TransAct Technologies Incorporated

Good day and welcome to the Transact Technologies fourth quarter 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Ryan Gardella, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and welcome to Transact Technologies fourth quarter full year 2021 earnings call. Today, we'll be discussing the results announced in our press release issued after market close. Joining us from the company is Chairman and CEO Bart Schulman and President and CFO Steve DiMartino. Today's call will include a discussion of the company's key operating strategies, progress on these initiatives, and details on our fourth quarter and full-year 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 made different 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 the call. Today's call and webcast will include non-GAAP financial measures within the meaning of SEC Regulation G. When required, reconciliation of all non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in today's press release as well as on the company's website.

And with that, I will now turn the call over to Bart. Thank you, Ryan, and thank you to everyone for joining us on the call today. Our fourth quarter results demonstrated strong momentum in both the food service technology or FST market, as well as fantastic results from our casino and gaming market. We experienced an almost 22% sequential increase in sales of our industry-leading casino and gaming products in the quarter and continue to see demand outstripping supply as the international bounce back begins and domestic strength continues. We also saw another quarter with over $2 million in recurring FSD revenue, and I will expand on both these points shortly. Our preliminary fourth quarter and full year 2021 total net revenue were $11.1 million and $39.4 million, respectively, gains of 43% and 29% from the year-over-year comparisons. Our fourth quarter revenue also represents a sequential acceleration of 5% from our third quarter revenue, which, as we mentioned, had been our highest revenue number since the fourth quarter of 2019. Our total FST revenue set another all-time record in the fourth quarter, up 25% year-over-year to 3.5 million. Our FST recurring revenue, which includes software, subscriptions, labels, and service, posted its third consecutive quarter of over $2 million, coming in at 2.1 million, which was a 124% year-over-year increase. For the full year of 2021, we generated $7.4 million in recurring FST revenue, which was above our guidance expectation of at least $7 million. Breaking this down a bit, our BOHA software sales were impacted in the fourth quarter as we decided to accommodate an overseas customer and provide a credit due to their BOHA terminals being inactive from COVID during the year. This resulted in an R pool of $965 in the fourth quarter, a $51 decline sequentially. Moving on to our terminal install base, as we have previously stated, 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 market, our recurring revenue will grow, fueling a predictable stream of FST revenue. In the fourth quarter, we added an additional 1,069 terminals for a total of 9,818 terminals, at the end of 2021. While we are slightly disappointed in the final number, it is worth noting that this number was affected by supply chain constraints with our customers. The opportunities for BOHA terminals and workstations remain high, and I am so happy to announce that a restaurant company with over 1,500 stores has just approved our BOHA terminal, allowing franchisees to replace our older 9,700 food safety terminals. We expect to begin shipping some BOHA terminals during Q1 of this year and will work with their franchisees as they convert to our BOHA enterprise online system. This is an exciting project for Transact as the customer is working with us on a special label design that will be used as a marketing tool for the grab-and-go items. Once the label is designed, completed, and sponsored by the corporate office, we believe all 1,500 stores could eventually need our BOHA terminal to print out this special marketing label along with the typical food safety labeling needs. This opportunity is right in our wheelhouse. We have two other large restaurant opportunities we are working on right now, and we also continue to have opportunities centered around fresh food in the convenience store market. There, the need for labeling remains high as they build out their fresh food programs. We continue to build the opportunity funnel across the spectrum of our different FST markets. While we do have additional large opportunities in the restaurant market that are progressing forward, I must reiterate some comments on the labor and food shortage situation that we have spoken about previously. We are still hearing from many prospective BOAC customers that we have been working with that they simply do not have the personnel right now to work on new technology installations as they work to improve their supply chain situation and their labor shortage and wage issues. However, we remain positive that when this situation begins to improve and as the country continues to open up, we are well positioned to capitalize even more on these opportunities as our technology is being evaluated, and that's our BOHA workstation and BOHA terminal. With the labor shortage, as we just noted, has been impacting the testing and deployment of new technology, At large restaurant companies, we have seen some great progress within our SMB sales group, basically in the small market, store market. These opportunities are typically quicker to close, and small chains have no choice but to continue operations as fast as possible as they face the difficult macroeconomic headwinds. As we announced last week, in the fourth quarter, we sold 44 workstations and terminals across 26 different small chains and franchisees, with the total opportunity for up to 900 more workstations and terminals for just these businesses alone. There is no restaurant too small to benefit from our go-live technology, and we continue to see success momentum in this SMB space. An additional initiative we started in our SMB sales group was the call on and answer calls from franchisees directly as they need technology to offset their labor and food shortage challenges. While the corporate office has their own personnel issues to address, we are proud to be assisting these franchisees in streamlining their processes. This initiative has proved successful so far, and not only are they buying our BOLAR technology, but they are helping to promote our technology into the corporate office. As this part of the market grows, we will continue to add to our inside sales team. As I said, 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 the restaurant market. Together with our friends at Apple, we are working on a clear message to the CIO office, highlighting both our technologies and how we can streamline their operations and demonstrate the cost benefit of the Bohart technology over individual solutions. We are also working on doing more customer and sales events together as the U.S. starts to open up. Hopefully, we will have more to say in the future. Before I end our discussion about the FST market, another bright spot for Transact is in regards to our POS printers we sell to the front of the house for restaurants, mainly McDonald's. I'm very pleased to report that we experienced growth in our POS market in 2021. but want to make a special note to our investors regarding this year. We are embarking on a special project for McDonald's, and coupled with our competitors' issues with manufacturing printers for them, we expect to double the sales in our POS market in 2022. Now let's move on to our casino and gaming market. Revenue in the quarter was $4.9 million, up 84% year over year, and revenue for the full year was $15.3 million, up 39% from the full year 2020. We are seeing very strong demand continue in the domestic market, and we are pleased with the recent rebound of the international market, which was up 100% sequentially. As more markets around the world open up from COVID-related closures, we expect to see demand continue to accelerate as we move through 2022. Finally, I wanted to make a few broader comments about our business and the macro environment we are in. We are incredibly proud of our team at Transact for navigating through a challenging environment, but certain effects of the worldwide supply constraints and ongoing COVID pandemic have started to impact our business. In the third and fourth quarters of 2021, we benefited greatly from having a very good inventory level. But unfortunately, as I have spoken about before regarding the word decommit, As we ended 2021, we found ourselves dealing with decommitments of the chips and print heads that were ordered and needed for the production of our hardware in 2022. Not only is sales rising, but we experienced higher sales in 2021, so we need to replenish our inventory. Chip shortages cannot be avoided, and delays in the production by our suppliers have impacted our ability to build back our inventory positions. Going forward, our hardware sales will be hand-to-mouth in every market in 2022. While not ideal, there are plenty of silver linings here. First, we believe we are well ahead of our competitors in terms of managing our supply chain. We have even seen instances where customers of our competitors are replacing their products with Transact products as we are able to facilitate the delivery of hardware in a timely fashion. I can tell you one of our competitors has not been able to deliver a printer to a certain customer for over six months. Second, the demand pipeline continues to be very strong. Every unit that is produced either already has a buyer or will soon have a buyer. In fact, we currently have orders going all the way to the end of 2022, which is not typical for us. You need to know we are working very closely with our chip manufacturer who has really responded to our needs, as they are helping us to align our company with their latest chip technology. We are doing this so we utilize their mass production chips to ensure better availability as we end 2022. I cannot thank our engineering staff enough who have committed to complete the necessary board and firmware redesigns, some hardware that will go through two different redesigns, to meet all demands in 2022 and beyond. Our investors should know the chip shortage issue is no joke, and worldwide demand easily continues to outstrip supply. I can point to a major car manufacturer who recently announced cutting production by 500,000 cars in 2022 due to the chip shortage issue. Finally, in order to combat rising costs and inflation and having to ship our hardware by air, we are implementing our second across-the-board price hike on our hardware. This price increase will allow us to absorb the vast majority of the increased cost pressure we are facing. I am pleased to say we are not seeing any pushback from customers on this new pricing level. They need our hardware, and by working hard with our suppliers in the market and flying in the products, they can continue to purchase from Transact. To close out, I wanted to discuss our guidance for 2022 and our rationale behind it. First, we're expecting to add another 6,500 to 7,500 paid terminals in service for the year. Unfortunately, as we deal with the supply of chips and wafers to put in our products, we felt it proven to guide to a level that we feel confident in our ability to produce rather than sell. Should that situation abate quicker than expected, we'll revisit that number. Similarly, we're guiding between 10.5 million and 11 million in recurring FST revenue for the full year 2022. As you know, our FST recurring revenue is largely a function of the number of paid terminals in service. Despite all these headwinds in chip and processor supplies, and hopefully the beginning of the end of the pandemic, you can see we're excited about the future of our business as we transition our company into a software and service organization. And with that, I'd like to turn the call over to our President and Chief Financial Officer, Steve DiMartino, for a comprehensive rundown of our fourth quarter and full year numbers.