Transact Technologies Inc Q2 FY2020 Earnings Call

Good day, and welcome to the TransAct Technologies Second Quarter 2020 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Marc Griffin. Please go ahead, sir. Thank you. Good afternoon, and welcome to TransAct Technologies second quarter 2020 earnings call. Today, we'll be discussing the results announced in our press release issued after the market close. 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 on these initiatives, and details on the second quarter financial results. We will then open up 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 in the business and the company, please refer to the company's SEC filings, including its reports on Form 10-K and 10-Q. TransAct takes no obligation 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. With that, let me turn it over to Bart.

Thank you, Marc, and thank you to everyone joining us on the call today. Let me just start by saying that about 20 minutes ago, we lost power in the building that we are doing the conference call from. So we're on cell phones. Should it get a little fuzzy, we apologize, but we have no electricity as Connecticut was hit very hard by the storm. But before I begin, I'd like to say a few words of thanks. First, I thank our TransAct employees who have had to endure the unfortunate spread of the virus and the tough changes we had to make at TransAct. You did not cause this horrible virus, yet you stayed committed to the work we needed to get done and made the necessary adjustments to keep us going. No words can thank you enough. Second, I want to thank our shareholders. Nobody understands the impact on your portfolio as much as I do, as I spent a fair amount of my own money this year buying into my options and doing outright purchases of TransAct stock. So I know what you're feeling. I thank you for your commitment to TransAct. And finally, I want to thank our Board. You have been diligent in your approach to your role and holding us as a management team accountable. I thank you. Now on to the business of the conference call. Our second quarter performance was relatively solid given the significant challenges presented to us and our customer base by the COVID-19 pandemic. To quickly summarize, our second quarter total net revenue declined 53% year-over-year to $5.3 million and exceeded our revenue expectations of $4.5 million to $5 million. We recorded an operating loss of $2.7 million and an adjusted EBITDA loss of $2.3 million, which also exceeded our internal projection for the second quarter. We delivered a quarterly gross profit margin of 43.3% despite the much lower revenue, and the EPS loss for the first quarter was $0.25 per share. Of course, Steve will go into much detail later in the call. As you are all aware, the COVID-19 pandemic continues to create challenges for countries, towns, businesses, and families around the world. I'd like to provide some insight into the different markets we serve to give context to where our business is trending in the second half of 2020. The global casino and gaming markets were very challenged during Q2 and are recovering at different rates depending on the region. The Asian casino market, which has now grown to include many more countries than Macau, experienced diminished traffic due to the virus outbreak. While many casinos have reopened, the impact of the spread of the virus has curtailed travel and visas into certain areas. However, new opportunities are still arising, and we are encouraged that a few new casino openings are still scheduled to occur this year and next. Europe also experienced significant shutdowns early in Q2, and we are starting to see opportunities arise for this geographic market. The growth of sports betting terminals still exists, and we even see the potential for a new jurisdiction to open for casinos that represent a significant opportunity for TransAct. In the US, all casinos were closed for the first half of the second quarter, with many starting to open in late May and early June. As we head into the third quarter, approximately 85% of the casinos across the US are now open for gaming but with limited capacity and most non-gaming attractions remaining closed. We did experience a growth in orders for the US casino market as we entered the month of June, which has continued into the third quarter of this year. Industry data has been encouraging with reports that show spending per visit materially offsetting limitations in capacity. In addition, one casino analyst, Barry Jonas from Truist, formerly SunTrust, recently issued a report stating, 'Gaming is going back to gambling.' Basically, what he is saying is in the past, casinos grew their revenues and play by adding new bars, restaurants, and nightclubs which drove higher traffic. With most of them closed, casinos will have to grow their business by focusing on their core gaming operations, which can only be good for TransAct. He said attracting slot players back into casinos with new games will be a focus for local casinos around the US, projecting that they will start to get back to 2019 CapEx spending levels early in 2021. Since CapEx will not be spent on venues but rather the gaming floor, I believe this could be positive for TransAct. Now on to our Epicentral platform, which was created to help casinos drive more activity through real-time promotions and incentives. Once consumers are back in a casino, our real-time Epicentral system can reward players and incentivize them to come back again. We have just begun to market our Epicentral against the issue of players getting their promotions from kiosks, having to wait in line which could cause social distancing issues. Each slot machine and casino can be transformed into a kiosk using Epicentral, eliminating the issue of lines at kiosks. Players would go directly to slot machines to collect their coupons and rewards. Even as casinos open, they are continually challenged with new sanitation requirements, and our technology can assist there as well. During the quarter, we announced the launch of Epicentral Clean2Play, a revolutionary casino product that provides real-time printed proof that a slot machine has been cleaned, sanitized, and is ready for play. Epicentral Clean2Play, built on Acres 4.0's Clean Machine product, detects when each gaming machine's play ends and instantly dispatches a staff member to sanitize the game. Once sanitation is complete, Epicentral Clean2Play causes the gaming machine to print the Clean2Play certification ticket, which the casino cleaning staff member then places on the machine or directly over the machine's bill acceptor. Before the next play can begin, the cleaning voucher will be removed from the slot machine, allowing casino guests to see that the slot machine is certified as clean. Slot players will look for machines with a Clean2Play ticket to begin their play. Moving on to our Food Service Technology market or FST, the second quarter was an extremely challenging time for many restaurants and food service companies as the industry worked through new plans, procedures, and policies to keep employees and customers healthy and safe. Different verticals of the food service industry have fared better than others. Casual restaurants and those without robust delivery and takeout systems or drive-throughs have been the hardest hit. Most restaurants have been open but are experiencing lower traffic based on limited seating requirements. On the other hand, convenience stores and grocery stores have rebounded much faster as they expanded their fresh food offerings and consumer behaviors changed towards pick up and eat in. Looking at the second quarter results, I was encouraged by the 100% growth in our recurring revenue from our Food Service Technology market compared to the second quarter of 2019. Please remember the recurring revenue for our FST market includes software license fees, service, and label sales. As we ended the second quarter 2020, we now have 3,501 BOHA! terminals running on our system, and our recurring revenue for the second quarter was $659,000. Despite the shutdowns and slower traffic at our customers' locations in the second quarter of 2020, I am pleased to report our annual revenue per terminal averaged approximately $753. As challenging as the quarter was, we are beginning to see an uptick in orders from new and existing customers in our Food Service Technology revenue portion of FST potentially exceeding $1 million in the third quarter, a first for TransAct. Part of our growing excitement comes from a large label order we received from our largest BOHA! customer, a convenience store chain, which we will execute during the second half of 2020. They have also begun to order terminals once again. Additionally, we have previously announced corporate approval for BOHA! at a large Canadian fast-food franchise chain with over 1,000 locations. COVID forced these franchise owners to pause their activity, but they are now up and running, evaluating our BOHA! solution and placing orders once again. BOHA! is resonating with customers large and small, and we are excited about the traction we are receiving with small and mid-market operators. Our most recent announcement covered 10 customers totaling 74 new BOHA! terminals and included fast-casual, full-service, and convenience store concepts, showcasing the flexibility of TransAct's industry-leading BOHA! solution. And I do want to remind you we announced just a few weeks back an order for 1,200 BOHA! systems for a kiosk operator inside grocery stores. Our goal is to have all 1,200 terminals installed by the end of the year, which will then add to our growing recurring revenue base. As we look at the remainder of 2020 and beyond, investing in our technology is paramount to enhancing our position in the Food Service Technology market. Our most recent addition to the BOHA! solution suite is BOHA! Employee Wellness. BOHA! Employee Wellness offers a safe and secure digital process with its mobile app to conduct wellness screenings that will either greenlight employees that can work or identify those that must go home to recover. Moreover, BOHA! Employee Wellness can be included as part of the broader BOHA! COVID Readiness and Prevention program along with COVID-related checklists, digital menus, and Clean2Eat labels. The BOHA! COVID Readiness and Prevention program ensures employee safety while reinforcing new and updated standard operating procedures with digital accuracy and accountability, so operators can reopen and operate in the safest, cleanest, and most compliant way possible. We plan to announce a major product launch in late fall of this year, which we believe will showcase our leadership position with restaurant and foodservice operators with a leap in technology. With that, I'd like to turn the call over to Steve, who will review our second quarter results and our liquidity position, after which I'll make some summary remarks before opening the call to questions and answers. Steve?

Thanks, Bart. Good afternoon, everyone. Before I get into the details of our second quarter results, I'd like to highlight the steps we've taken to decrease our operating expenses to manage our liquidity. On our last earnings call in May, we discussed the pivot we made in late March as COVID first caused most of our customers to shutter their businesses. We went from accelerating spending to support the growth of our BOHA! solution to halting all new spending and executing a detailed plan to reduce expenses. During the first quarter, we lowered our operating and manufacturing overhead expenses by approximately $700,000 from the levels we projected internally for the first quarter. Then early in Q2, we took additional steps that we estimated will reduce our total expense run rate by $1.1 million compared to the first quarter. I'm pleased to report that we ended up exceeding that estimate with total savings of approximately $1.7 million sequentially, consisting of savings in operating expenses of $1.2 million and manufacturing overhead expenses of $0.5 million. You should also note that we achieved the $1.7 million of Q2 savings even with adding back payroll costs for our furloughed employees who we were happily able to return to work for most of May and June as a result of receiving proceeds from the Paycheck Protection Program administered by the SBA. We also temporarily removed the 10% salary reduction we put in place in April for most employees, except for senior management, in order to fully take advantage of the PPP program. As a reminder, we received almost $2.2 million of PPP funds in early May that we used to pay payroll costs and help fund our facility leases and utilities for the eight-week period ending June 30. We're still awaiting finalization of the PPP forgiveness rules and application process. Based on our use of the loan proceeds, we believe a substantial portion of the loan will be forgiven. Because we finished using the PPP fund by the end of June, in July, we took additional expense reduction actions, which included reducing our workforce by approximately 20% through a combination of employee terminations and temporary furloughs, which we expect to continue through the end of 2020. We reinstituted a 10% salary reduction across the board for all hourly and salaried non-commissioned employees through at least the end of 2020, and we continued the elimination of all discretionary spending, including trade shows, marketing and promotional activities, travel and entertainment expenses, and training wherever possible. We expect these additional measures to reduce our operating expenses and manufacturing overhead spend by approximately $400,000 to $500,000 per quarter compared to Q2, though we will not likely see the full impact of the expense reduction in Q3 due to severance and other non-recurring expenses we expect to incur. Now turning to our second quarter results. Net sales were $5.3 million, which was down 53% from $11.4 million in the second quarter last year. Looking at our second quarter sales by market, our Food Service Technology market, or FST, was up 7% to $1.2 million from $1.1 million in the second quarter of last year. Our FST hardware sales declined 32% to $545,000, and we ended the quarter with 3,501 paid terminals installed. Hardware revenues were down largely due to lower sales of our 9,700 terminals to McDonald's as their stores experienced the impact of COVID-19. Our recurring FST sales, including software and service subscriptions as well as consumable label sales, came in at $659,000 in Q2, which was more than double the $324,000 we reported in the year-ago period. This large increase in our recurring revenue demonstrates that our BOHA! initiatives have begun to gain traction and are building a recurring revenue stream as our installed base of terminals grows. Casino and gaming sales were $1.4 million, a decline of 76% from the second quarter of 2019 as we began to experience the full effect of casino closures from COVID-19 on casino ticket printer purchases in the quarter. Breaking this down further, our domestic revenues were down 72% from the prior year, and our international revenues were down 82%. POS automation and banking sales were down 71% to $481,000 in the second quarter of 2020 on significantly lower sales of our Ithaca 9000 POS printer to McDonald's due to the impact of COVID on their business, but they continue to have robust drive-through and take-out activity. Looking at Printrex sales, virtually no activity occurred in the quarter due to the COVID-19 pandemic, resulting in revenues of just $8,000 in the quarter. While we continue to deemphasize Printrex sales, we expect to receive additional orders from our legacy customers as the industry recovers from the impact of COVID-19. As we exited the lottery market, we made a final shipment of $817,000 of lottery printers in the second quarter of 2020, and we don't expect any future lottery printer sales beyond that. Finally, TransAct Services Group, or TSG, sales were down 44% year-over-year to $1.4 million as we continued to experience declines in sales of legacy spare parts and consumable products, such as HP inkjet cartridges and POS paper rolls that we no longer focus on. Moving down the income statement, our second quarter gross margin was 43.3%, which compares to 50.3% in the prior year period, as our gross margin was negatively impacted by the overall sales decline in the quarter. Total operating expenses for the second quarter of 2020 were $5 million, which was down $1.2 million or 19% sequentially from the first quarter and down 7% year-over-year. As we outlined on our last call, we took several steps to lower our expense structure from the first-quarter run rate in response to the effect of the COVID-19 pandemic on our business. Selling and marketing expenses were down $670,000 or 32% year-over-year to $1.4 million. The sharp decline is primarily attributed to the elimination of a significant portion of all trade shows and other sales and marketing programs, as well as employee furloughs and terminations in April. G&A expenses were up $51,000 or 2% year-over-year to $2.2 million on additional legal, accounting, and other professional fees mostly related to new issues, consultations, and disclosures related to COVID-19, which was largely offset by a ban on travel expenses and a reduction in other discretionary expenses. Engineering, design, and product development expenses were up $252,000 or 23% year-over-year to $1.4 million on continued BOHA! software development projects that we decided to continue even while dealing with the COVID-19 pandemic. We incurred an operating loss for the second quarter of $2.7 million or 51.8% of net sales compared to operating income of $309,000 or 2.7% of net sales in the year-ago period. As explained on the Q1 earnings call, we again recorded an unusually high effective tax rate of 33.2% in the second quarter, which is well above the corporate statutory rate of 21%, resulting in a tax benefit of $921,000 in the second quarter of 2020. As a reminder, an additional provision of the CARES Act gives companies the ability to carry back federal net operating losses. This provision allows companies that generate a net operating loss in 2020 to carry back five years and receive a cash refund based on prior tax payments. Since we expect to incur a net operating loss in 2020, we expect not to pay any federal income tax this year and carry back our anticipated 2020 NOL to an earlier year when we paid a corporate tax rate of 34%, and receive a cash refund sometime in the middle of 2021. Depending on the amount of our 2020 NOL, the cash refund could be substantial and provide an additional boost to our liquidity when we receive the refund. Finally, on the bottom line, we recorded a net loss of $1.9 million or $0.25 per diluted share in the second quarter of 2020, which compares to net income of $186,000 or $0.02 per diluted share in the year-ago period. Adjusted EBITDA for the second quarter of 2020 was a negative $2.3 million, which compares to positive $616,000 in the second quarter last year. Turning to the balance sheet, we ended the June quarter with $3.1 million in cash, $2.2 million of debt under the PPP loan, and just $6,000 of outstanding borrowings under our credit facility. Though we traditionally have not given financial guidance, in the spirit of transparency given the continuing COVID-19 pandemic, we wanted to again provide investors with an understanding of where the business has trended in the third quarter, our sales expectations for the remainder of the year, and insight into our projected liquidity. Our total sales for July were approximately $1.4 million, and based on our average daily bookings so far, we expect our estimated Q3 sales to be around $5.5 million to $6 million. We believe our customers' businesses will gradually improve as the impact from COVID-19 diminishes over time. As a result, we expect our sales to slowly build sequentially each quarter as we move through Q4 and into 2021. Based on our projections, we believe that the liquidity measures we've taken, combined with available borrowings under our new credit facility, will provide us with enough run rate for at least the next 12 months, and enable us to endure through these challenging times. In summary, we continue to make prudent decisions going forward during these unprecedented times and believe we have the operating discipline to manage through the current volatility of our business and emerge on the other side ready to grow again. At this point, I'd hand the call back to Bart.

Thank you, Steve. Well done. The outlook for 2020 remains a bit challenged, but we are clearly optimistic about the momentum we are seeing in the restaurant industry and with the uptick in order activity. It's interesting that our Food Service Technology industry market will now drive our revenue growth. We're confident in the resilience of our business and employees and believe we will emerge from these times even stronger. At this point, I'd like to open up the call to questions.

Thank you. We'll take our first question from Mitchell Sacks of Grand Slam LLC.

Hey, guys, how are you?

Good, Mitch.

Hi, Mitch.

Good. Regarding the convenience store market, I noticed that your website primarily lists Seven-Eleven as one of your customers. What are your thoughts on the Speedway acquisition? Additionally, I recall you mentioning that one of your major customers was becoming active again. Can we assume that consumer is indeed them?

Yes. So the good news, Mitch, is that we are starting to see orders return from our large convenience store customer. They had planned on rolling out 10,000 terminals, and while we lost around six months due to the pandemic, we are starting to see that come back. The other encouraging news is that we just received a very large label order from them. We're trying to understand what that means for our monthly run rate because we believe that between labels and software and service, we would be somewhere around $1,700 per terminal per year in recurring revenue. Based on the latest label order we received, there could be significantly more. We're preparing to ship and will work closely with their master distributor. And we expect them to roll out their fresh food initiative at Speedway, adding around 3,900 more stores to our footprint, which would put us close to 14,000 stores. With increased average revenue per unit, this could be quite significant. We will monitor the orders and the sell-through rate of the terminals closely. Additionally, I would like to mention that we have been focusing on convenience stores and grocery stores because they stayed open and aggressively pursued their fresh food initiative. Our sales team provided a list of all the C-stores we are doing business with through BOHA!, amounting to 22. Some are using our old 9700 terminals, and we are working to convert them to the BOHA! terminals. This shows our successful outreach to different sectors, especially given the challenges we faced in April and May.

And then in your notes, you talked about the business environment being uncertain, but it sounds like you're starting to see orders moving. Can you just talk us through what you're seeing from your potential customers?

We need to differentiate between the casino market and the Food Service Technology market. In the casino market, we observed an uptick in orders in June that continued into July. Typically, July is our lightest month; however, this year was different as we saw a fair number of orders come through. Barry Jonas from Truist is focused on local markets and is hearing mixed but overall positive things about capital budgets returning in 2021. We hold 50% of the market share, so we expect a good portion of that business. As for the Food Service Technology market, we are seeing more inquiries from customers wanting to trial our technology, suggesting a return to deal flow. Our existing customers are also beginning to purchase more terminals and increasing their order volume. This indicates positive trends for the label business and a return to sales activity.

Awesome. Thank you very much.

You got it.

We'll now take our next question from Jeff Bernstein with Cowen.

Hi everyone, I want to commend you all on navigating through tough times exceptionally well. This last quarter has been remarkable, and it's impressive what you have accomplished. I was pleasantly surprised to hear about your balance sheet, specifically that your long-term debt stands at $2.17 million. Did I understand correctly that most of that is associated with the PPP loan or another government loan, while only about $300,000 is from your line of credit?

No, Jeff, the whole amount that shows up on that line item is all PPP loans.

Yes. Yes, we have no real debt.

Okay.

And $3 million in cash.

And $3 million cash. That is really quite impressive. Congratulations. That's awesome. All right, so there's some fuel in the tank here to get through this, and you've cut expenses significantly. I guess we can talk off-line a little bit more about just how that models out because obviously some of the savings are in the run rate in Q2, and some is new, et cetera. But it sounds like you're really getting this down to where we're going to have some flexibility to navigate through this.

Yes. Jeff, with the resurgence of the FST business, the talk in the restaurant market today is that they need technology. When you add a person, you add a liability now. Technology doesn't get sick. We're seeing good requests for how technology can assist them. There's complexity to it as we need to navigate medical record laws, but we believe we have solutions that can help. For instance, our wellness program was developed from a need expressed by a restaurant company. They're looking for ways to ensure employees stay healthy, as they fear losing workers if they show up sick. We are hearing positive feedback on this direction. There's a rising demand for technology solutions now, and we expect to capitalize on that as we move forward.

It should seamlessly integrate with any testing program that anyone conducts, allowing for immediate setup for tests as necessary.

Yes, the essential question is how restaurants ensure that employees are healthy enough to come to work. We believe our integrated solution will help address that need effectively.

So between Food Service and the Clean2Play casino initiative, one would expect that people would be eager to implement this. Is it just that they were hesitant and now feel ready to move forward after a period of stagnation? Where do these individuals stand in the decision-making process?

I believe the normalization process has begun. Businesses, especially restaurants and casinos, must first understand how to reopen effectively. We've seen them focus on operational challenges, such as spacing tables or using QR codes for menus. Now, they are starting to explore technology solutions to enhance their operations. Casinos might be a bit slower adjusting, as they have faced operational issues that required adjustment before considering technology. Overall, we believe there will be a rising demand for our solutions as they work to adapt.

Got you. Okay. All right. Well, listen, thanks to both you guys and the team for a job well done in a really tough environment.

Thank you.

So please let everybody know that your shareholders are grateful.

Thank you. Thank you, Jeff.

As there are no further telephone questions, I'd like to turn the conference back over to our presenters for any additional or closing remarks.

Again, I started the call with a bunch of thank yous. I thank our employees, our shareholders, and our Board. Nobody was expecting something like we're going through, and I really appreciate the support from all three groups. We're working very hard on your behalf, shareholders, and we have a path forward. The good news is we're starting to see the markets open; and that recurring revenue surely helps. So thanks, everybody, for being on the call. We'll talk to you in a couple of months. Bye-bye.

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.