TransAct Technologies Incorporated Q1 2023 Earnings Call
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Okay.
Greetings and welcome to the transact technologies first quarter 2023 earnings conference call.
This time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.
And one should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Ryan Gardella Investor Relations.
Sir you may begin.
Thank you Kal.
Afternoon, and welcome to transact technologies first quarter 2023 earnings call. They will be discussing the results announced in our press release issued after market close joining us from the company is CEO , John <unk>, President and CFO , Steve Demartino and this call will include a discussion of the company's key operating strategies progress on these initiatives and the details of our first quarter financial results.
The call participants for questions. As a reminder, this conference call contains statements about future events and expectations are forward looking in nature statements on this call may be deemed as forward looking and actual results may differ materially for full list of risks inherent to the business and the company. Please refer to the company's SEC filings, including its reports on forms 10-K, 10-Q transact undertakes no obligations.
Revised or update any forward looking statements to reflect events or circumstances.
After the call today's call and webcast will include non-GAAP financial measures within the meaning of the 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 website and with that I'll turn the call over to John Huh.
Thanks, Ryan This is John Dillon and good afternoon to all of you and thanks for joining us today.
And this is my first earnings call as Chief Executive at Transact and for those of you don't know me again my name is John Dillon.
Before becoming the CEO here I've been on the board for about a decade. So I know something about the company and you can look me up and linked in but I've been a tech tech individual for a long time places like Oracle Salesforce Hyperion solutions and the like so.
So I feel like I can bring a fair amount of guidance and.
Experience to the job.
So I've only been here for about a month, but I want to share some of my first impressions with you.
And highlight some of the things that I think we're doing well and where we have some opportunity.
To do better.
First of all I feel confident that stating that transact is a great number of strengths and some fundamental goodness for.
For a company of our sites and we're not big.
I also would.
It would be remiss, if I didn't thank Bart schulman for his dedication to transact I mean, his ability to navigate three years of remarkably unprecedented business and logistics challenges, which we all know because of the virus.
War in Europe inflation, and a potential recession without his leadership and through the Lockdowns in Covid related challenges the company would not be nearly as well positioned as it is today. So for me I just wanted to shout out a thank you to Bart for everything he's done to get us where.
We are.
First let me say that we have a number of core competencies that I.
Think differentiate us from our competition and that I believe we can leverage effectively to build <unk>.
Pettitte moats around some of our businesses I mean for example, the printing products and manufacturing processes and logistic capability.
Our industry standard.
And it allowed us to in the past two quarters demonstrate we're capable of delivering product.
When others cannot and winning share and printing markets around the world and frankly, it builds trust with our customers.
I believe this is an advantage that we should lead into.
And I intend to double down on these strengths and go where we can win in essence penetrate customer opportunities and markets first with a winning strategy.
And usually if you're smart you lead with your long suit and we can do that and second.
The ball hub platform is differentiated.
It's a well designed product and with our recent relaunch of the bowl of Hot terminal too I think the product strength only improves.
And frankly, the need for technology solutions in the back of the house, where operational challenges are only increasing.
Companies in the foodservice industry are dealing with food wastage spillage labor and cost everyday and I believe there's a challenge of the FDA approved labeling or.
Only continue to grow every day, and frankly, I think transaction ability to be the product that wins that market is real.
I also believe that adjustments to our product positioning and sales strategies will result in positive changes.
To help customers and prospects see our boho platform and I believe in the end.
We can gain widespread adoption of these terminals in the food service establishments that we serve.
In a short time since I've been the CEO I've had the opportunity to move quickly to enact some early changes implemented relative to sales motion and go to market strategy.
And I believe this is an iterative process. These things aren't things that will have a massive impact immediately but I believe that we all and all can improve the G. T. M. The go to market strategy relative to F. S. T food safety technology Foodservice technology and that we can increase the number of new terminals we sell.
And I believe we should treat that as the most important indicator.
Where we have success and traction for bolthouse.
I'm already making moves to prioritize this objective.
Third and perhaps most importantly, our customers have learned to trust us and rely on transact and our products. The relationships, we have with the lifeblood of any business as you probably all know and through our years of service and innovation and collaboration with our customers. We felt like I say, a very high degree of customer intimacy that.
Any business would want and want to leverage to continue to grow the market opportunity ahead of them.
So these things are things that I believe that we can continue to evolve and improve with a focus on customer centric approach and I think that's going to be a key to our long term success and frankly our differentiation.
And finally, I'm getting to know and speak with members of the transact team I knew many of them already is for my service on the board, but I'm very impressed with the quality of the people that we have in the organization. Many of them are tenured and certainly very dedicated to success here at transact the bench strength is good.
Institutional knowledge across the company from finance and accounting led by Steve and Bill our sales organization Who's now led by Tracey, who we made the chief revenue Officer recently to cover both F S T and to cover our gaming and casino.
And our technology and design teams led by Brent I've got a solid team and I'm delighted to work with these individuals and are very confident that we can do what we need to get done. The foundation is here and I believe transact.
Fundamentally is taking the right steps towards growing into a class leading.
Enterprise.
So I've got some highlights I'll walk through them from our two key vertical markets F S T and casino and gaming.
Before a brief conversation about guidance that I'm going to hand, it off to Steve for some more detailed analysis then we'll do some Q&A so relative to F. S T foodservice technology.
It'll F S T revenue for the quarter was up.
About 60% to $3 5 million.
Led predominantly by an increase in the number of terminals sold to new logos as well as higher shipments of our accu date 9700.
As previously mentioned the new terminal growth remains the most important element of our F. S. T business I intend to focus on that metric and while we are encouraged by the 553, new terminals. We added in the quarter, we're making as I mentioned already changes to our sales strategy to enhance the quarterly run rate the changes will take some time.
It's all iterative as I already mentioned and I will provide more detail around what we're doing in the coming quarters and what we expect to yield from the efforts.
We ended the quarter with one with 12733 terminals in the marketplace.
Year over year up from 10127.
From the Q1 of 2022.
That's a 26% year over year increase that's good but it's not as good as it should be.
Next on the casino and gaming market, we saw all time high quarterly record revenues of $15 8 million up nearly 250% year over year and almost 50% sequentially.
Which was our previous high in the past. So this quarter is the highest revenue bookings for casino and gaming in the history as far as I know.
Strength across broad both domestic and international sales.
Triple digit percent gauge as industry, leading printers continue to pick up market share.
As was mentioned last quarter, we remain the beneficiary of a competitor's inability to provide product to the market and our stellar product production and design teams have been able to secure parts and products, where the competition is not.
Well. This is obviously a good result, we believe that there is a likelihood that we may see a more normalized competitive environment in the future I mean that really wouldn't surprise us.
We just feel it prudent to update our financial outlook ranges. So for fiscal year 2023, we're now expecting between $71 5 million and $73 5 million in revenue.
And between six five and $7 5 million in adjusted EBITDA.
So while the strength of our first quarter results demonstrate the opportunity in the market for US. We believe the correct approach is to assume that the current market dynamics in the casino and gaming market may not continue.
So were.
Currently assuming a moderation in the casino and gaming sales in the back half of the year.
Additionally, while we are making changes to our sales and go to market strategy and F. S. T. It will take some time as I've mentioned several times on this call to see the results flow through into improved sales numbers. So we are not assuming appreciable impact in the near term.
From a profitability standpoint, we assume there will be a downward margin pressure from current levels due to slightly lower casino and gaming sales, which will flow through our results.
So well, we're not seeing our main competitor currently in the market in the second quarter. We believe these assumptions are.
The ones that we're making now are probably the most prudent given that we have no really our ability to project, how our competitors going to move back into a marketplace, where they've mostly been absent.
Finally, as CEO of transact I wanted to use the opportunity to communicate to you.
And the financial community, what you'd expect for me.
The most important objective I have here is to create value for all stakeholders and as a shareholder myself. Our objectives are completely aligned Trust me.
My success as a leader of transact business will result, and should result in deserves to result in success for all the stakeholders.
In part this will be achieved through transparency with you as shareholders and the financial community as a whole.
You know I sincerely welcome feedback comments criticism and encourage any holder.
Our equity to reach out let us know how we're doing.
Our ways, you would like to see us improve.
And a very sincere about that I can do better with good questions. If I don't have an answer I'll get them you can trust me on that so.
So with that those are my sort of formal comments here today and I'd like to turn the call over to Steve Demartino, Our Chief Financial Officer.
Thanks, John and thanks, everyone for joining us.
Let's take a look at our first quarter 'twenty three results in more detail.
Total net sales for the first quarter were $22 3 million up 130% compared to $9 7 million in the year ago period.
Sales from our foodservice technology market or F. S. T for the first quarter were $3 5 million up 62% compared to $2 1 million in the prior year period.
These gains were driven by strength across the board, including record high quarterly software revenue and stronger hardware sales with both ball hub terminals sold to new logos and accurate 9700 units leading the way.
We added 553, new paid terminals ending the first quarter at 12733 terminals versus 10127 at the end of the year ago period.
Our recurring FSD sales, which include software and service subscriptions as well as consumable label sales for the first quarter 'twenty three were $2 3 million up 49% compared to $1 6 million in the prior year period.
Our our pool for the first quarter 'twenty, three with $764 up 20% compared to 638 in the first quarter of 'twenty, two but down sequentially from 806 in the fourth quarter.
As a reminder, the downward pressure on <unk> as a result of additional terminals installed base, which are currently not generating any recurring revenue, which was slightly offset by an increase in recurring FSD sales.
However, as I mentioned last quarter. The good news is that we have a growing population of bolthouse terminals installed in the marketplace, giving us fertile ground to cross sell other bolthouse software applications to these customers.
Our casino and gaming sales reached a quarterly record high of $15 8 million up 232% from the first quarter of 'twenty, two and up 44% sequentially from the fourth quarter of 22.
We continue to see strength across the board in the casino and gaming business with our domestic sales up 315% and international sales up 115% year over year.
While these excellent results continues to be driven by a competitor's inability to supply their customers with product as John spoke to earlier, we can't assume these trends will hold for the entire year.
But we have yet to see evidence materialize. We believe it is likely that our main competitor, but we enter the market in the back half of the year, which would affect our results.
However, we also believe a certain amount of our new market share gain will be sticky, resulting in a new go forward run rate once the competitive dynamics normalize.
P O S automation sales for the first quarter to 23 or $1 8 million up 38% from $1 3 million in the prior year period.
This was a result of higher risk at 9000 and sales compared to a COVID-19 impacted Q1, 'twenty two largely from a price increase we instituted in mid 'twenty, two and responsive supply shortages.
As expected sales were down significantly sequentially as our largest <unk> customer completed a major initiative in 2022.
As a result, we expect sales to continue to be lower throughout twenty-three compared to 2022.
Moving on to transact services group or T. S G.
For the first quarter <unk> sales were down 20% year over year to $1 2 million.
This decrease was largely due to lower sales of spare parts for our legacy lottery printers, which we do expect to recover somewhat during the remainder of 'twenty three.
Moving down the income statement, our first quarter 'twenty three gross margin was 55% as compared to 26, 4% in the prior year quarter.
The significant margin gains resulted from higher sales volume improved mix of higher margin casino and gaming printer sales and the effects from two rounds of price increases we instituted during 2022.
Looking forward, we expect gross margins to be under modest downward pressure as we move through the remainder of the year as we begin to experience the anticipated impact from the change in competitive dynamics at the casino and gaming market.
Our operating expenses for the first quarter increased 3% to $8 4 million up from $8 2 million in the first quarter 'twenty two.
Breaking this down a bit our engineering and R&D expenses for the first quarter were flat at $2 3 billion.
Selling and marketing expenses were also relatively flat, increasing 3% to $2 8 million for the first quarter as we returned to more normalized levels of travel marketing and trade shows compared to the still COVID-19 impacted first quarter of 'twenty two.
Lastly, our G&A expenses increased 7% to $3 4 million for the first quarter.
This increase was largely attributable to an across the board salary increase for all employees. The hiring of additional back office staff and depreciation related to our new ERP system that we implemented in the second quarter last year.
We generated operating income of $3 8 million or 17, 1% of net sales in the first quarter 23, compared to operating loss of $5 6 million in the prior year period.
On the bottom line, we recorded net income of $3 1 million or 31 cents per diluted share compared to a net loss of $4 4 million or a loss of 44 per diluted share a year ago period.
Our adjusted EBITDA for the quarter improved to $4 5 million compared to an adjusted EBITDA loss of $5 1 million for the first quarter last year.
As John stated, we've updated our adjusted EBITDA guidance for 'twenty three to six five to $7 5 million, which is up from our previous expectation of 5.2 to $5 4 million.
We believe that this outlook is the most prudent approach to our guidance considering the expected normalization of the casino and gaming market in the back half of the year, which would negatively impact both our sales and gross margin compared to the first quarter of 'twenty three.
Lastly, I'd like to mention our cash position.
Finished the quarter was $6 4 million of cash on hand, and $2 million to $5 million of outstanding borrowings under our $10 million revolving credit facility with C&I lending.
Within the framework of our current guidance, we expect to be cash flow positive for 2023 and believe our current cash on hand and available borrowings under the Sienna facility position us well to execute our current growth roadmap without any immediate additional funding needs.
And with that operator, I think we can open up the call to questions.
Thank you.
I'll be conducting the question and answer session.
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Our first question comes from George Sutton with Craig Hallum. Please go ahead.
Thank you our great results and John welcome to the call.
I'm curious.
Could talk about the casino printer business from the following context.
We were adding lines much of last year to try to keep up with demand can you just give us an update of where we are there are we working off of a backlog and is there any way to characterize this on a book to bill kind of basis.
I think I can answer that I think we're in pretty good shape, but I think some of the specifics I think I'd like to ask Steve to speak too sure. We haven't we haven't we have a very healthy sales backlog for casino and gaming printers on the inventory side were actually good we actually were able to for the first time, we actually were able to.
Shipped all the orders that we had scheduled for the first quarter. So in other words, there we had no push out of orders from Q1 to Q2, we were able to deliver everything that was scheduled so we're in a good position where we were.
Or still have a low inventory position, but we're building that back now in the second quarter.
Gotcha, and and John You had mentioned both hot the second version of Boo Ha can you talk about changes and improvements that we've made to that and and.
I understand there were certain push backs from potential customers have we addressed those push backs with the second version.
And I think the answer is yes, we've got a pretty good.
Relationship with a number of our clients that want a terminal that does exit of Y and Z and we've been listening to them.
This this this new terminal two is sort of like all of the enhancements that we would have wanted to make the screen is better the printer is faster the power supply is built in the screen is you can get it two ways you can get it with a tablet that you can walk around.
And detach, but this screen and its vessels are built in.
And you kind of put all of it together and it's just all the way around a better terminal. It's faster. It's more performance. The screen is brighter I mean, it's sort of a whole bunch of those things all combined and I've taken a close look at it and the other thing that you wouldn't see is that we standardize sort of the underlying chipset underneath.
The core product and we're unifying that across our other products. So that we only have sort of one common underlying underpinning design that we can use for other terminals or even our terminals that we use in the gaming and casino industry. So you know fundamentally the reason people want these things to so that they can save labor and.
They can comply with F D a.
Labeling requirements. They can do date coding and they can print a grab and go labels and the like and we do that really really really well. So I think I think we nailed it.
We're going to show it at the NRA conference coming up on the twenty-first Dumais and we've got a couple of other trade shows that we're going to be making the rounds with and candidly it really wasn't not so much the terminal, but I'm really encouraged by some.
Some changes we've made in the sales organization. Some training, we're giving you the people and the reality is it's almost like a client can't afford not to implement a back of the house automation system and we think the labeling component of that is probably the leading requirement that those things are going to need however, the terminal its.
Shelf can run pretty much any software that you wanted to run so given that it's all in one place it's connected to the Internet and it's secure you put all that stuff together and it's a pretty good piece of equipment to have in the back of the house.
Great. One last question for me can you talk about Theres, a large convenience store customer that you've referred to in the past and a large franchise or that's coming in the back half of this year is there any updates on those two opportunities.
Not specifically I would say that the large convenience store is is purchasing equipment again.
He took a break for other reasons that had nothing to do with us and Theyre kind of back on track.
And as for the large franchise franchisee Ah Theres no Theres no news and that's good they like what we're doing and.
Stay tuned.
Alright, Thank you very much.
Our next question comes from Jeff Martin with Roth. Please.
Please go ahead.
Thanks, Good afternoon, John and Steve.
John wanted to jump in on on the changes in go to market strategy, specifically with Ohio, you mentioned, some enhanced training, but are there other kind of low hanging fruit are characteristics that go with that strategy and I know you.
<unk>. This is not an immediate results type of situation, maybe give us a framework of when you expect some momentum to start to build there.
Well that that the outcome is is hard to predict with any certainty.
But you know this is a classic let's get the go to market strategy right.
What kind of salespeople do we have how are they trained what what kind of lead funnel do we have are we doing account based marketing how do we reach the clients, what's the conversion rates and we're basically putting in what I believe is sort of industry best practices across the board. We've made some reorganization in the sales force we've got.
Some training planned we're also doing more selective targeting you know if you think about it.
Theres, an awful lot of businesses, we estimate maybe a couple million dollars that we could sell our Beaumont terminal to but some of them have three stores. Some of them have five stores. Some of them have one and then there's people that have a thousand and we're trying to focus the sales organization.
We're willing we've always been willing to take a call for moments anybody. So some of the things that we're doing are intended to focus the resources that we do have.
Create success, where we know we can get it and then double down on that I believe that.
We have the ability it's kind of interesting if you think about it a franchisor is very very different than somebody who owns the stores.
And my other question is around the bowl hot to terminal relic.
Relative to the initial blow Hot terminology is your sense that you know the.
The initial version.
Kept kept customers from purchasing it for you know.
The the reasons that you know are different about the upgrades to the bill ought to terminal trying to get a sense of.
Is this terminal Gonna open open the door essentially too you know starting to close some larger restaurant chains at a restaurant groups.
Yeah, Great question.
Well look I mean, this has been an iterative process with the terminals as well we.
We started out just with the basic labeling.
Printer today the software in there for labeling is very sophisticated there's a lot of things. We can do the bullet terminal by the way and I hate to talk about features but I think this was kind of cool you can have two different rolls of paper and there you could have downturn and ensure an inch and a quarter all the way up to three inches. We do 300 DPI printing. So you can put a heck of a lot more information on.
On a on a small piece of paper.
And.
So I think the answer is yes, and no I don't think there was anything deficient in the earlier versions, but here's what I would say.
It, especially for large organizations.
This is sort of a.
<unk> for the client to change the way they operate the back of the house I mean, we've got people with Greece.
Grease pencils, writing things on sticky notes and putting mud packages of mayonnaise, and and potato salad and stuff like that and you know so.
From a sales standpoint.
I think it's a relatively long sales cycle, and it's going to be lumpy, especially for the large clients because we're asking them to do a bit of a lift and shift in the back office.
And a lot of the clients and I haven't been enough sales calls yet, but the anecdotes that I hear.
This is kind of a situation where the customers don't say no. They don't they say not now.
And one of the things relative to the prior question that.
Was asked was.
About the go to market what are the things that we are implementing is and nurture track because we want to make sure that people who have expressed interest we want to make sure that we keep them warm so that when they are ready.
When we touch base with them. They go Okay now is the time.
And you know for franchisees you can imagine that in some situations the franchise might approve of technology, but then they the franchise.
Waits for the franchises themselves to buy an approved piece of technology and then in some other cases the headquarters basically rolls out a new system across the board, especially for something like grabbing go where they implement a new go to market strategy themselves and they need the FDA labeling that we can provide so you know I think it's kind of a combination of all those.
Things better terminal better sales approach better nurturing better customer targeting and.
The bottom line is the terminal works and it works really well we've been demo demonstrating it kind of under non disclosure for awhile and we've gotten tremendously positive feedback.
Great. Thank you.
Ladies and gentlemen, as a reminder.
Question. Please press start one.
Next question comes from tax Grand plan. Please go ahead.
Hi, guys, great a great quarter obviously.
Question. It has to do with you know sort of historical so you've you've got some number of 97 hundred's.
Out there across you know the restaurant convenience store space.
Can you give us a sense of.
How many units are out there and what the opportunity to go back to those customers to to upgrade them to the newer terminal and obviously to get them hopefully doing some more recurring revenue.
Well.
That's a great opportunity for an upgrade for a couple of reasons one the bow at terminal two can do a lot more than the 90 702. Eventually that appears all need to be replaced so we look forward to kind of replacement business, which course generates revenue.
We have a lot of 97 hundreds out there.
Steve won't tell me the exact answer because he's afraid I'm going to share with you all but you know, it's ken's tens of thousands hits in the tens of thousands more than 110.
Okay, if that and so so.
Right.
Safe to assume you guys are approaching those customers to to.
To try to get them to upgrade and if so when you're doing that what's the biggest pushback on doing it now versus like you say not now.
Well the answer to the first part of the question is yes, we're approaching them and frankly some of these clients are the ones that were getting really good feedback from you know.
What you want to do is build a product that the customer wants.
Not getting any particular pushback I mean, we just haven't had the terminal ready.
We do now and I think that we're just beginning the sales process both for new clients and then the replacement placement clients. The only pushback frankly is the 9700 is a pretty good workhorse and so if it's performing adequately we're going to get the business eventually, but you know they might not feel compelled to go out and rip up.
A thousand terminals at a time, where a couple hundred and so we think we think the replacement is going to happen.
Sort of more evenly throughout the growth trajectory of the ball Hot terminal to as opposed to all of a sudden every 9700 is going to be replaced in her in a matter of three to six months.
Mhm.
Okay. Thanks, a lot.
There are no further questions at this time.
Turn to far back over to John <unk>, Chief Executive Officer for closing comments.
Well again, thanks, a lot for joining today.
I am very sincere in my request for feedback comments input.
Stuff you think we ought to be doing that we're not or if you like some of the stuff I love those kind of calls.
But I'm open to suggestions and ideas from all of you and back to my original.
Statement as I intend to be more and more transparent and I think that's something that the investors deserve and as they get more comfortable with the data and the information I intend to share more and more of it and to the extent that I can speak freely about the company and our progress I'm happy to do that.
And with that I will say goodbye and thank you.
This concludes today's tonic.
You may disconnect your lines at this time, thank you for your participation.
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