Greetings, and welcome to the TransAct Technologies' Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Gardella, Investor Relations. Thank you. You may begin.

Thanks. Good afternoon, and welcome to the TransAct Technologies' Third Quarter 2024 Earnings Call. Today, we'll be discussing the results announced in the press release issued after market close. Joining us from the company is CEO, John Dillon; and President and CFO, Steve DeMartino. Today's call will include a discussion of the 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 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 Forms 10-K and 10-Q. TransAct undertakes 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, reconciliation of all non-GAAP financial measures to the most directly comparable financial figures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website. And with that, I'll turn it over to John.

Thanks, Ryan, and good afternoon, everyone, and thank you all for joining us today. Total sales for the quarter were $10.9 million. We had excellent progress in the FST foodservice technology space, highlighted by 1,355 units sold, meaning that in the last two quarters, over the last six months, we've sold 2,800 units, and we're feeling pretty good about that. We're proud of the sales progress we've made with the team, and we expect this approximate level of quarterly terminal placements to continue as we head into 2025. So that's some pretty good news. But let's walk through some of the other FST highlights. First, the FST revenue line was $4.3 million, up 2% year-over-year and 3% sequentially. The FST recurring revenue was $2.9 million, down 8% year-over-year, but up 3% sequentially on continued strength from several of our large chain customers. FST hardware sales were up 30% year-over-year and approximately 3% sequentially. In Q3, we sold 1,355 units in the quarter, which was up 90% from the prior period a year ago. We believe this momentum is just the start from the reorganization and refocusing of our FST sales group. We're going to continue to fine-tune the process, but fundamentally, I believe that we've got the right directionality here. We've made excellent progress. We've improved the lead process, which we didn't do very well in the past, and now it's beginning to work pretty well. Sales will continue to be lumpy as we are an enterprise B2B company. When enterprises buy, they usually buy in lumps. We use a land and expand strategy somewhat where a client will start with our technology and then buy more. The current run rate of terminal placement is sustainable, which is encouraging for us. The rollout of our Terminal 2 to our large QSR client continues as planned with a large number of terminals placed this past quarter. The feedback on the product continues to be overwhelmingly positive, and we even sold about 100 units to a sushi customer in the quarter, which is also a good sign. We have a couple of large convenience store customers set to upgrade their entire installed base of some of our older units. We sunsetted the AccuDate 9700 terminal at the end of 2023, which means all those units installed are available for potential upgrades to the new BOHA! Terminal 2. We added 12 new BOHA! clients in the quarter, representing an opportunity for about 2,400 units over time. The New business pipeline remains strong. Quarter-over-quarter differences in the 4-quarter pipeline remain solid and consistent. I'm feeling very good about the pipeline coverage compared to the target revenue goals we set for the sales team. Moving on to casino and gaming, we reported revenue of $4.5 million, down 50% year-over-year. However, on a positive note, we're seeing continued normalization of this market as we predicted on previous calls. On the inventory side, we're down to just one major OEM stuck in an oversupply situation, and we're actively working with this client to reconfigure their existing stock for other markets to help them accelerate liquidation and begin buying product from us again. We expect them not to be buyers until at least the start of the year. Anecdotally, casino activity seems to be slowing a bit. We were at G2E in Las Vegas and got a sense that the gaming industry is a little slow. We think it’s macroeconomic factors impacting this trend into 2025. We're also seeing increased sales traction with our Epicentral product due to our partnership with CasinoTrac. CasinoTrac is selling Epicentral as part of their Slot Suite product offering on a subscription basis. We like subscription revenue, especially when it's software. We believe this could represent significant white space for us in the casino market, and we're excited about that over the long term. Regarding our strategic review process, we are working hard on the process, and we promise to update everyone via the appropriate channels as soon as we have something to report. Due to the unexpected lengths of demand lag in casino and gaming, we feel it's most prudent to revise our revenue outlook to a range between $43 million and $45 million, while our adjusted EBITDA range will remain the same as we've been very disciplined on the cost side of the business. In summary, we are pleased with the progress, particularly on the FST side of the business. Year-over-year terminal placement is up 90%. We continue to see additional demand from several larger key FST customers. The Terminal 2 product is one of the best products we've developed, and I'm really excited about the potential. We're getting strong positive feedback and growing sales opportunities. The process improvements have started to show results. On the casino and gaming side, we are optimistic about resolving and normalizing dynamics in the first half of 2025.

Thanks, John, and thanks, everyone, for joining us today. Let's turn to our third quarter results in more detail. Total net sales for the third quarter were $10.9 million, which was down 6% sequentially and down 37% compared to $17.2 million in the prior year period. Sales from our foodservice technology market were $4.3 million, which was up 3% sequentially and up 2% compared to $4.2 million in the prior year period. Our recurring FST sales were $2.9 million, up 3% sequentially, but down 8% compared to $3.1 million in the prior year period. Our ARPU for the third quarter was $700, down 3% sequentially and down 25% compared to $929 in the third quarter of last year. We are currently selling a number of BOHA! terminals to a large QSR with no recurring revenue initially attached to them, which drags our ARPU number. We had approximately 5,300 terminals come offline due to the loss of a C-store customer discussed on our first quarter call. The new online terminal number and ARPU will be reflected in our fourth quarter results, but we expect our ARPU to rise to around $800 once these changes occur. Our casino and gaming sales were $4.5 million, down 50% from the third quarter of 2023, primarily due to one remaining large OEM customer who continues to work down high levels of printer inventory they stockpiled during the supply crisis in 2023. On the positive side, all other large OEMs resumed buying again in the third quarter. POS automation sales decreased 30% from the prior year to $1.1 million due to difficult comparisons against unusually high sales in 2023, and competitors are now back online, creating a more normalized competitive environment. We are adjusting our pricing to align with these new dynamics. For the TransAct Services Group, TSG sales were down 62% year-over-year to $864,000 due to unusually high sales of legacy lottery spare parts in the prior year. We expect current quarterly sales levels for TSG to represent our new run rate moving forward. Our third quarter gross margin was 48.1%, down from 51.9% in the prior year, primarily due to lower sales volume including significantly lower casino and gaming sales which have higher margins. We expect our gross margin to continue in the mid to high 40% range as we head into 2025. Total operating expenses for the third quarter decreased by 22% year-over-year to $6.1 million and were also down sequentially by 7%. The year-over-year decline is largely due to savings achieved from two successful rounds of cost reductions totaling $5 million on an annualized basis. We estimate that these cost reduction initiatives will continue to provide their effects in the fourth quarter; however, we will see an uptick in marketing expenses due to annual trade shows. Our engineering and R&D expenses for the third quarter were down 35% year-over-year to $1.6 million. Our selling and marketing expenses were down 22% to $1.9 million, and our G&A expenses were down 10% to $2.5 million. Our operating loss was $837,000 or negative 7.7% of net sales compared to operating income of $1.2 million or 6.9% of net sales in the prior year period. We recorded a net loss of $551,000 or $0.06 per diluted share for the third quarter, compared to net income of $906,000 or $0.09 per diluted share in the year-ago period. Our adjusted EBITDA for the quarter was negative $204,000, down from $1.7 million for the third quarter of last year. Our balance sheet remains solid with over $11 million in cash and only the minimum required $2.25 million of borrowings under our credit facility. Our liquidity position continues to be strong. With that, I'd like to turn the call over to the operator for questions.

The first question is from George Sutton from Craig-Hallum Capital. Please go ahead.

Hey, good afternoon, guys. This is Logan on for George. I wanted to start on the casino and gaming side. Can we double-click on the one OEM that you guys mentioned is still in oversupply? I want to ensure I understand what you are doing with them to work through that. It sounded like you discussed liquidating or repurposing, and I have a follow-up to that regarding your perspective on the competitive environment relative to your ability to take market share.

Steve, yes. The way I expressed it is there are different configurations for other markets. For a large OEM who makes various gaming systems, it's possible that the printers in oversupply for one geographical market may work well in another. We're optimistic about being able to make some slight changes to existing inventory to move it out to other markets without oversupply. So we're working on that with one of our large OEMs.

Logan, we sometimes add or remove accessories depending on the geographic market or load different firmware based on the games. These reconfigurations are what John referred to.

Additionally, what can you tell me about the competitive environment there? Typically, you guys compete with one other player. Can you share what that looks like?

Yes. The other competitor was absent during the recovery from the pandemic but is back now. We tend to do well head-to-head, especially for placements in new casinos and construction projects. We maintain strong inroads, yet it’s early to tell how much our efforts will affect future business with existing customers.

The next question is from Tyler Nguyen from ROTH Capital Partners. Please go ahead.

Good afternoon, guys. I had a quick question on your FST. You added 13 clients in the second and third quarters. How is your average client size trending? What is the initial order attachment rate for new clients versus a gradual ramp over time?

That’s a complicated question. We focused our team on large operations, meaning our typical new client will buy a minimum of 50 to 100 units. We target larger clients for significant growth, but if a smaller client approaches us, we are open to that for brand experience. With our land-and-expand strategy, initial orders might be small, but we aim to prove our technology, making follow-ups easier. On average, we'd estimate a couple hundred units based on our new customer additions this quarter. Selling to existing customers is much easier and more cost-effective than landing new ones, so that's the focus of our sales team, and it's working well.

Are there any specific end markets your clients are in?

We sell across five sub-verticals within the foodservice industry: quick-service restaurants, convenience stores, sushi operations, restaurants, and food service management companies. We are learning a lot from these different sectors and understanding the ROI our clients see from BOHA! installations. Our salespeople are improving in sharing success stories, enhancing our close rates as we refine our go-to-market strategy.

Regarding improved conversion rates in 2025, what is driving that?

It's about the process. We now understand that a lead is simply a name at the lowest common denominator. By measuring engagement metrics, our ability to transform a lead into a closed deal improves. The marketing and sales teams work closely, and we've established goals for everyone. Improvements across the tracking system help us refine our process, and we feel confident in executing effectively moving forward.

You mentioned that gaming casino customers are working through excess inventory. When do you anticipate a return to normal activity?

It's challenging to determine a timeline. The pandemic affected everyone in gaming. Many vendors had stock outages and over-purchased. We’re seeing a brief slowdown now but do not foresee long-term issues. We expect some of the challenges to resolve in 2025 as we reach a new normal.

This concludes the question-and-answer session. I would like to turn the floor back over to John Dillon for closing comments.

Thank you for joining us today. We feel good about FST, and we believe that the gaming casino market is reaching new normalcy by 2025. We are focused on working through the remaining OEM stock issues and remain heads down on cost control while improving operations. I’ll be attending the ROTH Conference in November, and I’m open for one-on-ones or calls at any time. If I don’t speak to you, enjoy the coming holidays. Thanks a lot. God bless.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.