Earnings Call Transcript - TACT Q1 2025

Operator, Operator

Greetings, and welcome to the TransAct Technologies First Quarter 2025 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ryan Gardella, Investor Relations. Please go ahead, sir.

Ryan Gardella, Investor Relations

Thank you. Good afternoon, and welcome to the TransAct Technologies first quarter 2025 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, John Dillon; and President and CFO, Steve DeMartino. Today's call will include a discussion of the company's key operating strategies, the progress of these initiatives and details of our 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 reports on Form 10-K and 10-Q. TransAct undertakes no obligation to revise or update any forward-looking statements to reflect eventual circumstances that occur after the call. Today's call and webcast will include non-GAAP financial measures in 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. And with that, I'd like to turn the call over to John.

John Dillon, CEO

Thanks, Ryan, and good afternoon, everyone, and thanks for joining us today. I'm pleased to report that TransAct started off 2025 with a strong quarter, delivering record BOHA Terminals sales. We had 2,350 units, which surpassed last quarter's results, which I believe were 16,139 units. This performance in our foodservice technology or FST business is a high bar for the year and why we believe it's likely to be our strongest quarter for 2025. We're pleased with the strength and execution of our revised go-to-market strategies and the dedication of our reorganized sales team. So let me start by reviewing some of the FST highlights for the quarter. First, total FST revenue increased to $14.9 million, up an impressive 49% year-over-year, driven largely by hardware sales. Recurring FST revenue remained stable, and we're happy to report positive net income and adjusted EBITDA for the quarter, demonstrating that our operational and cost discipline is delivering positive results. Clearly, we're encouraged by this momentum, and our team is excited about what the potential for the future. The key driver for this quarter was the conversion of 3 Tier 1 customers from our first-generation BOHA Terminal to the BOHA Terminal 2. These upgrades include rollouts with a major QSR and convenience store chains and highlight the confidence our customers have in the platform. The Terminal 2 is streamlining operations, driving efficiency, and that sales story is resonating. The feedback we're getting is positive, which fuels our optimism for continued growth. Our sales teams refined lead tracking and nurturing processes, which I spent significant time and effort overhauling are paying off with what I consider well-scrubbed pipeline. A lot of times, pipelines are kind of a mess, but we're feeling like we're in pretty good shape, and it's holding steady quarter-over-quarter. We also, as previously reported, continue targeting the about 40,000 unit AccuDate 9,700 installed base. This was a prior terminal, probably the baby terminal in the early days, then we had the Terminal 1, then we had the Terminal 2. So that's a significant long-term opportunity, and we're targeting that, I believe, effectively. Our success in the convenience store market demonstrates a solid footing that we're finding with this Terminal 2. We secured a major BOHA Terminal 2 upgrade order with a leading national convenience store chain that operates over 700 locations. What started out as a simple pilot has expanded into a full rollout. The chain is replacing legacy workstations to enhance food safety, labeling, and operational tests. The rollout showcases our growing traction in the convenience store vertical, which we believe is an important vertical, and there's a lot of headroom there and opportunity in the future. We're seeing strong adoption in this subvertical and expect this win to unlock further opportunities as we move forward. The success reinforces the commitment to what I call a land-and-expand strategy where we secure initial deployments and then grow our footprint over time. Being a little glib here, simple wins, easy expansion. The product is probably the best salesperson we have on the staff. It works well. It's reliable. It delivers the value we promise. And once we get that unit in the store and operational, the customers easily see the advantage, and that's the way we expand the business. We're very proud to demonstrate the power of the terminal and its applicability across a large range of industries. In Q1, we got a contract with a national healthcare food service provider to deploy BOHA terminals for nutritional labeling and compliance in hospital and care facility kitchens. This new use case in a large subvertical demonstrates the flexibility of the technology, how it adapts seamlessly to different demands for different industries; in this case, healthcare, yet delivering the same reliability that the restaurant and food service customers, the typical food service customers that we target rely on. This foothold opens new growth avenues and proves that BOHA is a versatile platform built for innovation, and we think we can serve a number of different industries. We're excited to explore that, and we believe the terminal can drive a lot of value. Shifting over to casino and gaming, we're seeing the rebound that we forecasted last quarter with notable strength in our domestic markets. We recorded casino and gaming revenue of $6.7 million, up 18% year-over-year and 41% sequentially. The growth was driven by improving market demand, as we highlighted on our last call, and we're pleased that all of our major US OEM partners have returned to what we call buying positions after resolving the prior inventory oversupply. A new win with a major OEM also was a significant contributor to this quarter's success, and we're eager to deepen the partnership with that supplier moving forward. Our new Epic TR80, which is a thermal roll printer, has now fully entered the market and is available for purchase. It handles printing for sports betting kiosks, video lottery terminals, and other non-casino gaming applications. And during Q&A, if somebody wants to know what those are, I'd be happy to help describe that, but it's not betting the same way. It's more like a lottery system for things like a Lions Club or a rotary club or a veterans home. Anyway, the TR80 is gaining momentum, and we expect sales to climb steadily through 2025, complementing the existing casino and gaming portfolio. Additionally, our partnership with CasinoTrac continues to drive EPICENTRAL sales through their SlotSUITE offering, which generates subscription-based revenue that enhances player engagement and supports our recurring revenue income stream. We are mindful of the macroeconomic uncertainties, yet we see no systemic challenges in the mid-term for our casino and gaming business and the industry's somewhat slow and pretty jerky, but nonetheless, headed up to the right; the recovery gives us confidence for the year ahead. Next, let me provide you with an update on the strategic review process. As you've likely seen in our press release, the Board of Directors and management have determined that it would be most appropriate to suspend the process for now, due to increasing levels of uncertainty in the macroeconomic environment at this time. And then given the increased momentum in both the FST and casino business, we think slowing down right now is the best strategy, and yet TransAct and our Board and management feel the intention to focus on incremental growth now executing on our corporate plan, and in order to expand the business and invest, we're prudent, yet retaining a commitment to disciplined spending. If and when conditions seem more favorable and/or opportunities arise, the Board and management will jump right back into resuming the process as always, the Board is committed to maximizing stockholder value and is constantly evaluating that strategy to achieve that goal. Before I turn the call over to Steve, I wanted to provide a brief update on our financial outlook for 2025. We're maintaining a full year revenue guidance of $47 million to $52 million with adjusted EBITDA now expected to range from breakeven to negative $1.5 million. That moves the bottom end of the range up by $0.5 million based on a solid first quarter. The ranges we assume, we see continuing to be based on recovery in casino and gaming throughout the year without any unexpected disruption in either supply or demand. While we believe this will be the case, we felt it was important to highlight this with some additional color. We have a strong balance sheet, ample working capital to provide a buffer against economic and potential uncertain headwinds. We are pretty strong in the area of cost discipline, evident in Q1's positive EBITDA, and positions us well for the year. So I'm pretty comfortable with that. And in summary, we're pleased with the strong first quarter. We achieved record BOHA! terminal sales. We delivered positive net income and EBITDA and drove robust growth in FST and casino and gaming sales here to be back. The BOHA! platform is demonstrating its value to customers in convenience stores, healthcare, and beyond. We're seeing the rebound we anticipated last quarter in casino and gaming, including a win with a new OEM customer that helped us generate strong results for products like the TR80. We're focused on execution, improving processes and fiscal discipline as I believe you hope we would be. And net-net, I'm pleased with the results for the quarter and confident in our team's ability to execute during the remainder of the year. And with that, I'd like to hand the call over to Steve for a detailed review of the financials.

Steve DeMartino, President and CFO

Thank you, John, and thank you everyone for joining us today. Let's dive into our first quarter results in more detail. Our total net sales for the first quarter were $13.1 million, which is a 28% increase from the previous quarter and a 22% increase from $10.7 million in the same period last year. Sales from our foodservice technology market for the first quarter reached $4.9 million, representing a 14% sequential increase and a 49% increase compared to $3.3 million last year. Our recurring sales in the FST segment, which include software and service subscriptions along with consumable label sales, amounted to $2.7 million. This figure is down 3% sequentially, but up 10% from $2.4 million in last year's first quarter. Our average revenue per user for the first quarter of 2025 was $761, which is a 13% decrease sequentially but a 15% increase year-over-year. As mentioned in previous calls, we continue to sell numerous BOHA! terminals to a major quick-service restaurant without associated recurring revenue initially, which currently affects our ARPU. In this quarter, many terminals fell into that category, and we expect this trend to continue in the near term. Our casino and gaming sales were $6.7 million, an increase of 41% sequentially and 18% year-over-year, reflecting the market recovery John mentioned and sales from a new OEM win coupled with normalized buying levels from major OEMs. Our POS automation sales for the first quarter declined 5% from the prior year to $618,000, due to a strong competitive landscape as other market participants restored their supply chains. We will continue to adjust pricing if necessary to stay competitive. Moving to the TransAct Services Group, or TSG, sales for the first quarter were down 22% year-over-year to $808,000, primarily due to strong demand for legacy spare parts in the previous year period that did not repeat. We anticipate TSG sales will remain around this quarterly run rate going forward, consistent with normalized demand. As for our income statement, our first quarter gross margin was 48.7%, down from 52.6% in the prior year, mainly due to a higher proportion of lower-margin FST hardware sales compared to our casino and gaming products. Looking ahead, we expect our gross margin to stay in the mid- to high 40% range for the rest of 2025. I also want to briefly address our tariff exposure and its impact on product costs. Currently, we have implemented a small tariff surcharge on applicable imported items, primarily our casino and gaming printers, to maintain our margins. I want to point out that our BOHA! terminals are presently exempt from any tariffs. We will keep monitoring this situation and provide updates as necessary. As for our operating expenses, total OpEx for the first quarter fell by 8% from the same quarter last year to $6.4 million. This year-over-year decline reflects the impact of several cost reduction initiatives we implemented in 2023 and 2024, resulting in annualized savings of about $5 million. We have begun to fully realize these savings in the second half of 2024 and expect to continue doing so throughout 2025, although somewhat offset by typical annual cost of living adjustments and other inflationary increases. Our engineering and R&D expenses for the first quarter were down 17% year-over-year to $1.6 million. Our selling and marketing expenses remained steady at $2.1 million, while our G&A expenses fell by 8% to $2.7 million. On the operating income side, we just missed breakeven for the first quarter, reporting a slight operating loss of $15,000, or negative 0.1% of net sales, compared to an operating loss of $1.3 million, or negative 12.2% of net sales in the previous year. I'm pleased to report that we achieved positive net income of $19,000, which resulted in earnings per share of $0, in contrast to a net loss of $1 million or a $0.10 loss per diluted share last year. Our adjusted EBITDA for the quarter also turned positive, reaching $544,000, up from a negative $701,000 in the same period last year. Lastly, regarding our balance sheet, it remains solid. Our cash and cash equivalents stood at $14.2 million, consistent with our year-end cash balance of $14.4 million, and our debt balance remained unchanged from year-end, with only $3 million in required minimum borrowings under our $10 million credit facility. Overall, our liquidity position continues to be strong.

Operator, Operator

At this time, we will be conducting a question-and-answer session. The first question now we have comes from Jeff Martin of ROTH MKM. Please go ahead.

Jeff Martin, Analyst

Thanks. Good afternoon, John and Steve. Hope you're both doing well. John, can we start on the FST pipeline? You mentioned that it's stable. How is conversion progressing? And what end markets are you seeing the most traction in currently?

John Dillon, CEO

I had you all on mute to avoid the noise from a leaf blower outside. Just joking, but there's some truth to it. Great question, Jeff. The FST machinery is performing quite effectively. We had to redo much of it. Initially, we thought fine dining restaurants would be significant users of our technology, but their challenges are less complex compared to large food service management companies and the grab-and-go market. In grab-and-go, where you prepare food products that require nutritional labeling, the applications need to be sophisticated. You need to know the ingredients and have access to a database for calorie counts, glycerides, cholesterol, fat content, sugars, sodium, and other details that must be included on the label, along with production and consumption dates. We're excelling in this area, particularly with grab-and-go sushi, which is made fresh daily. This raises consumer concerns about food safety, so it's crucial to have robust technology in place, and we are doing well with several major national sushi suppliers who don’t operate stores but provide sushi products displayed in counters and containers with high-quality labels, many printed using the TransAct BOHA! Terminal. Another strong area for us is food service management, with clients such as Sodexo, Aramark, and Compass Group. They manage large facilities, whether it’s a rest home, sports stadium, hospital, college campus, or a major manufacturing location, feeding anywhere from 5,000 to 20,000 employees across multiple stations. They need advanced food service technology, and we’re performing well in that segment too. Additionally, we see an opportunity in the medical sector. A few quarters back, we secured a deal where we supplied Temp and Sense capabilities for senior living facilities, equipping all small refrigerators that store controlled medicines. It’s vital that the temperature in these refrigerators remains stable as the effectiveness of the medicines can degrade, and we don’t want to risk harming anyone by providing compromised medication, especially when those medicines can be costly. We're gaining traction in the hospital and medical food service markets, with developing partnerships with suppliers who already have established relationships in the industry, allowing us to integrate our technology. We're enthusiastic about this emerging opportunity as well.

Jeff Martin, Analyst

Great. And then could you touch on pipeline conversion for CAC ST?

John Dillon, CEO

It's looking positive. We brought on six new clients this past quarter, which are brand-new customers with the potential for approximately 1,800 units over time. We’re keen on the land and expand approach. Our conversion rates are strong, and we're continuously refining the metrics related to Customer Acquisition Costs and Lifetime Customer Value. We're enhancing our pipeline management by focusing on who we target as potential customers, analyzing engagement within those clients, and marketing to them while monitoring conversion rates from initial interest to opportunity. This involves tracking Marketing Qualified Leads that are handed off to sales teams for conversion into sales-qualified leads and monitoring various steps in the sales cycle, including close rates. By examining yields at each step, we identify inconsistencies that suggest there may be an issue—whether it’s pricing, technology, or our approach. It’s a broad process, but we are actively working on improving yields across around 15 different steps. Although it’s complex, we feel that our processes are becoming more effective, and we are gaining a better understanding of what works.

Jeff Martin, Analyst

Okay. And then with respect to the QSR rollout, where are we? If you want to use a baseball analogy, what inning are we in, in terms of fulfilling as many of those 40,000 legacy units as possible?

John Dillon, CEO

I'd say we just finished maybe the second inning or possibly the third inning. I'm not sure if it's a home team or the visitors, but things are going really well. We don't view that client as a new customer per se, but there have been a few instances where we've entered entirely new markets where we had no presence before. Historically, we were only allowed to sell our product in North America, but now we have permission to sell globally. This means we can operate in every country where that QSR is present, which represents a significant market opportunity. So far, the response has been very positive and successful.

Jeff Martin, Analyst

And then, last one for me. As we look at the revenue guidance range maintained at $47 million to $52 million, anything we should consider in terms of how that comes in on a quarter-by-quarter basis over the balance of the year?

John Dillon, CEO

I don't think so. I think we tried to provide some guidance that says we think that we can continue to improve the year-over-year performance. But the business still is lumpy. We mentioned we had a convenience store operation that has 700 units that upgraded with an enormous number of upgraded terminals from basically the prior terminal to the BOHA! 2. And those orders happen, but they're lumpy. We take revenue when we ship. So sometimes they want it all at once, sometimes they don't. So I think you should assume that the business will still have a little bit of ups and downs in it. But I think what we're saying is, quarter-over-quarter, when we look at it year-over-year, I think we can say that we expect that we can continue to improve.

Jeff Martin, Analyst

Thank you.

John Dillon, CEO

Thanks, Jeff.

Operator, Operator

At this stage, there seem to be no further questions. I will now hand the call back to John Dillon for closing remarks. Please go ahead, sir.

John Dillon, CEO

Thank you very much. And once again, everyone, thank you for joining us, thanks for your support. We look forward to talking to you if you're interested in conversations during the next quarter, but of course, again in August on our next quarter two earnings call. And again, thank you very much. If it's summer coming up, I hope you have a great summer vacation and we're looking forward to continuing to deliver on the promise. Thank you.

Operator, Operator

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.