TransAct Technologies Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Transact Technologies Third Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Gardella, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thanks. Good afternoon, and welcome to the Trademark Technologies Q3 2024 Earnings Call. Today, we'll be discussing the results announced in the press release issued after market close. Joining us from the company is CEO, John Dillon and President and CFO, Steve DiMartino. Today's call will include discussion of the company's key operating strategies, the progress on those initiatives and details on our Q3 financial results.

Speaker 1

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 full lists of risks inherent to the business and the company, please refer to the company's SEC filings, including its reports on Forms 10 ks and 10 Q. Transact undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that appear after the call.

Speaker 1

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 figures calculated and presented in accordance with GAAP can be found in today's press release as well as in the company website. And with that, I'll turn it over to John.

Speaker 2

Thanks, Ryan, and good afternoon, everyone, and thank you all for joining us today. Total sales for the quarter were $10,900,000 We had excellent progress in the FST Foodservice Technology space. It was highlighted by 1355 units sold, meaning that in the last two quarters, the last 6 months, given that last quarter we sold about 1476 units, last 6 months we've sold 2,800 units and we're feeling pretty good about that. We're proud of the sales progress we've made with the team and we expect this approximate level of quarterly terminal placements to continue as we head into 2025. So that's some pretty good news, but let's walk through some of the other FST highlights.

Speaker 2

First, the FST from a revenue line standpoint was $4,300,000 up 2% year over year and 3% sequentially. The FST recurring revenue was $2,900,000 down 8% year over year, but up 3% sequentially. On continued strength from several of our large chain customers, so we feel pretty good about that as well. FST hardware sales were up 30% year over year and up approximately 3% sequentially. And as I mentioned, in Q3, we sold 13.55 units in the quarter, which is up 90% from the prior period a year ago.

Speaker 2

As we discussed on the last call, we believe this momentum is just the start from the reorganization and refocusing of our FST sales group. We spent a lot of time on that since I started as a full time CEO. I guess it was April last year. We're going to continue to fine tune the process, but fundamentally I believe that we've got the right directionality here. We've made excellent progress and especially with our focus that's related to developing, tracking and nurturing the lead process, which we didn't do very well in the past.

Speaker 2

We've got a really good process now and it's beginning to work pretty well. I will reiterate, as I said before, that sales will continue to be lumpy. We're an enterprise B2B company and when enterprises buy, they usually buy in lumps. We use a land and expand strategy somewhat where a client will start with our technology and then buy more. But sometimes it's very hard to predict those large additional acquisitions.

Speaker 2

And the final thing I'll just say on that is, I think that we should assume that the current run rate of terminal placement is sustainable. I think that's pretty encouraging for us. And as well, the rollout of our terminal 2 to our large QSR client continues to go as planned with a large number of the terminals this past quarter being placed with them. The feedback on the product continues to be overwhelmingly positive and we even sold about 100 units to a sushi customer in the quarter, which is also a good sign. And we have a couple of large major convenience store customers set to upgrade their entire installed base of some of our older units.

Speaker 2

For those of you who don't remember, we sunsetted the Accudate 9,700 terminal at the end of 2023, which means all those units that are out there installed are installed base that we can use for potential upgrades to the new BOHOT terminal 2. We also had a strong quarter on the new logo line. We added 12 new BOHA clients in the quarter, representing an opportunity for about 2,400 units over time. The new business pipeline remains strong. Quarter over quarter difference in the 4 quarter pipeline remains solid and consistent.

Speaker 2

It's holding steady even though we booked business from last quarter, we take it out. We have to add new opportunities into the pipe. And I'm feeling very good about the pipeline coverage compared to the target revenue goals that we set for the sales team. Moving on to casino and gaming, we reported revenue of $4,500,000 that's down 50% year over year. However, on a positive note, we're seeing continued normalization of this market as we predicted on previous calls.

Speaker 2

On the inventory side, I'm happy to say that we're down to just one of our major OEMs who is stuck in an oversupply situation. We're actively working with this client to reconfigure some of their existing stock for other markets in order to help them accelerate the liquidation and begin buying product from us again. However, we still expect them not to be buyers until at least the start of the year. And anecdotally, I know some of you have heard this, as well, but casino activity seems to be slowing a little bit. We were just at IGT, I'm sorry, G2E.

Speaker 2

IGT is a nice client, but G2E in Las Vegas. And we kind of got a sense that right now the gaming industry is a little slow. We think it's macroeconomic factors. We don't think there's anything serious there, but we may see this trend continue until 2025. And we also believe it's contributed to the slower pace of slot sales from some of our OEM customers.

Speaker 2

On a final note relative to gaming and casino, we're seeing some increased sales traction with our Epicentral product as a result of our relationship with Casino Track. Casino Track is selling Epicentral as part of their slot suite product offering on a subscription basis. We like subscription revenue, especially when it's software. In August, we shared some results from the 6 month deployment of slot suite, which was developed in this partnership with Casino Track and Transact and going across an installed base of 2,500 games and compared against data from the previous 12 months, the customer where we were doing this pilot saw substantial increases in carded play, rated coin in, overall coin in as well as rated in overall WPU, that's win per unit. And we believe this could represent some significant white space for us in the casino market and we're excited about that over the long term.

Speaker 2

Next, I wanted to provide you with a bit of an update on our strategic review process. And while I cannot provide any further details at this time, I wanted to ensure investors that we're working hard on the process. We're driving quickly towards an optimal outcome for our company and its stakeholders, but we don't really have any news. We promise that we will update everyone via the appropriate channels as soon as we have something to report, something to talk about. Before I turn the call over to Steve for more detail, I wanted to provide a bit of feedback on our financial outlook.

Speaker 2

Due to the unexpected lengths of demand lag in the casino and gaming, we feel it's most prudent for us to revise our revenue outlook to a range of between $43,000,000 $45,000,000 Our adjusted EBITDA, however, range will remain the same as we've been very disciplined on the cost side of the business. So I wanted to make sure you heard that information from me. So in summary, we are pleased with the progress, particularly on the FST side of the business. Year over year terminal placement up 90%. We continue to see additional demand from several of our larger key FST customers.

Speaker 2

The product is a winning product, the Terminal 2. It's one of the best products we've come up with and I'm really excited about the potential. We're getting strong positive feedback and growing sales opportunities. The process improvements have clearly started to show results and on the casino and gaming side, while the lag and demand has been longer than anticipated, we're down to really only one OEM customer is not currently buying from us and we expect this dynamic will resolve and normalize in the first half of twenty twenty five. So that's really much the news from my report.

Speaker 2

And with that, I'd like to pass the call over to Steve for more detailed review of the numbers. Steve?

Speaker 3

Thanks, John, and thanks everyone for joining us today. Let's turn to our Q3 results in a little more detail. Total net sales for the Q3 were $10,900,000 which was down 6% sequentially and down 37% compared to $17,200,000 in the prior year period. Sales from our Foodservice Technology market or FST for the 3rd quarter were $4,300,000 which was up 3% sequentially and also up 2% compared to $4,200,000 in the prior year period. Our recurring FST sales, which includes software and service subscriptions as well as consumable label sales for the 3rd quarter were $2,900,000 That was up 3% sequentially, but it was down 8% compared to $3,100,000 in the prior year period.

Speaker 3

Our ARPU for the Q3 of 2024 was $700 That was down 3% sequentially and down 25% compared to $9.29 in Q3 of last year. As a reminder, we're currently selling a number of BOHA terminals to a large QSR with no recurring revenue attached to them to start. While this presents an opportunity to sell recurring elements in the future, for now they still represent a drag to our ARPU number. In the quarter, a large number of our terminals again fell into this category and we expect this to continue into the near future. I also wanted to remind everyone that we had approximately 5,300 terminals that just came offline due to the loss of a C store customer that we discussed on our Q1 call.

Speaker 3

The new online terminal number and ARPU will be reflected in our Q4 results, but we expect our ARPU to rise to around the $800 range once these changes have occurred. Our casino and gaming sales were $4,500,000 They were down 50% from the Q3 of 2023, primarily due to one remaining large OEM customer who continues to work down high levels of printer inventory that they stockpile during the supply crisis in 2023. As John mentioned, we're working with this customer to reconfigure their in stock printers for the global market in order to accelerate the liquidation of their inventories and return them to a buying position. On the positive side, all the rest of our largest OEMs resume buying again in the 3rd quarter. We believe our sales in the 3rd quarter may also have been impacted by some demand softness in the global casino gaming industry.

Speaker 3

POS automation sales for the Q3 decreased 30% from the prior year to $1,100,000 This decline was largely the result of difficult comps as we experienced unusually high sales in 2023 due to our competitors' inability to supply product. In addition, the competitors in this market are now fully back online and we're returning to a more normalized competitive environment. As a result, we continue to take steps including adjusting our pricing to ensure our products are in line with the new dynamics of the market. Moving to Transact Services Group or TSG. For the Q3, TSG sales were down 62% year over year to $864,000 This decrease was largely due to unusually high sales of the legacy lottery spare parts in the prior year due to a customer's last buy in 2023.

Speaker 3

As a result of this last buy, we don't anticipate any future sales of these spare parts. Therefore, we expect our current quarterly sales level for TSG to be about our new run rate going forward. Moving down the income statement now, our 3rd quarter gross margin was 48.1%, which was down from 51.9% in the prior year period. This comes as a result of lower overall sales volume, including significantly lower casino and gaming sales that are higher margins. Going forward, we expect our gross margin to continue to be in the mid to high 40% range as we head into 2025.

Speaker 3

Our total operating expenses for the Q3 decreased by 22% from the prior year Q3 to $6,100,000 and they were also down sequentially by 7%. The year over year decline came in large part as a result of the savings we achieved from initiating 2 separate and successful rounds of cost reduction actions totaling $5,000,000 on an annualized basis. In late Q3 of last year, we initiated our 1st round of broad based cost cutting efforts. We estimate that this initiative would produce operating expense savings of about $3,000,000 on an annualized basis. And we've experienced the full effect from these reductions throughout 2024 to date, including the Q3.

Speaker 3

We then instituted the 2nd cost reduction initiative in June of this year, focused largely on further reducing headcount and other external third party resources. We estimated that the second initiative would generate an additional $2,000,000 of annualized cost savings over and above the $3,000,000 of savings from the 1st round. I'm happy to report that we also experienced a full effect from the 2nd round of cost reductions in the 3rd quarter. There's one thing I'd like to note regarding our expected operating expense level for the Q4. While we will continue to see the effects from both rounds of our cost savings in the Q4, we also will see an uptick in marketing spend due to the timing of annual trade shows that we attend as our 2 largest shows, G2E and NACS, both occur in the Q4.

Speaker 3

This is consistent with prior years that we have reduced our overall spend on these trade shows for this year. So as a result, on a sequential basis, we expect total operating expenses to be higher in the 4th quarter as compared to the 3rd quarter. And now returning to our Q3 OpEx, they break down as follows. Our engineering and R and D expenses for the Q3 were down 35% year over year to $1,600,000 Our selling and marketing expenses were down 22% to $1,900,000 and our G and A expenses were down 10% to $2,500,000 For the Q3, our operating loss was $837,000 or negative 7.7 percent of net sales compared to operating income of $1,200,000 or 6.9 percent of net sales in the prior year period. On the bottom line, we recorded a net loss of $551,000 or $0.06 per diluted share for the 3rd quarter, which compares to net income of $906,000 or $0.09 per diluted share in the year ago period.

Speaker 3

And our adjusted EBITDA for the quarter was negative $204,000 which was down from $1,700,000 for the Q3 of last year. And lastly, turning to our balance sheet. It continues to remain solid. Even with the reported net loss for the quarter, our working capital trends remained positive and we ended the quarter with over $11,000,000 in cash and only the minimum required $2,250,000 of borrowings under our credit facility with Sienna Lending. So overall, our liquidity position continues to be strong.

Speaker 3

And with that, I'd like to turn the call over to the operator for questions. Operator?

Speaker 4

Thank

Operator

The first question is from George Sutton from Craig Hallum Capital. Please go ahead.

Speaker 5

Hey, good afternoon guys. This is Logan on for George. I wanted to start on that casino and gaming side. And can we maybe just double click on the one OEM that you guys are talking about still being an oversupply? I just want to make sure I understand what you kind of are doing with them to kind of try to work through that.

Speaker 5

It sounded like you talked about liquidating or repurposing. And then kind of a follow-up to that is, I mean, it sounds like that maybe subsides in 2025. Thinking beyond that, just how would you characterize the competitive environment there relative to your ability to kind of take market share? Or what does that look like?

Speaker 3

John, do you have that one?

Speaker 1

Steve, do you want

Speaker 2

to? Yes. Well, so the way I expressed it was there's other markets and the machines that go into other markets have different configurations. And so for a large OEM who makes different types of gaming systems, it's possible that the printers that they have that might be an oversupply in one geographical market may work well in another one. And that might be an easy way for us to make some slight changes to the existing inventory and have them move out to other markets that we also like those other markets, but where there's not an oversupply.

Speaker 2

So we're kind of working with that with one of our large OEMs and we're optimistic we might be able to get that worked out.

Speaker 3

Yes. Logan, sometimes we add or take off accessories depending on the geographic market that it's going into or it might add different firmware that gets loaded depending on the games that they're going to be used in. So those are the type of reconfigurations John was referring to.

Speaker 5

Okay. And then just anything on the competitive environment there? I know usually you guys are kind of competing with kind of you and one other player. I'm just kind of wondering what that looks like.

Speaker 2

Yes. Well, the other guys were missing an action during the recovery from the pandemic and they're back. We tend to do a pretty good job head to head, and that particularly is placements in new casinos and new construction projects. But they kind of got their bastion with moats around them. We have ours with our moats around them.

Speaker 2

We made pretty good inroads, and we're working real hard to maintain, if you will, those inroads. But just to give you a sense of it, if you were operating a single operation, you might want our units or you might want units from another vendor. Mixing and matching is great from a supply chain redundancy standpoint, but frankly, the engineers on the floor, the techs, they kind of want to work with 1 vendor, not more than 1 vendor. So we're doing the best we can to show that our products are more reliable, more cost effective, etcetera, etcetera. And we will gain market share or the market share that we gained, some of it will be sustainable.

Speaker 2

What it's too early to tell, because you kind of have to go through a few replacement cycles to kind of find out how much your inroads are going to make a difference in terms of garnering additional business within the same existing customer.

Speaker 5

Got it. Thanks. I'll hop back in the queue.

Operator

The next question is from Tyler Nuyen from ROTH Capital Partners. Please go ahead.

Speaker 4

Hi. Good afternoon, guys. I had a quick question on your FSP. So you added 13 clients in the Q2 and the Q3. So how is your average client size trending?

Speaker 4

And what is the initial order attachment rate for new clients versus a gradual ramp over time?

Speaker 2

That's a complicated question. One of the things that we did when we refocused the team is our product is sophisticated and very capable and it's suitable for a large operation. That's why we're successful with large QSRs and some of the food service management companies where they care an awful lot about the data. It's not just the mom and pop operator. So now most of our focus from a selling standpoint is on companies and organizations that can buy a minimum of 50 to 100 units.

Speaker 2

So that's typically the scale at a minimum where we're going to get a new client. Now that doesn't mean if somebody calls up and they're not going to represent a big challenge from an implementation or a support and service standpoint, we'll take a smaller client because that's good for the brand and it's good experience for us because we always learn things from our clients just like they learn things from us. But the interesting thing is with the land and expand strategy, it may be the case with a new operator, we might pick up an early order for 5 or 10 machines, while they'll try it out in a few of their stores or fewer their operations. And then with the success, a lot easier for us to go back and work with the customer on expanding that product success into either other branches or more facilities or more stores, depending on what kind of operation they have. So I would say that you should assume, I mean, if we added 12 companies as new customers this last quarter and we're telling you that 2,800 units is the potential, that's a couple of 100 units maybe on average.

Speaker 2

I mean, that's kind of the sweet spot for us, but it's pretty hard to tell that ASP, the average selling price is not really a good indicator because if it's a big QSR and they want to try the product out in 4 or 5 stores and they want to buy 5 or 10 machines, it's not going to be a big order, but getting the camel's nose into the tent is really important. And as I think everybody on the call knows, selling more product to an existing customer is massively easier and massively cheaper than trying to land a new customer. So we try to get in early and small, prove the technology, it works so well and then grow that business from there. So our sales team is targeting like that and it seems to be working.

Speaker 4

Got it. So are there any particular end markets that the clients are within?

Speaker 2

Say again?

Speaker 4

Are there any particular end markets that the clients are within?

Speaker 2

Not in particular. We sell across about 5 sub verticals within the food service industry. We've got QSRs, quick service restaurants. We have convenience stores. A strong space for us is sushi.

Speaker 2

Now sushi oftentimes is going into grocery stores. If you go in and you pick up a sushi thing, you want to read the label and you want to know that it's safe and what the ingredients are. We also sell into restaurants. We also serve and do food service management companies, people like Sodexo and Aramark. And they're kind of all over the map, frankly.

Speaker 2

They all do different things when it comes to food. And we're very happy with the fact that we're learning a lot about those different industries. We're understanding the ROI, the return on investment clients get from installing the BOHA system. And candidly, our salespeople are getting better and better at sharing success stories and kind of getting the first meeting and then getting the next step and the next step. And we've got a pretty good close rate now, which is great.

Speaker 2

A lot of times if your sales team is kind of new or not very experienced, you'll get a lot of first calls, but you don't get much follow-up. And part of where we're focused, as I mentioned on the call, is we're looking at the whole GTM, the go to market, which starts out with where do you get a lead and that could be a trade show, it could be a banner ad online, it could be email, it could be through LinkedIn or other different vehicles. And then you start out with somebody that you know, which I would prefer to call a suspect and then you kind of work from there. We study the personas of the different people who need the technology, whether it's somebody in charge of operations, somebody in charge of food safety or somebody in charge of store efficiency from a data standpoint and a digital standpoint. And then we work through that and we're actually tracking this with a funnel at each stage.

Speaker 2

The marketing team develops it with a nurture track to a point where all of a sudden they can hand it off to the sales team, either because the client, a potential client says, I'd like to talk to somebody or I'd like a proposal, can I get a demonstration? I'd like some more information and we carry it all the way through and it becomes an SQL, a sales qualified lead. And one of the things that we are doing now, it's early days still, but we're tracking the yield at each one of these steps and we're figuring out are there any choke points in there, the new bottlenecks, what can we do better? And in each step along the way, we're creating tools for the sales organization to help it make it easier for them to get from that step to the next one, like say an ROI calculator or maybe a white paper on how customers have gotten a good ROI from the investment in the BOHA platform. And that's kind of the sales process that we're refining.

Speaker 2

It's kind of one of these wash, rinse, improve, repeat things. And I feel like as each quarter goes by, we're getting better and better and better. We've got a good team, they're motivated and they're well targeted.

Speaker 4

That's very helpful. Thanks. And also you guys mentioned the potential for improved conversion rates in 2025. Can you elaborate what particularly is driving that?

Speaker 2

It's a process. If you think about what a lead is, it's a name. At the most lowest common denominator, it's a name. Well, if you don't know anything about that name, your ability to work that person from the top of the funnel all the way down to a closed deal, the yield is going to be really, really, really low. So the reason the yield is getting better is that we have better metrics, we're paying attention to the metrics, the sales team and the marketing team are joined at the hip and nobody wins in the building unless we get an order and everybody's targeted on that and everybody's gold on that, but we're looking at the process end to end.

Speaker 2

And there's an old saying that if you don't measure it, you can't improve it. Well, trust me, we're measuring it and we're looking at areas where we can improve and we're working on it. And I think we're doing a better and better job and that's kind of the product's good. We just have to be really good at executing in the field and that's kind of where a lot of our focus is.

Speaker 4

Got it. And lastly, so you guys were mentioning that customers in the gaming casino market are still working through excess inventory. When do you expect to return back to normal patterns?

Speaker 2

It's pretty hard to say. I mean, the pandemic was a gut punch for everybody in the gaming industry. And then when the supply chain thing cropped up at the end of the pandemic and then the people wanted to swing back into action and get things going again and they couldn't get product, a lot of them just went crazy and overbought. They were afraid that the supply chain problems would persist. There were many vendors in our industry or adjacent to our industry that basically had stock outages and couldn't supply.

Speaker 2

If you're making a slot machine and you need a ticket in, ticket out or bill validator and you can't get 1, you can't ship a slot machine. And so when they started buying, they went crazy because normally it's kind of hand to mouth in the industry because as a good supplier, usually if a client calls up and says I need 50 or 100 units, I need them in about 2 or 3 weeks, we can get them to them. But when the supply chain hit, I mean, there were times when we were basically triaging and allocating to various clients. And so they all got nervous and some of the other vendors in the business couldn't even supply anything. So they overbought.

Speaker 2

And they got to work their way through that. And then as I mentioned on the call, we're seeing a little bit of a slowdown right now in the gaming industry. And my belief in that, the reason for that is that just like the slot manufacturers overbought, we believe that a lot of the casinos roared back to life and a lot of people, especially in the American, North American marketplace flocked back to the casinos and things like that. So there was a bulge kind of in there and everybody kind of love that bulge and now things are settling back down to normal. And when that happens, it's kind of like, okay, now it's time to take a breath, catch our breath and gradually now plot going forward and kind of a new normal, whatever that looks like.

Speaker 2

We don't see any long term problem with the market opportunity, but we do see a little bit of headwinds right now, which we think are going to subside in 2025.

Speaker 4

Perfect. Thanks for taking my questions. I'll go back to the queue.

Operator

This concludes the question and answer session. I would like to turn the floor back over to John Dillon for closing comments.

Speaker 2

Well, listen folks, thanks a lot for joining us today. I hope you got the message. We feel pretty good about We believe that gaming casino is just going to reach a new normalcy here. It's probably 2025. We are working with the one remaining OEM that's not quite out of the stock.

Speaker 2

It's still overstocked. We're going to work that through and we're heads down. Steve is doing a great job running the business. We're spending a lot of time and cost control and we're showing that we can operate as a smaller top line company with reasonably good bottom line. We're focused on the process.

Speaker 2

I mentioned that. And just one last thing, I'm going to be at the ROTH Conference coming up here in November. I think it's the 19th 20th and I'll be in New York City if any of you are there and you want to get a 1 on 1 with me or if you want to take a call, we can do that. We're always open to a call and I'm happy to take them any time. So with that, I think we'll wrap up.

Speaker 2

Again, thank you very much. And if I don't speak to you again soon, we've got some great holidays coming up and I hope you all enjoy them. Thanks a lot. God bless.

Operator

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

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TransAct Technologies Q3 2024
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