TransAct Technologies Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 9, 2023

There are 7 speakers on the call.

Operator

And welcome to the Transact Technologies First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Gardella, Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Thank you, Kyle. Good afternoon, and

Speaker 2

welcome to Transact Technologies' Q1 2023 earnings call. Today, we'll be discussing the results announced in our press release issued after market close. Joining us from the company is CEO, John Dillon and President and CFO, Dave DeMartino.

Speaker 1

This call will include

Speaker 2

a discussion of the company's key operating strategies, the progress on these initiatives and the details on our Q1 financial results. We'll then open the call to participants for questions. As a reminder, this conference call contains statements about future events and expectations, which are forward looking in nature. Statements on this call may be deemed as forward looking and actual results may differ materially. For full list of risks inherent to the business and the company, please refer to the company's SEC filings, including its reports on Forms 10 ks and 10 Q.

Speaker 2

Transact undertakes no obligation to provide or update any forward looking statements to reflect events or circumstances that occur after the call. Today's call and webcast will include non GAAP financial measures within the meaning of the SEC regulation sheet. When required, reconciliation of all non GAAP financial measures to the most directly comparable financial measures

Speaker 3

Thanks, Ryan. This is John Dillon, and it's good afternoon to all of you, and thanks for joining us today. And this is my first earnings call as Chief Executive at TRANZACT. And for those of you who don't know me, again, my name is John Dillon. Before becoming the CEO here, I've been on the Board for about a decade, so I know something about the company.

Speaker 3

And you can look me up in LinkedIn, but I've been a A tech individual for a long time, places like Oracle, Salesforce, Hyperion Solutions and the like. So I feel like I can bring a fair amount of guidance And experience to the job. So I've only been here for about a month, but I want to share some of my first impressions with you and highlight some of the things that I think we're doing well and where we have some opportunity to do better. First of all, I feel confident that stating that TRANZACT has a great number of strengths and some fundamental goodness for a company of our size, and we're not big. I also would be remiss if I didn't thank Bart Schulman for his dedication to transact.

Speaker 3

I mean, his ability to navigate 3 years of remarkably unprecedented business and logistics Challenge in which we all know because of the virus, war in Europe, inflation and potential recession. Without his leadership and through the lockdowns and COVID related challenges, the company would not be nearly as well positioned as it is today. So for me, I just wanted to shout out a thank you to Bart for everything he's done to get us where we are. So first, Let me say that we have a number of core competencies that I think differentiate us from our competition and that I believe We can leverage effectively to build competitive moats around some of our businesses. I mean, for example, the printing products and manufacturing processes and Logistics Capability are industry standard and have allowed us to, in the past 2 quarters, Demonstrate we're capable of delivering product when others cannot and winning share in printing markets around the world And frankly, it builds trust with our customers.

Speaker 3

I believe this is an advantage that we should lean into and I intend to double down On these strengths and go where we can win in essence, penetrate customer opportunities and markets first with a winning strategy. And usually if you're smart, you lead with your long suit and we can do that. And second, the BOHA platform is differentiated. It's a well designed product and with our recent relaunch of the BOHA Terminal 2, I think the product strength only improves. And frankly, the need for technology solutions in the back of the house where operational challenges are only increasing, Companies in the food service industry are dealing with food wastage, spillage, labor and cost every day.

Speaker 3

And I believe there's a challenge of the FDA approved labeling only continue to grow every day. And frankly, I think TRANZACT's ability to be the product that wins that market is real. I also believe that adjustments to our product positioning and sales strategies will result in positive changes to help customers and prospects see our BOHA platform. And I believe in the end, we can gain widespread adoption of these terminals in the foodservice establishments that we serve. In a short time since I've been the CEO, I've had an opportunity to move quickly to enact some early changes implemented relative to sales motion and go to market strategy.

Speaker 3

And I believe this is an iterative process. These things aren't things that will have a massive impact immediately, but I believe that we all in all can improve the GTM, the go to market Strategy relative to FST, food safety technology, food service technology and that we can increase the number of new terminals we sell And I believe we should treat that as the most important indicator where we have success and traction for BOHA. I'm already making moves to prioritize This objective and 3rd, and perhaps most importantly, our customers have learned to trust us and rely on TRANZACT and our products. The relationships we have are the lifeblood of any business as you probably all know. And through our years of service and innovation and collaboration with our customers, we've built, I'd say a very high degree of customer intimacy that any business would want and want to leverage to continue to grow the market opportunity ahead of them.

Speaker 3

So these things are things that I believe that we can continue to evolve and improve with a focus on customer centric approach. And I think that's going to be a key to our long term success and frankly our differentiation. And finally, I'm getting to know and speak with members of the TRANZACT team. I knew many of them already as from my service on the Board, but I'm very impressed with the quality of the people that we have in the organization. Many of them are tenured and certainly very dedicated to success here at TRANZACT.

Speaker 3

The bench strength is good, Institutional knowledge across the company from finance and accounting led by Steve and Bill, our sales organization who is now led by Tracy who We made the Chief Revenue Officer recently to cover both FST and to cover gaming and casino. And our technology and design teams led by Brent, I've got a solid team and I'm delighted to work with these individuals and I'm very Confident that we can do what we need to get done. The foundation is here and I believe TRANZACT Fundamentally, he's taking the right steps towards growing into a class leading enterprise. So I've got some highlights. I'll walk through them from our 2 key vertical markets FST and Casino and Gaming, before a brief conversation about guidance.

Speaker 3

Then I'm going to hand it off to Steve for some more detailed analysis, then we'll do some Q and A. So relative to FST, Food Service Technology, Total FST revenue for the quarter was up about 60% to $3,500,000 led predominantly by an increase in the number of terminals sold to new logos as well as higher shipments of our Accudate 9,700. As previously mentioned, the new terminal growth remains the most important element of our FST business. I intend to focus on that metric. And while we are encouraged by the 553 new terminals we added in the quarter, we're making, as I mentioned already, changes to our sales strategy to enhance the quarterly run rate.

Speaker 3

The changes will take some time. It's all iterative, as I already mentioned, and I will With 12,733 terminals in the marketplace, year over year from 10,127 From the Q1 of 2022, that's a 26% year over year increase. That's good, but it's not as good as it should be. Next on the casino and gaming market, we saw all time high quarterly record revenues of $15,800,000 Up nearly 2 50% year over year and almost 50% sequentially, which was our previous high in the past. So this Quarter is the highest revenue bookings for casino and gaming in the history as far as I know.

Speaker 3

Strength across brought both domestic and international sales, triple digit percent gains as industry leading printers continue to pick up market share. As was mentioned last quarter, we remain the beneficiary of a competitor's inability to provide product to the market And our stellar product production and design teams have been able to secure parts and products where the competition is not. Well, this is obviously a good result. We believe that there is a likelihood that we may see a more normalized competitive environment in the future. I mean that really wouldn't surprise us.

Speaker 3

We thus feel it prudent to update our financial outlook ranges. So for fiscal year 2023, we're now expecting between $71,500,000 $73,500,000 in revenue and between $6,500,000 $7,500,000 in adjusted EBITDA. So while the strength of our Q1 results demonstrate the opportunity in the market for us, we believe the correct approach is to assume that the current market dynamics in the casino and gaming Market may not continue, so we're currently assuming a moderation in the casino and gaming sales in the back half of the year. Additionally, while we are making changes to our sales and go to market strategy in FST, it will take some time, as I've mentioned several times on this call, to see the results flow through and improve sales numbers. So we are not assuming appreciable impact in the near term.

Speaker 3

From a profitability standpoint, we assume there will be a downward margin pressure from current levels due to slightly lower casino and gaming sales, which We'll flow through our results. So while we're not seeing our main competitor currently in the market in the Q2, we believe these assumptions are The ones we're making now are probably the most prudent given that we have no really ability to project how a competitor is going to move back into a marketplace where they've mostly been Finally, as CEO of TRANZACT, I wanted to use the opportunity to communicate to you and the financial community what you'd expect from me. The most important objective I have here is to create value for all stakeholders. And as a shareholder myself, our objectives are completely aligned, trust me. My success as a leader of Transact's business will result and should result and deserves to result in success for all the stakeholders.

Speaker 3

In part, this will be achieved through transparency with U. S. Shareholders and the financial community as a whole. I sincerely welcome feedback, comments, criticism and encourage any holder of our equity to reach out and let us know how we're doing or ways you would like to see us improve. And I'm very sincere about that.

Speaker 3

I can do better with good questions. So with that, those are my sort of formal comments here today. And I'd like to turn the call over to Steve DiMartino, our Chief Financial Officer.

Speaker 4

Thanks, John. Thanks, everyone, for joining us.

Speaker 5

Let's take a look at

Speaker 4

our Q1 'twenty three results in more detail. Total net sales for the Q1 were $22,300,000 up 130% compared to $9,700,000 in the year ago period. Sales from our Foodservice Technology market or FST for the Q1 were $3,500,000 up 62% compared to $2,100,000 in the prior year period. These gains were driven by strength across the board, including record high quarterly software revenue and stronger hardware sales with both BOHA terminals sold to new logos and Accudate 9,700 units leading the way. We added 553 new paid terminals ending the first quarter at 12,733 terminals versus 10,127 at the end of the year ago period.

Speaker 4

Our recurring FST sales, which includes software and service subscriptions as well as consumable label sales for the Q1 of 'twenty three were $2,300,000 up 49% compared to $1,600,000 in the prior year period. Our ARPU for the Q1 of 'twenty three was $7.64 up 20% compared to $6.38 in the Q1 of 'twenty two, but down sequentially from 806 in the 4th quarter. As a reminder, the downward pressure on ARPU is a result of additional terminals in the installed base, which are currently not generating any recurring revenue, which was slightly offset by an increase in recurring FSD sales. However, as I mentioned last quarter, the good news is that we have a growing population of BOHA terminals installed in the marketplace, giving us fertile ground to cross sell other BOHA software applications to these customers. Our casino and gaming sales reached a quarterly record high of $15,800,000 up 2 32 percent from the Q1 of 2022 and up 44% sequentially from the Q4 of 2022.

Speaker 4

We continue to see strength across the board in the casino and gaming business, with our domestic sales up 3 15% and international sales up 115% year over While these excellent results continue to be driven by competitors' inability to supply their customers with product, as John spoke to earlier, we can't assume these trends will hold for the entire year. Though we have yet to see evidence materialize, we believe it is likely our main competitor will reenter the market in the back half of the year, which would affect our results. However, we also believe a certain amount of our new market share gain will be sticky, resulting in a new go forward run rate once the competitive dynamics normalize. POS Automation sales for the Q1 of 'twenty three were 1,800,000 up 38% from $1,300,000 in the prior year period. This was a result of higher Ithaca 9,000 sales compared to a COVID impacted Q1 'twenty two, largely from a price increase we instituted in mid-twenty 2 in response to supply shortages.

Speaker 4

As expected, sales were down significantly sequentially as our largest QSR customer completed a major initiative in 2022. As a result, we expect POS sales to continue to be lower throughout 2023 compared to 2022. Moving on to Transact Services Group or TSG. For the Q1, TSG sales were down 20% year over year to $1,200,000 This decrease was largely due to lower sales of spare parts for our to the lottery printers, which we do expect to recover somewhat during the remainder of 'twenty three. Moving down the income statement.

Speaker 4

Our Q1 2020 gross margin was 55% as compared to 26.4% in the prior year quarter. The significant margin gain resulted from higher sales volume, improved mix of higher margin casino and gaming printer sales the effect from 2 rounds of price increases we instituted during 2022. Looking forward, we expect gross margin to be under modest downward pressure as we move through the remainder of the year as we begin to experience the anticipated impact from the change in competitive dynamics in the casino and gaming market. Our operating expenses for the Q1 increased 3 percent to $8,400,000 up from $8,200,000 in the Q1 of 'twenty two. Breaking this down a bit, our engineering and R and D expenses for the Q1 were flat at $2,300,000 Selling and marketing expenses were also relatively flat, increasing 3 percent to $2,800,000 for the Q1 as we return to more normalized levels of travel, Marketing and trade shows compared to the still COVID impacted Q1 of 'twenty 2.

Speaker 4

Lastly, Our G and A expenses increased 7% to $3,400,000 for the Q1. This increase was largely attributable to an across the board salary increase for all employees, The hiring of additional back office staff and depreciation related to our new ERP system that we implemented in the Q2 last year. We generated operating income of $3,800,000 or 17.1 percent of net sales in the Q1 of 'twenty 3 compared to operating loss of $5,600,000 in the prior year period. On the bottom line, we recorded net income of 3,100,000 or $0.31 per diluted share compared to a net loss of $4,400,000 or a loss of $0.44 per diluted share in the year ago period. Our adjusted EBITDA for the quarter improved to $4,500,000 compared to an adjusted EBITDA loss of 5,100,000 for the Q1 last year.

Speaker 4

As John stated, we've updated our adjusted EBITDA guidance for 2023 to 6,500,000 to 7,500,000 which is up from our previous expectation of $5,200,000 to $5,400,000 We believe that this outlook is the most prudent approach to our guidance considering the expected normalization of the casino and gaming market in the back half of the year, which would negatively impact both our sales and gross margin compared to the Q1 of 2023. Lastly, I'd like to mention our cash position. We finished the quarter with $6,400,000 of cash on hand and 2,250,000 of outstanding borrowings under our $10,000,000 revolving credit facility with Sienna Lending. Within the framework of our current guidance, We expect to be cash flow positive for 2023 and believe our current cash on hand and available borrowings under the Sienna facility position us well to execute our current growth roadmap without any immediate additional funding needs. And with that, operator, I think we can open up the call

Operator

Thank you. We will now be conducting a question and answer session. It may be necessary to pick up your handset before pressing the star keys. Our first question comes from George Sutton with Craig Hallum. Please go ahead.

Speaker 1

Thank you. Great results and John, welcome to the call. I'm curious if you could talk about the casino printer business from the following context. We were adding lines much of last year to try to keep up with demand. Can you just give us an update of where we are there?

Speaker 1

Are we working off of a backlog? And Is there any way to characterize this on a book to bill kind of basis?

Speaker 3

I think I can answer that. I think we're in pretty good shape, but I think some of the I think I'd like to ask Steve to speak to. Sure.

Speaker 4

We have a very healthy sales backlog for casino and gaming printers. On the inventory side, we're actually good. We actually were able to for the first time, we actually were able to shipped all the orders that we had scheduled for the Q1. So in other words, we had no push out of orders from Q1 to Q2. We were able to deliver everything that was scheduled.

Speaker 4

So we're in a good position. We still have a low inventory position, but we're building that back now in the second quarter.

Speaker 1

Got you. And John, you had mentioned BOHA, the second version of BOHA. Can you talk about Changes and improvements that have been made to that and I understand there were certain pushbacks from Potential customers, have we addressed those pushbacks with the second version?

Speaker 3

I think the answer is yes. We've got a pretty good Relationship with a number of clients that want a terminal that does X and Y and Z, and we've been listening to them. This new Terminal 2 is sort of like all of the enhancements that we would have wanted to make. The screen is better. The printer is faster.

Speaker 3

The power supply is built in. The screen is you can get it Two ways. You can get it with a tablet that you can walk around with and detach, but this screen and its bezel are built in. And you kind of put all of it together and it's just all the way around a better terminal, it's faster, it's more performant, the screen is brighter. I mean, it's sort of a whole bunch of those things all combined, and I've taken a close look at it.

Speaker 3

And the other thing that you wouldn't see is that we've standardized Sort of the underlying chipset underneath the core product and we're unifying that across our other products so that we only have sort of one common Underlying underpinning design that we can use for other terminals or even our terminals that we use in the gaming and casino industry. So fundamentally, the reason people want these things is so that they can save labor and they can comply with FDA Labeling requirements, they can do date coding and they can print grab and go labels and the like, and we do that really, really, really well. So I think we nailed it. We're going to show it at the NRA conference coming up on the 21st May, and we've got a couple of other trade shows that we're going to Be making the rounds with and candidly, it really wasn't not so much the terminal, but I'm really encouraged by Some changes we've made in the sales organization, some training we're giving to the people. And the reality is it's almost like a client can't afford not to implement A back of the house automation system and we think the labeling component of that is probably the leading requirement that those things are going to need.

Speaker 3

However, the terminal itself can run pretty much any software that you want it to run. So given that it's all in one place, It's connected to the Internet and it's secure. You put all that stuff together, it's a pretty good piece of equipment to have in the back of the

Speaker 1

house. Great. One last question for me. Can you talk about there's a large convenience store customer that you've referred to in the past and a large franchisor that's Coming in the back half of this year, are there any updates on those two opportunities?

Speaker 3

Not specifically. I would say that the large Convenience store is purchasing equipment again. They took a break for other reasons. It had nothing to do with us, and they're kind of back on Jack? And as for the large franchisee, there's no news, and that's good.

Speaker 3

They like what we're doing and sort of stay tuned.

Speaker 1

All right. Thank you very much.

Operator

Our next question comes from Jeff Martin with ROTH and Kilometers. Please go ahead.

Speaker 6

Thanks. Good afternoon, John and Steve. John, I wanted to jump in on the changes in go to market strategy, specifically with Baha. You mentioned some enhanced Training, but are there other kind of low hanging fruit characteristics that go with that strategy? And I know you Besides this is not an immediate results type of situation, maybe give us a framework of when you expect some momentum to start to build there?

Speaker 3

Well, the outcome is hard to predict with any certainty. But this is a classic let's get the go to market strategy right. What kind of sales people do we have? How are they trained? What kind of lead funnel do we have?

Speaker 3

Are we doing account based marketing? How do we reach the clients? What's the conversion rates? And we're basically putting in what I believe is sort of industry best practices across the board. We've made some reorganization in the sales We've got some training planned.

Speaker 3

We're also doing more selective targeting. If you think about it, There's an awful lot of businesses we estimate maybe a couple of million that we could sell a BOHA terminal to. But some of them have 3 stores, some of them have 5 Some of them have 1, and then there's people that have 1,000. And we're trying to focus the sales organization. We're willing we've always been willing to take a call from almost anybody.

Speaker 3

So some of the things that we're doing are intended to focus the resources that we do have, Create success where we know we can get it and then double down on that. I believe that we have the ability It's kind of interesting if you think about it. A franchiser is very, very different than somebody who owns the stores. Cervantes in general are still getting back on their feet. So a lot of what we're doing is focusing at sort of territory triage.

Speaker 3

I could kind of go on and talk about it probably for half an hour. From a career standpoint, I've done a ton of this stuff. None of it's rocket science. But As you know, we've had a number of individuals heading up the sales organization, and we now have Tracy, who's a veteran at And I'm spending a lot of time with her as Chief Revenue Officer. And in short, we're sort of retooling The sales organization retargeting them, building, if you will, better incentive plans for them, focusing on them where we have Advantage to win and working on lead gen and lead conversion.

Speaker 3

And in short, I guess I'd say we're putting all that together, And I think we're going to come out with a refreshed most of it's already done, but a refreshed go to market program, which I think is going to yield better results than we've been getting in the past.

Speaker 6

Okay, great. And my other question is around the BOHA 2 terminal relative to the initial BOHA terminal. Is your sense that the initial version Kept customers from purchasing it for the reasons that are different about the upgrades to the Baha Trying to get a sense of is this terminal going to open the door essentially to starting to close some larger Restaurant chains and restaurant groups?

Speaker 3

Yes, great question. Well, look, I mean, this has been an iterative With the terminals as well, we started out just with a basic labeling printer today. The software in there for labeling is very sophisticated. There's a lot of things we can do. The BOA terminal, by the way, and I hate to talk about features, but I think this one's Cool.

Speaker 3

You can have 2 different rolls of paper in there. You could have down to an inch or 1.25 inches all the way up to 3 inches We do 300 DPI printing, so you can put a heck of a lot more information on a small piece of paper. And so I think the answer is Yes and no. I don't think there was anything deficient in the earlier versions. But here's what I would say, Especially for large organizations, this is sort of a request for the client to change the way they operate the back of the house.

Speaker 3

I mean, we've got people with grease pencils writing things on sticky notes And putting them on packages of mayonnaise and potato salad and stuff like that. And so from a sales standpoint, I think it's a relatively long sales cycle and it's going to be lumpy, especially for the large clients because we're asking them to do a bit of a lift and shift in the back office. And a lot of the clients, and I haven't been on enough sales calls yet, but the anecdotes that I hear, This is kind of a situation where customers don't say no, they say not now. And one of the things relative to the prior question that Was asked was about the go to market. One of the things that we are implementing is a nurture track because we want to make sure that people who've expressed interest, we want to make sure that we keep them warm so that when they are ready, When we touch base with them, they go, okay, now is the time.

Speaker 3

And for franchisees, you can imagine that in some situations, The franchise might approve a technology, but then the franchisor waits for the franchises themselves to buy an approved piece of technology. And then in some other cases, the headquarters basically rolls out a new system across the board, especially for something like grab and go, where they implement a new Go to market strategy themselves and they need the FDA labeling that we can provide. So I think it's kind of a combination All those things, better terminal, better sales approach, better nurturing, better customer targeting. And The bottom line is the terminal works and it works really well. We've been demonstrating it kind of under non disclosure for a while And we've gotten tremendously positive feedback.

Speaker 2

Great. Thank you.

Operator

Our next question comes from Mitchell Sachs with Grandland. Please go ahead.

Speaker 5

Hi, guys. Great quarter, obviously. Question has to do with sort of historical. So you've got Some number of 9,700s out there across the restaurant and convenience store space. Can you give us a sense of how many units are out there and what the opportunity is to go back to those customers to upgrade them to the Newer terminal and obviously to get them hopefully doing some more recurring revenue?

Speaker 3

Well, That's a great opportunity for an upgrade for a couple of reasons. 1, the Boha Terminal 2 can do a lot more than the 9,700. And 2, eventually the printers all need to be replaced. So we look forward to kind of replacement business, which of course generates revenue. We have a lot of 9,700s out there.

Speaker 3

Steve won't tell me the exact answer because he's afraid I'm going to share it with you all. But it's Tens of It's in

Speaker 4

the tens of thousands.

Speaker 3

It's in the tens of thousands, more than 110. Okay. Is that And

Speaker 5

so is it

Speaker 6

Is it safe to assume

Speaker 5

you guys are approaching those customers to try to get them to upgrade? And if so, when you're doing that, What's the biggest pushback on doing it now versus like you say not now?

Speaker 3

Well, the answer to the first Part of the question is yes, we're approaching them. And frankly, some of these clients are the ones that we're getting really good feedback from. What you want to do is build a product that the customer wants. We're not getting any particular pushback. I mean, we just haven't had the terminal ready.

Speaker 3

We do now. And I think that we're just beginning The sales process both for new clients and then the replacement clients. The only pushback frankly is the 9,700 is a pretty good workhorse. And so if it's performing adequately, we're going to get the business eventually, but they might not feel compelled to go out and rip out 1,000 terminals at a time or a couple of 100. And so we think the replacement is going to happen sort of more evenly Throughout the growth trajectory of the Baja Terminal 2 as opposed to all of a sudden every 9,700 is going to be replaced in a matter of 3 to 6 months.

Speaker 5

Okay. Thanks a lot.

Operator

There are no further questions at this time. I would like to turn the floor back over to John Dillon, Chief Executive Officer for closing comments.

Speaker 3

Well, again, thanks a lot for joining today. I'm very sincere in my request for feedback, comments, input. If there's stuff you think we ought to be doing that we're not or if you like some of the stuff, I love those kind of calls. But I'm open to Suggestions and ideas from all of you and back to my original statement is I intend to be more and more transparent. I think that's something that the investors deserve.

Speaker 3

And as I get more comfortable with the data and the information, I intend to share more and more of it. And to the extent that I can speak freely about the company and our progress, I'm happy to do that. And with that, I will say goodbye and thank you.

Operator

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

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TransAct Technologies Q1 2023
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