TransAct Technologies Incorporated

Good day and welcome to the Transact Technologies third quarter 2021 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Ryan Gardella. Please go ahead, sir.

Thank you. Good afternoon and welcome to Transact Technologies third quarter 2021 earnings call. Today, we'll be discussing the results announced in our press release issued after market close. Joining us today from the company are Chairman and CEO Bart Shulman and President and CFO Steve DiMartino. Today's call will include discussion of the company's key operating strategies, progress on these initiatives, and details on the 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. Statements 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 Form 10-K and 10-Q. Transact undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after this call. Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. One required reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release as well as on the company website. And with that, I'll turn the call over to Bart.

Thank you, Ryan, and that was very quick. Thank you, Ryan, and thank you to everyone joining us on the call today. Our third quarter results marked an important point in our business as we posted our highest net sales number since the fourth quarter of 2019. This was accomplished through a combination of sustained momentum in BOHA and our food service technology market as a whole, as well as a major rebound in our casino and gaming market, which I will elaborate on shortly. As Steve will discuss in detail later, our preliminary third quarter total net revenue was $10.6 million, representing a 46% gain year-over-year, and as just mentioned, our highest number since the fourth quarter of 2019. We also recorded net income of $910,000 and an adjusted EBITDA loss of $1.2 million. Well, now let's discuss some of the results in our key markets. First up is our food service technology, or FST, market. Our total FST revenue hit another all-time high in the quarter, up 40% year-over-year to $3.3 million. Our FST recurring revenue, which includes software subscriptions, labels, and service, also showed strength with our second consecutive quarter of at least $2 million in recurring revenue and represents a 28% increase from the year prior period. As an important note, in September, we recorded our highest revenue month for FST software and label sales as the Delta variant started to subside. Those sales started to accelerate in September, and both software and label sales have continued to expand in October. Year to date, we have now generated $5.3 million in FST recurring revenue versus our guidance of at least $7 million for the full year of 2021. Barring anything outside our control, we should easily achieve the $7 million number that we provided. As our terminal base expands, this leads to higher FST recurring revenue, which we expect to be accretive to our gross margin in 2022 and beyond. Moving on to our terminal base, we added an additional 807 paid terminals in the third quarter for a total of 8,749 in the market. That represents an additional 3,061 paid terminals in the marketplace so far in 2021. As I have mentioned on previous calls, hardware sales and the number of paid terminals in the market are the lifeblood of our recurring revenue stream As we increase the number of terminals in the marketplace, our recurring revenue will grow exponentially, fueling a predictable stream of FST revenue. While we have many existing projects and new opportunities underway, we are unfortunately encountering some unforeseen headwinds in our new terminal installations due to the dire labor situation in the hospitality market and product shortages, especially with restaurants and convenience stores. We're hearing from several prospective and existing BOHA customers that they simply do not have personnel available right now to work on new technology installations as they work to improve their supply chain situation and their labor shortage issues. I'd like to emphasize that this does not mean these opportunities are disappearing, but the timing of these potential deals has simply been pushed out. As a result, this labor and food shortage issue has created a modest headwind in the timing of adoption of our technology, and we are now expecting our installed terminal base for 2021 to be at the low end of our previous guidance of 10,000 to 11,000. However, we believe these issues and challenges provide a huge opportunity for the recognition of the importance of our BOHA system and its ability to provide labor hour savings and efficiencies in the back of house of restaurants and with convenience stores fresh food programs. So when the labor and food shortage situations begin to improve, we're well positioned to capitalize on this opportunity as our technology is already being evaluated with BOHA workstations and terminals underway or about to begin. Let me tell you, our phones continue to ring and we continue to add new prospects for future potential business. Next, I wanted to provide you with an update on our ARPU. For the third quarter of 2021, our ARPU fell slightly sequentially to $1,016 per terminal versus $1,179 in the second quarter of 2021. Well, part of the reason for the decline was due to the impact of the Delta variant early in the quarter. As I previously said, we had our best month ever in September for FST recurring revenue, and it has continued into October. As I have mentioned previously during our investor calls, we have a strong relationship with the convenience store chain 7-Eleven, and they continue to order more terminals to be installed in their stores as they focus on expanding their fresh food initiatives. Each store requires some construction changes to add fresh food capabilities and includes the installation of the BOHA terminal. While we will not be providing a quarterly update on the penetration of the 7-11 stores, we will remind you that the terminal install opportunity for this year is about 2,000 total terminals, and the remaining amount of terminals for us to ship is about 7,000. I'm very encouraged by the many opportunities in our FST pipeline, despite the labor and food shortage issues in the market, and continue to be impressed with our relationship with Apple as we both work to win in the restaurant market. Now let's move on to our casino and gaming business. Revenue in the quarter was $4 million, up a fully 100% year-over-year and 16% sequentially. The continued strength in our casino business has been fueled largely by momentum in the domestic casino floor spending. We're seeing a very solid return to slot machine and EGT's growth onto the casino floors across the country as pent-up demand finally has an outlet to be realized. We expect the casino and gaming industry to continue to ramp up spending through the remainder of 2021 and well into 2022. Finally, I wanted to talk specifically about some of the challenges almost every business faces today. First, I'm sure everyone is aware that we have a major shortage of workers that is affecting a number of industries, but perhaps none as badly as the service industry and especially restaurants and convenience stores. As I said, this is creating a headwind to the timing of some BOHA deals due to the inability to assign resources to train and assess the capability on our platform, as I mentioned earlier. Second, we have seen widespread supply chain issues affecting primarily technology manufacturing, and unfortunately, we have not been immune to these. While our BOHA terminals and workstations have not been affected by these problems, our 9700 food service terminal, primarily for McDonald's, which falls under FST revenue, and our Epic 950 and Epic Edge gaming printers, as well as our Ithaca 9000 POS printers, have. We are working diligently to ensure the impact of these delays is minimized by every method possible, including buying parts on the spot market, which usually means paying more for these parts. These higher material costs combined with the current elevated shipping prices could have a short-term downward effect on the margin of our hardware sales. However, we have taken steps to mitigate these cost increases, including raising our prices. We are working hard to be able to ship every order we receive, but we could run out of product, especially if the market continues to rapidly expand for our technology and products. I would like to end this discussion by saying if we must push any order into 2022, we do not believe we will lose any of these sales. Remember, any competitor of ours is facing the same issues, and we believe we entered this new part shortage phase with much more inventory than most of our competitors. Before I turn the call to Steve to give you details about our financial performance, I'd like to take the time to thank the employees at Transact for all they did during one of the most difficult times in the country's history, but also in their lives also. Two industries devastated by COVID-19 pandemic were restaurants and casinos. So much went on inside of Transact. And just want to thank every employee for all you did to get us through these difficulties. Not only did these wonderful employees stay dedicated to Transact, but we also worked together to get our offices open so we could get back to meetings and discussions in the office and off the video. Our offices are now open. 100% of our employees are vaccinated, and it's great to see the interaction between the teams once again. I cannot thank the Transact employees more. You are wonderful. And with that, I'd like to turn the call over to Steve to go over our results in detail. Steve?