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Edited Transcript of TACT earnings conference call or presentation 6-Nov-19 9:30pm GMT

Q3 2019 TransAct Technologies Inc Earnings Call

Hamden Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of TransAct Technologies Inc earnings conference call or presentation Wednesday, November 6, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bart C. Shuldman

TransAct Technologies Incorporated - Executive Chairman & CEO

* Steven A. DeMartino

TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary

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Conference Call Participants

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* Jeffrey M. K. Bernstein

Cowen Inc. - VP

* Kara Lyn Anderson

B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group

* Mitchell Lester Sacks

Grand Slam Asset Management, LLC - CEO

* James Leahy

JCIR - MD

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the TransAct Technologies Third Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Investor Relations, Mr. James Leahy. You may begin.

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James Leahy, JCIR - MD [2]

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Thank you, (inaudible). Good afternoon, and welcome to TransAct Technologie's 2019 Third Quarter Conference Call. Joining us today from the company are Chairman and CEO, Bart Shuldman; and President and CFO, Steve DeMartino. Today's call will include a discussion of the company's key operating strategies, progress against these initiatives and details on the third quarter financial results. We will then open the call to participants for questions. As a reminder, this conference call contains statements about future events and expectations, which are forward-looking in nature. Statements on this call may be deemed as forward-looking, and actual results may differ materially. For a full list of risks inherent to the business and the company, please refer to the company's SEC filings, including its reports on Form 10-K and 10-Q. TransAct undertakes no obligations 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, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance of GAAP can be found in today's press release as well on the company's website.

At this time, I would like to turn the call over to Bart Shuldman. Bart?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [3]

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Thank you, Jim. And welcome to everyone joining us on this afternoon's conference call and webcast. Before I begin my discussion regarding our preliminary financial and business results and update you on our exciting new restaurant solutions market and BOHA! products, I want to spend a few minutes on the recent Form 8-K filed by TransAct. We issued the Form 8-K to disclose material control weaknesses, but it's important for you to hear from me what occurred. It recently came to our attention that our independent registered public accounting firm, PricewaterhouseCoopers received a report regarding an inspection relating to their PwC's audit of the effectiveness of our internal controls, as of December 31, 2018. And that PwC then conducted an internal review of its own audit of our 2018 consolidated financial statements and our internal controls.

That internal review resulted in PwC's reconsideration of its conclusion about the effectiveness of our internal controls, and ultimately in our own reconsideration, of our conclusion that our internal controls were effective as of year-end 2018. As a result of our reconsideration, we determined that there exists control deficiencies as of that date, namely with respect to our internal controls over certain aspects of our information technology including related access and segregation of duties and controls over key spreadsheets. We have concluded that these controlled deficiencies represent material weaknesses in our internal control over financial reporting as of the year 2018.

Now TransAct has received an unqualified opinion regarding our internal controls from Pricewaterhouse every year that internal controls audit has been required, including 2018, and including since 2007, when we implemented our new information technology. While we are very disappointed by what has occurred, we have now concluded that we have material control weaknesses and we'll work quickly and efficiently to rectify this situation. Please understand we believe there are no financial issues inside of TransAct as a result of the control weaknesses or otherwise, and that Pricewaterhouse has not withdrawn its opinion on our 2018 consolidated financial statements.

What we are doing now is developing a remediation plan that we will -- that we believe will properly resolve these weaknesses, and are already implementing certain changes to our controls to address the control deficiencies that we have identified.

Now on to the business results. For the 2019 third quarter, on a preliminary basis, TransAct generated net sales of $11.7 million, operating income of $312,000 and adjusted EBITDA of $673,000, delivering a quarterly gross profit margin of 47.5%. Diluted EPS for the third quarter was $0.05 a share. Of course, Steve will review these and the rest of our financial results in more detail in a few minutes. Throughout the quarter we made continued progress with our significant business transition, which now has TransAct focused on executing against the very large restaurant solutions market opportunity, represented by our BOHA! hardware and software ecosystem. This ecosystem, which includes recurring sales in the form of software and service subscriptions, and consumable label sales, as well as the upfront sales of purpose-built hardware, is now in active deployment with a variety of restaurant and foodservice operators. Our third quarter results clearly demonstrate TransAct's early success with this new opportunity as we generated year-over-year restaurant solutions, net sales growth and significant growth in recurring revenue related to both BOHA! label sales and service contracts.

Now we have to remember, we just launched the BOHA! solution in May of this year, and I'm pleased to report BOHA! software sales increased by 10x from the third quarter of 2018, compared to the third quarter of 2019, and the total recurrent revenue from our restaurant solutions market increased by over 270%. We are now live with BOHA! solutions in 14 different restaurant and foodservice companies.

During the third quarter, we announced 2 new BOHA! sales agreements, both of which include a BOHA! SaaS-based app and TEMS, our TransAct enterprise management system, as well as upfront sales with the BOHA! Terminal. As with other announced wins to date, these 2 new agreements highlight the variety of customers and settings that BOHA! can address, and both provide TransAct with what we believe will be significant sources of long-term recurring revenue. The first agreement, a 3-year contract signed with a large corporate customer, includes the customers' approval for TransAct to pursue sales of BOHA! into more than 1,000 fast-food franchise locations across Canada.

We are back -- we are actively selling BOHA! to this potential operating base today and believe that annual recurrent revenue per unit sold could reach $275, with potential upside as the customer evaluates 5 additional BOHA! apps along with 2 additional BOHA! hardware solutions. The second agreement with a retail foodservice operator includes the deployment of the BOHA! Terminal and one BOHA! app across the customer's 45 locations, 30 of which are expected to go live over the next 12 months. This new customer is expected to be an active user of the print capabilities of BOHA! Terminal, and as a result, we believe could average revenue per unit sold that could eclipse $2,500 per year.

As with the other agreement, there is upside potential to recurring revenue as this customer evaluates the use of up to 2 additional BOHA! apps. Those who follow the restaurant industry closely have no doubt heard from operators that they are seeing margin compression and their business is giving rise in labor cost due to the $15 an hour legislations going around the U.S., commodity, healthcare and real estate costs, and a very tight labor market that only serves to increase cost pressures on restaurant and foodservice providers. Existing customers who have rolled out BOHA! are benefiting from the labor efficiencies it brings to their back of house operations and the savings it provides.

Given that BOHA! was designed from the start to lower labor and food costs, we believe it is ideally positioned for today's environment as a customer that brings real change to our -- as a solution that brings real change to our customer's bottom line. Our efforts to commercialize BOHA! are gaining momentum and this is becoming more clearly evident in our financial results. While we are still working off a small base, restaurant solutions recurring revenue nearly tripled in the 2019 third quarter when compared with the prior year, and nearly doubled when compared with our results for the 2019 second quarter. At the same time, we've seen potential customer engagements rise across a wide scope of the restaurant and foodservice industries.

BOHA!'s success is building and we remain confident that TransAct is in the front of what can ultimately become a market that exceeds $1 billion. Our sales team is focused on turning this market opportunity into reality, and working closely with existing customers to expand their use of BOHA! while generating new sale leads and trials activity with potential new customers, including our opportunities with our existing base of casino customers.

One existing customer has told us they can increase the total installations of our BOHA! ecosystem to a potential 10,000 locations. Before I turn the call over to Steve, I want to touch briefly on our market-leading casino and gaming printer business, an important business that has allowed us to continue to allow TransAct to invest in BOHA!'s ongoing development and commercialization. As with the second quarter 2019, the comparability of our 2019 third quarter results in the casino and gaming business was impacted by several large customer orders which did not repeat. Steve will provide more color on this in a few moments. That said, we recently completed our annual product demonstrations at the Global Gaming Expo in Las Vegas where we interacted with many of our long-time -- long-term customers.

These interactions led us to believe that the underlying casino and gaming business remains very stable and that our printer business should remain a nice cash flow generator for TransAct for the foreseeable future. We also received great feedback from our newly announced partnership with casino industry legend John Acres, and his company Acres 4.0, which we believe will greatly improve the power of our Epicentral promotion and bonus in print solution. Acre 4.0's new CyberMax solution will offer operators and technology partners the ability to receive real-time gaming [floor] and slot machine data. This real-time access will serve as a key component in Epicentral 4.0, which we just launched, which will come to market in the middle of the first quarter of 2020.

One clear feature that I would like to highlight is our new ability to issue a coupon or promotion to an uncarded player. This ability, in my opinion, is a Holy Grail of the casino industry, as our ability to target an uncarded player gives you a real selling feature that combines technology with Acres 4.0. We believe the combination of CyberMax and Epicentral 4.0, which we demonstrated at G2E, will allow our unique promotion and bonusing solution to realize its full potential growth going forward.

Now with that, Steve will review our preliminary 2019 third quarter results, after which I'll make some summary remarks before opening the call to questions and answers. Steve?

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [4]

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Thanks, Bart. Good afternoon, everyone. In light of our determination regarding the effectiveness of our internal controls that Bart discussed earlier, we're presenting our third quarter results in preliminary form subject to the completion of additional procedures. Upon completion of these procedures, we expect to finalize our operating results for the third quarter 2019 and file the related Form 10-Q as well as file the necessary amendment to our 2018 Form 10-K. As Bart noted, PwC has not withdrawn its opinion on our 2018 consolidated financial statements, and to our knowledge, the weaknesses did not result in a material misstatement of any of our previously issued financials.

With that said, third quarter 2019 net sales were $11.7 million, down 26% from $15.8 million in the third quarter last year. Looking at our third quarter sales by market, restaurant solutions sales grew 5% year-over-year to $1.4 million.

During the quarter, we saw growth in both hardware and software sales given the growing traction for our entire ecosystem of BOHA! solutions. In particular, hardware sales in the third quarter were up approximately 21% on a unit basis and up 2% on a dollar basis, as we aggressively expanded the number of BOHA! Terminal units out in the field, which we believe will lead to an increase in software subscription and label sales over time. Though starting from a low base, software subscription sales were up tenfold in the quarter as a result of the increased BOHA! Terminal install base. Due to strong sales pipeline of BOHA! Terminal and other BOHA! hardware products, we believe we are well positioned for future sales growth.

Casino and gaming sales were down 39% year-over-year to $5.1 million in the 2019 third quarter. Domestic casino and gaming sales were down 50% from the prior year. Sales for the year ago period were unusually high as it included a large sale of replacement printers to a major corporate customer that did not repeat, as well as significant order activity from a large OEM customer that did not reach similar levels this quarter.

Excluding these large one-time items, our domestic casino and gaming business remained stable. Sales for the international markets were down 12% over the prior year, as growth in sales through our Australian and Asian distributors were more than offset by a reduction in sales to a large European OEM customer. POS automation and banking sales were down 22% to $1.5 million in the 2019 third quarter. We continue to see slowing sales of the Ithaca 9000 POS printer for McDonald's, including the ongoing impact of the decision by one of McDonald's large POS system vendors to repair versus replace their printers. As we've noted before, while this decision reduces new printer sales, it's driven an increase in service and spare part sales which show up in our TSG sales unit.

Lottery printer sales of 95,000 were down 86% from the prior year quarter, in line with our expectations given our decision to no longer focus on this market. Printrex product sales of 296,000, were down 34% from a year ago. We expect sales to continue at a roughly the same level in the fourth quarter '19. TSG sales were up 3% year-over-year to $3.3 million as a decline in lottery spare part sales was more than offset by strong labor and service sales for our -- the BOHA! ecosystem, as well as repair service revenue for Ithaca 9000 printers installed in McDonald's locations.

Sales of TransAct labels in support of BOHA!, which are largely recurring in nature, more than tripled in the quarter versus the prior year. Our BOHA! recurring service revenue more than quadrupled year-over-year, though off of a low base. Gross margin for the third quarter was 47.5% compared to a record 50.5% in the year-ago quarter. The year-over-year decline in casino and gaming printer sales during the third quarter weighed on gross margin, more than offsetting the benefit to our business from the ongoing shift in sales mix away from our lower-margin legacy products.

Total operating expenses for the third quarter of '19 were $5.2 million, which was up 9% year-over-year. Engineering design and product development expenses declined $58,000 or 5% on lower contract design and hardware prototype expenses. Selling and marketing expenses were up $149,000 or 8% as we increased our marketing spend in hired sales, technical sales and marketing staff in support of the BOHA! rollout. G&A expenses were up $351,000 or 19% on a higher legal accounting of the professional service fees as well as increased recruiting expenses in connection with the hiring of additional restaurant solutions support personnel.

Our operating income for the third quarter of '19 was $312,000 or 2.7% net sales, which compared to $3.2 million or 20.3% of net sales in the year ago quarter.

We recorded net income of $384,000 or $0.05 per diluted share in the '19 third quarter, compared to net income of $2.6 million or $0.33 per diluted share in the year ago period. Adjusted EBITDA for the third quarter of '19 was $673,000, which compares to $3.6 million in the third quarter of last year. And finally turning to the balance sheet, we ended the 2019 third quarter with $1.2 million in cash and no debt. We also returned about $700,000 of capital to shareholders in the third quarter through our quarterly cash dividend of $0.09 per share. With our stable balance sheet, we remain positioned to continue to invest in the rollout of BOHA! as we prepare for 2020.

Existing sales and trial activity lead us to believe that TransAct will generate increasing levels of annual recurring revenue in the coming quarters, as we have staffed up and will add more staff as necessary to ensure that we have the team in place to support our customers as they introduce BOHA! Into their day-to-day operations. The growth in software subscription and label sales in the 2019 third quarter highlights the benefits of our ongoing investments and is a key sign that the transformation of TransAct's business model is beginning to take hold. We're becoming a provider of SaaS-based software, consumable products and services that generate recurring revenue. And our expanding install base of hardware will be a driver of these recurring offerings going forward. TransAct remains on track to benefit from BOHA! and the long-term growth potential of this exciting marketing opportunity.

At this point, I'd like to give the call back to Bart for some closing remarks. Bart?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [5]

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Thanks, Steve. As we wrap up 2019 and look ahead to 2020, we remain confident in our view that the BOHA! ecosystem in the restaurant solutions market is TransAct's largest ever revenue opportunity. While 2019 has presented its challenges, as we move towards the expected inflection point in our restaurant solutions business, we remain focused day in and day out on driving near and long-term success for BOHA! and TransAct. The future does look bright for TransAct and we look forward to delivering the long-term value, our shareholders expect.

I'll end my comments, as I do every quarter, by thanking our shareholders for your support and trust. I'll also take this opportunity to thank the TransAct team for the great work, as we position our company for the road ahead. I also would like to make a special thank you to Steve, who over the last couple of days has been through a very difficult situation, who works his tail off as we were informed of what was to transpire. I would also like to invite all shareholders to the Southwest IDEAS Investor conference at the Westin Dallas Downtown Hotel. I will present -- I will be presenting on Thursday, November 21.

Operator, at this time, we are ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Kara Anderson from B. Riley FBR.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [2]

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So just wanted to clarify -- I'm not sure if I missed it, did you quantify or talk about how much of the $1.4 million in restaurant solutions was directly generated from BOHA!?

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [3]

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We don't break out the hardware and software, Kara, is that what you're asking?

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [4]

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I guess I'm just trying to get a sense for -- are you still selling the AccuDate terminals and is BOHA! generating more in revenues at this point versus what you're selling to maybe McDonald's?

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [5]

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The new BOHA! portion is taking over to become the majority of those sales versus the AccuDate.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [6]

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Yes, we still have some business with McDonald's but as we've announced, all the new orders is BOHA! based.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [7]

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Okay. And then you have talked about some -- in some press releases, a pretty fairly steady flow of wins here to date, just wondering if you can speak to how those systems are shipping versus sort of their original schedules that were laid out.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [8]

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You know, Kara, pretty much on target, I guess the one that I -- that we talked about which is the one in Canada, is a license-to-win business. And clearly, we're pleased with the progress we've made as we got a couple of the big franchisees buying the technology. There is one that was pretty big also that I made a comment on that has recently told us that there -- I always said that the success of this one win would be their success of this new product that they wanted to sell and how they needed our technology. And they informed us that it's going very well and that over the next couple of years, we could expect an installation of up to 10,000 terminals.

Now we just got to keep going but it never feels bad when a customer says we think it was x and now it's 3x what they thought it was going to be. So we're very pleased about that. We also in most of our customers, they're trialing other apps. So as we always said we would pretty much start off with 1 or 2 apps, mainly 1 app because of the label application is just such an easy application for them to implement. But we have one customer that is looking at 5 additional apps. So -- and when you talk about AccuDate, I can tell you that we have one customer that we rolled out AccuDate years ago, that we're in negotiation to change over to BOHA!

So from how we see the market and what we've been able to put out and share with the shareholders, we're very pleased with what we see. The other thing is the recurring revenue was coming at a little stronger than we thought, hence, the nice third quarter in recurring revenue. So we're -- what we look out, it looks very positive to us.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [9]

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Kind of on that last point, I don't know if you'll give it to me, certainly, we can appreciate the growth that's coming from the recurring revenue for BOHA! Is it possible to sort of quantify the run rate you're at, at this point?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [10]

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Not yet. There's a couple of things that we're trying to determine. We're trying to determine average revenue per unit, which as you hear, we've got one customer that's going to do $2,500 each -- per unit and an another customer is going to do $275. So what we'd like to do is see this all settle down. Some of the initial sales is the initial rollout, and then we'll see what the ongoing sales or labels are, for instance. So I would say over the next couple of quarters, we'll be able to start sharing that with you.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [11]

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Okay. And then I think you might have touched on this but when you think about the price on the hardware, how much flexibility goes into that? I mean, are you willing to or are capable of selling this at a much lower margin than maybe we might all have thought it would sell at? For the opportunity on the revenue -- the recurring revenue side. Just hoping you can provide a little bit of color around your strategy from pricing that piece.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [12]

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Sure. That's really easy because you see our margin in the third quarter, right? Little lower -- clearly lower gaming sales, but we -- as Steve said, our unit volume was up but our revenue wasn't up as much because we found the sweet point. There's a sweet point in regards to what the terminal price needed to be in the marketplace. And once we found that, we've been continuing to sell at that price. So -- it's -- from a winning a business standpoint, we know where the terminal leads to date. All the other pricing is sticking, there is no special pricing on software, there is no special pricing on labels. We know exactly what we need to sell the labels at. We know exactly what we can sell our service at. We know exactly what we can sell the apps at. So it really was a -- somewhat of a lower adjustment of our terminal that hit the sweet spot for restaurants and foodservice providers. And that, really -- Steve, I would think you would agree with me that really hasn't changed over the last couple of months.

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [13]

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Yes. I mean like I said our unit buying was up 22% quarter-over-quarter but our revenue is only up 2% in the restaurant solutions. That's because we constantly lowered the price on the terminal. It's the razor-razorblade model, Kara.

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Kara Lyn Anderson, B. Riley FBR, Inc., Research Division - Senior Analyst of Discovery Group [14]

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Yes, understood. Definitely get that. And it sounds like that's probably a trend that we might see over the next couple of quarters now that you've found the sweet spot.

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Operator [15]

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(Operator Instructions).

Your next question comes from the line of Mitchell Sacks from Grand Slam.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [16]

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Guys, I think you mentioned earlier in the call that BOHA! is live today at 14 companies. You had released, I guess was about 5 or 6 -- 5 earlier, so the other 9 companies that are using BOHA!, are those customers that have switched over? Are those new customers? And -- just give a little bit more color, if you could?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [17]

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It's a combination of customers that we won before the announcement of BOHA! Some of the customers actually remember -- ran our combination of our XL2e with [Jolt] and now have moved over to BOHA! or are in the process of moving over to BOHA!. So there were some customers that we closed -- that's why when we talk about, [Mitch] the fact that we had some recurring revenue in the third Quarter 2018 on the software side, that was some of the wins that we had in regards to selling what was then called the XL2e with the Jolt systems, now has moved over to -- the terminals are out there, but we moved them over to the BOHA! labeling and TEMS solution.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [18]

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Okay, and of the 14 customers that you've signed so far for BOHA!, have any of them added apps yet or are they still in consideration mode?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [19]

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Still in consideration mode.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [20]

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Okay. And then you mentioned that there was a customer that was tripling the size of what they expected to roll out. So I think you had released a press release saying that you had a customer that was going to do about 3,000 terminals over the next few years, so that customer now would be doing roughly 10,000 terminals over the next few years?

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [21]

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Yes, sir.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [22]

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Yes, that's it. You got it. They're telling us next year could be 10,000. They are very pleased with the way their program is going. Now again it will take probably 3 years unless it continues to go so well that they decide to actually roll it out faster, but yes, that's the customer that actually we even said that the recurring revenues for that customer, I believe, was $1,700 per terminal.

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Mitchell Lester Sacks, Grand Slam Asset Management, LLC - CEO [23]

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Okay. And then to my final question -- I think it was sort of based off of Kara's question, I wasn't sure I quite grasped it. But -- so as of today, you guys or TransAct knows or has a certain amount of recurring revenue that you're generating on a either monthly, quarterly or annual basis, because I think you talk about how much that grew year-over-year. Was that what you were saying you don't want to quite release it in terms of dollar volume or was it what you were talking more about your average revenue per unit was?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [24]

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Both. What I'd like to able to tell the shareholders, look, every deal is going to be between x and x of recurring revenue. Even if -- we'll put out the dollar amount we'll start to build an average of what we believe it's going to be, and then I do believe we have this start to sharing with the shareholders exactly what our recurring revenue from restaurant solutions is. I do believe we have to do that.

It's a decent number right now but I think over the next couple of quarters, it's going to turn into, again, a bigger number. And I'll give you an idea of what we're doing. And you can see what the customer that's telling us it could be 10,000 and at $1,700 per terminal, that's quite a lot of recurring revenue.

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Operator [25]

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Your next question comes from the line of Jeff Bernstein from Cowen.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [26]

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Guys, just a couple of questions. One, the hunting license you have in Canada. Is that with a U.S. fast-food company in their Canadian geography or is it a Canadian fast-food company?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [27]

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It's a great question. Steve, do you know the answer to that? Do they have any in the U.S?

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [28]

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It's a Canadian company.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [29]

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And then in terms of the gross margin, obviously, you talked about the pricing change on BOHA!, lack of the casino revenue, but we should still be thinking about gross margin being in a rising trend as a result of this transformation of the company.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [30]

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No doubt. No doubt because -- look, Jeff, the casino industry is very profitable. But you still have legacy business in there. We still sold some lottery printers. We still sold, what, $1.5 million of POS printers. So as much as we've lowered the cost with the BOHA! Terminal, it still makes money. And clearly, the labels are making money and the software is making money. And as I think you know, the labels sales -- the label app sales is a 100% TransAct, we don't share that with our partner. So clearly as that grows, the gross margin, I would say we're probably a couple of quarters away from maybe getting to a new level.

Even in this environment the casino market was a little different for us this quarter. Europe's a mess, and I don't think I need to explain that to anybody. We're very happy with Asia and Australia, and the U.S. had a couple of one-time orders but that should continue and that's got some good margin. And in all fairness, we're very excited as much as we've had Epicentral for years and it never really materialized.

One of the issues we had with Epicentral is we just couldn't get real-time data from the casino systems, which is bizarre. And we were dealing with connecting to a device that was designed and built in 1997 and 1999. And now with Acres, we literally, within a second or two, not only get the data but can -- player will get their coupon. And I'm not kidding when I'm talking about that this uncarded player thing could be big because there was no way for us to see an uncarded player using existing casino systems.

But now we're watching every transaction in less than a second. So we see somebody putting money into a casino that doesn't have a card or money into a slot machine that doesn't have a card, we know they're uncarded. And that's the Holy Grail for casinos to be -- if they can increase their carded play, that's just huge. And you don't need to talk to me, just talk to a casino operator about what it means to get -- to transfer an uncarded player to a carded player. So even the opportunity over the next couple of years with Epicentral is starting to look a lot better because we're not fighting with the slot system people that had antiquated technology, even though many casinos wanted to use our technology. It was just the inability to get this real-time data. And for anybody that was at the show and got to see the demonstration of our technology, -- we now got -- by the way we transitioned. I should have said this on the call.

We've transitioned Epicentral from a sales to a SaaS model also. So we're no longer selling Epicentral, you buy a subscription per slot machine. So we're really building -- and Steve said it, we're really building a SaaS-based company. I know it's going to take time and God knows we got to get through this little hiccup that happened but -- maybe not a little hiccup. But if you look at what we're working on, one investor asked why did we invest again into Epicentral? Because casinos would like to have a marketing system, it's just the technology -- not ours but what we're connecting to is pretty bad. But we were working with Acres and we knew that that opportunity could be wonderful. So you look out, to us it looks very promising.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [31]

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Got you. So that's a good lead into my next question, which was about SaaS model. So as you are having more SaaS revenue, we're not going to see that as quickly as you if you had a one-time software sale, right? So we're only going to get the 12 or a couple of 12s and a quarter depending on, right -- when the sale took place, et cetera. We should start to see some build in deferred revenues and long-term deferred revenues on the balance sheet. Is that right? Is that the sort of where we should be looking for evidence of more SaaS software sales?

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [32]

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That's right, Jeff. A typical model will have a customer sign a multiyear subscription agreement and then pay for it upfront a year-end time.

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Jeffrey M. K. Bernstein, Cowen Inc. - VP [33]

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Yes. Okay. So just to kind of level set expectations here, so with the razor-razorblade model, which makes all the sense in the world, we shouldn't expect that all of a sudden we're going to, in a quarter or two, hockey stick on revenue. We'll get some benefit from hardware sales for sure but the SaaS is going to be layering in, right? As you sign contracts and we start getting quarterly deals signed and whatever. And what we're really going to build is this flywheel of recurring revenue. And it may be a little bit of a slower build than a real fast ramp-up.

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [34]

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I couldn't have said it any better.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [35]

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Yes, it's exactly that. We are monitoring every lead, every trial. We've had some great, great -- I mean I tell you, I had the pleasure of going to one restaurant with their CEO when they were trialing our system, and the CEO turns to me, he said he's never seen his people so excited about technology. They've been running it for a couple of weeks because of the benefit. So yes, it's going to take time but that's why we've been announced all these deals, that's why we keep giving away the recurring revenue because over time it's just going to keep building and building and building.

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Operator [36]

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And we have your next question coming from the line of (inaudible) from (inaudible).

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Unidentified Analyst, [37]

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Can I ask about cash -- the cash level, was there -- maybe -- what was the Capex in the quarter? Because I noticed there is a sequential drop in the cash level with the -- it seems like maybe it came from some place not in the income statement.

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Steven A. DeMartino, TransAct Technologies Incorporated - President, CFO, Treasurer & Secretary [38]

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Yes, the CapEx wasn't anything unusual. We typically run around $1 billion a year. That can be a little bit spiky going from quarter-to-quarter but it's actually fairly regular. So the cash decline really was inventory. So we invested in some inventory. And actually since the quarter has ended our cash balance has actually gone up significantly because we're liquidating receivables. So you'll probably see us a spike up on the fourth quarter in the cash balance.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [39]

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We also had an OEM ask us to give them an extra 30 days which we did. So we didn't collect it in September, we collected it in October. And it built the relationship with the customer, they very much appreciated what we did for them. And of course, they paid us in October. So we also had one of those in the quarter. But that's -- because our balance sheet is so good, we can do that.

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Unidentified Analyst, [40]

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Can you help me directionally, fourth quarter revenue, is it more likely to be like the third quarter that just ended? Is it more likely to be something else? I'm just trying to figure out kind of whether you've lapped the comparisons from the various entities across the line items from last year? Any thoughts on that will be helpful, fourth quarter revenue?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [41]

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Well, we don't give out projections. And I think, it's not helpful for us to do that right now. We're clearly monitoring the installations and the shipments that are going out. We're also monitoring that casino industry, we think this, the level that we are at now looks about right but it actually could go up a little. The G2E show ended and that tends to be a buying show. So we'll see what happens. But I really apologize we just don't give projections out.

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Unidentified Analyst, [42]

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What about expenses? Any help on that, the expense levels that you did this year across engineering, SG&A, are those good levels to work with going forward?

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [43]

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The one thing I can say that we are doing that is -- with our Board is looking at our expense level. The company is very excited about BOHA! and the question is how fast do we go? And it is a conversation that we're having with the Board right now because the market response has been -- it's just been very, very positive. And the more salespeople we have, the more opportunities you get. The more marketing expense, the more opportunities you get. So we are having the conversation with the Board about it. We had a -- we had our Board meeting just a couple of days ago. We spent a lot of time on what we should do. We've analyzed the size of the market and it's very large and the thing is we want to maintain our first to market position. So we're looking at that and we're looking at our spend. Just to see if we did spend more, how much more sales could we bring in quicker, how many more opportunities. Because it does take time for all this to layer in, as Jeff Bernstein did say. So we're going to look at it. We want to do what's right for the company in regards to this opportunity and gain as much momentum as we can and as early as we can.

From an engineering standpoint, we're pretty good. We've got a couple of tech people that we brought in to help us test the software. We've got a couple of opportunities where we have some changes to the app or actually new app that customers asking us to look at, which means we've got to test it. So we're looking at that but if anything I think you could potentially see growth in our sales and marketing just because that the excitement inside the business in regards to the market is there.

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Unidentified Analyst, [44]

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Did the dividend come up in that context at all? I mean it seems like the transition to a more growth-oriented company and then the historical dividend might not necessarily be great partners, so to speak, or maybe the complexion to the investor base might not be -- it might not be problematic if you were to cut it or eliminate it in order to support your growth. Given you don't have a lot of excess cash sitting around, my first question -- I'm just kind of wondering if that enters into the discussion with the Board.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [45]

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It did. It clearly did. Look, there was a reason to pay the dividend when we went through this, right? We told the shareholders that we're investing very heavily in a, what we considered to be large opportunity, and we had a lot of cash. We were generating a fair amount of cash. And we didn't have to ramp up, we didn't have to beef up the inventory and do other things and we hadn't beefed up our marketing yet because we were in a development mode. So we decided to reward, not reward, but give something back to the shareholders while they waited. But clearly, we're in a -- in restaurant solutions, we're in a high-growth opportunity, and so the Board is looking at that. It's looking at what we should do.

Good question, by the way. Thank you for the question.

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Operator [46]

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And I am showing no further questions at this time. I would now like to turn the conference back to CEO, Mr. Bart Shuldman.

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Bart C. Shuldman, TransAct Technologies Incorporated - Executive Chairman & CEO [47]

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Okay. Thank you, everybody, for joining us on the call this afternoon. We look forward to reporting back to you on further progress in our business when we report our fourth quarter results in early March of what you -- (inaudible) 2020. Anyway, I really appreciate everybody joining us on the call. All of the questions were wonderful. Of course, both Steve and I are reachable, so if you got any more questions, please give us a call. And as we enter the holiday season, may you and your family have a great holiday. Thank you.

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Operator [48]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day. You may all disconnect.