Q2 2023 TransAct Technologies Incorporated Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the Transact Technologies Q2, 2023 earnings conference call. At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Wednesday August nine 2023, I would now like to turn the conference over to Ryan Gardella Investor Relations. Please go ahead.
Thanks, Chris Good afternoon, and welcome to transact Technologies' second quarter 2023 earnings call today, we'll be discussing the results announced in our press release issued after market close joining us from the company CEO , John Dillon, and President and CFO , Steve Demartino. Today's call will include a discussion of the company's key operating strategies progress on those initiatives and deep.
<unk> on our second 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 at actual results may differ materially.
The 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 and 10-Q.
<unk> undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after the call.
Call and webcast will include non-GAAP financial measures within the meaning of SEC regulation G. When required reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found todays press release as well as in our company website and with that I'd like to turn the call over to John .
Okay.
Yeah.
Thank you Ryan and good afternoon, everyone and thanks for joining today.
Last time I had a chance to present to you all I was only about a month into the job as CEO for transact and note that 127 days that carried him up and I've had at least a little bit more of an opportunity to roll up my sleeves and dig into some of the work in earnest. So I'm happy with the progress we've made Adam and his shares.
All of that with you today.
Sure.
Okay.
At a high level. The results came in as expected and discussed on our last call net sales came in at $19 9 million year over year. The increase was approximately 58%.
But it was a sequential decline of approximately 11% from the first quarter as we expected.
We've all tried.
To work hard setting the stage for success in the back half of the.
The year and more importantly on into 'twenty four and beyond.
Last quarter I talked about the fundamental goodness I found here at transact and as well as some of the parts of the business that we're going to require some action to allow us to take advantage of the opportunities up ahead in the market I can say that we are almost done revamping the parts of the business where that needed to be done.
And we've added some new internal process.
There was none before we have moved some personnel around we'd let a few go we've added a few I like the progress we've made.
And I feel that we're fully ready to add some much needed momentum for the business.
The reality is that our sales teams processes and go to market GPM strategies really required.
Pretty significant overhaul.
And I'm really happy to say that the first phase of that is largely complete I also feel confident that we now have the right people in the right places and we can now it turned our attention to the other parts of the equation predominantly focusing on execution.
While change takes time and shifting behaviors and habits in any business can be a long game I'm pretty confident that we're now moving to all in the right direction.
Let me go over some of the results from our two markets first.
In our food service technology or F. S T market.
SSD revenue was $3 9 million up about 14% year over year. This was led primarily by higher shipments of our accu date, 9700 product and increased level of sales.
Also added 743, net new Bohai terminals in the quarter, bringing the total number of our online terminals in the market up to <unk>.
<unk> thousand 476 as of the end of the quarter June 32023.
So that's up from 10941 in the prior period a year ago.
And honestly I know, we can improve on these numbers and that's one of the focuses that's pretty key for me.
Our FSD sales team is rebuilt and has refocused.
And the number one priority, which is selling as many of these new units as possible and in the marketplace. We have implemented the personnel changes I mentioned, where needed and we're out there every day pitching both the new and existing clients on this freshly launched bolthouse terminal two.
We've also made some excellent progress revamping, our sales motions and GPM strategy and while this is an iterative process that will continue to take time.
<unk> already been seeing begin to seeing promises of momentum and some pre orders from new of the new terminals from some of our existing customers.
As I mentioned after digging in a bit.
Frankly, a lot of room for improvement and that's G. T M.
And its execution well they were far from optimal the good news is that these things are relatively.
Easily fixable.
Rocket science, we just have to do it and that's why it took to move around a few people and creating a little bit of focus where it wasn't many however, given the long sales cycle. It still is going to take time for the good work to manifest in results.
And further as I discussed last quarter, we are very happy with the Beaumont terminal to the.
The product turned out bigger faster brighter and more capable and frankly, just a lot playing better than the original and we're happy as well with a positive reception, we've gotten from those customers and clients who have tried it so far.
We believe that Theres, a large opportunity within the existing installed customer base, who are looking to upgrade from our older Accuray 9700 product and to some extent our earlier.
Both hot terminal as well.
As a reminder, the bulk of our sales cycle as long as I've already said that and it's complex, but it pays dividends and when the headquarters grants us a green light to engage with their franchisees. This typically.
Is the case with most of the established franchises and so once they say, yes, okay. We've authorized it we've approved it then that gives us an opportunity to go out to the individual franchisees and then.
<unk> and.
And introduce them to the unit and basically hope for upsell and uptake and that is really key and we're well underway to getting some of those approvals at some of our key accounts.
We're optimistic that the approvals.
We will begin to yield results towards the back end of 2020, the year this year and on into 2024.
Next are the casino and gaming side, we saw total casino and gaming revenue of $12 2 million up 87% year over year, but down 23% sequentially from the all time high we saw in the first quarter. There are two main reasons for that the sequential decline first we.
Had predicted as we predicted on our last call. We did see the first signs of our major competitor reentering the market and they did make some deliveries out their product in the last quarter not a lot, but some second the order rate and backlog additions to our books are certainly slowing which we believe is a result of the slot Oems having bill.
The large inventory position of printers in the first half of 2023.
And as supply chain tensions ease combined with the fact that some Oems had over ordered printers. Just in case supply chain problems continued we are no longer seeing manufacturers, placing orders six to nine months out as we had previously.
So we will certainly at the right place at the right time.
With the ability to capitalize on this influx of pent up demand during the market recovery and we believe this benefit will benefit us beyond the short term spike in sales and profitability that was created earlier this year.
We're not resting on our laurels as you say, we have increased our casino and gaming sales staff and are actively gone out to our new customers in an effort to retain as much of the market share gain as possible a portion of those new customers will certainly become long term buyers for our printers. However.
However, we also expect to reduce pricing a little bit on these products in order to make sure that we stay competitive in the marketplace as much as possible.
The price here is a new baseline sales level as a result of a permanent increase in market share.
We believe we are well positioned to capture that demand going forward and at this stage.
We would estimate that our go forward net sales run rate in the market should be about 15% to 20% higher than our pre COVID-19 historical average and we would expect this new run rate to be fully reflected in the fourth quarter of this year and on into 2024.
Further we hope to see some benefit from our newest casino and gaming printer, it's called the epic 888.
We believe will help us retain some of these new Cup new customers, we expect to launch this at the end of towards the end of the year.
That launch et cetera will happen publicly at some point, but it's a really nice looking unit and we expect it to be a nice boost to some of the gaming and casino customers.
Finally, I wanted to discuss our outlook for the rest of 2023 and provide some color on how we are seeing the business progress.
As I discussed we are in fact, seeing the downward trajectory of casino and gaming that we did expect and spoke about last quarter, while we're taking strong action to retain as much of that business as possible. The reality is the return of our competitors as well as price reductions that we're talking about will continue to impact both our net sales and profitability.
Unadjusted EBITDA.
As such we have decided the most prudent approach to our guidance is to maintain our current net sales guidance of $71 5 million to $73 5 million.
And raise our adjusted EBITDA guidance to a range of 8 million to $8 5 million for the full year 2023.
These ranges take into account all of the points I have mentioned today.
There's still work to be done here at transact, but I'm pleased with our results for the quarter and believe the company is now moving in the right direction as a whole.
Believe the pieces are in place across the company from a personnel perspective, but again the impact does take time are rebuilt F. S. T foodservice technology sales team and newly reinforced casino and gaming sales teams are now in the best position to.
Capitalize on opportunities in front of us and our sales cycles, particularly for F. S T.
Take time, but the feedback we're getting early on is very encouraging for preorders on the BOE Hot terminal two.
Wow, that's predicted or competitive environment in casino and gaming began to normalize in the quarter.
Printer sales began to decelerate with Oems no longer stockpiling, we are hard at work to nurture these new customer relationships to retain as much of that share as possible.
So that's pretty much it and now I'd like to turn the call over to Steve for a more detailed review of the numbers.
Steve.
Thanks, John .
Thanks, everyone for joining us this afternoon.
Let's turn to our second quarter 'twenty three results in more detail.
As John mentioned total net sales for the second quarter were $19 9 million, which was up 58% compared to the $12 6 million, we reported a year ago.
Sales from our foodservice technology market or F. S. T for the second quarter were $3 9 million, which was up 13% sequentially and also up 14% compared to $3 4 million in the prior year period the.
The increase was largely due to higher shipments of labels and are accurate 890, 700 product as well as record high ball how software subscription revenue.
As John mentioned, we added 743 terminals in the second quarter, which gave US a 13476 of the market at the end of the quarter.
While we're encouraged by the sequential increase in our FSC sales our sales initiatives will take time to implement and then flow through to our bottom line results. So we believe this number may continue to be lumpy for a while.
Our recurring <unk> sales, which include software and service subscriptions as well as consumable label sales for the second quarter were $2 5 million, which was up 14% compared to $2 2 million in the prior year period.
Our <unk> for the second quarter of 'twenty three it was seven $782, which was down 9% compared to $8 61 in the second quarter of last year, but up sequentially by 3% compared to 761 in the first quarter.
As a reminder, we're currently selling sample how terminals with no recurring revenue attached to them to start well.
While this presents an opportunity to sell recurring elements in the future for now they represent a drag on our ARPA.
Our casino and gaming sales were $12 2 million, which was up 87% from the second quarter of 'twenty, two but down sequentially, 23% from the first quarter record high of $15 8 million.
As John mentioned this is due to a combination of the gradual reentry of our major competitor into the market as well as Oems working down high levels of printer inventory. They stockpiled during the supply crisis, that's now east.
Despite these factors we continue to see strength in our domestic sales, which were up 141% year over year.
P O S automation sales for the second quarter increased by 63% from the prior year $1 9 million to $1 9 million.
This was the result of higher risk of 9000 and sales as compared to this time last year with sales were limited due to supply chain issues that restricted our product availability.
We expect sales in this market to return to more normalized levels as competitors begin ramping production and we lower prices to remain competitive.
Moving to transact services group or <unk> sales for.
For the second quarter, <unk> sales were up 30% year over year to $1 9 million.
This increase was largely due to higher sales of spare parts and service for legacy lottery printers.
We had a strong second quarter sales of legacy lottery printer spare parts can be sporadic difficult to predict and can vary significantly from quarter to quarter.
Moving down the income statement, our second quarter gross margin was 54, 5% down slightly from a record high of 55% in the prior year quarter, but up from 43% in the prior year period.
This comes as a result of higher overall sales volume improved mix of higher margin of casino and gaming printer sales and the effect of two rounds of price increases we instituted during 'twenty two to account for increased production and shipping cost at the time.
However, as John mentioned, we expect to see some modest deleveraging of our gross margin due to expected price reductions across certain products, particularly in casino and gaming.
As a result looking forward to the second half of 'twenty three we expect our gross margin to return to a level closer to our historical pre Covid average.
Our total operating expenses for the second quarter increased 15% to $9 6 million.
Excluding the severance charge, which I'll talk about in a bit our operating expenses decreased 3%.
Breaking this down a bit our engineering and R&D expenses for the second quarter increased 15% to $2 5 million.
The increase was largely due to higher incentive compensation as well as additional software quality resources and increased outside testing fees.
Our selling and marketing expenses decreased 19% to $2 <unk> $2 7 million for the second quarter on a year over year basis.
Largely due to reduced trade show expenses at Baja market studies conducted in the first half of 'twenty two.
That we did not repeat in 'twenty three.
Lastly, our G&A expenses increased 52% to $4 4 million for the second quarter.
The increase was largely due to a onetime severance charge of $1 5 billion related to the resignation of our former CEO in April .
Excluding discharge G&A expenses would have been relatively flat at approximately $3 million up only 2% year over year.
We generated operating income of $1 2 million in the second quarter 23, compared to an operating loss of $3 million in the prior year period.
Our results last year were negatively impacted by lower sales volume associated with the COVID-19 related supply chain issues.
On the bottom line, we recorded net income of 765000 or <unk> <unk> per diluted share compared to a net loss of $2 4 million or 24, seven loss per diluted share in the year ago period.
Excluding the $1 5 million severance charge I just discussed our EPS would have been 22 cents for the current quarter.
Our adjusted EBITDA for the quarter improved to $3 2 million compared to an adjusted EBITDA loss of $2 5 million in the second quarter last year.
As John mentioned for 'twenty, three we now expect our expect to generate total adjusted EBITDA of between 8 million and $8 5 million.
And lastly on the balance sheet, we finished the quarter with $10 8 million in cash and $2 million to $5 million of debt outstanding.
Our credit facility with C&I lending.
And with that operator, I think wed like to open up the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone you will hear a three ton prompt acknowledging our request and your questions will be pulled in the order they are received.
Should you wish to decline from the polling process. Please press star followed by two if.
If you are using a speaker phone please lift the handset before pressing any keys.
Your first question comes from Jeff Martin Roth and Cam Jeff. Please go ahead.
Thanks, Hi, John Hi.
Steve I hope you're doing well.
John wanted to dig in a little bit more on what's changed with the go to market how quickly that starts to produce changes in behavior and then ultimately <unk>.
Improved our improved sales results.
Yeah.
Theres a lot of stuff that you can do relative to marketing automation.
To use that is it kind of.
You go out you try to find somebody that's got some possibility of being interested in your product ultimately and you've got to work. It all the way to the point, where you closed the deal and then frankly, you've got to treat that customer well, so I call that from AA from awareness to advocacy.
And we.
Just really had a disconnect in my opinion between marketing and sales.
The market opportunity is big but we really didn't have our arms around it and so we've implemented a number of what I'd call GTS.
Metrics related to funnel management everything from awareness to nurture track too.
Marketing qualified leads to sales qualified leads and then ultimately turn it over sort of conversation ready opportunities through the sales team and you can't take a salesperson and say, where there's a lot of potential customers out there go get them and have them basically making all the KOL calls and yet you're still doing a bunch of trade shows and getting a bunch of people to scan badges.
And so we put in a process in place that sort of manages that looks at the yield at every step and then figures out is it getting better is it getting worse, what's working and what's not now do we how do we improve where it's not working as well as it should be and how do we do more of the stuff that works well and this is just up net.
We didn't do much of a couple of other things are gradually implementing some metrics that I think for those of you and the investors that track.
<unk> deliver services.
Youre going to see us reporting on attrition.
And expansion net retention.
Even customer acquisition cost and a lot of things that you find in most of the modern SaaS companies I'm pretty familiar with most of those things and we're creating an awareness in the team.
Around excuse me around all of that and we're also excuse me.
We're also finding that some of the marketing initiatives that we've undertaken don't yield.
The best results or that the results are very expensive and some of the other ones are easy to do and we get better results and the yields that yield.
The conversion yields are much better so a lot of the focus has been on that we've got a great product and there is a big more or less untapped market opportunity and that's kind of what where we're putting a lot of the a lot of that sort of the business process focuses in place there and it's underway I've got a great chief revenue.
Officer, she's been with us for quite a while but she knows.
All about the company.
And she's a kind of a take no prisoners kind of a manager in a good way.
<unk> got great bedside manner, but you should expect in the sales team to produce.
And we've made some personnel changes we've moved some people around and one of the things that the two businesses are different but one of the things. We are focused on is.
Account retention and continued market share penetration into the gaming casino space, where it's at more steady Eddie kind of business, but we picked up a fair amount of extra market share in the last year and that's a key area as well so we're not taking our eye off that ball as well.
Great and then one more if I could on in terms of S. S T markets, where they stand.
Our large restaurant groups are looking to deploy further technology at this time or are we still in an environment, where you have.
Inflation costs related that are inputs and labor.
<unk> are still affecting their decision, making and then maybe you could touch on like convenience store.
And.
And like the grocery market in terms of.
Touching on the major end markets for F. S. T in terms of the Receptiveness in this environment.
Well I think the restaurant space is still you know.
Back on its heels a little bit.
Prices are up.
Most of them are focused on the front of the house right now.
That's a more immediate payback kind of thing I just read the toast.
Print and it looks good.
<unk> got a really good job.
My opinion.
We see.
That market opportunity coming back we're engaged and if you get into the.
Quick serve.
Restaurants, and some of the large chains are very good candidates for us.
I will mention because it's been mentioned before.
One of the large ones and buying again from us they kind of slowed down whether we're revamping some of their stores.
We're having good conversations with some of the other large groups, but in terms of your fine dining.
And those sorts of.
Opportunities, where maybe they've got a handful of stores or maybe 20 or 30 or 40 or 50 stores.
We're focused now predominantly on the larger.
<unk> from a larger restaurant operator operators because the.
The effort to sell there is pretty much the same calorie investment. It is it is if we're trying to get somebody who has got 30 stores.
If we do get.
A green light from some of the franchise or the headquarters.
A couple of these large ones, where the individual franchisees have an opportunity to actually decide yes, I do want to use this I think youre going to see I.
I wouldn't call. It floodgates open, but I would say I think you're going to see a real steady uptick in business throughout those franchise organizations.
Right now grab and go.
Grocery store sushi as an example.
And foodservice managers are easier sales sales right now I mean, everybody is still eating food and it's everything from compliance. We help you with compliance we help you by eliminating food waste, we help you by reducing labor and we help you by not making mistakes and Frank.
A lot of these places have a lot of head count turnover and the ability to use these systems to train people or to make sure that they don't make the errors really makes a difference in the economics and the ROI on our product is actually pretty excellent.
No.
We're focusing right now where there's more low hanging fruit.
<unk> done a pretty extensive market review, where we're looking at the top X number of companies in every one of the different buckets, and we kind of know where we've been where we haven't been and who needs us and who doesn't and that's part of the go to market strategy that we kind of implemented we're targeting both the sales and marketing teams at at the place where we place.
Where we think <unk> greatest opportunity if that makes sense.
Okay very helpful. Thanks for your time.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone.
Your next question comes from George Sutton, Craig Hallum. George Please go ahead.
Thank you John just to follow up on something you just mentioned you talked about the ROI being excellent for the.
<unk> terminals.
I've not seen anything published or really discussed.
So how do you actually communicate that.
Okay.
Verbally.
Fortunately, that's an area from a marketing standpoint that we're up leveling.
We got a great product technically we're very proud of it we've got great engineers.
Feeds and speeds isn't why managers buy stuff they buy it because of the business value would add.
And one of the things that I have encountered is that you can look at our brochure from transact and candidly it talks about a nice bright screen talks about 300 DPI printing.
It talks about.
How reliable it is and those are all really important but at the end of the day you want to apply those states to some business problem you've got in your operation and I'm working to if you will add the business value dimension to our go to market from our sales team whether it's prospecting.
Proof of concept or even here's the ROI on how much it's going to save if you buy one of these things and frankly.
The terminals easily pay for themselves in a matter of a few months and we don't really market that way.
And I think that's something that we're going to.
We're going to you're going to see that be part of the pointy end of the sphere.
As we move forward.
Great.
You mentioned that with the Bahar two.
You've got an ability to go after some of your existing terminals out there can you just give us a sense of.
Acura, David how many of those are out there in the market that you would view as opportunistic and if.
If I'm specifically looking at the Bahar one.
Irrelevant number there as well.
Steve you want to hit that one because you've got the numbers.
Yes, George probably I mean, we're I think we're mainly talking about our first gender, replacing the 9700 and there's tens of thousands of those out there.
Sure.
The difference between those the difference between those two is at 97 hundreds of Standalone unit works, great very reliable good little workhorse, but it is not online it's not connected.
And ultimately my opinion is the ball at terminal can be a platform in the back of the house.
And frankly, you could running software you wanted to run.
And so the fact that it's connected and for large organizations that have multiple stores.
The ability to have sort of one menu as it were or different menus in different geographies or to be able to upload stats and this that and the other thing.
It was just a big difference between having the interconnectivity of the Bolthouse terminal two in the older 9700. So we're pretty excited about that we think we're going to get a lot of upgrades.
The downside in all of this is a gang products. We make are so darn reliable that I love it on one hand, but on the other hand I'll break there's no planned obsolescence and these things we've got printers out there doing workhorse printers that are out there have been working hard at work for 10 years.
We're just waiting for the customer to finally say it broke could you get me another one but with a 9700 the upgrade to being fully connected.
And being able to do some other things like you can do today in the 20 <unk> century, I think ultimately is going to be really important for the organizations that want to use technology to gain competitive advantage.
Got you and then final question relative to the printer side.
When supply chain normalized and you were able to start shipping you built a fairly significant production capacity added lines et cetera can you just give us an update on what your plans are for from a production capacity perspective.
We've got pretty good production capacity, it's all cm contract manufacturing.
And they are pretty elastic so in that regard we're in pretty good shape, we're probably going to add a fourth line in a different country. We havent made it economic decision as to where it's best we've moved almost 100% almost not all 100% of our manufacturing is not in China.
But theres a little bit of stuff still left there.
But I think we're going to pick another location it may be in Asia, but we might find an opportunity to do some manufacturing in.
In the Americas.
I haven't decided that yet but we.
We liked the flexibility we've got a really good engineering team and manufacturing and operations team to one of the areas where it Ain't broke don't fix it.
And as you saw I mean, we did marvelously well during the recovery from the pandemic when most companies Couldnt ship didn't have product didn't get parts and we were able to come through on that front and I give the team.
Enormous kudos for being able to work their way through that and as I mentioned in the call I think we're going to retain.
Easily 10% to 15% increase in market share at least in the gaming casino printing business.
Perfect. Thank you very much.
Thank you thank.
Thank you there are no further questions at this time. Please proceed.
Okay.
So let me let me wrap this up here.
Yeah.
Bottom line.
I think we put together a pretty solid quarter.
I think we're doing a lot of the right work too.
Put the company on the right track and I mentioned that.
We retooled the FSD go to market piece manufacturing is in good shape.
We're watching expenses and optimizing the spend on marketing spend on sales and the new terminal the Beaumont terminal two looks.
It looks to be a winner and we're taking that to market. The only other thing I'd say is.
I'm not done figuring out everything that I think we need to be doing here.
Ultimate strategy tactics and the like.
Mm 127 days in here, but we are.
Got it.
The formulating and are formulating our thoughts and plans.
Going forward and you'll probably see us discuss things like strategy issues initiatives and this that and the other thing.
Probably either later in this quarter or very early in Q4. After we do our earnings announcement, where we.
We really want to give the stakeholders and understanding of the opportunity ahead, the future the tradeoffs and the opportunities and what we believe are the best courses of action. So that's something to be determined yet.
Work in progress and I would hope everybody will stay tune and give us a little more time to sort of that with future and communicate that transparently to the stakeholders.
And that's all I have.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
Okay.
Yeah.