TransAct Technologies Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 7, 2024

There are 6 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to the Transact Technologies First Quarter of 2024 Earnings Call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Ryan Godello of Investor Relations.

Operator

You may begin.

Speaker 1

Good morning. Welcome to Transact Technologies' Q1 2024 Earnings Call. Today, we'll be discussing the results announced in our press release issued before market open. Joining us from the company is CEO, John Dillon President and CFO, Steve DeMartino. Today's call will include a discussion of the company's key operating strategies, the progress in those initiatives and details on our Q1 financial results.

Speaker 1

We will then open the call to participants for questions. As a reminder, this conference call contains statements about future events and expectations, which are forward looking in nature. Statements on this call may be deemed as forward looking 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. Triszak undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances that occur after the call.

Speaker 1

Today's call and webcast may include non GAAP financial measures within the meaning of SEC Regulation G. For an 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 in the company website. And with that, I'd like to turn the call over to John. John?

Speaker 2

Thank you, Ryan, and good morning, everyone, or evening as the case may be, and thank you for joining us today. At a high level, the quarter came in mostly as expected. Total sales were $10,700,000 which is down as expected 52% year over year, mostly due to the dynamics that we discussed at the last call relative to casino and gaming. FST, that's Food Service Technology, recurring revenue increased to 2,400,000 dollars versus the year ago period. FST was a bit lighter than expected because 2 of the larger expected transactions slipped into Q2 and have been or will be closed shortly.

Speaker 2

Further, we are seeing strong demand for our FST technology from our large QSR client worldwide USA, North America, Europe and even in Middle East and Africa are placing orders. On a less positive note, one of our large clients, a convenience store client is moving to a smartphone application deployment model, single smartphone, and it will replace a considerable amount of our label sales revenue from the ARPU calculations. And while we enjoy the revenue from label sales, it's not an important revenue stream for us. Nonetheless, it will impact our numbers going forward. Before we go any deeper into the financials, I wanted to take a step back and talk a little bit about TRANZACT as a business and discuss where we stand today as well as what we have in store for the future.

Speaker 2

It's been just barely over a year since I took over as Chief Executive. And since then, I believe we've made considerable progress operationally by refocusing and retraining a new sales team, cutting expenses and spending, rolling out and winning important approvals for our new Baha T2 product and introducing a couple of new metrics for investors to help us track our progress. While I'm encouraged by what the team has accomplished so far, I want to spend some time talking today about the future for TRANZACT rather than the past. I think we have a great organization at TRANZACT. It has core strengths, fundamental goodness, and I believe there's still considerable room for us to explore untapped potential and better define ourselves as an agile industry agnostic transaction validation platform that delivers tailored business solutions to our clients.

Speaker 2

And while more products like casino and gaming printers and our BOHA platform might appear as serving 2 very separate markets with disparate goals, the reality is that both our industry based solutions that leverage both hardware and software to validate transactions in the moment at the point of occurrence. And for a number of reasons, casino and gaming and restaurants back at the house are at 2 different stages in their transaction validation lifecycle. I mean, we recognize that for casinos, there will always be a need for transaction validation, even if many players eventually switch from paper to electronic form of validation. We're also well positioned to do that. I mean, this is a question I get frequently and while we believe there will always be a place for paper receipts in gaming environments, TRANZACT is moving with the market, introducing cutting edge technology to clients and providing custom solutions such that many transaction validation capabilities are possible.

Speaker 2

For example, sports betting is now the fastest growing gaming segment at many casinos, which is why we introduced a purpose built printer called the EPYC 880. And soon this will be replaced by the TR-eighty, which is the next generation for this exact application and working with our OAN clients to design and optimize printers for kiosks. Competitor solutions typically involve hastily redesigned existing products that put it into position where it's either difficult to service, prone to air, hard to operate or both. And on the BOHA side, an example we've talked about in the past few months has been our entry into assisted living communities, where our technology is used to monitor temperatures in refrigerators and freezers for controlled medicinals in their storage areas. And medication storage has not traditionally been a service we advertise, but that doesn't mean we aren't more than equipped to take it on.

Speaker 2

We work diligently with this client to ensure we could provide a custom solution utilizing the BOHA platform to meet their unique particular requirements. I mean, FST is simply one market that can be one with our BOHA platform and we believe we have the ability to enter other markets with the same solution as well. So these small steps towards entering new verticals and applying our technology and strengths in new ways in existing verticals are symbolic of all the opportunity there is for our services to grow and expand. We believe there are opportunities like these across a range of spaces from places we've already previously been like lottery and banking to totally new white space opportunities that may not even know yet they can benefit from our technology. As an example, and those of you who have been with us for a long time, remember, we used to have substantial market segment back in the 2000s up until about 2017 was our banking business.

Speaker 2

Specifically, if you recall, our Bankjet Inkjet printers were used at bank teller stations all over the United States. It was a great market for us, but obviously banking has changed. But the point is that we have been in many other vertical markets and we do a good job of it. With updated products and revised go to market strategy, we believe there's a lot of possibilities here for us. After all, TRANZACT is a company with a legacy of design wins in multiple verticals spanning multiple decades and that ability has not disappeared.

Speaker 2

We have those roots. It's part of our DNA and I think we have the opportunity to find more and new ways to win in different markets as a leading transaction validation and verification platform. We've already identified a few opportunities to explore. Don't worry, we're staying very focused on the markets we're serving today, but the opportunity is exciting in these adjacent markets for our technology. In the long term, we believe that we can apply ourselves to a wider array of industries.

Speaker 2

So having said that, let me move on to some key points from the quarter and then I'll pass it back to Steve for more detailed review of the financials. On the FST side, our Foodservice Technology, we saw revenues of 3,300,000 dollars down about 5% year over year with recurring revenues of $2,400,000 which was up about 3% year over year. We delivered 901 Baja terminals resulting in 856 net new installations and we ended the quarter with 15,370 online terminals in service. As the initial cohort, our Bohai terminal installed base begins to hit contract renewals, we do experience a minimum amount of churn in the quarter. We don't report that yet because it's too early to get significant metrics, but it's something that I expect to report in the future.

Speaker 2

But that's the difference between the terminals we sell and then the net new installation. So sometimes we'll lose a few terminals if somebody goes out of business or whatever. And that's an important metric that eventually as we get better statistics, we'll probably begin to report. Our T2 product continues to be well received by customers and prospects as well, and I believe this new product will be crucial to our growth going forward. However, as I mentioned in the past, we expect progress to be lumpy quarter to quarter.

Speaker 2

We're a small business and these are big purchases typically when a business or a company that's going to become a client has to change a process in the back of the house. So we expect it to be lumpy. We expect rollouts to be somewhat inconsistent, but we have a lot of optimism for the future here. The new FST pipeline growth metric, which measures the quarter over quarter difference in our 4 quarter looking forward pipeline that grew about 4% quarter over quarter. So it's going in the right direction.

Speaker 2

We scrub it carefully. We're paying a lot of close attention to what's in the pipeline. And as I pointed out earlier, we've added 8 new customers in the last quarter with the potential to purchase as many as 10,000 terminals or more over the next 12 to 24 months. And that's adding to the 12 new customers that we added in the prior quarter. Next, I want to provide an update on the status of 711.

Speaker 2

Occasionally, some of you asked me about it. In April, 711 Corporation informed us that they would be moving to a net new system and moving off the Baja terminal. They're in the 1st generation, we had obviously hoped that we would sell them the terminal 2. This loss was due to a cost cutting project where virtually all of their in store applications are going to be run on a single cell phone. These applications include point of sale, replacing their point of sale system, their inventory system, waste management ordering and all the other back of the house and front of the house applications that they operate in a single store.

Speaker 2

They're all going to be moved to this in house system by the end of the Q2 in 2024. While this is a disappointing development, we wanted to note that BOHA was not specifically targeted. It had nothing to do with the decision to make at the executive level at headquarters. And we're not taking it personally as it were, and it's not due to any problems with our product or services, but rather was a result of a long effort to create and institute their own technology. We really didn't have much perspective on this.

Speaker 2

We were somewhat unaware of this until the termination. Their 711's parent company, 7i Holdings generates tens of 1,000,000,000 of dollars in revenue and staffs 100 of engineers and even then and allegedly took years to build and roll out this very specific one off product that is customized specifically for single store 711 business. This development will impact approximately 5,400 terminals in our installed base and will reduce recurring revenue at an annualized rate of approximately 3,600,000 largely label sales and this has been reflected in the updated guidance range that we're going to provide. I also wanted to briefly mention our international QSR win that I have referenced in prior calls. The rollout has been an incredible success so far and we have started receiving an increasing number of orders for locations around the world.

Speaker 2

We couldn't be more thrilled with the positive reception and believe this is an opportunity that could provide over 1,000 allheart terminal sales quarter over quarter over quarter. We believe the worldwide footprint we have already will expand even wider. And then finally, moving on, I want to mention that we have a large sushi client that is converting from our original terminal to the new Baja terminal 2, T2. We expect this will generate hundreds of additional sales of the T2 terminals over the next 12 to 18 months. Most of them will probably occur in 2024.

Speaker 2

Moving on to casino and gaming, we reported revenue of $5,700,000 for the quarter. That was down 64% from the prior year and we've been discussing the changing dynamics in this largely duopoly market for the past several quarters and wanted to update everyone on how we see it progressing. First, on the competitive side, we believe our main competitor has reentered the market and we're seeing some of the pricing pressure we expected as this occurs. We're taking appropriate steps needed to make sure that we retain as much of the captured market share as possible. 2nd, on the inventory side, we continue to hear from most of our OEM customers that they are in an oversupply position still and we expect this to continue for at least the next quarter and this dynamic continues to be the larger reason for the sequential slowdown in sales.

Speaker 2

Previously, we expected the Q1 to be the peak of this oversupply and now we believe that this will continue through at least the Q2 with order pickup beginning in the Q3 and then going forward from there. And finally, I wanted to provide an update to our financial outlook for 2024. Due to the changing dynamics around both FST and Casino and Gaming, we decided it's most prudent to adjust our financial guidance to ensure that investors have an accurate idea of where we believe our performance will be for the remainder of the year. We now are currently estimating that our full year revenues will be between $45,000,000 $50,000,000 and adjusted EBITDA will be between a negative $2,500,000 negative $3,500,000 dollars I'm relentlessly optimistic about the future of TRANZACT and believe that we have the right products, the right people to win in our existing markets as well as some new ones in the future, While I acknowledge a continuing need to execute, especially in the near term, it is also important as ever, but I have complete confidence in the strength of the organization to perform. So those are my comments this morning.

Speaker 2

And now I'd like to pass it over to Steve DiMartino for a more detailed review of the financials. Steve?

Speaker 3

Thank you, John, and thanks everyone for joining us this morning. Let's turn to our Q1 2024 financial results in more detail. Total net sales for the Q1 were $10,700,000 which was down 50 compared to $22,300,000 in the year ago period. Sales from our Foodservice Technology market or FST for the Q1 were $3,300,000 which was down 30% sequentially and also down 5% compared to $3,500,000 in the prior year period. Our recurring FST sales, which include software and service subscriptions as well as consumable label sales for the Q1 were $2,400,000 which was down 25% sequentially, but up 3% compared to $2,300,000 in the prior year period.

Speaker 3

Our ARPU for the Q1 of 2024 was $6.63 that was down 13% compared to $7.64 in the Q1 of 2023. As a reminder, we're currently selling a number of BOHA terminals with no recurring revenue attached to them to start. While this presents an opportunity to sell recurring elements in the future, for now they represent a drag to our ARPU number. In the Q1, a large number of our terminals fell into this category and we expect this to continue in the near future. We're working on ways to lift this number going forward, but we expect our ARPU to be in the $500,000 to $1,000 range for at least the rest of 20 24.

Speaker 3

Our 4. Our casino and gaming sales were $5,700,000 which was down 64% from the Q1 of 2023, primarily due to OEMs working down high levels of printer inventory that they stockpile during the supply crisis earlier in 2023 that has now eased. As John mentioned, we expect the dynamics we experienced during the Q1 to continue through at least the Q2 of 2024 and begin to improve in the back half of this year. POS automation sales for the Q1 decreased 64% from the prior year to 651,000. 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 3

In addition, similar to the casino market, during Q1, our customers were finishing up working down unusually high levels of printer inventory they built up during the supply crisis in 2023. We believe the competitors in the market are now fully back online and we are taking the appropriate steps to maintain market share and ensure our products are in line with the new dynamics of the marketplace. Moving to Transact Services Group or TSG. For the Q1, TSG sales were down 14% year over year to $1,000,000 This decrease was largely due to unusually high sales of legacy lottery spare parts in the prior year, which we don't expect to repeat at the same levels in 2024. Moving down the income statement.

Speaker 3

Our Q1 gross margin was a solid 52.6 percent, which was up sequentially from 48%, but down from 55% in the prior year period. The sequential increase comes as a result of an improved sales mix and favorable overhead cost absorption, somewhat offset by lower overall sales volume. Going forward, we expect our gross margin for the remainder of the year to be in the mid to high 40% range. Our operating our total operating expenses for the Q1 decreased by 18% from the prior year Q1 to $6,900,000 and were flat sequentially. The year over year decline came as a result of our previously disclosed savings achieved from the cost cutting efforts we began to put in place late in Q3 last year.

Speaker 3

We estimate that these actions would produce operating expense savings of about $3,000,000 on an annualized basis and we experienced the full effect of these reductions during the Q1. Breaking down our operating expenses a bit, our engineering and R and D expenses for the Q1 were down 13% year over year to $2,000,000 Our selling and marketing expenses decreased 24% year over year to $2,100,000 and our G and A expenses decreased 60% year over year to 2,900,000 dollars For the Q1, our operating loss was $1,300,000 or a negative 12.2 percent of net sales and this compares to operating income of $3,800,000 or 17.1 percent of net sales in the prior year period. On the bottom line, we recorded a net loss of $1,000,000 or a $0.10 loss per diluted share for the Q1. And this compares to net income of $3,100,000 or $0.31 per diluted share in the year ago period. Our adjusted EBITDA for the quarter was negative $701,000 and this compares to positive $4,500,000 for the Q1 of last year.

Speaker 3

Taking a quick look at our balance sheet, it continues to remain solid. We ended the quarter with $10,600,000 in cash with only the minimum required $2,250,000 of outstanding borrowings under our credit facility with Sienna Lending. And finally, before I open the call to Q and A, I wanted to address the expected impact our new guidance range is anticipated to have on our projected cash flow for 24. Even with the projected adjusted EBITDA loss of negative $2,500,000 to $3,500,000 for 2024, we expect the business to be only slightly cash flow negative for the full year. We expect to sell down our inventories as we move through the year, which now sit at $19,200,000 and believe this combined with liquidation of receivables resulting from lower sales levels will likely be enough to fund a good portion of our projected EBITDA loss.

Speaker 3

So given these factors, we believe we will easily have enough cash to fund our business for at least the next 12 months. And with that, I'd like to turn the call over to the operator for questions. Operator?

Operator

Thank you, sir. Our first question comes from Geoff Martin of Roth M. K. M. Please go ahead.

Speaker 4

Thanks. Good morning, guys. John, wanted to dig in a little bit on the 8 new logos. What kind of terminal volume does that represent potentially in the 2 FST transactions that slipped into Q2? Have those shipped as of today and what kind of volume are we looking at in those 2 as well?

Speaker 3

John?

Speaker 2

Jeff, thanks for the question.

Operator

We think we

Speaker 2

figure out how to not be on mute during this virtual calls, so apologies for that. The 8 transactions that are net new clients represent the potential for north of 1,000 units over time. As I mentioned in the prior call, we focused the team on selling to clients that have the potential to place a considerable amount of additional orders. We use a land and expand strategy. The product is, if you will, the best salesperson we have on team, performs well.

Speaker 2

So once it's installed, it performs and most clients want to make sure that it's going to provide the ROI and the other capabilities that were the reason for their purchase in the first place. So we start small with most clients and we expand. So that's kind of where we're at with that. And we closed the net new clients about 12 of them in 20 in Q1 of this year. So looking at those clients for expansion is something that we spend a lot of time on.

Speaker 2

Relative to the 2 that slipped, one of them was a large QSR that was going to place orders and at the last minute they decided to do a security audit to make sure that everything in their shops were buttoned up and they postponed placing orders until they that done and that delayed things for about 2 months and all that business is back on track. We're shipping product. And the other one was a whole debt on an opportunity that was in place. I don't think we have that order yet, but we expect to get it literally in the next couple of weeks.

Speaker 4

Great. And then with respect to the change at 711,

Speaker 1

has that's a

Speaker 4

Q2 event, correct? So we had full results still in Q1. And then 2, wanted to get a sense of what the other convenience stores are doing in terms of the Baja utilizing the Baja terminal? Thanks.

Speaker 2

Relative to 711, I've seen the movie before, a big company of sites they want to build it in house. They're basically jettisoning all of their vendors and they're going to roll out a homegrown system that's taken them years to build. I don't know how much they spent on it, but it's probably a lot. We didn't see we don't see this as a if you will a customer loss because our product was inferior or it's not a replacement scenario. This is a custom in house built project that they decided that was strategically in their interest.

Speaker 2

And I think the primary reason was to just cut costs. I mean labor rates and food rates are going through the roof. And 711 is operated typically by a single employee. And so this is going to be the individual is going to have a cell phone in their hand, a little itty bitty printer and that supposedly is going to handle everything in the store. I don't know how well it's going to work.

Speaker 2

They're beginning to roll it out now. The only disappointment I have is we didn't have a greater perspective on when this was going to happen. I mean, in Q1 1 of this year, they were still placing orders and we really weren't we were somewhat surprised by the sort of turn of events. But they were a 1st generation customer. They were running our older products.

Speaker 2

And while we're delighted to have clients like that, the simplicity of a 711 store is sort of below the threshold where our technology really makes a big difference. So I'm happy to take this as for many convenience store operation, but frankly we're targeting more complex systems where our technology has a much greater competitive advantage.

Speaker 4

Thank

Operator

Our next question comes from Jeff Bernstein of Silverberg Bernstein Capital. Please go ahead.

Speaker 3

Yes. Hi, guys. You guys were just talking a little bit fast. I was wondering if you could just go back and give the terminal numbers again. And if you could just talk about the model name of the new casino and gaming terminal that you're coming out with?

Speaker 2

I'll answer the first one and let Steve go back and pull up the number. We have had a product in the market called the 880 and we're replacing that with a new model that's called the TR-eighty. We've announced it. We have shipped some. We expect that to kind of go into full production here in the next few months.

Speaker 2

And it's essentially, it's a kiosk printer for sports betting. We do that sort of technology really well. It has a form factor. It's sort of a rack mounted unit. You slot it right into a kiosk.

Speaker 2

And in a lot of places, sports betting, as you go into a device, it's got a screen, you fiddle around with the screen, you place your bets and you got to get a ticket. And we do that really well. It's specifically built for this purpose. It's very much like what I was talking about where we go in and work with the client, what do you really need it to do. But it's a 2nd generation of basically a sports betting kiosk printer.

Speaker 3

Got you. And is there an Epic Central type software opportunity here in sports betting or does that not really apply?

Speaker 2

I would say it's too soon to know. In sports betting, it's not so much like we need to know the personality of the person to be betting because they're deciding on a cricket match or a football game and the like. So not clear. I do believe that client intimacy is something that most of these devices are going to need. We're going to a more and more telematic centric system, telematic meaning we're communicating Wi Fi, Bluetooth, near field communication.

Speaker 2

And the devices that we install in various machines have the ability or will have the ability to communicate digitally with clients maybe through their cell phone or their smart watches. And so the more you can know about your client, depending on who the ultimate vendor is, the better you can service them. And so we think that things like Epic Central will be a key part of the future, but we're working with clients with our customers who are mostly OEM in our products to see if in fact we can help them engineer some of their stuff into their technology. But it's early days still.

Operator

Great. Thanks.

Speaker 3

Jeff, did you want the terminal numbers? Yes, please. Yes. So we ended the quarter with 15,370 and we added 901 new terminals sold during the quarter. Great.

Speaker 3

Thanks. Welcome.

Operator

Our next question comes from Rick Ferran of Acretus Capital Partners. Please go ahead.

Speaker 5

Good morning, John. I wondered if you could provide an update on the strategic alternatives.

Speaker 2

Well, we've announced that we have an advisory service that's helping us. We are in process. It's going as it were. We don't have anything to report at this point, but we're looking at strategy challenges and opportunities and we're going to continue to do that. And if we come up with things that make a difference, we'll be sure to basically post that stuff for our investors, but trust us that we are working it diligently.

Speaker 5

Okay. And just to clarify, this encompasses M and A strategies?

Speaker 2

That's true.

Speaker 5

Okay. All right. Thank you.

Operator

Ladies and gentlemen, we have reached the end of the question and answer session. I will now hand over to John Dillon for closing remarks.

Speaker 2

Thank you. And I want to thank you all for joining and listening. And I want to thank everyone for their support and feedback. As always, if you want to speak about anything about TRANZACT related, please reach out to me or Ryan in our IR department to get a call set up. Happy to take the calls, happy to spend the time.

Operator

Thank you, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending. And you may now disconnect your lines.

Powered by Quartr
Earnings Conference Call
TransAct Technologies Q1 2024
00:00 / 00:00