Earnings Call Transcript - TACT Q2 2025

Operator, Operator

Hello, and welcome, everyone, joining today's TransAct Technologies Second Quarter 2025 Earnings Call. Please note this call is being recorded. I am standing by should you need any assistance. It is now my pleasure to turn the program over to Ryan Gardella from Investor Relations. Please go ahead.

Ryan Gardella, Investor Relations

Thank you. Good afternoon, and welcome to the TransAct Technologies Second 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, Steven DeMartino. Today's call will include a discussion of the company's key operating strategies, the progress on these initiatives and details on the second quarter financial results. We'll then open the call to participants for questions. As a reminder, this conference call contains statements about future events and expectations, which are forward-looking in nature. Statements on this call may be deemed as forward-looking, and actual results may differ materially. For a full list of risks inherent to the business and the company, please refer to the company's SEC filings, including its reports on Form 10-K and 10-Q. TransAct undertakes no 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 measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company website. And with that, I'd like to turn the call over to John.

John M. Dillon, CEO

Thanks, Ryan, and good afternoon, everyone, and thank you for joining us today. I'm delighted to report that TransAct delivered a solid quarter, building momentum from a strong start to the year. We sold 1,942 BOHA! Terminals in Q2, which is a 32% increase year-over-year. That brings the total sold in the first six months to 4,292. I'm really happy about this number. It shows progress for sure. The continued strength in the food service business, which we refer to as FST, underscores the effectiveness of what I call our go-to-market initiatives. We believe this trajectory positions us for sustainable progress and improving results. It's really just continued good processes, discipline, and resolve—not too much more than that. There's a lot of low-hanging fruit, and we're trying to be focused as we execute. Good processes, discipline, and resolve are probably key to the progress we're making. The focus is to build the business with good execution, consistent results, and with a goal to make TransAct a formidable competitor in what we see as a growing, valuable, and somewhat transitional market. So before we dive into the results, let me mention today that we announced that we have acquired a perpetual license to a copy of the source code for the BOHA! software for a consideration of $2.55 million, plus approximately $1 million of professional services fees in connection with the in-housing transition that we'll undertake. We see this as a very important step in the life of TransAct and frankly, a decision that should generate significant benefits for the company in the coming years. This is a pretty big deal. First, let me talk about why this was the correct move at this time. As many of you are already aware, the BOHA! software was initially developed by a small third-party software development shop but was then acquired by a much larger company. For many years, we have been licensing the software for use while paying royalty fees as a percentage of the software sales. Since we didn't own the software and it was not operating in our environment, we had to rely on third-party support for implementing changes, bug fixes, and enhancements to the code. This was, as you'd expect, time-consuming and a complex process that didn't really allow us what I would consider direct control over the results. As part of the new agreement we have, we will now host the code in our own cloud environment, giving us full control over when and what is changed. We expect to fully deploy the version of the code in the first quarter of 2027. While we expect to incur some incremental costs associated with hosting and maintaining the code ourselves, we believe the freedom and agility to modify it and use it perpetually at our discretion is certainly worth the price. This agreement also gives us the ability to sublicense the code, which is an important potential benefit for the company in the future. Taken altogether, we believe this move unlocks significant value for TransAct and gives us an important opportunity to generate incremental revenue. Finally, let me quickly talk through the financial impact of this strategic move, and later, Steve will cover the balance sheet implications in more detail. But in summary, we expect to capitalize $3.55 million of the purchase price, which is the purchase and the services to get all this done, and we will capitalize that and begin to amortize it in early 2027 when our hosted version goes live. Over that period of time, we will also see some cost savings as we will no longer be required to pay royalties. Once our version is live, we expect to incur some additional costs in R&D beyond the royalty savings at first as we will now be operating and modifying the code ourselves. So next, let me dive into our FST highlights for the quarter. Total FST revenue rose to $4.8 million, up 14% year-over-year, fueled by a mix of higher hardware sales and growing recurring revenue. Recurring FST revenue climbed to $3 million for the quarter, showing solid gains both sequentially and year-over-year. We also saw a small gain in the ARPU, the average revenue per unit, to $792, again, up on both fronts. We feel these metrics reflect our discipline and focus on the sales process and its improvements combined with continued focus on operational efficiency, resulting in our second consecutive quarter of positive adjusted EBITDA and building on our success from the last quarter. The main takeaway is that we're executing against our operational priorities and moving the needle in a meaningful way on the FST side of the business. We're seeing strong momentum and believe the changes we've made in the go-to-market strategy are yielding tangible results for the business. The rollouts we mentioned last quarter are progressing according to plan, and our existing base of approximately 40,000 AccuDate 9700 units along with first-generation BOHA! Terminals represent a ripe opportunity for us for upgrades and expansions. We are focusing on that, as well as new clients and customer expansions. We continue to drive the conversions and expansions with key customers in the second quarter, including further upgrades with major quick service restaurant and convenience store chains where the Terminal 2 is being recognized for its value in enhancing food safety, labeling, and improving overall efficiency. We're getting great traction with many of our clients, and they see the value here, which is fantastic. Feedback is positive, reinforcing our optimism for ongoing adoption. The sales team has refined its processes for lead tracking and nurturing leads, maintaining a solid and sufficiently well-scrubbed pipeline that holds steady quarter-over-quarter, even as we close deals from the pipeline and add more back in, yielding improving revenue results. In Q2, we closed two new logos, but we also focused on expansion from the land and expand strategy we use, which seems to be working well. We prefer to get the initial, if you will, bite of the apple, and then adding more products over time is easier than trying to secure a large deal upfront. This approach is much more strategic yet tactical in terms of acquiring new clients. Shifting over to casino and gaming, we are still experiencing the rebound we anticipated. We expect these positive results to persist at around current levels throughout the rest of the year. Total casino and gaming revenue reached $7.6 million, up 42% year-over-year and 14% sequentially from $6.7 million in the first quarter. These results were primarily driven by improved market demand, as we highlighted in the last call, with all our major U.S. OEM partners remaining in buying positions after we worked with them to resolve prior inventory oversupply. We also benefited from sales to a new OEM for non-casino charitable gaming applications, a segment of the gaming market that we believe may present a sizable growth opportunity as states move to regulate this previously unregulated portion of the market. These are opportunities similar to state lottery systems, where some of the money goes to the lottery system provider, some goes to the lottery player, and some goes to the state. There are charitable gaming systems operating in places like Elks Lodges and DFW Homes that have gaming systems in them. The market was previously unregulated, and now states are getting involved, and we've had some good wins there, making a difference for us. We're seeing positive results from our Epic TR80, the thermal roll printer, which fully entered the market last quarter and is gaining traction in sports betting kiosks, video lottery terminals, and other applications. Though sales of the TR80 were modest in the second quarter, we expect sales to ramp up in the second half of 2025 and contribute more significantly to our overall casino and gaming markets over time. Our partnership with CasinoTrac also continues to thrive, with Epicentral integrated into their SlotSUITE offering to drive player engagement and create steady subscription income. We're going to remain vigilant about the broader economic factors surrounding casino and gaming. The industry is going through a bit of a bumpy time right now, but we don't have long-term or midterm concerns about the market. I think everyone has recovered from the pandemic, experienced a little hangover, and things are stabilizing, albeit with ups and downs. Nevertheless, we are still seeing good sourcing from the casinos and demand from slot manufacturers. Clearly, we are excited about the consistent improving results for both FST and casino gaming, which speaks to the streamlining and improved processes we've implemented throughout the business. The Board and management remain committed to maximizing shareholder value and prioritizing incremental initiatives, disciplined investments, and execution of our corporate plan. We will revisit strategic options if conditions improve or compelling opportunities emerge. But for now, we believe our internal momentum is the best path to building long-term shareholder value. Before handing the call over to Steve, let me update our financial outlook for 2025. Based on the strong first half, we're raising our full year guidance to between $49 million and $53 million in revenue, reflecting confidence in continued FST expansion and casino stability. Adjusted EBITDA is now expected to range from breakeven to a positive $1.5 million, an improvement from last quarter's guidance, assuming no major disruptions in supply or demand. Our robust balance sheet with ample working capital provides the flexibility, and our proven cost discipline positions us to deliver enhanced profitability. In summary, we're thrilled with the second quarter results and the progress across the business. We drove significant BOHA! Terminal sales growth, achieved higher FST revenue with strong recurring contributions, and maintained positive adjusted EBITDA. The BOHA! platform is successfully expanding in convenience stores, healthcare, and beyond, fueled by our land and expand strategy. The casino and gaming rebound is delivering as expected with key wins from OEM partners and momentum in products like the Epic TR80. We continue our focus on execution, operational improvements, and fiscal discipline to drive shareholder value. I'm very excited about the transaction of acquiring the actual source code and software for the BOHA! suite of products. This will give us a huge amount of additional momentum, and I'm very excited about the potential now in our hands. I'm proud of the team's performance, optimistic about the second half of 2025 and into 2026, and anticipate beginning to produce more consistent growth across all markets. With that, I'll turn the call over to Steve for a detailed review of the financials.

Steven A. DeMartino, CFO

Thanks, John, and thanks, everyone, for joining us today. Let's take a look at the second quarter results in a little more detail. Total net sales for the second quarter were $13.8 million, an increase of 6% sequentially and up 19% compared to $11.6 million in the prior year period. Sales from our food service technology market, or FST, for the second quarter were $4.7 million, down slightly by 3% sequentially but up 14% compared to $4.2 million in the prior year period. Our recurring FST sales, including software and service subscriptions as well as consumable label sales for the second quarter, were $3 million, representing an 11% sequential increase and a 7% increase compared to $2.8 million in the prior year period. Our ARPU for the second quarter of '25 was $792, up 10% year-over-year. As I remind you each quarter, we continue to sell many BOHA! Terminals to a large QSR with nonrecurring revenue attached initially. While this represents an opportunity to sell recurring elements in the future, for now, they continue to represent a drag on our ARPU number. A large number of our terminals again fell into this category in the quarter, and we expect this to continue into the near future. Our casino and gaming sales were $7.6 million, an increase of 14% sequentially and a 42% increase year-over-year. This reflects normalized buying levels from almost all our major OEMs, as well as a new OEM win for non-casino charitable gaming applications, which could represent a significant growth opportunity over time. We believe sales from the casino and gaming market should maintain a similar run rate through at least the third quarter of '25. POS automation sales for the second quarter declined 49% from the prior year to $590,000. As we've discussed in the past, we believe that Ithaca 9000 sales have now reached normalized levels. We expect sales for POS automation to remain around the $500,000 to $600,000 range per quarter for the remainder of '25. Moving to TransAct Services Group, or TSG, for the second quarter. TSG sales were down 10% year-over-year to $818,000. This decrease was largely due to lower demand for legacy spare parts and service on a year-over-year basis. We expect TSG sales to remain approximately at this quarterly run rate going forward, consistent with normalized demand. Our second quarter gross margin was 48.2%, down from 52.7% in the prior year period but only down 50 basis points sequentially. This decrease is the result of a higher mix of FST hardware sales, which carry lower margins than casino and gaming products, and to a lesser extent, increased overhead costs, inflation, and lower prices on our POS automation printer due to increased competitive pressure. We expect our gross margin to remain in the mid- to high 40% range for the remainder of '25. I also want to give a brief update on our tariff situation. Last quarter, we added a small tariff surcharge to our applicable imported items, which was generally well received by our customers. Based on further tariff modifications announced last week, we expect to incur another increase in tariff costs on our imports. As a result, we expect to take a second pricing action with customers in the coming weeks to cover the incremental cost. As you can imagine, this is a fluid situation that we'll continue to closely monitor and update as needed. Our total operating expenses for the second quarter increased by 6% from the prior year’s second quarter to $6.9 million. Our engineering and R&D expenses for the second quarter were down 4% year-over-year to $1.7 million. Our selling and marketing expenses also decreased 4% to $2.1 million, while our G&A expenses were up 21% to $3.1 million. The increase in G&A was largely due to higher incentive and share-based compensation expenses from our improved year-over-year results. For the second quarter, we had an operating loss of $258,000, or negative 1.9% of net sales, compared to an operating loss of $438,000, or negative 3.8% of net sales in the prior year period. On the bottom line, we recorded a net loss of $143,000, or negative $0.01 per share, compared to a net loss of $319,000, or negative $0.03 per share in the year-ago period. Our adjusted EBITDA for the quarter remained positive at $478,000, up from positive $89,000 in the prior year period. Lastly, turning to our balance sheet, it remains solid. We had cash and cash equivalents of almost $18 million, with only $3 million of required minimum borrowings outstanding under our $10 million credit facility at the end of the second quarter. Before I finish my remarks, I wanted to take a few minutes to discuss the expected financial impact from the acquisition of the license for the BOHA! source code. As John discussed, we expect this to be a largely balance sheet event until we go live with our hosted version, which we expect will be in early '27. We expect to capitalize substantially all of the $3.55 million of total consideration to be paid, plus any additional costs related to in-housing the source code through the go-live date. These costs will appear as an intangible asset on our balance sheet. At the go-live point, we expect to begin amortizing the total amount of the capitalized costs to cost of sales on our income statement over a period of about 5 to 7 years. From a cash perspective, we expect to fund the $2.55 million purchase price plus the $1 million of professional service fees and any other related costs from the approximate $18 million of cash on our balance sheet. The $3.55 million of total consideration is expected to be paid in installments, with about $1.35 million to be paid in the second half of '25 and the remaining approximately $2.2 million to be paid during calendar '26. From a P&L perspective, we expect three items to impact our P&L related to the source code acquisition. First, cost savings realized from the elimination of the royalty fees that we currently pay on our BOHA! software subscriptions; second, amortization expense of the capitalized costs; and third, incremental costs we incur after go-live that will be expensed versus being capitalized prior to go-live. Based on our projections, we expect the P&L impact from these items to become net positive within 4 to 5 years. We estimate the royalty fee savings on our expected growing software subscriptions will outpace the combination of amortization expense and the incremental expenses needed to support the software in-house. Lastly, from an EBITDA perspective, we expect the acquisition to be immediately accretive due to the add-back of projected amortization expense. With that, I'd like to turn the call back over to the operator for questions.

Operator, Operator

And we'll take our first question from Jeff Martin with ROTH Capital Partners.

Jeffrey Michael Martin, Analyst

John, I was wondering if you could dive in a little bit on FST, excluding the QSR, how satisfied you are or maybe detail some of the progress into selling into the newer client base? I know you mentioned two new logos in the quarter, but give us a gauge of how you're looking at that.

John M. Dillon, CEO

Listen, it's a great question. I'm excited about the progress we've made. It's progress that, as I mentioned, is sort of like discipline, process, and execution. We are making good progress there. There is more to be made. The good thing about the go-to-market approach is that it's an area where no matter how good your product is, you can always improve your customer engagement, how you engage with clients, and how you execute against that engagement to land business. I think the progress is good, though it's still lumpy because customers follow the land-and-expand method I mentioned, where the goal is to get the camel's nose into the tent. If the product works well—and it does—the customer is delighted and it's much easier to sell more products over time than trying to secure a very large order upfront. Additionally, we've targeted specifically the clients that make our sales effort worthwhile. In other words, they have the potential to buy enough or spend enough money with us over time that the economics of the sales process cover the customer acquisition cost effectively. We're focused on that, and the numbers are getting better and better. Finally, we’ve invested significantly in sales training, not so much to train people to sell products, but to convey the value and ROI to the customer effectively. We need to express this in literature, on our website, and in the narrative that our salespeople have with their clients. To summarize, it’s lots of little things together, and generally speaking, I’m pleased with the progress. There remains a lot of room for improvement.

Jeffrey Michael Martin, Analyst

Great. And on the sale of terminals to the large QSR, are you having dialogue today about potentially adding software components to that? I know that would be a nice incremental benefit to the business longer term.

John M. Dillon, CEO

The answer to that question is yes.

Jeffrey Michael Martin, Analyst

Excellent. That's great to hear. And then on the casino and gaming side, I know you mentioned Q3 would be similar to Q2, which is great to hear. I think that exceeded people's expectations. Is this kind of a new level of market share? And do you think you've gained that market share on an ongoing basis?

John M. Dillon, CEO

I'll say a few things, and then Steve will provide specifics on the numbers we might be expecting in the next quarter or two. I think we're executing with a greater degree of focus and passion. While I wouldn't say we've whipped the sales team into a frenzy, our expectation is that gradually, we want to erode the positions that other large vendors have in our marketplace. It requires focusing on new opportunities that are emerging and being present and prepared when they arise. When we show up, we ask ourselves what differentiates us, how do we win, and why do we win. We've injected additional discipline, including adjusting compensation plans to create a focus on winning and landing new business—paying the sales team more for taking a customer away or expanding a new customer, rather than just following up with replacements for existing clients. Those strategies are paying off. Gradually, we're beginning to make incursions into the installed base of some of our competitors, which I find encouraging. When a new casino opens, I want our team there, suited up and ready to win. This newfound intensity is refreshing. Our partnership with CasinoTrac is also progressing well, and one of our innovative and creative sales individuals brought that deal to the table, which is fantastic. This is stimulating sales of Epicentral, generating recurring SaaS revenue, which is valuable for us. We have a promising opportunity in this emerging non-casino gambling space that seems poised for significant growth; we're glad to be getting in early. Our attention to market dynamics has improved, I'm pleased with our progress, and I expect to see more results reflecting this effort.

Operator, Operator

It seems there are no additional questions from the line. I will now hand things over to John Dillon for any final comments or closing statements.

John M. Dillon, CEO

All right, everybody. Well, thanks so much for joining us today. We appreciate your time and attention. Steve and I are always available for calls between quarterly reports. I appreciate your support and continued attention to our progress. With that, I'd like to wish you fair winds and following speed, and farewell until next time.

Operator, Operator

Thank you. That brings us to the end of today's meeting. We appreciate your time and participation. You may now disconnect. Thank you.