TransAct Technologies Incorporated (TACT) Earnings Call Transcript & Summary

Greetings, and welcome to the TransAct Technologies First Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Gardella, Investor Relations. Thank you, sir. You may begin.

Thank you, Kyle. Good afternoon, and welcome to TransAct Technologies First Quarter 2023 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 the details on 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 in 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 the SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented that accordance with GAAP can be found in today's press release as well as on the website. And with that, I'd like to turn the call over to John. John?

Thanks, Ryan. This is John Dillon, and it's good afternoon to all of you, and thanks for joining us today. This is my first earnings call as Chief Executive at TransAct. And for those of you who don't know me, again, my name is John Dillon. Before becoming the CEO here, I've been on the Board for about a decade, so I know something about the company. And you can look me up in LinkedIn, but I've been a tech individual for a long time, places like Oracle, Salesforce, Hyperion Solutions and the like. So I feel like I can bring a fair amount of guidance and experience to the job. So I've only been here for about a month, but I want to share some of my first impressions with you and highlight some of the things that I think we're doing well and where we have some opportunity to do better. First of all, I feel confident that stating that TransAct has a great number of strengths and some fundamental goodness for a company of our sites, and we're not big. I also would be remiss if I didn't thank Bart Shuldman for his dedication to TransAct. I mean, his ability to navigate 3 years of remarkably unprecedented business and logistics challenges, which we all know because of the virus, war in Europe, inflation and potential recession. Without his leadership and through the lockdowns and COVID-related challenges, the company would not be nearly as well positioned as it is today. So for me, I just wanted to shout out to thank you to Bart for everything he's done to get us where we are. So first, let me say that we have a number of core competencies that I think differentiate us from our competition and that I believe we can leverage effectively to build competitive moats around some of our businesses. For example, the printing products and manufacturing processes and logistic capability, our industry-standard and have allowed us to, in the past 2 quarters demonstrate we're capable of delivering product when others cannot and winning share in printing markets around the world, and frankly, it builds trust with our customers. I believe this is an advantage that we should lean into, and I intend to double down on these strengths and go where we can win, in essence, penetrate customer opportunities and markets first with a winning strategy. And usually, if you're smart, you lead with your long suit, and we can do that. And second, the BOHA! Platform is differentiated. It's a well-designed product. And with our recent relaunch of the BOHA! Terminal 2, I think the product strength only improves. And frankly, the need for technology solutions in the back of the house where operational challenges are only increasing. Companies in the foodservice industry are dealing with food wastage, spillage, labor and cost every day. And I believe there's a challenge of the FDA-approved labeling, only continue to grow every day. And frankly, I think TransAct's ability to be the product that wins that market is real. I also believe that adjustments to our product positioning and sales strategies will result in positive changes to how customers and prospects see our Boho platform. And I believe in the end, we can gain widespread adoption of these terminals in the food service establishments that we serve. In a short time, since I've been the CEO, I've had an opportunity to move, quickly to enact some early changes implemented relative to sales motion and go-to-market strategy. And I believe this is an iterative process. These things aren't things that will have a massive impact immediately, but I believe that we, all in all, can improve the GTM, the go-to-market strategy relative to FST, food safety technology, food service technology and that we can increase the number of new terminals we sell. And I believe we should treat that as the most important indicator where we have success and traction for BOHA! I'm already making moves to prioritize this objective. And third, and perhaps most importantly, our customers have learned to trust us and rely on TransAct and our products. The relationships we have are the lifeblood of any business, as you probably all know, and through our years of service and innovation and collaboration with our customers, we've built, I'd say, a very high degree of customer intimacy that any business would want and want to leverage to continue to grow the market opportunity ahead of them. So these things are things that I believe that we can continue to evolve and improve with a focus on customer-centric approach, and I think that's going to be a key to our long-term success and frankly, our differentiation. And finally, I'm getting to know and speak with members of the TransAct team. I knew many of them already from my service on the Board, but I'm very impressed with the quality of the people that we have in the organization, many of them are tenured and certainly very dedicated to success here at TransAct. The bench strength is good, institutional knowledge across the company from finance and accounting, led by Steve and Bill, our sales organization who is now led by Tracy, who we made the Chief Revenue Officer recently to cover both FST and the cover gaming and casino and our technology and design teams led by Brent, I've got a solid team, and I'm delighted to work with these individuals, and I'm very confident that we can do what we need to get done. The foundation is here, and I believe TransAct fundamentally is taking the right steps towards growing into a class-leading enterprise. So I've got some highlights. I'll walk through them from our 2 key vertical markets, FST and casino and gaming before a brief conversation about guidance. Then I'm going to hand it off to Steve for some more detailed analysis, then we'll do some Q&A. So relative to FST, foodservice technology, total FST revenue for the quarter was up about 60% to $3.5 million, led predominantly by an increase in the number of terminals sold to new logos as well as higher shipments of our AccuDate 9700. As previously mentioned, the new terminal growth remains the most important element of our FST business. I intend to focus on that metric. And while we are encouraged by the 553 new terminals we added in the quarter, we're making, as I mentioned, already, changes to our sales strategy to enhance the quarterly run rate. The changes will take some time. It's all iterative, as I already mentioned, and I will provide more detail around what we're doing in the coming quarters and what we expect to yield from the efforts. We ended the quarter with 12,733 terminals in the marketplace year-over-year from 10,127 from the Q1 of 2022. That's a 26% year-over-year increase. That's good, but it's not as good as it should be. Next, on the casino and gaming market, we saw all-time high quarterly record revenues of $15.8 million, up nearly 250% year-over-year and almost 50% sequentially, which was our previous high in the past. So this quarter is the highest revenue bookings for casino and gaming in the history as far as I know. Strength across broad both domestic and international sales, triple-digit percent gains as industry-leading printers continue to pick up market share. As was mentioned last quarter, we remain the beneficiary of a competitor's inability to provide product to the market, and our stellar product production and design teams have been able to secure parts and products where the competition is not. Well, this is obviously a good result. We believe that there is a likelihood that we may see a more normalized competitive environment than the future. That really wouldn't surprise us. We thus feel it prudent to update our financial outlook ranges. So for fiscal year 2023, we're now expecting between $71.5 million and $73.5 million in revenue and between $6.5 million and $7.5 million in adjusted EBITDA. So while the strength of our first quarter results demonstrate the opportunity in the market for us, we believe the correct approach is to assume that the current market dynamics in the casino and gaming market may not continue. So we're currently assuming a moderation in the casino and gaming sales in the back half of the year. Additionally, while we are making changes to our sales and go-to-market strategy in FST, it will take some time, as I've mentioned several times on this call, to see the results flow through into improved sales numbers. So we are not assuming appreciable impact in the near term. From a profitability standpoint, we assume there will be a downward margin pressure from current levels due to slightly lower casino and gaming sales, which will flow through our results. So while we're not seeing our main competitor currently in the market in the second quarter, we believe these assumptions aren't the ones we're making now are probably the most prudent given that we have no ability to project how a competitor is going to move back into a marketplace where they've mostly been absent. Finally, as CEO of TransAct, I wanted to use the opportunity to communicate to you and the financial community what you'd expect for me. The most important objective I have here is to create value for all stakeholders. And as a shareholder myself, our objectives are completely aligned, trust me. My success as the leader of TransAct's business will result and should result and deserves to result in success for all the stakeholders. In part, this will be achieved through transparency with you as shareholders and the financial community as a whole. I sincerely welcome feedback, comments, criticism and encourage any holder of our equity to reach out and let us know how we're doing or ways you would like to see us improve. And I'm very sincere about that. I can do better with good questions. If I don't have an answer, I'll get them, you can trust me on that. So with that, those are my formal comments here today, and I'd like to turn the call over to Steve DeMartino, our Chief Financial Officer.

Thanks, John. Thanks, everyone, for joining us. Let's take a look at our first quarter '23 results in more detail. Total net sales for the first quarter were $22.3 million, up 130% compared to $9.7 million in the year-ago period. Sales from our foodservice technology market or FST, for the first quarter were $3.5 million, up 62% compared to $2.1 million in the prior year period. These gains were driven by strength across the board, including record-high quarterly software revenue and stronger hardware sales with both BOHA! terminals sold to new logos and AccuDate 9700 units leading the way. We added 553 new paid terminals ending the first quarter at 12,733 terminals versus 10,127 at the end of the year-ago period. Our recurring FST sales, which includes software and service subscriptions as well as consumable label sales for the first quarter were $2.3 million, up 49% compared to $1.6 million in the prior year period. Our ARPU for the first quarter of '23 was $764, up 20% compared to $638 in the first quarter of '22, but down sequentially from $806 in the fourth quarter. As a reminder, the downward pressure on ARPU is a result of additional terminals in the installed base, which are currently not generating any recurring revenue, which was slightly offset by an increase in recurring FST sales. However, as I mentioned last quarter, the good news is that we have a growing population of BOHA! terminals installed in the marketplace, giving us fertile ground to cross-sell other BOHA! software applications to these customers. Our casino and gaming sales reached a quarterly record high of $15.8 million, up 232% from the first quarter of '22 and up 44% sequentially from the fourth quarter '22. We continue to see strength across the board in the casino and gaming business with our domestic sales up 315% and international sales up 115% year-over-year. While these excellent results continue to be driven by a competitor's inability to supply their customers with product. As John spoke to earlier, we can't assume these trends will hold for the entire year. So we have yet to see evidence materialize. We believe it is likely that our main competitor will reenter the market in the back half of the year, which would affect our results. However, we also believe a certain amount of our new market share gain will be sticky, resulting in a new go-forward run rate once the competitive dynamics normalize. POS Automation sales for the first quarter of '23 were $1.8 million, up 38% from $1.3 million in the prior year period. This was a result of higher [ AccuDate ] 9,000 sales compared to a COVID-impacted Q1 '22, largely from a price increase we instituted in mid-'22 in response to supply shortages. As expected, sales were down significantly sequentially as our largest QSR customer completed a major initiative in 2022. As a result, we expect POS sales to continue to be lower throughout '23 compared to 2022. Moving on to TransAct Services Group, or TSG, for the first quarter, TSG sales were down 20% year-over-year to $1.2 million. This decrease was largely due to lower sales of spare parts for our legacy lottery printers, which we do expect to recover somewhat during the remainder of '23. Moving down the income statement. Our first quarter '23 gross margin was 55% as compared to 26.4% in the prior-year quarter. The significant margin gain resulted from higher sales volume, improved mix of higher-margin casino and gaming printer sales and the effect from 2 rounds of price increases we instituted during 2022. Looking forward, we expect gross margin to be under modest downward pressure as we move through the remainder of the year as we begin to experience the anticipated impact from the change in competitive dynamics in the casino and gaming market. Our operating expenses for the first quarter increased 3% to $8.4 million, up from $8.2 million in the first quarter of '22. Breaking this down a bit. Our engineering and R&D expenses for the first quarter were flat at $2.3 million. Selling and marketing expenses were also relatively flat, increasing 3% to $2.8 million for the first quarter as we return to more normalized levels of travel, marketing and trade shows compared to the still COVID-impacted first quarter of '22. Lastly, our G&A expenses increased 7% to $3.4 million for the first quarter. This increase was largely attributable to an across-the-board salary increase for all employees, the hiring of additional back office staff, and depreciation related to our new ERP system that we implemented in the second quarter last year. We generated operating income of $3.8 million or 17.1% of net sales in the first quarter '23 compared to operating loss of $5.6 million in the prior year period. On the bottom line, we recorded net income of $3.1 million or $0.31 per diluted share compared to a net loss of $4.4 million or a loss of $0.44 per diluted share in the year-ago period. Our adjusted EBITDA for the quarter improved to $4.5 million compared to an adjusted EBITDA loss of $5.1 million for the first quarter last year. As John stated, we've updated our adjusted EBITDA guidance for '23 to $6.5 million to $7.5 million, which is up from our previous expectation of $5.2 million to $5.4 million. We believe that this outlook is the most prudent approach to our guidance, considering the expected normalization of the casino and gaming market in the back half of the year, which would negatively impact both our sales and gross margin compared to the first quarter of '23. Lastly, I'd like to mention our cash position. We finished the quarter with $6.4 million of cash on hand and $2.25 million of outstanding borrowings under our $10 million revolving credit facility with Ciena lending. Within the framework of our current guidance, we expect to be cash flow positive for 2023 and believe our current cash on hand and available borrowings under the Ciena facility position us well to execute our current growth roadmap without any immediate additional funding needs. And with that, operator, I think we can open up the call to questions.

[Operator Instructions] Our first question comes from George Sutton with Craig-Hallum.

Great results, and John, welcome to the call. I'm curious if you could talk about the casino printer business from the following context. We were adding lines much of last year to try to keep up with demand. Can you just give us an update on where we are there? Are we working off of a backlog? And is there any way to characterize this on a book-to-bill basis?

I think I can answer that. I think we're in pretty good shape, but some of the specifics, I'd like to ask Steve to speak to.

Sure. We have a very healthy sales backlog for casino and gaming printers. On the inventory side, we're actually good. We actually were able to -- for the first time, we actually were able to ship all the orders that we had scheduled for the first quarter. So in other words, we had no pushout of orders from Q1 to Q2. We were able to deliver everything that was scheduled. So we're in a good position. We still have a low inventory position, but we're building that back now in the second quarter.

Got you. And John, you had mentioned BOHA!, the second version of BOHA! Can you talk about changes and improvements that have been made to that? And I understand there were certain pushbacks from potential customers. Have we addressed those pushbacks with this second version?

I think the answer is yes. We've got a pretty good relationship with a number of clients that want a terminal that does X and Y and Z and we've been listening to them. This new Terminal 2 is all of the enhancements that we would have wanted to make. The screen is better. The printer is faster. The power supply is built in. The screen, you can get it 2 ways. You can get it with a tablet that you can walk around with and detach with this screen and its bezel are built in. And you put all of it together, and it's just all the way around a better terminal, it's faster. It's more performant. The screen is brighter. I mean it's a whole bunch of those things all combined. And I've taken a close look at it. And the other thing that you wouldn't see is that we've standardized the underlying chipset underneath the core product, and we're unifying that across our other products so that we only have one common underlying underpinning design that we can use for other terminals or even our terminals that we use in the gaming and casino industry. So fundamentally, the reason people want these things is so that they can save labor and they can comply with FDA labeling requirements. They can do date coding, and they can print grab-and-go labels and the like, and we do that really, really, really well. So I think we nailed it. We're going to show it at the NRA conference coming up on the 21st of May, and we've got a couple of other trade shows that we're going to be making the rounds with. And candidly, it really was not so much the terminal, but I'm really encouraged by some changes we've made in the sales organization, some training we're giving to the people. And the reality is it's almost like a client can't afford not to implement a back-of-the-house automation system. And we think the labeling component of that is probably the leading requirement that those things are going to need. However, the terminal itself can run pretty much any software that you wanted to run. So given that it's all in one place, it's connected to the Internet, and it's secure, you put all that stuff together, and it's a pretty good piece of equipment to have in the back of the house.

Great. One last question for me. Can you talk about there's a large convenience store customer that you've referred to in the past and a large franchisor that's coming in the back half of this year? Are there any updates on those 2 opportunities?

Not specifically, I would say that the large convenience store is purchasing equipment again. They took a break for other reasons that had nothing to do with us, and they're back on track. And as for the large franchisee, there's no news, and that's good. They like what we're doing and stay tuned.

Our next question comes from Jeff Martin with ROTH MKM.

John, I wanted to jump in on the changes in go-to-market strategy, specifically with how you mentioned some enhanced training. But are there other low-hanging fruit characteristics that go with that strategy? And I know you emphasized this is not an immediate results type of situation. Maybe give us a framework of when you expect some momentum to start to build there?

Well, the outcome is hard to predict with any certainty. But this is a classic let's get the go-to-market strategy right. What kind of salespeople do we have? How are they trained? What kind of lead funnel do we have? Are we doing account-based marketing? How do we reach the clients? What's the conversion rates? And we're basically putting in what I believe is industry best practices across the board. We've made some reorganization in the sales force. We've got some training planned. We're also doing more selective targeting. If you think about it, there's an awful lot of businesses. We estimate maybe a couple of million that we could sell a BOHA! Terminal 2. But some of them have 3 stores, some of them have 5 stores, some of them have 1, and then there's people that have 1,000. And we're trying to focus the sales organization. We're willing -- we've always been willing to take a call from almost anybody. So some of the things that we're doing are intended to focus the resources that we do have create success where we know we can get it and then double down on that. I believe that we have the ability -- it's interesting, if you think about it. A franchisor is very, very different than somebody who owns the stores. Restaurants, in general, are still getting back on their feet. So a lot of what we're doing is focusing its territory triage. I could go on and talk about it probably for half an hour. From a career standpoint, I've done a ton of this stuff. None of it's rocket science. But as you know, we've had a number of individuals heading up the sales organization, and we now have Tracy, who's a veteran of the company, and I'm spending a lot of time with her as Chief Revenue Officer. And in short, we're retooling the sales organization, retargeting them, building, if you will, better incentive plans for them, focusing them where we have a fair competitive advantage to win and working on lead gen, lead conversion. And in short, I guess I'd say we're putting all that together, and I think we're going to come out with a refreshed - most of it's already done, but a refreshed go-to-market program, which I think is going to yield better results than we've been getting in the past.

Okay. Great. And then my other question is around the BOHA! 2 Terminal relative to the initial BOHA! Terminal. Is your sense that the initial version kept customers from purchasing it for the reasons that are different about the upgrades to the BOHA! 2 Terminal? Trying to get a sense of is this terminal going to open the door essentially to starting to close some larger restaurant chains and restaurant groups.

Yes, great question. Well, look, I mean this has been an iterative process with the terminals as well. We started out just with a basic labeling printer today. The software in there for labeling is very sophisticated. There's a lot of things we can do. The BOHA! Terminal - by the way, and I hate to talk about features, but I think this one is cool. You can have 2 different roles of paper in there. You could have down to an inch or an inch and quarter all the way up to 3 inches. We do 300 DPI printing. So you can put a heck of a lot more information on a small piece of paper. And so I think the answer is yes and no. I don't think there was anything deficient in the earlier versions. But here's what I would say, especially for large organizations, this is a request for the client to change the way they operate the back of the house. We've got people with grease pencils, writing things on sticky notes and putting them on packages of mayonnaise and potato salad and stuff like that. And so from a sales standpoint, I think it's a relatively long sales cycle and it's going to be lumpy, especially for the large clients because we're asking them to do a bit of a lift and shift in the back office. And a lot of the clients -- and I haven't been on enough sales calls yet, but the anecdotes that I hear, this is a situation where customers don't say no, they say not now. And one of the things relative to the prior question that was asked was about the go-to-market. One of the things that we are implementing is a nurture track because we want to make sure that people have expressed interest. We want to make sure that we keep them warm so that when they are ready, when we touch base with them, they go, "Okay, now it's the time." And for franchisees, you can imagine that in some situations, the franchise might approve a technology, but then the franchiser waits for the franchises themselves to buy an approved piece of technology. And then in some other cases, the headquarters basically rolls out a new system across the board, especially for something like grab and go where they implement a new go-to-market strategy themselves, and they need the FDA labeling that we can provide. So I think it's a combination of all those things, better terminal, better sales approach, better nurturing, better customer targeting. And the bottom line is the terminal works, and it works really well. We've been demonstrating it under nondisclosure for a while, and we've gotten tremendously positive feedback.

[Operator Instructions] Our next question comes from Mitchell Sacks with Grand Slam.

Great quarter, obviously. A question has to do with historical. So you've got some number of 9700s out there across the restaurant and convenience store space. Can you give us a sense of how many units are out there and what the opportunity is to go back to those customers to upgrade them to the newer terminal and obviously, to get them hopefully doing some more recurring revenue?

Well, that's a great opportunity for an upgrade for a couple of reasons. One, the BOHA! Terminal 2 can do a lot more than the 9700. And 2, eventually the printers all need to be replaced. So we look forward to replacement business and which, of course, generates revenue. We have a lot of 9700s out there. Steve won't tell me the exact answer because he's afraid I'm going to share it with you all. But it's tens of...

It's in the tens of thousands.

It's in the tens of thousands, more than 110.

Okay. Is it safe to assume you guys are approaching those customers to try to get them to upgrade? And if so, when you're doing that, what's the biggest pushback on doing it now versus like you say, not now?

Well, the answer to the first part of the question is yes, we're approaching them. And frankly, some of these clients are the ones that we're getting really good feedback from. What you want to do is build a product that the customer wants. We're not getting any particular pushback. We just haven't had the terminal ready. We do now, and I think that we're just beginning the sales process, both for new clients and then the replacement placement clients. The only pushback frankly, is the 9700 is a pretty good workhorse. And so if it's performing adequately, we're going to get the business eventually. But they might not feel compelled to go out and rip out 1,000 terminals at a time or a couple of hundred. And so we think the replacement is going to happen more evenly throughout the growth trajectory of the BOHA! Terminal 2 as opposed to all of a sudden, every 9700 is going to be replaced in a matter of 3 to 6 months.

There are no further questions at this time. I would like to turn the floor back over to John Dillon, Chief Executive Officer, for closing comments.

Well, again, thanks a lot for joining today. I'm very sincere in my request for feedback, comments, input. If there's stuff you think we ought to be doing that we're not or if you like some of the stuff, I love those kinds of calls. But I'm open to suggestions and ideas from all of you. And back to my original statement is I intend to be more and more transparent. And I think that's something that the investors deserve. And as they get more comfortable with the data and the information, I intend to share more and more of it. And to the extent that I can speak freely about the company and our progress, I'm happy to do that. And with that, I will say goodbye and thank you.

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