Transact Technologies Inc Q3 FY2022 Earnings Call

Good day and welcome to the TransAct Technologies Third Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Ryan Gardella, Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and welcome to TransAct Technologies third quarter 2022 earnings call. Today, we’ll be discussing the results announced in our press release issued after market close. Joining us from the company is CEO, Bart Shuldman and President and CFO, Steve DeMartino. Today’s call will include a discussion of our company’s key operating strategies, the progress on those initiatives and details on our third quarter financial results. We will then open the call to participants for questions. As a reminder, this conference call contains forward-looking 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 company, please refer to the company’s SEC filings, including its reports on Forms 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 in the company website. And with that, I’d like to turn the call over to Bart.

Thank you, Ryan, and thank you to everyone joining us on the call today. Our third-quarter results reflect the accumulation of many months of incredible work by the TransAct team, across every facet of the company. I’m incredibly proud of all of you at TransAct, and every team member contributed to the success we are seeing. After a very difficult couple of years, I believe we’re finally reaching an inflection point in the business and could not be more excited for the future. Last quarter, I discussed the efforts on the Engineering and Operations side to get production back to normal, addressing problems related to the ongoing worldwide parts shortage issue. I am thrilled that our production lines are back in full swing. I can confidently say we delivered a near-record number of Casino and point-of-sale printers in the third quarter, breaking several company sales records. Our Food Service Technology or FST side set record highs in terms of sales dollars for total FST revenue, label revenue, and total recurring FST revenue, which I’ll detail shortly. On the Casino and Gaming side, we saw another double-digit percentage increase in sales on the domestic side and yet another triple-digit sales increase on the international side. Suffice it to say, our R&D and operations ramped up production, resulting in massive success. Barring any unforeseen issues, we believe this momentum will continue. Before I go through the market results, I also wanted to provide an update on our cost-cutting initiatives and price increases, which I discussed in last quarter’s call and were fully in effect by September of the third quarter of 2022. These cost-cutting measures combined with the revenue growth resulted in a significant improvement in the flow through of our top-line revenue to the bottom-line profitability. We were thrilled to see our gross margin increased by 540 basis points. Let me start again. Sorry for the technical difficulties. These cost-cutting measures combined with revenue growth resulted in a significant improvement in the flow through of our top-line revenue to bottom-line profitability. We were thrilled to see our gross margin increase by 540 basis points while achieving both positive net income and positive adjusted EBITDA. What a great job by the TransAct team in getting us to this point. Now, let’s go through our markets in more detail, starting with FST. I cannot be more pleased with our results. As I just mentioned, we set several records. Our FST recurring revenue crossed over $2.5 million for the first time in a quarter, setting a new record high of nearly $2.6 million. While we saw increases across all three components of recurring revenue, label sales saw a particularly strong quarter and also set a new record high in terms of sales dollars. Combined with record high software sales and hardware sales in the quarter, we reached total FST revenue of $3.7 million for the quarter, which is a record for total FST sales dollars in a quarter. A lot of the positive momentum can be credited to our newly expanded sales force. Please keep in mind that our typical sales cycles are well over a year, and the expanded team has only been in place for less than six months. Some just joined us a few weeks ago. I’m really excited to see their early success, which we believe is setting the stage nicely for future performance. They have made significant inroads in the SMB vertical and have started to carve out new use cases for our industry-leading BOHA! Terminal and workstations, particularly in the grocery market, which we see as important for the TransAct brand going forward. The economics of the grocery aisle resemble very large convenience stores with heavy label usage, but with some additional software layered on top. In the third quarter, we added 988 paid terminals for a total of 11,929 currently in the market. I have received messages that people are having trouble entering the call. We continue to be optimistic about our results for the remainder of the year, and I am optimistic for 2023 and the future due to all the new sales opportunities our new sales team has identified. Our sales pipeline continues to look robust now more than ever. We are seeing great traction with a number of evaluations currently underway across well-known international brands, and our sales team is high gear working to close deals. While it will take time to close some of the opportunities in the pipeline, there is a real need for our technology, and we believe we will see positive momentum carry on through the end of the year and into 2023. With that in mind, we are reiterating our recurring FST revenue guidance for the full year of $8 million to $10 million. Now, I would like to speak about one large opportunity that should become a great success story for TransAct. We have been given approval to go into a final test with a very large QSR. The goal between our two organizations is to begin the sales process with their franchise organization in July of 2023. This is a substantial opportunity for TransAct, and we just need to finish some final design work and then undertake the final field test. We believe this will be the largest sales opportunity in the company’s history for a BOHA! technology. Before moving on, I wanted to touch on our ARPU for the quarter and it came in at $936 versus $861 sequentially. Our record FST recurring revenue helped fuel this gain, particularly with the strong performance from our label business. As a reminder, our target ARPU continues to be $1,000 to $1,200 per year. However, we are now selling several BOHA! Terminals that will replace our old 9700 AccuDate Food Safety Terminal, which will not generate any recurring revenue from the outset. While these units are included in our ARPU calculation and affect the number, the purchase price of these will be higher than our typical BOHA! Terminal or workstation sale, which will fall into hardware rather than recurring revenue. The BOHA! Terminals and workstations will also transition our customers onto our portal-based system, giving us the opportunity to upsell them to our various app offerings. Now, let’s discuss the Gaming and Casino market. Once again, we could have sold more products, but incredible demand is outstripping our supply, even as we ramp production significantly. For the third quarter, Casino and Gaming sales were $7.6 million, which is up almost 92% year-over-year. As I mentioned, we saw a solid double-digit gain in our domestic sales, and yet another triple-digit gain in our international markets. Our international success was achieved without much sales into the Chinese market, which is still affected by the COVID lockdown policy. As many know, our competitor in the Casino market appears to have a production issue, and we took on the task of ramping production as quickly as possible, despite the product shortages in the marketplace, to help our slot manufacturers with their sales to the Casinos. One slot manufacturer personally told me, 'Bart, we bailed them out.' There is no doubt the word is out that TransAct has supply, and new customers are coming in from across the globe to buy our epic line of printers. We continue to actively work on ways to increase our production to meet this record demand. We plan on increasing production even more in the fourth quarter of 2022, and we should experience higher sales as we ship more printers in the fourth quarter than we did in the third quarter. Additionally, we plan to boost production even more in the first quarter of 2023 to meet the demand we’re experiencing from customers around the world. We learned a lot at the G2E Show this year in Las Vegas and are working hard to produce more printers. I’d like to thank everyone we met at G2E for coming out and seeing our booths and product demonstrations. We had BOHA! in the booths, and we were pleased to see Casinos wanting to learn more about our back-of-the-house technology. We generated sales leads at G2E for BOHA! and have added this market to our focus list. It's fantastic to be back at trade shows like G2E, interacting with our customers and prospects, and showing them the power of our technology solutions all in one place. Now let’s move on to our POS Automation market. We also benefited from competitors’ inability to supply the market here, as we saw them ship a huge amount of our Ithaca 9000 printers to our key customers. This additional supply enabled us to start fulfilling backlog orders as well. Together, this resulted in sales of over $5.2 million, which was over 300% above our POS Automation sales from the prior year. It is important for us to continue our POS printer line and achieve a consistent level of production, as this leads us to dive further into the POS customers to cross-sell our BOHA! system. In closing, I want to quickly recap the highlights of the quarter. In FST, we’re seeing fantastic momentum in certain markets and feel confident in our growing pipeline going forward. We experienced record highs in our FST revenue. In Casino and Gaming, we’re actively taking shares in every geographic market we serve across the board due to our teams’ incredible success in ramping up production with the operations, R&D, and sales work we did. Our international sales were a real highlight, and we continue to see demand from these customers. Our price increases and cost reduction program resulted in a positive net income and adjusted EBITDA in the very first quarter they were fully implemented. We entered the fourth quarter of 2022 with $19 million of backlog. Taken together, it’s hard to imagine a better quarter for TransAct as a whole. With that, I’d like to hand the call to Steve to go over the numbers. But before I do, I hope people are finally able to join. I apologize for the issues in getting through. Okay, I’d like to hand over the call to Steve to go over the numbers.

Thanks, Bart, and thanks to everyone for joining us this afternoon. Let’s turn to our third quarter 2022 results in more detail. Total net sales for the third quarter were $17.9 million, which was up 68% from $10.6 million in the third quarter of ‘21. Sales from our Food Service Technology market, or FST, were up 14% to a record $3.7 million compared to the third quarter of ‘21. FST hardware sales decreased by 6% to $1.2 million, largely due to lower sales of our first generation AccuDate 9700 terminal to McDonald’s. Sales of our BOHA! Terminals and workstations remained relatively flat. We added 988 paid terminals during the third quarter of 2022 and finished with a total of 11,929 in the market. Our recurring FST sales, which include software and service subscriptions, as well as consumable label sales, were $2.6 million, also a record high and up 27% from the $2 million in the prior year. This improvement was due to record label and software sales in the quarter as well as higher service revenue. Our ARPU for the third quarter ‘22 was $936, which increased sequentially from $861 in the second quarter of 2022. The continued ARPU recovery is due to higher FST recurring revenue, which we’ve seen accelerate over the past two quarters. Our Casino and Gaming sales were $7.7 million, up 92% from the third quarter of ‘21 and 19% sequentially from the second quarter ‘22. Our international sales were up almost 190% year-over-year, and have continued to be very strong as we actively pick up market share, especially in Europe due to competitive dynamics. Domestic sales were also very strong, up 42% year-over-year. We also implemented our second price increase late in the third quarter, which began to positively impact our top line. As we mentioned last quarter, we’re seeing record demand. Although we’ve been able to increase production substantially, even in the face of worldwide supply shortages, we still sold out of Casino and Gaming printers in the quarter. We’re ramping up production even more in the fourth quarter, but still expect to be supply-limited against all the demand we’re experiencing. POS Automation sales more than quadrupled in the third quarter ‘22, increasing 340% from the prior year to $5.2 million. This jump resulted from significantly higher sales of our Ithaca 9000 printers to McDonald’s, due to dynamic competitive factors, with another key supplier unable to deliver products in the quarter. Additionally, our successful ramp in production allowed us to begin fulfilling our backlog of orders, which we were unable to fulfill sooner due to the ongoing chip shortage. Moving to TransAct Services Group or TSG sales. Overall TSG sales were down 42% to $1.1 million. This decrease was largely due to unusually high spare parts sales to a customer for our legacy lottery printers during the third quarter of last year, which didn’t repeat to the same extent this quarter. As a reminder, the TSG market is no longer a focus for us, and we expect sales to gradually wind down over time. Moving down the income statement, our third quarter gross margin was 45.9%, up from 40.5% in the prior year quarter. Gross margin was positively impacted by 68% higher sales, especially in the Casino and Gaming market, as well as two rounds of price increases we instituted late in Q1 and again in September 2022 to mitigate higher product and shipping costs related to chip shortages. While we originally anticipated gross margins to dip in the third quarter, the leverage from additional sales was more than enough to overcome this. As a result, our gross margin actually rose sequentially by 290 basis points from the second quarter. Our operating expenses for the third quarter increased by $1.9 million or 32% from the significantly lower COVID-impacted spending levels of the prior period. However, sequentially expenses were down 7% to $7.8 million resulting from our cost-saving initiatives. Breaking this down a little, our engineering and R&D expenses increased 6% to $2 million, largely due to hiring additional software developers in late 2021 for BOHA! software development. On a sequential basis, our engineering and R&D expenses were down 9% due to cost reduction initiatives. Our selling and marketing expenses increased 45% to $2.7 million due to additional investment in marketing programs, the return of trade show and travel spending to pre-COVID levels, and the further expansion of sales and customer support staff to support our BOHA! products. However, sequentially our selling and marketing expenses were down 17%, again due to cost reduction initiatives. Lastly, our G&A expenses increased 43% to $3.1 million. This increase included an across-the-board salary increase, hiring additional accounting and finance staff, recruiting fees, higher professional fees, and expenses related to the rollout of our new ERP system, NetSuite. Turning to operating income, we generated operating income of $387,000 or 2.2% of net sales in the third quarter of ‘22, which compares to an operating loss of $1.6 million in the prior year. On the bottom line, we recorded net income of $528,000 or $0.05 per diluted share, compared to net income of $901,000 or $0.09 per diluted share in the year-ago period. However, our EPS of $0.09 for the prior year third quarter included a $2.2 million gain on the forgiveness of the PPP loan from the SBA under the CARES Act. After removing this gain, we incurred an adjusted net loss during the third quarter of ‘21 of $1.3 million or $0.13 loss per share. Finally, I’m pleased to report that we generated positive adjusted EBITDA of $1.2 million in the third quarter of 2022, compared to negative $1.2 million in the prior year period. In terms of liquidity, we finished the quarter with $6.4 million in cash and $2.25 million in debt outstanding under our newly amended Siena credit facility. Based on our internal projections, we believe we have sufficient cash on hand and borrowing capacity under our Siena credit facility to fund our business through at least the end of ‘23. With that said, I’d like to turn the call back to Bart for any closing remarks.

Thanks, Steve. Once again, a great job. Before I open the call to questions, I want to let our shareholders know that I’ll be in New York City next week attending two investor conferences. Hopefully, I will see many of you, and I’d gladly meet you at the conferences, or if necessary for coffee, drinks, or dinner after. Just let me know. With that, operator, please open the call to questions.

Thank you. We’ll take our first question from the line of Jeff Martin with ROTH Capital Partners.

Steve, hope you’re doing well. I apologize, I was one of those that had a tough time getting on the call. Bart, you mentioned a large QSR order or a customer in the pipeline. I’m just curious how long you’ve been working with them and what stage they are currently at. You gave us a timeline of mid-year ‘23. What needs to happen between now and then? It would be helpful. Thank you.

Yeah. So we’ve been working with them for quite a while. They had some requirements that we worked on, and we’re just about finishing up. So we went in and demonstrated the final product to them and received the thumbs up. Based on the response we got, we checked off all the boxes as they put it. We’ll finish that up now that they approved it and start our final test as we get to the end of spring. The two organizations agree that we could start a rollout in early July 2023.

Okay. And care to disclose how many franchisees they have?

Well, I actually don’t know how many franchisees they have. I know that for all the different geographic areas, the addressable market we’re going after probably approaches 20,000 stores.

Okay, great. And then you may have touched on this in your prepared remarks, but in terms of pipeline development, what kind of progress did you see in the quarter? Are we starting to get to the point where larger restaurant organizations are less focused on labor issues and input inflation costs? Just curious if you’re seeing any kind of undamming of the sales process with respect to back-of-house purchase decisions?

Yeah. So if you break our FST business into three markets—convenience stores, grocery aisle, and Casino market—each has its own dynamics. The grocery aisle is another area we’re focused on, again related to fresh food and FDA labeling requirements, which have substantial opportunities. Response from the Casino market at G2E was very positive. They run restaurants as well, so it's a logical fit. The restaurant market has been the hardest segment due to past challenges, such as the pandemic and operating amidst high inflation. However, with our new sales team, we’re starting to see real traction with large customers. One large opportunity has advanced significantly, and there are many restaurants in the pipeline showing potential movement forward. We are starting to see that restaurants are opening up to our technology despite labor shortages and inflationary issues.

Okay. And then I may have missed it. But you gave updated terminal installation guidance for the year. I know you reiterated the recurring revenue guidance.

No. We didn’t update that. We’re running at about 1,000 terminals a quarter. Barring any unforeseen issues, we just aim to keep going forward and work with these large opportunities to get them through when they happen.

We’ll take our next question from the line of George Sutton with Craig-Hallum.

Thank you. Bart, congratulations on the great numbers. Relative to your discussion around the traditional sales cycle of a year and the fact that you brought on a lot of new salespeople over the past six months, I think the suggestion was that we are in front of even better news because those folks have not yet really become productive. Am I hearing that correctly, or was there anything that has accelerated the sales cycle we should be aware of?

It's a combination of both. Our salespeople are coming up to speed. But also, the restaurants weren’t ready. We’re seeing some exciting prospects as our sales force expands, which should drive growth in the pipeline. We are also developing our SMB market, as we now have three people in digital sales, which tends to close very quickly. The combination of a larger sales force and the evolving situation at restaurants is facilitating our sales efforts.

Can you talk about the impact of the G2E Show on your printer business? What has that meant? And can you also discuss your supply situation regarding the standardized chip?

The demand side continues to surprise us. We ramped up in the third quarter with capacity constraints. We’ve now decided to put a fourth line in, driven by demand. Currently, we have a $19 million backlog, and we hold orders we have not accepted yet due to delivery dates, which may push that backlog north of $30 million. The Casino market continues to impress, and we are ramping up as quickly as possible to meet this demand. We’re seeing record sales for Casino in the fourth quarter, and if the fourth line aligns, we expect record sales for the first quarter.

So to be clear, the growth and shipping capabilities are no longer a chip issue; now it’s production capacity that can be managed via hiring and building out facilities?

There’s no doubt the issues we faced have been largely resolved by our redesign and moving to our new processor. I can’t promise there won’t be a part issue that arises out of nowhere, but currently, our focus is on production capacity. We’re managing our ramp to meet this demand effectively.

Regarding the backlog difference between $30 million and $19 million, is the delta largely attributable to order class from your competitors’ capacity issues?

Yes. They’re waiting for delivery dates from us, so we need to stabilize production through the fourth quarter into the first quarter before we can share those dates. These orders will be entered; it’s about matching those purchase orders to our production and delivery.

We’ll take our next question from the line of Mitchell Sacks with GS Asset Management. Your line is open.

Can you hear me?

Yes.

Good. Hey, congrats on the quarter, guys. First question is around the backlog. In respect to the $19 million, when do you expect that to be filled?

Most of it’s for the fourth quarter, and some for the first quarter.

Yeah, I would say the majority of it will be fulfilled over the next six months, Mitch.

Okay. And in terms of additional orders that you’re holding off on, is the gating factor now those production lines rather than parts? If you could talk through a bit about the capacity changes?

It’s about getting that production line up. I can’t say 100% that we won’t encounter a part issue. But right now, we are focused on ramping up production capacity as all component parts need to work in synchronization.

Sure. And regarding the QSR opportunity, is that purely a franchise organization? Do they also have corporate stores?

Yes, they are both, but they’re mainly franchise operations with some corporate stores.

So you would be billing the franchisees, not corporate, for the recurring revenue and for the equipment?

That’s right, Mitch. The rollout will start, and we can sell to the franchisees in July. I can’t tell you that going to be a quick ramp-up or a slow ramp-up, but from a need standpoint, they need the technology.

Are you in conversations with large franchise groups? Is it being pushed bottom-up or top-down?

It has been pushed both ways. We’ve had some real needs in the marketplace, and through our franchise networks, they tested our product, which has strengthened our position.

Okay, cool. Great. Thanks a lot, Bart.

Our next question comes from the line of Jeff Martin with ROTH Capital Partners. Please go ahead.

Thanks. Bart, wanted to see if there’s any insight on 7-Eleven and their integration of Speedway. Are we growing closer to the potential knowing whether they’ll roll out the labeling BOHA! Terminal to their Speedway terminals?

The second half of this year has been their big focus on integrating Speedway. I think 900 people were laid off, including some of the people we worked with. We’re currently in a maintenance mode. What their approach to Speedway is still unclear, but I don’t think they will roll out anything new to those stores yet.

I was also curious if you could give us some relative perspective on label sales in the quarter. Are we at a sustainable level of label sales now, or was there some catch-up in the quarter?

No, it’s becoming predictable. As long as we don’t face a major outbreak, the business has been steady. Every time we put out 1,000 terminals, and let’s say 800 of them are recurring revenue terminals, we will gain revenue from those. It’s about getting those additional units out and online, and following through with software and service revenues, which will help grow our label business.

Great. I think you mentioned the AccuDate didn’t ship a lot of terminals this quarter. Does that mean we might see a significant hardware uptick in FST in the ensuing quarters?

We have shipped a lot of 9700s in the quarter. The technology for that product is aging now, technically. We are working to switch customers to the new BOHA! terminal and workstation. Once they make that decision, there is potential pent-up demand regarding hardware revenue.

Okay, thanks, Bart.

Thanks, everyone. Let me apologize once again for the issues people had in getting on the call. We’ll address this to ensure it doesn’t happen again. I thank our shareholders for their support. There’s no doubt that 2020-2021 were challenging years for us, compounded by significant parts shortages. Thanks to my team at TransAct for navigating through it and bringing us back to profitability. I also want to thank the Casino business for recognizing our product availability and purchasing volumes. I look forward to speaking with you again next quarter and hope to see many of you in New York City next week. Thank you.

This concludes today’s call. Thank you for your participation, and you may now disconnect.