rate, lowering it to 20.7% in the 2018 first quarter from 32.7% a year ago.

Adjusted EBITDA for the first quarter of 2018 was $1.2 million and that compares to $1.9 million in the first quarter last year.

And finally, looking at the balance sheet, we ended the 2018 first quarter with $4.7 million in cash and still no debt outstanding. We returned a total of approximately $2.3 million of capital to shareholders in the first quarter through our quarterly cash dividend of $0.09 per share and a repurchase of about 123,000 shares of common stock at an average price of $12.72 per share.

As of the end of March, we had approximately $3.4 million remaining under our current stock repurchase authorization.

And at this point, I’d like to give the call back to Bart for some closing remarks. Bart?

Bart Shuldman

Thanks, Steve. Great job. From what I see in the markets, the automation of the back to the house in restaurants and food service providers is accelerating and many different technologies are now being commercialized to address this opportunity.

I could not be more excited to see this all developing. As fast as it is happening now, it is an opening – it is opening an opportunity for our AccuDate XL2e terminal to become the hub for the many different products that customers might want.

Internet of Things, IOT has entered the restaurant market such as temperature probing of food and other IOT and cloud-based solutions are now popping up. I am sure, we will see more at the upcoming NRA show in Chicago. But what is clearly needed is a hub in the back to the restaurant, so all these solutions have a home to base their application and a hub with a chef or manager can review what is going on.

With our new TAMS in XL2e, our terminal is the solution to bring all these applications and technologies together. As we sit today, we are working with many of these technologies and products to have them integrate their solution on our terminal. As I spent time with a chef and an executive chef at an amazing new commissary type kitchen just a few weeks back, the need for a company to be the central base for all these new technologies was evident.

Both chefs understood what they face through all these new technologies and agreed with my findings and recommendations, it is so needed. And now with our XL2e in TAMS we have the solution. Not only do we bring a purposely built terminal within abundance of features and the security needed, but every terminal comes with two printers with food safety labeling, grab and go labeling and nutritional labeling and more.

We all have to remember that this is all new. None of this existed before and TransAct is one of the reasons why all this is happening. We’ve blazed the trail to bring a more sophisticated system in terminal solution to the back of the house. And now, with all the potential new solutions, we have the terminal with labeling capability, TAMS, Wi-Fi, Bluetooth and all the technology that can bring all these solutions together.

I believe we are in the first inning of this game, where TransAct leads with the best products which now includes TAMS as well as a pipeline of development and sales opportunities to make this to largest market opportunity in our company’s history. TransAct is looking forward to the balance of the year as we deliver on our promise, or for high value solutions that enhance our customers’ businesses and we expect to report on our success and progress in the coming quarters.

In closing, I’d like to express my thanks to the work our TransAct team does day in and day out to grow and evolve our business. It is also – I also like to thank our shareholders for their continued long-term support. Thank you.

Now, if you happen to be at the NRA Show in Chicago later this month, we love to see you at the TransAct booth. I think you’ll find that our growing line-up of restaurant solution products and partners is a compelling offering which our customers will no doubt be excited for.

At this time operator, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Kara Anderson with B. Riley FBR. You may begin.

Kara Anderson

Hi, good afternoon.

Bart Shuldman

Hello, Kara.

Kara Anderson

So, last quarter, there was a significant focus on the anticipated 2Q rollout at the large national restaurant customer. I see that you are now in the early stages of that deployment. Can you help frame the tempo around the timeline for that? And any type of quantification of the rollout or maintenance contract would be really helpful.

Bart Shuldman

So, the second part of your question, no, we don’t talk about pricing and things like that. I think we all have to remember, there is one thing that I’ll remind you and all of our shareholders, this is a live call with any competitor to listening.

So, I will refrain from talking about pricing or sales or in particular customer names and things like that. So, I ask our – I ask you and our shareholders to be mindful of that respectful that there is nobody else that does what we do which is be public and announce as much as we can. So we have to be careful of.

In regards to the rollout, it’s a process. We are at the mercy of our customers in getting the technology, getting the installation technology-ready, every location gets wired, Ethernet wiring and all that, every location that terminal goes in gets training. So, it is a process for both of our customers now in regards to the rollout.

One of our customers is using it in an application and they are out bidding on more and more business for them. They actually provide a solution to certain types of food service providers and as they win more business, they put a terminal in every location if not more than one terminal.

So we are also at the mercy of how many more wins that they have, but right now we’ve got a pretty good feel of the rollout scheduled for their existing business. And the second customer that came in line is one where they are rolling it out.

There is actually two or three terminals per location and it just takes time to get that location up to speed trained, all the technology rolled out and then completed and then they move on to their other stores. So, it’s a process. We look at it as a multi-quarter rollout. We kind of like that in a way, because it kind of smoothes things out a little. But it’s multi-quarter.

Kara Anderson

Okay. And then just one more for me. Can you update us on the, I guess, full year outlook you provided last quarter. I think you said, you would expect revenue growth and margin expansion on the operating line. I believe that’s what the outlook was, so just if you could update us on what you are thinking now.

Bart Shuldman

As we sit right now, I mean, look at the first quarter, the margin hit 47.9% on the gross line. So, clearly the gross margin is there. I think we’ve proved it over multiple quarters. We have added some people on the operating expense line. Sales of course, we’ve added to our sales force and some engineers. We are optimistic for this year.

We think that, as these opportunities close, the way I see it, Kara, is, we’ve now introduced a solution that we’ve been asked, could we do for little over a year, maybe year-and-a-half now in regards to providing a lock down type solution in using the terminal. And one of the issues that some of the restaurants had was clearly security who can get on the system as it is web-based.

Can they go to Google, can they go to Amazon, how do we lock that down? How do we secure it? How do we secure it on the internet? How do we secure it in the cloud since it’s an android-based system, how do we push down security updates that android has? So this was a long – not too long, but it was a process in our side to get the right talent in place and then the right software design so that we could have the XL become the XL2e in an enterprise solution.

So, for better words, over the last couple weeks, we’ve been introducing the solution back to our customers that we have highlighted that we are in the close category in our sales process. So now we are back at testing it with these customers, which is great. We are the only ones out there with this type of solution and so, it’s going to all depend on how quickly they want to move, how quickly they want to test it, how quickly they want to go back and test it.

It is not a new solution to them, but it’s got a new way to use the terminal. It does lock it down. I think the responses that we’ve gotten from our customers have been nothing but applaud, because we really dealt with a security issue that they were concerned about. So it’s really, from a timing standpoint, it’s all going to come down to when these customers want to roll it out.

From what I saw over the last couple weeks having been at the McDonald’s Show, having an opportunity to visit with another customer in one of their large commissary type kitchens, the back of the house automation is accelerating at a fast pace. In fact I called, Steve on a Tuesday night and said I was kind of overwhelmed by what I saw.

And there were lot of people out there now proposing not labeling solutions, I mean, we have that lock down, but all types of different Internet of Things solutions and in talking to these chefs, it’s kind of crazy with how many different types of solutions can be out there and how many different templates or tablets you need or handhelds you need and the chefs are all saying, look, we need to really think about this and think about how we control it and how do we have a so-called hub where all these types of applications and technologies can talk to.

So I am not looking at five different tablets and all fairness lock those tablets up in my office at the end of the night as somebody is going to walk away with it. So when we talk to them about our purposely built terminal, that will sit there doing their labeling needs, both their food safety labeling needs, their grab and go labeling needs, nutritional labeling.

I mean, even McDonald’s, you just won’t believe what they are labeling now. Everything is getting labeled because of the food safety issue. When we talk to the market about now having this hub, this back of the house assistant, their eyes slide up and say, great, now want to work with this customer and this product and that product to get them to load their app on your terminal and we are going to show some of that at the NRA Show.

So, you know what, this is going to take time. This is going to take some good effort. But the opportunities are really there. The customers are really there and now we are rolling the technology out and it’s a very large opportunity and we are just going to be there for the wins.

Kara Anderson

All right. Thank you.

Operator

Thank you. [Operator Instructions] And I am currently showing no further questions at this time. I would like to turn the call back over to Bart Shuldman for closing remarks.

Bart Shuldman

I don’t know if people decided not to have questions because they thought this was a Tesla phone conference call, that I am sorry. There are no more questions. So, I’d like to thank everybody for joining us on the call this afternoon. We do look forward to reporting back to you on further progress in our business when we report second quarter results in August.

I do invite you to come out to the National Restaurant Association. Our booth is well designed. We’ve got all the products and it’s going to be exciting to see some of our partners in the booth and showing the technology and you’ll get to see and understand what we’ve just accomplished. We also have our Annual Shareholders Meeting coming up. So, I invite you to attend that. Let us know if you are coming.

And I thank you for attending the call today. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference. Thanks for your participation and have a wonderful day.