Q3 2023 TransAct Technologies Inc Earnings Call
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Transact technologies earnings.
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Greetings and welcome to the transact technologies third quarter 2023 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone 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 Goodman dial up Investor Relations. Thank you Sir you may begin.
Thanks Kyle.
Good afternoon, and welcome to transact Technologies' third 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 as CEO, John Dillon, President and CFO, Steve Demartino. Today's call will include a discussion of the company's key operating strategies progress on those initiatives and details on our third quarter financial results.
We will then open the call to participants for questions. As a reminder, this conference call contains statements about future events and expectations, which are forward looking in nature.
On this call may be deemed as forward looking and actual results may differ materially for a full list of risks inherent to the business and the company. Please refer to the company's SEC filings, including its reports on forms 10-K 10-Q.
Exactly undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after the call.
This call and webcast will include non-GAAP financial measures within the meaning of SEC regulation G. When required reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website and with that I'd like to turn the call over to John.
Okay.
John.
Yeah.
Hey, Ryan Thank you and good afternoon, everyone and thank you for joining us today.
So I'm pleased with the progress, we're making and operationally across the organization and I'm happy to report fairly solid results for the quarter.
That said I'm, a firsthand knowledge yet we've still got some work to do a lot of work can be done and changes made and continue to make are going to take some time, it's always take time to produce the results that we know we need and we know that.
The company delivered the future that we want.
On the top line results were in line with basically what we expected for the quarter and discussed in our last call net sales $17 2 million was down sequentially year over year, 4%.
And approximately 14% down sequentially.
Sequential decline was a result of lower casino and gaming sales and I'll talk a little bit about that shortly later on the call.
Operationally I.
Believe me made an incredible amount of progress and are very much on the right track to getting the business back to a place of sustainable strength.
And before I jump into the results.
By market basis, I want to talk a little bit about some of the specific initiatives that we have underway.
So first.
You talked in prior calls after an extensive reorganization over F. S. T sales team and our go to market GPM strategies not only do we believe I believe that we have the right pieces in place and that's people and process.
And the organization to kind of make things happen.
But we've also refocused our attention on the part of the market. That's the best place for us to win.
And we expect to see results from these changes in the first half of 'twenty 'twenty four.
The <unk> platform, including the new <unk> terminal, our high end enterprise grade products and designed for enterprise type customers. These are bigger customers are that are more complex, they're more sophisticated and as such you should be focusing on enterprise level opportunities. So with that objective in mind, what we've done.
As we focused our sales team on basically your top thousand organizations in the United States and their operations internationally abroad to sell the boho platform.
So this requires us to be more focused on lead Gen Z generation the lead to closed metrics and customer acquisition costs CAC.
These are areas that we really believe are important to learning how the business operates what works what doesn't work how do we improve the stuff that needs improvement how do we do more of the stuff that works and works well.
In addition, we.
We performed what you'd consider a thorough scrubbing the pipeline.
And the good news is we're beginning to see quarter over quarter growth embedded in qualified needs. That's a sign of our early progress.
And in addition, as part of our commitment to transparency.
My intention to publish a pipeline metric beginning next quarter as well as number of net new logos for the FSP business I think that along with the unit sold are all pretty good vectors to indicate whether we're making the progress we want to make and whether that progress is solid so I'm hoping to start.
Producing those totally metrics next quarter and did they take a side bar here a side note I think the best way to look at metrics over a temporary period in other words, having just the particular number with no context as to what it was before and what do you think it's going to be in the future. It's sort of worthless I wanted to know if something is going up or down.
And it's up good or bad it's down good or is down bad and then if a job that then it's good let's do more of that if it's up and it's bad let's do less of whatever it is that's causing that and then.
That's the best instrument your business and so we're really focused on that now.
Now I will point out.
That.
As I've mentioned before these are long intensive processes. These improvements take time to be implemented and for us too.
The expected instantaneous return is not realistic, it's really something where we're going to iterate and we're going to optimize the measurement of these things and how we manage the metrics of what they tell us over time.
Also along with this project process looking into you know the.
Pipeline I am pleased to announce that we have won formal.
Our approval from a global key with our to sell a new boho terminal through into their stores overseas and with U S approval pending but expected. This is a multi thousand unit opportunity for us and what we have already seen the.
First few orders from this win so it's very exciting for us and I wanted to let you know that.
It is hard however to predict the penetration rate and the cadence of sales at this time.
Because you know different franchisees buy at different rates and things like that as you all know, but we will provide you a more fulsome update when possible.
I would also like to mention the cost cutting and rebalancing of our teams and organization as a whole we reported that in our press release.
And I think it's a really important aspect of the way we're running the business during the quarter we began.
The cost cutting effort that included eliminating approximately 10% of our workforce through a combination of attrition and selective headcount reductions.
Well, it's kind of a desert costs sales and marketing G&A and engineering.
And when completed more or less in the fourth quarter.
We estimate that these actions will produce an aggregate operating expense savings of approximately $3 million on an annualized basis.
And you will see those the full effect of these cuts in 2024.
So with the organization streamlined and focused we believe we're better positioned for long term success and enhanced profitability.
And I've asked Steve during his portion of the call to go over the details on the third quarter numbers shortly.
The third and final initiative I wanted to mentioned before jumping into results involves a fourth quarter development.
But I think we should share in the coming weeks, we intend to engage with an advisor for the C suite and the board of directors.
As she can locked down elements of our long term strategy for our business. We believe an independent external third party perspective will be important to help us make decisions about areas for transact.
To focus to ensure that we maximize value for shareholders and stakeholders and in that regard we will provide updates as this initiative Oh This initiative as they become available.
So let me discuss some results and updates on our two major markets first foodservice technology F. S. T. A total revenue was $4 2 million up about 13% year over year.
Also we're pleased to announce that the quarter produced our highest recurring revenue for F. S. T at $3 1 million. The first time this number was over $3 million.
We sold 710, new terminals in the quarter, bringing the total number of online terminals.
And 13795, while I'm disappointed in the sequential slowdown we're confident that the changes we're making on the sales side will result in more momentum in 'twenty 'twenty four.
And that we should probably start seeing some uplift in the numbers from a globe global Q ISR win in the fourth quarter of this year.
As a reminder, the boho sales cycle is typically long.
Somewhat complex.
Sort of a land and expand strategy because usually they start small, but then they can continue to buy over time and that becomes a long standing relationship that really pays dividends.
It takes stage to the headquarters thinking sort of granted a green light to engage with their franchisees.
And this is typical with some of the most established and sophisticated franchises and we're well on our way to getting those approvals on some key accounts and we're optimistic that these approvals will begin to yield results as we move into 2024.
Next on the casino and gaming side Casino and gaming revenue for the quarter was 9 million up approximately 7%, 17% year over year, but down 26% sequentially and let me provide an update on the two major forces shaping themselves and this duopoly market.
From a competitive standpoint, we have seen only minor reentry into the market from our main competitor, but frankly.
We have yet to see much if any of the pricing or market share erosion that we might have expected by now and.
And while we cannot be sure. When these efforts will develop and these effects will develop we're still fairly confident that this dynamic will shift at some point in the next few quarters, it's just hard to predict.
And then second on the inventory side, we have heard and are now continuing to hear perhaps a bit louder, but the Oems the people who buy our.
Systems and put them in their machines are indicating that they are in somewhat of an oversupply position and are slowing their order order rates. Accordingly. This was the largest reason we saw a slowdown in this quarter and likely we'll see something similar in the fourth quarter, we would expect a similar percentage decline in that period.
So at this stage, we would continue to estimate that our go forward net sales run rate and the market should be as I stated last quarterly report about 15% to 20% higher than our pre COVID-19 historical averages before however, we think this new run rate may not be fully in effect until 2024.
Sure.
Finally, let's go over the outlook for the remainder of the year I mean, given my comments in this call. We believe the most prudent approach is to raise the low end of our current net sales guidance to a range of $72 5 million to $73 5 million for the full year and to raise our adjust.
The EBITDA guidance to a range of between $9 5 million and 10.0 million for the full year.
These range is taken into account all the points I discussed today, and we will update you with guidance for 2024 on our next call.
So I believe we have made good operational progress so far and there are plenty of reasons to be confident as we move into 2024, we've been making progress on F. S. T side of the business as we focused our sales team and as I mentioned and we're focusing on the top thousand organizations in the Tam the total addressable market.
In the U S and their operations abroad.
We're in the process of optimizing the business with a $3 million reduction in spend which we expect to experience in the full 20 year 2024.
One approval to sell our board terminal to the overseas stores of a global Q ISR and expect U S approval to follow.
And the pipeline is scrubbed and the pipeline is growing and we believe that we will see continuing sustainable pipeline growth going forward.
And then lastly last point is that we intend to engage an advisor to give this guidance as we consider long term direction for the business.
That's really my formal report here and I'll now pass the call over to Stuart for a more detailed review of the numbers.
Steve.
Thanks, John.
And thank you everyone for joining us.
Let's jump right into the third quarter results.
As John mentioned total net sales for the third quarter were $17 2 million, which was down 4% compared to $17 9 million from the same period last year.
Sales from our foodservice technology market our S. S. T for the third quarter were $4 2 million, which was up 13% from prior year period and 9% sequentially.
This increase was largely due to record highs in both bolthouse software subscription revenue as well as label sales.
We sold 710, new terminals during the third quarter, bringing us to a total of 13795 online terminals in the market at the end of Q3.
Our recurring FSC sales, which include software and service subscriptions as well as consumable label sales for the third quarter reached a record high $3 1 million, which was up 22% compared to $2 6 million in the prior year period.
Our <unk> for the third quarter of 23 was $929 fairly consistent with our improved 936 in the third quarter of last year.
On a sequential basis <unk> was up 19% compared to $782 in the second quarter largely due to the record recurring revenue we realized in the third quarter of 'twenty three.
As a reminder, we are currently selling some boho terminals with no recurring revenue attached to them to start.
While this presents an opportunity to sell recurring elements of the future in the near term they represent a drag on our ARPA number.
Our casino and gaming sales were $9 million up 17% from third quarter, a 22 of the strength of domestic sales, which were up 43% year over year.
However, sales were down sequentially, 26% from the second quarter. The second quarter's level of $12 2 million, primarily due to Oems working down high levels of printer inventory. They stockpiled during the supply crisis earlier this year, that's now east.
We expect this trend to continue until the fourth quarter.
P O S automation sales for the third quarter decreased 69% from the prior year to $1 $6 million.
This was a result of returned to a more normalized level of sales compared to last year when the chip shortage limited our competitors' ability to supply product, therefore, making our sales unusually high.
We believe this quarter represents normalized levels for a P. O S automation sales and we expect to see this trend continue into Q4 and into 2024.
Moving to transact services group, our T S T cells.
For the third quarter T. S. G sales doubled up 101% year over year to $2 3 million.
This increase was largely due to higher sales of spare parts and service for legacy lottery printers.
We had a strong third quarter these sales and expect a similar fourth quarter.
Sales of legacy lottery printer spare parts are sporadic they are difficult to predict and can vary significantly from quarter to quarter.
Moving down the income statement now.
Our third quarter gross margin was 51, 9%, which was down sequentially from 54, 5%, but up from 45, 9% in the prior year period.
This comes as a result of an improved mix of higher margin casino and gaming printer sales as well as the continued positive effect from two rounds of price increases we instituted in 2022, and we're able to maintain through the third quarter 'twenty three.
However, looking forward, we do expect to see some downward pressure on our gross margin in the fourth quarter due to lower expected sales volume.
Our total operating expenses for the third quarter remained relatively consistent decreasing by 1% to $7 7 million.
And on a sequential basis after removing the effect of a $1 $5 million severance charge for the termination of our former CEO in the second quarter, our operating expenses declined 5%.
This sequential decline resulted from initial savings achieved from cost cutting efforts, we began to put in place late in Q3.
We expect these cost reduction reduction initiatives to have an even greater impact on our Q4 operating expense level.
However, we don't expect to achieve the full effect from the cost cutting initiatives until 2024, which we believe will be about a $3 million annualized cost savings expected to be realized ratably throughout 2024.
Breaking down our operating expenses a bit more our engineering and R&D expenses for the third quarter increased 26% to $2 5 million.
The increase was largely due to higher incentive compensation as well as additional software resources and increased outside testing fees for new product launches.
Our selling and marketing expenses decreased 13% to $2 4 million for the third quarter on a year over year basis.
Largely due to cost reduction initiatives, including reductions in headcount tradeshows and overall marketing spend.
Lastly, our G&A expenses decreased 8% to $2 8 million for the third quarter.
The decrease was largely due to lower stock and incentive compensation expense from the termination of our former CEO as well as post go live support for the implementation of Netsuite, we incurred in the third quarter of last year that didn't repeat.
We generated operating income of $1 2 million or six 9% of net sales in Q3 23.
Compared to 387000 or two 2% of net sales in the prior year period.
Note that our operating margin last year was negatively impacted by lower gross margin, resulting largely from COVID-19 related supply chain issues.
And on the bottom line, we recorded net income of 906000 or <unk> <unk> per share compared to 528000 or <unk> <unk> per share in the year ago period.
Our adjusted EBITDA for the quarter improved to $1 7 million compared to $1 2 million for the third quarter last year.
And as John mentioned for the full year 'twenty three we now expect to generate total adjusted EBITDA of between nine five and $10 million.
And lastly, our balance sheet remains solid.
We finished the quarter with $11 6 million in cash and the minimum required 2.25 million outstanding borrowings on our credit facility with C&I lending.
And with that I'd like to turn the call back over to John for any closing remarks John.
Yes.
Okay.
I want to thank you all for joining and listening and I want to thank everyone for their support and feedback we are dedicated to generating value for all of our stakeholders and shareholders and providing a new level of transparency to the business fairly well.
As always should you want to speak on anything transact.
Related please reach out to me or Brian and I are and we can set up a call.
And we can probably open up the question of the call for questions now.
Thank you well now be conducting a question and answer session.
Would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from George Sutton with Craig Hallum Capital Group. Please go ahead.
Hey, guys. This is James on for George Thanks for taking my questions.
John as you look at the current pipeline how would you kind of describe the mix between convenience stores <unk> and then other potential verticals you might look to address.
Well, it's interesting on that point, because we first got into the business, we thought restaurants would be a really hot space.
But restaurants are still recovering frankly from the pandemic, whereas convenient stores and people do and grab and go and even if you think grocery in store sushi those markets are really good and we're finding a lot of traction there. So I think.
The restaurant market space is one we're still interested in of course, but we're finding that that <unk> change yeah.
It gives doors with grab and go and and also foodservice management companies are probably the hottest space.
And as we refocus the sales organization on if you go the more sophisticated.
Potential customer.
They were more insertion points into more sophisticated sales process and.
And we've done some training we're learning what those businesses really need and we're seeing some pretty good traction as we move the opportunities through the pipeline and as I mentioned before.
We've added.
And it improved lead generation process its targeted account.
Account based marketing, but it's close to that weird tracking funnel metrics at the top of the funnel and we're tracking market qualified leads marketing qualified lead sales qualified leads and we're looking at the yields at each one of the steps and I'm really pleased with the progress. The team has made and in general I think I can give you.
The health check or giving you produce great on the health check for the team right now and again I think keep large T with ours.
Uh huh.
Grab and go and in particular sushi and grocery stores are probably the three hottest markets force followed by Foodservice management.
Great.
And then congrats on starting the global MSR.
Can you sort of talk about the sales process.
And sort of some of the initial feedback from that customer and sort of why they selected boho.
Well honestly, it's a great product.
We've been in this business for a while we're very good at engineering were also very good at listening to our customers and the feedback we're getting not just from that particular queue in Saar, but others is that this is the product that we've been waiting for and we're really excited about it and candidly our sales team is excited about it and it always helps when the sales team believes in the.
And we are excited about the opportunity you know when you think about the alternative I mean.
You know now that I'm here.
Chief Executive I walk around at grocery stores and everywhere and I see tablets sitting on the shelf.
<unk> blocks and things like that and I look at labels or kind of crummy.
The income smeared, if that's what it is or they don't stick on right now.
There's tons of opportunity and we are really enjoying the opportunity to waiting that with a brand new suite of products.
Okay.
Great.
Then just lastly for me if you have an engaging the advisor and what sort of sounds like evaluating strategic options.
Can you just sort of speak to all of the options that are potentially on the table there.
Well yeah I.
I mean, we're pretty smart group of people at least we'd like to think so.
We got a lot of experience on our board of directors and my job is to help Shepherd the company into the future and we wanted to have an outside adviser to that could you know.
Help us understand the lay of the land and the competitive landscape who's doing what and where we fit and help us make sure that we underwrite track and not that I'm appreciating any in particular.
Outcome I mean, we really want to have outside percent perspective, because a lot of times you get to close.
Got you got you blinders on because you're so focused on what's today or whats. The next quarter, we really need to look over the horizon, a little bit make sure that we're considering all the options and anything that's a good option and even options. We haven't even considered we want to make sure that we fully considered.
Yeah.
Great.
Yes.
Alright, thank you.
Ladies and gentlemen, as a reminder, if you would like to ask a question. Please press star one on your Touchtone telephone. Our next question comes from Jeff Martin with Roth Capital Partners LLC. Please go ahead.
Thanks, Good evening guys.
John wanted to get a sense.
On the 3 million expense reduction effort, well there'll be offsetting growth initiatives next year.
Investing in just thinking about it from a modeling point of view.
I wouldn't say that we're going to go into any.
<unk>.
Meaningful adjacent verticals, although I think that's a possibility in the future.
Right now and making sure that we're shipshape and that we can sell to.
Sell through the hazards in the seas ahead.
We're not cutting back on initiatives to develop and expand the business, but we want to make sure that everything that we've got working now is working well sort of like running on an engine that has all the cylinders firing.
A nice smooth cam shafts, so everything's efficient.
And then from there I think that's a springboard into other initiatives from a growth standpoint.
And I will make one other comment Geoff is that I think the Tam for <unk>.
<unk> T is enormous.
I think it's underpenetrated at this point there are competitors out there but.
But we believe that it's it's very substantial win right now we don't have that headroom problem into the sort of fashion, but I'm concerned about so.
The Sky's the limit there and we just need to demonstrate that we can you can go there we can win and we can expand.
Dissipation in that opportunity.
Yep great.
And then in terms of the top 110000 organizations you've identified.
How are you parsing those out how do you assign them to different parts of the sales organization and do you have structured teams for that just curious kind of thing.
A little more of a look under the hood in terms of the sales and marketing engine.
<unk>.
You know, taking the lead generation focus with them kind of reconfigured.
So.
You know really diving in and looking at what's in the Tam. The total addressable market and then you what product we have and then where should we sell it.
And without any guidance, we'll take a call from anybody who will sell them something.
We have customers that have one terminal.
We have customers that have 1000 terminals and the question is if we have a long sales cycle and we have a product that offers benefits for larger organizations that would not be fully appreciated.
At the low end of the market in terms of.
The amount of spend in the amount of required features and capabilities of the technology.
It's sort of the we might be considered overkill or let's just say there are other products that are may be cheaper, but do less but it's sufficient for the opportunity for us.
A single mom operation or something like that so what I did was I had the team, saying well, let's look at what's the serviceable part of the Tam where should we go and where should we sell and I said why don't we do an exercise and look at the different sub verticals within FSP and that was like convenience foodservice management.
Restaurants are.
Grocery stores.
And.
Convenient stores and you said, that's that's focused on let's take a look and see how many people how many organizations out there. If we won the business could we sell them 50 units, let's just draw a line there and see how big the Tam is and it turns out that if you look at the number of opportunities or the number of units that you could sell.
If you're 100% of everybody over 50 units versus everybody else. It turns out that that's about two thirds of the market opportunity.
And for us that turns out to be about 1000 organization. So what we've done is we basically split the sales team up in about five buckets and those in each of the five buckets restaurant convenience FSAM.
<unk> and.
The grab and go folks.
And.
Targeting they know exactly who were supposed to sell to do with lead generation based on that and importantly is that we're building assets that help the sales team progressive sales opportunity from step by step from if you will first contact.
To close and even the stuff after you close the deal to implementation and training and support and service to make sure that end to end.
The customer and transact or I'm fully aligned with equal Lee.
Equal equal motivation to get to goal congruity with a successful customer that loves the product and buys more and if you sell one unit the customer.
Two a one unit opportunity you're never going to sell another unit and in the larger units that become larger opportunities that become lighthouse accounts.
Then the account management and the quality of our service and the talent of our people really makes a difference I mean, we're not selling a commodity product.
We want to make sure that we're selling with the values appreciated where we can capture a good margin for a good product that tackles, much more complex problems. So that was kind of the exercise and we're doing the lead gen associated with each of those five sub buckets and we're nurturing the leads through the sales funnel and then we hand them off to the sales team and.
Tracy Winslow, who is running our our revenue generation process, you don't see our CFO.
She is on top of this every day and we're making really good progress.
From an opportunity standpoint, we're making sure that we stay in touch with the opportunities I would never say this arrogantly to a customer but our product is good and it's sort of like sooner or later you are going to need what we have and we want to make sure that we have a chance to help you understand what it is so that we have an opportunity to engage so if a customer says I'm not interested in.
More of it not know, but did not know inside there are initiatives that they have and maybe building out more stores and maybe automating the front of the house.
Mature later, we're going to be we're probably going to be one of the companies that you consider for the back of the house and we want to make sure that we're front and center and that sort of the attitude. We are taking so in some cases the sales cycles, maybe long sometimes they may be quick but all of that focus is already seems to pay off in terms of what I'm seeing in the pipeline.
Great really appreciate the color there and then one more if I could.
On the <unk> win.
Wanted to clarify that I heard correctly that that basically is an international hunting license and then the U S has to follow meaning the U S is not part of that initial several thousand units is that.
It's not part of the opportunity yet, but we expect that to follow.
Okay, Great and then just wanted to clarify as well that.
And then you'll.
You'll be selling software modules on this it's not a terminal on my type of arrangement.
Well in each case that the ultimate franchise.
We'll have some say into what applications. They may or may not want so it's hard for us to predict but we expect there'll be software for sure.
Great.
For your time.
There are no further questions at this time, so that concludes our Q&A session for today.
Now I'd like to turn the floor back over to John dealing for closing comments. Please Sir go ahead.
Okay.
But like the.
I'd like to thank all of you for joining us and as I mentioned before if you want to follow up with US you can reach out to me personally or you can reach out to our IR firm and contact Ryan and be happy to set up an appointment for a chat about the quarter and any other topics that are related to transact.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Okay.
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Yeah.
Yes.
Okay.
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