Q3 2024 TransAct Technologies Inc Earnings Call
This is a production of the U.S. Department of State.
Speaker Change: Greetings and welcome to the Transact Technologies third quarter 2024 earnings call. At this time all participants are in a listen-only mode.
Speaker Change: A brief question and answer session will follow the formal presentation. Should anyone require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
Speaker Change: It is now my pleasure to introduce your host, Ryan Gardella, Investor Relations. Thank you. You may begin.
Thanks.
Speaker Change: Good afternoon and welcome to the Trade and Act Technologies Quarter 2024 earnings call. Today we'll be discussing the results announced in a press release issued after market closed.
Speaker Change: Joining us from the company is CEO John Dillon and President and CFO Steve DeMartino. Today's call will include discussion of the company's key operating strategies, the progress on those initiatives, and details on our third order of financial results. We will then open the call to participants for questions.
Speaker Change: As a reminder, this conference could often contain statements about future events and expectations which are forward-looking and dangerous.
Speaker Change: Transact undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances set after the call.
Speaker Change: Today's call and webcast will include non-GAAP financial measures in the meaning of SEC Regulation G. When required, reconciliation of all non-GAAP financial measures in most directly comparable financial figures calculated and presented in accordance with GAAP can be found on today's press release as well as on the company website. And with that, I'll turn it over to John.
John Dillon: Thanks Ryan and good afternoon everyone and thank you all for joining us today.
Total sales for the quarter were $10.9 million.
John Dillon: We had excellent progress in the FST food service technology space.
John Dillon: was highlighted by 1,355 units sold, meaning that in the last two quarters, the last six months, given that last quarter we sold about 1,476 units, last six months, we've sold 2,800 units.
John Dillon: and we're feeling pretty good about that. We're proud of the sales progress we've made with the team and we expect this approximate level of quarterly terminal placements to continue as we head into 2025.
John Dillon: So that's some pretty good news, but let's walk through some of the other FST highlights. First, the FST from a revenue line standpoint was $4.3 million, up 2% year over year, and 3% sequentially.
John Dillon: The FST recurring revenue is $2.9 million, down 8% year over year, but up 3% sequentially.
John Dillon: on continuous strength from several of our large chain customers. So we feel pretty good about that as well.
John Dillon: FST hardware sales were up 30% year over year and up approximately 3% sequentially and as I mentioned in Q3 we sold 1,355 units in the quarter which is up 90% from the prior period a year ago.
John Dillon: As we discussed on the last call, we believe this momentum is just the start from the reorganization and refocusing of our FST sales group.
Speaker Change: We've spent a lot of time on that since I started as a full-time CEO. I guess it was April last year. We're going to continue to fine-tune the process but
Fundamentally I believe that we've got the right directionality here.
We've made excellent progress.
Speaker Change: And especially with our focus that's related to developing, tracking, and nurturing the lead process, which we didn't do very well in the past, we've got a really good process now, and it's beginning to work pretty well. I will reiterate, as I said before, that sales will continue to be lumpy.
Speaker Change: We're an enterprise B2B company, and when enterprises buy, they usually buy in lumps.
We use that
Speaker Change: land and expand strategy somewhat where a client will start with our technology and then buy more but sometimes it's very hard to predict those large additional acquisitions.
Speaker Change: And the final thing I'll just say on that is I think that we should assume that the current run rate of terminal placement is sustainable. I think that's pretty encouraging for us.
Speaker Change: and as well the rollout of our Terminal 2 to our large QSR client continues to go as planned with a large number of the terminals this past quarter being placed with them.
The feedback on the product continues to be overwhelmingly positive.
Speaker Change: And we even sold about 100 units to a sushi customer in the quarter, which is also a good sign. And we have a couple of large, major convenience store customers set to upgrade.
Their entire install base of some of our older units.
Speaker Change: For those of you who don't remember, we sunsetted the Accudate 9700 terminal at the end of 2023, which means all those units that are out there installed are an install base that we can use for potential upgrades to the new Boha Terminal 2.
Speaker Change: We also had a strong quarter on the new logo line. We added 12 new BOHA clients in the quarter, representing an opportunity for about 2,400 units over time.
Speaker Change: The new business pipeline remains strong, quarter over quarter difference in the four-quarter pipeline remains solid and consistent. It's holding steady even though we booked business for last quarter. We take it out. We have to add new opportunities into the pipe, and I'm feeling very good about the pipeline coverage compared to the target revenue goals that we set for the sales team.
Speaker Change: Moving on to casino and gaming, we reported revenue of $4.5 million.
Speaker Change: That's down 50% year-over-year. However, on a positive note, we're seeing continued normalization of this market as we predicted on previous calls.
Speaker Change: On the inventory side, I'm happy to say that we're down to just one of our major OEMs who is stuck in an oversupply situation. We're actively working with this client to reconfigure some of their existing stock for other markets in order to help them accelerate the liquidation.
and begin buying product from us again.
Speaker Change: However, we still expect them not to be buyers until at least the start of the year and anecdotally I know some of you have heard this
Speaker Change: as well, but casino activity seems to be slowing a little bit. We were just at IGT.
Speaker Change: I'm sorry, G2E, IGT is a nice client, but G2E in Las Vegas
Speaker Change: And we kind of got a sense that right now the gaming industry is a little slow. We think it's macroeconomic factors. We don't think there's anything serious there.
Speaker Change: but we may see this trend continue until 2025. And we also believe it's contributed to the slower pace of slot sales from some of our OEM customers.
Speaker Change: On a final note relative to gaming and casino we're seeing some increased sales traction with our epicentral product as a result of our relationship with casino track.
Speaker Change: CasinoTrack is selling Epicentral as part of their SlotSuite product offering on a subscription basis. We like subscription revenue, especially when it's software. In August, we shared some results from the six-month deployment of SlotSuite.
which was.
Speaker Change: developed in this partnership with Casino Track and Transact and going across an install base at 2,500 games and compared against data from the previous 12 months.
Speaker Change: The customer where we're doing this pilot saw substantial increases in carded play, rated coin in, overall coin in, as well as rated and overall WPU, that's win per unit.
Speaker Change: Next, I wanted to provide you with a bit of an update on our strategic review process.
Speaker Change: and while I cannot provide any further details at this time I wanted to assure investors that we're working hard on the process.
Speaker Change: Before I turn the call over to Steve for more detail, I wanted to provide a bit of feedback on our financial output.
Speaker Change: Due to the unexpected length of demand lag in the casino and gaming, we feel it's most prudent for us to revise our revenue outlook to a range of between $43 and $45 million.
Speaker Change: Our adjusted EBITDA, however, range will remain the same as we've been very disciplined on the cost side of the business. So I wanted to make sure you heard that information from me.
Speaker Change: So, in summary, we are pleased with the progress, particularly on the FST side of the business. Year-over-year terminal placement up 90%. We continue to see additional demand from several of our larger key FST customers.
Speaker Change: The product is a winning product, the Terminal 2. It's one of the best products we've come up with and I'm really excited about the potential. We're getting strong positive feedback and growing sales opportunities. The process improvements.
Speaker Change: have clearly started to show results. And on the casino and gaming side, while the lag and demand has been longer than anticipated, we're down to really only one OEM customer is not currently buying from us.
Speaker Change: and we expect this dynamic will resolve and normalize in the first half of 2025.
Speaker Change: So that's really much the news for my report and with that I'd like to pass the call over to Steve for more detailed review of the numbers.
Steve
Steve Demartino: Thanks John and thanks everyone for joining us today. Let's turn to our third quarter results in a little more detail.
Steve Demartino: Total net sales for the third quarter were $10.9 million, which was down 6% sequentially and down 37% compared to $17.2 million in the prior year period.
Steve Demartino: Sales from our food service technology market, or FST, for the third quarter were $4.3 million, which was up 3% sequentially, and also up 2% compared to $4.2 million in the prior year period.
Steve Demartino: Our recurring FST sales, which include software and service subscriptions, as well as consumable label sales for the third quarter, were $2.9 million. That was up 3% sequentially, but it was down 8% compared to $3.1 million in the prior year period.
Steve Demartino: Our ARPU for the third quarter of 24 was $700. That was down 3% sequentially and down 25% compared to $929 in the third quarter of last year.
Steve Demartino: As a reminder, we're currently selling a number of BOHA terminals to a large QSR with no recurring revenue attached to them to start.
Steve Demartino: While this presents an opportunity to solve recurring elements in the future, for now they still represent a drag to our ARPU number.
Steve Demartino: In the quarter, a large number of our terminals again fell into this category, and we expect this to continue into the near future.
Steve Demartino: I also wanted to remind everyone that we had approximately 5,300 terminals that just came offline due to the loss of a C-Store customer that we discussed on our first quarter call.
Steve Demartino: The new online terminal number in ARPU will be reflected in our fourth quarter results, but we expect our ARPU to rise to around the $800 range once these changes have occurred.
Unknown Speaker 0. Okay. Unknown Speaker 0.
Steve Demartino: They were down 50% from the third quarter of 23, primarily due to one remaining large OEM customer who continues to work down high levels of printer inventory that they stockpiled during the supply crisis in 23.
Speaker Change: As John mentioned, we're working with this customer to reconfigure their in-stock printers for the global market in order to accelerate the liquidation of their inventories and return them to a buying position.
Speaker Change: On the positive side, all the rest of our largest OEMs resume buying again in the third quarter.
Speaker Change: We believe our sales in the third quarter may also have been impacted by some demand softness in the global casino gaming industry.
Speaker Change: POS automation sales for the third quarter decreased 30% from the prior year to 1.1 million.
Speaker Change: This decline was largely the result of difficult comps, as we experienced unusually high sales in 2023 due to a competitor's inability to supply product.
Speaker Change: In addition, the competitors in this market are now fully back online, and we're returning to a more normalized competitive environment.
Speaker Change: Moving to Transact Services Group or TSG. For the third quarter, TSG sales were down 62% year-over-year to $864,000.
Speaker Change: This decrease was largely due to unusually high sales of Legacy Lottery spirit parts in the prior year, due to a customer's last buy in 2023.
Speaker Change: As a result of this last buy, we don't anticipate any future sales of these spare parts. Therefore, we expect our current quarterly sales level for TSG to be about our new run rate going forward.
Speaker Change: Moving down the income statement now, our third quarter gross margin was 48.1%, which was down from 51.9% in the prior year period.
Speaker Change: This comes as a result of lower overall sales volume, including significantly lower casino and gaming sales that are at higher margins.
Speaker Change: Going forward, we expect our gross margin to continue to be in the mid to high 40% range as we head into 25.
Speaker Change: Our total operating expenses for the third quarter decreased by 22% from the prior year third quarter to $6.1 million and they were also down sequentially by 7%.
Speaker Change: The year-over-year decline came in large part as a result of the savings we achieved from initiating two separate and successful rounds of cost reduction actions, totaling $5 million on an annualized basis.
Speaker Change: In late Q3 of last year, we initiated our first round of broad-based cost-cutting efforts.
Speaker Change: We estimate that this initiative would produce operating expense savings of about $3 million on an annualized basis.
Speaker Change: And we've experienced the full effect from these reductions throughout 24 to date, including the third quarter.
Speaker Change: We then instituted the second cost reduction initiative in June of this year focused largely on further reducing headcount and other external third-party resources.
Speaker Change: I'm happy to report that we also experienced a full effect from the second round of cost reductions in the third quarter.
Speaker Change: There's one thing I'd like to note regarding our expected operating expense level for the fourth quarter.
Speaker Change: While we will continue to see the effect from both rounds of our cost savings in the fourth quarter, we also will see an uptick in marketing spend due to the timing of annual trade shows that we attend, as our two largest shows, G2E and NAX, both occur in the fourth quarter.
Speaker Change: This is consistent with prior years, though we have reduced our overall spend on these trade shows for this year.
Speaker Change: So, as a result, on a sequential basis, we expect total operating expenses to be higher in the fourth quarter as compared to the third quarter.
Speaker Change: And now returning to our third quarter OPEX, they break down as follows. Our engineering and R&D expenses for the third quarter were down 35% year-over-year to $1.6 million. Our selling and marketing expenses were down 22% to $1.9 million, and our G&A expenses were down 10% to $2.5 million.
Speaker Change: For the third quarter, operating loss was $837,000, or negative 7.7% of net sales, compared to operating income of $1.2 million, or 6.9% of net sales in the prior year period.
Speaker Change: On the bottom line, we recorded a net loss of $551,000, or $0.06 per diluted share for the third quarter, which compares to a net income of $906,000, or $0.09 per diluted share in the year-ago period.
Speaker Change: And our adjusted EBITDA for the quarter was negative $204,000, which was down from $1.7 million for the third quarter of last year.
Speaker Change: And lastly, turning to our balance sheet, it continues to remain solid.
Speaker Change: Even with the reported net loss for the quarter, our working capital trends remained positive, and we ended the quarter with over $11 million in cash and only the minimum required $2.25 million of borrowings under our credit facility with Siena Lending.
So overall, our liquidity position continues to be strong.
Speaker Change: and with that I'd like to turn the call over to the operator for questions. Operator?
Speaker Change: We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions.
Speaker Change: The first question is from George Sutton from Craig Hallam Capital. Please go ahead.
Speaker Change: Hey, good afternoon guys. This is Logan on for George. I wanted to start on that casino and gaming side and can we maybe just double click on
Speaker Change: The one OEM that you guys are talking about still being in oversupply. I just want to make sure I understand what you Kind of are doing with them to kind of try to work through that. It sounded like he talked about liquidating or repurposing And then kind of a follow-up to that is
I mean it sounds like that maybe subsides in 2025.
Speaker Change: Thinking beyond that, just how would you characterize the competitive environment there relative to your ability to kind of take market share? What does that look like?
Thank you. Bye. Bye.
John, do you have that with you?
Yeah, well, so.
Speaker Change: The way I expressed it was there's other markets and the machines that go into other markets have different configurations and so for a large OEM who makes different types of gaming systems it's possible that the printers that they have that might be an oversupply in one geographical market may work well in another one.
Speaker Change: And that might be an easy way for us to make some slight changes to the existing inventory and have them move out to other markets that we also like those other markets but where there's not an oversupply. So, we're kind of working with that with one of our large OEMs and we're optimistic we might be able to get that worked out.
Speaker Change: Yeah, sometimes we add or take off accessories depending on the geographic market that it's going into. Or it might have different firmware that gets loaded depending on the games that they're going to be used in. So those are the type of reconfigurations John was referring to.
Thank you.
Okay, and then just anything on the competitive environment there?
I know usually you guys are kind of competing with.
Speaker Change: It's kind of you and one other player. I'm just kind of wondering
That's what that looks like.
Speaker Change: Yeah, well, the other guys were missing in action during the recovery from the pandemic, and they're back. We tend to do a pretty good job head to head. And that particularly is placements in new casinos and new construction projects.
Speaker Change: but they kind of got their bastion with moats around them. We have ours with our moats around them. We made pretty good inroads and we're working real hard to maintain, if you will, those inroads.
Speaker Change: Unknown Speaker But just to give you a sense of it, if you were operating a single operation, you might want R units or you might want units from another vendor.
Speaker Change: Mixing and matching is great from a supply chain redundancy standpoint but frankly the engineers on the floor, the techs, they kind of want to work with one vendor but not more than one vendor.
Speaker Change: So we're doing the best we can to show that our products are more reliable, more cost effective, etc, etc.
Got it. Thanks. I'll hop back in the queue.
Speaker Change: As a reminder, to ask a question, please press star one.
Speaker Change: Next question is from Tyler Nguyen from Roth Capital Partners. Please go ahead.
Good afternoon, guys.
Speaker Change: I had a quick question on your FSP. So you added 13 clients in the second quarter and the third quarter. So how is your average client size trending? And what is the initial order attachment rate for new clients versus a gradual ramp over time?
Speaker Change: Oh, that's a complicated question. We one of the things that we did when we refocus the team is our product is sophisticated and very capable and it's suitable for
Unknown Speaker .
Speaker Change: you know, a large operation. That's why we're successful with large QSRs and some of the food service management companies where they care an awful lot about the data. It's not just a mon-pa operator. So now most of our focus from a selling standpoint is on companies and organizations that can buy a minimum of 50 to 100 units.
So,
Speaker Change: But the interesting thing is with a land and expand strategy
Speaker Change: It may be the case with a new operator, we might pick up an early order for 5 or 10 machines where they'll try it out in a few of their stores or a few of their operations.
Speaker Change: And then with the success, it's a lot easier for us to go back and work with the customer on expanding that product success into other either other branches or more facilities or more stores, depending on what kind of operation they have.
So, I would say that you should assume...
Speaker Change: I mean, if we added 12 companies as new customers this this last quarter, and we're telling you that
Speaker Change: 2800 units is the potential, you know, that's a couple hundred units, maybe on average, I mean, that's kind of the sweet spot for us.
Speaker Change: But it's pretty hard to tell the ASP, the average selling price, is not really a good indicator because...
Speaker Change: and as I think everybody on the call knows, selling more product to an existing customer is massively easier and massively cheaper than trying to land a new customer.
Speaker Change: We try to get in early and small, prove the technology works so well, and then grow that business from there. So our sales team is targeting like that, and it seems to be working.
Speaker Change: Got it. So are there any particular end markets that the clients are within?
Say again
Speaker Change: Are there any particular end markets that the clients are within?
Speaker Change: Not in particular. You know, we sell across about five sub-verticals within the food service industry. We've got QSRs, quick service restaurants, we have convenience stores.
Speaker Change: Unknown Speaker A strong space for us is sushi. Now, sushi oftentimes is going into grocery stores. If you go in and you pick up a sushi thing, you want to read the label and you want to know that it's safe and what the ingredients are. We also sell into restaurants.
We also serve and do...
Food Service Management Companies, people like Sidoxo and Aramark.
Speaker Change: and they're kind of all over the map, frankly. They all do different things when it comes to food.
Speaker Change: And we're very happy with the fact that we're learning a lot about those different industries. We're understanding the ROI, the return on investment clients get from installing the BOHA system. And candidly, our salespeople are getting better and better at sharing success stories and, you know, kind of getting the first meeting and then getting the next step and the next step.
Speaker Change: and you know we've got we've got a pretty good close rate now which is great. A lot of times if your sales team is kind of new or not very experienced you'll get a lot of first calls but you don't get much follow-up and part of where we'll focus as I mentioned on the call
Speaker Change: because we're looking at the whole GTM, the go to market, which starts out with where do you get a lead? And that could be a trade show. It could be a banner ad online. It could be email. It could be through LinkedIn or other different
Speaker Change: vehicles and and then you start out with somebody that you know which I would prefer to call a suspect.
Speaker Change: And then you kind of work from there. We studied the personas of the different people who need the technology, whether it's somebody in charge of operations, somebody in charge of food safety, or somebody in charge of, you know, store efficiency from a data standpoint and a digital standpoint.
Speaker Change: All of a sudden, they can hand it off to the sales team, either because a client, a potential client says, I'd like to talk to somebody. I'd like a proposal. Can I get a demonstration? You know, I'd like some more information and you carry it all the way through and it becomes an SQL sales qualified lead.
Speaker Change: Are there any choke points in there? Are there any bottlenecks? What can we do better? And in each step along the way, we're creating tools for the sales organization to help it be easier for them to get from that step to the next one.
Speaker Change: say an ROI calculator or maybe a white paper on how customers have gotten a good ROI from the investment in the Boha platform.
Speaker Change: And that's kind of the sales process that we're refining. It's kind of one of these wash, rinse, improve, repeat things. And I feel like as each quarter goes by, we're getting better and better and better. We've got a good team. They're motivated and they're well targeted.
Speaker Change: That was very helpful. Thanks. And also, you guys mentioned the potential for improved conversion rates in 25. Could you elaborate what particular is driving that?
It's a process.
Speaker Change: You know, if you think about what a lead is, it's a name, you know, at the most lowest common denominator, it's a name. Well, if you don't know anything about that name, your ability to work that person from the top of the funnel all the way down to a closed deal, the yield is going to be really, really, really low.
Speaker Change: and nobody wins in the building unless we get an order and everybody's targeted on that and everybody's gold on that. But we're looking at the process end to end.
Speaker Change: And there's an old saying that if you don't measure it, you can't improve it. Well, trust me, we're measuring it. And we're looking at areas where we can improve and we're working on it. And I think we're doing a better and better job. And that's kind of the products good, you just have to be really good at executing in the field. And that's kind of where a lot of our focus is.
Got it. And lastly,
Speaker Change: So you guys were mentioning that customers in the gaming casino market are still working through excess inventory. When do you expect to return back to normal patterns?
Speaker Change: You know, it's pretty hard to say. I mean, the pandemic...
was a gut punch for everybody in the gaming industry.
Speaker Change: and then when the supply chain thing cropped up at the end of the pandemic.
Speaker Change: Unknown Speaker And then the people wanted to swing back into action and get things going again and they couldn't get product. A lot of them just went crazy and overbought. They were afraid that the supply chain problems would persist.
Speaker Change: there were many vendors in our industry or adjacent to our industry that basically had stock outages and couldn't supply you know if you're making a slot machine and you need a ticket in ticket out or a bill validator and you can't get one you can't ship a slot machine
Speaker Change: and so when they started buying they went crazy because normally it's kind of hand-to-mouth in the industry because as a good supplier usually if a client calls up and says I need 50 or 100 units
Speaker Change: I need them in about two or three weeks. We can get them to them. But when the supply chain hit
Speaker Change: And so, they all got nervous and some of the other vendors in the business couldn't even supply anything, so they overbought. And they got to work their way through that.
Speaker Change: And then as I mentioned on the call, we're seeing a little bit of a slowdown right now in the gaming industry. And my belief in that the reason for that is that just like the slot manufacturers overbought, we believe that a lot of the casinos roared back to life and a lot of
Speaker Change: People, especially in the American North American marketplace flocked back to the casinos and things like that. So there was a bulge kind of in there, and everybody kind of loved that bulge. And now things are settling back down to normal. And when that happens,
Speaker Change: it's kind of like, okay, now it's time to take a breath, catch our catch our breath and gradually now plot going forward and kind of a new normal, new normal, whatever that looks like. We don't see any long term, you know, problem with the market opportunity. But we do see a little bit of
Speaker Change: Headwinds right now, which we think are going to subside in 2025
Speaker Change: Thanks for taking my questions. I'll go back to the queue.
Speaker Change: This concludes the question and answer session. I would like to turn the floor back over to John Dillon for closing comments.
John Dillon: Well listen folks, thanks a lot for joining us today. I hope you got the message we feel pretty good about FST. We believe that Gaming Casino
John Dillon: is just going to reach a new normalcy here. It's probably 2025. We are working with the one remaining OEM that's not quite.
John Dillon: Out of the stock, you know, it's still overstocked. We're going to work that through. And, you know, we're heads down, Steve's doing a great job running the business we're doing spending a lot of time and cost control. And we're showing that we can operate as a smaller top line company with reasonably
John Dillon: Good bottom line. We're focused on the process. I mentioned that. And just one last thing. I'm going to be at the Roth conference coming up here in November. I think it's the 19th and the 20th. And I'll be in New York City if any of you are there and you want to get a one-on-one with me or if you want to take a call, we can do that. We're always open to a call and I'm happy to take them anytime.
John Dillon: So, with that, I think we'll wrap up. Again, thank you very much, and if I don't speak to you again soon, we've got some great holidays coming up, and I hope you all enjoy them. Thanks a lot. God bless.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.