TransAct Technologies Incorporated ($TACT)

Greetings, and welcome to the TransAct Technologies Fourth Quarter 2025 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ryan Gardella, Investor Relations. Please go ahead.

Thanks, Paul. Good afternoon. Welcome to the TransAct Technologies Fourth Quarter and Full Year 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 on these initiatives and details on our fourth quarter and full year 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 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'll turn the call over to John.

Thanks, Ryan, and good afternoon, everyone, and thank you for joining us today. I'm pleased to report that TransAct closed 2025 with a strong fourth quarter, building on the momentum we established earlier in the year. This performance positions us well heading into '26 as we focus on driving revenue growth in the FST, that's foodservice technology vertical. And we expect software to serve as our primary growth engine going forward, supported by targeted and disciplined investments across the business, particularly in marketing and growth initiatives, and I'll share some of those details shortly. In the fourth quarter, we sold 1,434 BOHA! Terminals, bringing the full year total to 7,317 which is a 36% increase year-over-year from '24 when we sold 5,371 units. On day 1, my top priority was to improve our go-to-market and sales motions. There is always still work to be done. But given the success we've had placing new terminals, it's clear to me that we're moving in the right direction. The growth underscores the effectiveness of the land and expand strategy that we use as we continue to increase penetration within the customer base, and it's a large customer base, so that's good. Units sold continue to be the best leading indicator of our sales organization's performance. So I report that every quarter. And it is encouraging to see strong retention across our installed base, which is one of the metrics I'm hoping to introduce probably in the next quarter or 2 as we discuss the different KPIs, key performance indicators that we report and we use to measure internally. I'm going to report those publicly. Before going into the quarterly highlights, let me update you on strategic priorities for '26. As many of you know from our discussions, we're evolving our focus towards revenue growth, of course, but particularly in FST, foodservice. And we're funding that expansion through the steady cash flows from our casino and gaming vertical. We believe that software is unequivocally our growth engine going forward and that this is where we will drive not just revenue, but also margin expansion. In '25, we took an important step forward with our acquisition of the source code for the BOHA! software. And in '26, we intend to leverage our control of the code to enhance the offerings, introduce new applications and capture higher-margin recurring revenue. That's ARR, annual recurring revenue in that software. We expect to deliver positive adjusted EBITDA for '26 while making targeted investments in sales and marketing to support the growth without compromising our fiscal discipline. This includes strengthening our sales team with a sharper focus on the software-led solutions and prioritizing the upselling of software modules into the existing customer installed base. We are refining our go-to-market strategy with emphasis on competitive pricing, some strategic partnerships and targeted outreach in high potential subverticals such as the QSR, which is quick-serve restaurants, convenience stores, grab-and-go sushi, which has turned into a really strong market for us and corporate food services. Those are people that do, say, a stadium or a campus, a college university or a hospital organizations that under contract will provide the food services, and we are having good success in that market -- submarket as well. These initiatives will require measured increases in spending, including selective hires in key roles, expanded digital marketing and continued investment in our product road map. We plan to maintain a disciplined cost management regimen to target positive adjusted EBITDA and preserve the strength of the balance sheet. You should hopefully going to do that, and we are. On that note, the transition following our acquisition of the BOHA! Source Code is progressing smoothly. We've made tangible strides standing up our own fully operational version, and we continue to expect the launch targeted for midyear 2026. This ownership not only provides operational freedom, but also enables us to accelerate software innovation like exploring an application store model for our terminals, for example. This could allow users to opt into new applications directly on the hardware. It would drive additional software revenue streams as well. It's still a future project, but one we're excited about as we shift from a hardware-centric focus to a software-driven solutions provider environment. We're also working on migrating existing customers to a public cloud platform, which will enhance scalability and open up more cross-selling opportunities for us. Longer term, we're aiming to get our installed base up to something like $200 per machine per month. That would be ARR or actually MRR monthly recurring revenue. It's a great thing if we can do it, and that's where we're targeting. This would unlock significant value given our growing installed base. I think right now, we've got some 18,000 to 19,000 online terminals in the marketplace, and we're adding more every day. So that's an important opportunity for us. And for context, data from comparable SaaS software service models shows that this level is very achievable, and we'll emphasize this through our sales team software-focused pitches, the GTM, the go-to-market enhancements and the sales training. So that's an area -- a key area of focus for us in '26. Now turning over to the FST highlights for the fourth quarter. Total FST net sales came in at $4.8 million, up 12% year-over-year, fueled by hardware placements, expanding software adoption and record quarter for labels. Recurring FST revenue reached $3.4 million with the ARPU, that's the average revenue per unit at $756 per unit. Labels hit an all-time high at $2.6 million in the quarter. And while label sales can be lumpy, they are not only margin accretive, but they also help us build sticky, no pun intended, sticky long-term relationships with our customers. By providing best-in-class, cost-effective labels that help operators with compliance, branding and efficiency, we're fostering greater retention and hopefully opening doors for future software integration sales in the future. The customer intimacy is really important, and this allows us to be a key part of the customers, if you will, business operation, and we enjoy that, and it's a good relationship. And we have a degree of confidence that none of the other vendors that might be in the marketplace do. Our BOHA! Terminal 2 rollouts from prior quarters continue to progress as expected. And our installed base of roughly 40,000 legacy, these are off-line terminals, the AccuDate and the first-generation BOHA! units remain a prime opportunity for additional upgrades. We saw solid conversions and expansions throughout 2025, including further deployments with our large global QSR and also within the C-store customer base, where our Terminal 2 is boosting efficiency, reduces waste, improves margins for our clients. In the fourth quarter, we had 3 new logo additions with about 600 potential future units, and we're confident in our new logo pipeline for 2026. As I mentioned last quarter, we're also excited about 2 potential new revenue levers in BOHA!. Near term, the labels business, as I mentioned, continues to perform well with potential for label-only deals where customers value our quality, expertise, pricing edge and our label design software. Longer term, the App Store concept I mentioned could transform our terminals into platforms for third-party applications, significantly boosting software revenue and, frankly, stickiness -- in accordance with our public disclosure obligations, we will keep you updated when appropriate as these initiatives develop, but our improving sales and GTM strategy is placing heavy emphasis on these software opportunities. Before moving on, let me touch on our new Chief Marketing Officer, Dana Loof, who joined us recently to lead our marketing and growth initiatives. And while it's still early days for Dana, she has hit the ground running, and it's been an absolute pleasure working with her so far. Her priorities will include competitive positioning, messaging, a press release drumbeat and lead generation. And of course, all of the content that we generate and that we create will find its way to refresh our somewhat lackluster website presence. It's been kind of a thorn on my side. I want that website to tell our story and tell it effectively, and we're going to get there pretty soon. As well, I expect to complement that with an active investor outreach program beginning in Q2 to tell the story, share the strategy -- share the strategy along with our plans for growth. We're looking forward to the impact she will have on our business, and we'll keep you all apprised of progress against these initiatives. Shifting to casino and gaming. We recorded net sales of $5.3 million for the quarter, up 13% from last year and 2025 sales of $26.9 million, up 32% from 2024. While we did see some sequential softening in domestic demand towards the end of the year as anticipated due to macro headwinds in Las Vegas and broader casino performance, for some reason, the international sales continue to be strong. Our new domestic OEM win, which we talked about in the last few quarters, gave us significant momentum in 2025, which has begun to taper off a bit as they work down their inventory while they wait for the next jurisdictional approval for new rollout. Although casino and gaming business is highly cyclical, I want to emphasize that there is always significant free cash flow generated from it, and we do not expect that to change in '26. Different topic in gaming and casino, our relatively new Epic TR80 in the marketplace, the thermal roll printer is gaining traction in sports betting kiosks and video lottery terminals, and we anticipate it to become a more meaningful contributor this year. Overall, this vertical remains a reliable cash cow funding our FST investments while we explore expansion like charitable gaming and deeper Epicentral integrations for recurring revenue. Moving on to financial guidance for '26. The company expects '26 net sales to be between $55 million and $57 million with an adjusted EBITDA, the company expects that to come in between $800,000 and $1.5 million positive. So I'm optimistic about the direction of the business in '26, particularly around our FST software initiatives and Dana's priorities for the year. We've delivered consistent BOHA! growth, recorded solid label performance in the fourth quarter and achieved both our revenue and adjusted EBITDA guidance for the year. Our enhanced sales team and GTM that's go-to-market strategy will emphasize software upsell, partnerships and targeted subvertical expansion to drive this forward with measured incremental investments intended to keep us above that adjusted EBITDA breakeven line and to protect our balance sheet. We believe that our casino business provides stability regardless of where we are in the cycle of the market and controlling our software unlocks tremendous potential for the recurring revenue growth. Our focus remains execution, fiscal discipline and creating shareholder value through prudent growth, and we look forward to updating you on progress in that regard. To sum it up, this was a turnaround. It's been a lot of work. There's been a lot we have to do. A lot has been done, and we believe we've now turned the corner. The original opportunity is still in front of us, and we're ready to go get it and deliver on the promise. Lots of work ahead, but now it's all -- what I call it's all good work. So with that, let me pass the call over to Steve for a more detailed review of the numbers. Steve?

Thanks, John, and thank you, everyone, for joining us today. Let's turn to our fourth quarter and full year '25 results in a little more detail. Total net sales for the fourth quarter were $11.5 million, which was up 12% compared to $10.2 million in the prior year period. For the full year '25, total net sales were $51.5 million. That was up 19% compared to $43.4 million in '24 and within our increased outlook range for the year. Sales from our foodservice technology market or FST, for the fourth quarter were $4.8 million. That was approximately flat sequentially, but up 12% compared to $4.3 million in the prior year period. For the full year, FST sales were $19.3 million. That was up 20% compared to $16.1 million in '24. We sold 1,434 terminals in the fourth quarter and ended the year with 7,317 terminals sold, which represented a 36% increase from the full year '24. Our recurring FST sales, which includes software and service subscriptions as well as consumable label sales for the fourth quarter were $3.4 million. That was up 24% compared to $2.7 million in the prior year period. For the full year, recurring FST sales were $12.2 million, and that was up 14% compared to $10.8 million for the full year '24. Our ARPU for the fourth quarter of '25 was $756. That was down 14% compared to $875 in the fourth quarter of last year and down 5% sequentially from $792 in the third quarter of '25. As a reminder, we continue to sell BOHA! Terminals to a large customer with no recurring revenue attached to them to start. While we expect to begin the process of changing the selling model to this customer in '26, for now, it represents a drag to our ARPU number. Our casino and gaming sales were $5.4 million, and that was up 13% from $4.8 million in the fourth quarter of '24, but down 25% sequentially. As John highlighted, we began to see a demand slowdown in the fourth quarter as a large customer reached fully stocked status and is awaiting approval for rollouts to begin, which we currently expect will be sometime later in '26. For the full year, casino and gaming sales were $26.9 million, that was up 32% year-over-year. While we expect fluctuations quarter-to-quarter in our sales, overall, we expect casino and gaming sales to continue to contribute positively to our cash flow during '26. POS automation sales for the fourth quarter increased 47% from the prior year to $606,000. For the full year, POS automation sales were $2.2 million, and that was down 34% from $3.4 million in the full year '24. Overall, Ithaca 9000 sales remain in our new normalized range, and we expect results to remain similar going forward in this market. Moving to TransAct Services Group, or TSG. TSG sales were $658,000 for the fourth quarter, and that was down 13% from $759,000 in the prior year period. Sales were down across all portions of the TSG market, including legacy consumable business, which consists mainly of sales of cases of thermal POS paper rolls and inked ribbons, which we've decided to exit. We expect slightly declining TSG sales sequentially going forward. Moving down the income statement. Our fourth quarter gross margin was 47.6%, and that was down from 44.2% in the prior year period. Our full year gross margin was 48.6%. That was down just slightly from 49.5% in the full year '24. Going forward, we expect our gross margin to be in the high 40% range for 2026. Our total operating expenses for the fourth quarter increased by 19% to $6.6 million. For the full year, operating expenses were $26.4 million, and that was up 5% compared to $25.1 million in the prior year, largely due to higher sales commissions, incentive compensation and share-based compensation resulting from our improved results in '25. These increases were somewhat offset by savings from cost reduction initiatives we initiated in late '24. Breaking down our operating expenses a bit, our engineering and R&D expenses for the fourth quarter were flat sequentially at $1.7 million and up by 7% compared to the fourth quarter of '24. For the full year '25, these expenses decreased 4% to $6.7 million. Our selling and marketing expenses for the fourth quarter increased 3% sequentially and 6% over the prior year's fourth quarter to $2.2 million, largely due to severance charges. For the full year, selling and marketing expenses increased 3% to $8.4 million. And lastly, our G&A expenses essentially stayed flat sequentially at $2.8 million for the fourth quarter, but increased 41% compared to the prior year's fourth quarter, mostly on higher incentive and share-based compensation. For the full year '25, our G&A expenses were $11.3 million, and that was up 14% from the full year '24. For the fourth quarter, our operating loss was $1.2 million or 10.1% of net sales, and that compared to an operating loss of $1 million or 10.3% of net sales in the prior year period. For the full year, our operating loss was $1.4 million, and that compared to $3.6 million in '24. On the bottom line, we recorded a net loss of $1.1 million or $0.11 loss per diluted share for the fourth quarter compared to a net loss of $8 million or $0.79 loss per share in the year ago period. For the full year '25, we had a net loss of $1.2 million or $0.12 per share, and that compared to a net loss of $9.9 million or $0.99 loss per share in '24. As a reminder, both our fourth quarter and full year '24 numbers included a $7.3 million noncash charge to income tax expense to record a full valuation allowance against our deferred tax assets. Our adjusted EBITDA for the quarter was negative $499,000 and that compared to negative $705,000 for the fourth quarter of '24. And for the full year, our adjusted EBITDA was a positive $1.2 million, and that compared to negative $1.5 million in '24. Our full year adjusted EBITDA result placed us above the midpoint of our '25 outlook range. And lastly, turning to our balance sheet. It still remains solid. We finished the year with over $20 million in cash, which was up $6 million from our cash balance at the end of '24. And in terms of debt, we had only the minimum required $3 million of outstanding borrowings under our credit facility with [indiscernible]. And with that, I'd like to turn the call back over to the operator for questions. Operator?

[Operator Instructions]. Our first question is from Jeff Bernstein with Silverberg Bernstein Capital.

So maybe you can address the AI question. How do you see AI programming tools actually helping you guys with the business? How do you see them potentially increasing competition or reasons why they shouldn't do that?

Yes. Thanks for the question, Jeff. We use AI internally. You know that we have the code, the source code for the BOHA! software. And what the things you can do with some of the application tools is you can run the code through it and it can look for problems with the code, it can look for dead end, it can look for circular references. And it can actually give you a summary of what the code actually does. So it's making us more efficient in that regard. And on a somewhat tangential issue, there are many applications that are in the food service industry and a couple in the gaming industry, where we will add AI tooling, nothing sophisticated, but just enough to help the clients make better decisions to optimize around the data they've got to decide on this strategy or that strategy or inventory management and the like. So you'll see our products over time, engage with various AI technologies to improve our customers' interaction with the software and the results they get. Relative to competition, I think that -- I heard that story said. I think it's a lot of hype. It still takes a lot of smart people to create applications at the light users. And it's not lost on any of us that large language models allow you to write stories very quickly. Normally, what happens here is the AI systems can do a lot of the pedestrian work, kind of just basic coding, but you need somebody with user experience, user engagement model to be able to understand what's the flow. It's sort of like making a movie. You've got all the computers that can do the CGI stuff, but the reality is somebody has to build the storyboards to figure out what is it we're going to do? Why do we do it? Why do we do it this way? And there's an awful lot of that. So it takes more senior expertise in the building, where what we're doing is we're -- we can gradually cut back on the lower-level programmers that do kind of the [ rotor, ] and we can have more brilliant people kind of focusing on delighting customers. So we see this as an opportunity, not really a threat. I know the marketplace has taken the downturn a little bit on the software companies. But we're all engaging with the technology, and I don't think it's going to give some start-up companies some opportunity to roar in and magically build a brand-new system overnight that competes with a lot of the existing software. And the reality is that what we're doing is we're delivering enterprise-grade solutions. So it involves hardware, software, telematics, networking, whether it's WiFi, Bluetooth, LTE mobile and all of that stuff has to go together in a way where the customers that we serve are on the high end, and there's everything that is involved with that. It's not really commodity stuff, I guess, is what I'm saying. And we think that, that differentiation is something that's pretty sustainable.

[Operator Instructions]. There are no further questions at this time. I would like to hand the floor back over to John Dillon for any closing remarks.

Well, first, let me thank you for your time and attention today. We appreciate it. I'm looking forward to speaking with any of you. Some of you have scheduled calls. But as calendars aligned, if any of you want to follow up, feel free to reach out to me or Steve. So thanks again. And with that, we'll sign off, and we'll hopefully talk to you soon. Have a good day. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. We thank you again for your participation.