Jim Leahy - VP, JCIR Bart Shuldman - Chairman and CEO Steve DeMartino - President and CFO

Phil Bernard - Eilers Research Jeff Burstein - Concept Capital

Thank you, Valarie. Good afternoon and welcome to TransAct Technologies 2015 first quarter conference call.

Joining us today from the Company are Chairman and CEO, Bart Shuldman; and President and CFO, Steve DeMartino. Today’s call will include a discussion of the Company’s key operating strategies, progress against these initiatives and details on the first 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 obligations 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, a 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’s website. At this time, I would like to turn the call over to Bart Shuldman.

Bart?

Thank you, Jim, welcome to everybody joining us on this afternoon's call and webcast. This afternoon we reported a 19% year-over-year increase in our first quarter revenue to $16.2 million, adjusted EBITDA of $2.5 million, GAAP diluted EPS of $0.02 and very happy to report adjusted diluted EPS of $0.16.

Steve will review the financial results in detail in a few moments, but let me start by saying I am extremely pleased with the results for the first quarter of 2015, which include strong sales in our lottery market, a healthy quarterly sequential increase in our casino and gaming revenues and the benefit of a very robust growth in sales in our food safety terminal. You know just back a few months ago during our 2014 fourth quarter investor conference call I emphasized that TransAct will be laser focused on sales execution this year.

We added invested time and capital into diversifying our business over the last several years and as a result we entered some exciting new market opportunities and as I said, we were done with the heavy lifting. With our focus going forward on revenue growth, while also looking at reducing our costs as we sought to grow both the top line and just as important our bottom line even more.

I have to say we accomplished just that in the first quarter of 2015. The first quarter results particularly the progress achieved with our sales of our food safety terminals are a good indication that we are determined to achieve our primary goal for the year.

With the product development work that went through into transforming TransAct through the creation of several new high value products for new markets completed, and with any distraction for what had been a lengthy legal process and our disagreement with Avery Dennison similarly behind us, I believe we're positioned with the appropriate resources and organization wide focus to make solid progress with our newest products. So I'll reiterate what I previously said.

Across the company, we're embracing and executing on our 2015 theme of “it's all about sales”. While our outlook for the casino and gaming industry remains cautious, business activity in the first quarter is encouraging particularly after the sluggish results in our last three quarters of 2014.

If you remember we began 2014 with a healthy first quarter for the casino and gaming market. Before the significant declines really impact our overall business and basically the bottom dropped out.

As I look at results in the first quarter in 2015 and compare it to the last three quarters of 2014 what I call the downturn quarters, we had solid quarterly sequential growth in the gaming and casino market and so far in the second quarter 2015, we continue to see some of the rebound in the market that we experienced in our first quarter. But since it's still early in the quarter and certainly for the full year, we have what I term as a cautious optimism for better performance in the market this year.

Our first quarter results were also benefitted from the tremendous progress we made in a very short time to reduce our overall cost as I spoke about during our fourth quarter 2014 Investor Call. Steve will review that progress in more detail in a few minutes.

So now I want to briefly review the outlook we have for our products in the markets we serve. In some cases, we're managing our products and sales for true revenue growth.

In other cases such as oil and gas, we're managing to ensure we maintain the profitability we achieved in 2014 despite the difficult oil and gas exploration market. First for our gaming and casino industry, as I noted earlier, we saw nice quarterly sequential lead on in this market.

It’s important to note that even during the challenging times in 2014 we were able to grow our market share for electronic gaming machine printers. The progress we have made in growing our share of this market is a terrific testament to the trust casino operators have in the reliability and ease of use of our Epic printers.

And the casino operators can rely on TransAct for the consistent availability of the printer and its outstanding performance. Business activity in casino and gaming is more favorable to date than it was at this time last year.

We expect our gaming and casino sales in 2015 to not only potentially benefit from higher printer sales, but we also believe our sales will benefit from higher Epicentral activity in 2015 compared to 2014 both in new domestic and international installations. In fact we close our deal for Epicentral software system in April and resourced world New York and over 2500 electronic gaming devices.

Our work is done, contract completed and we expect the casino to go live over the next month or so. While it was the cumulation of very long process, this installation of Epicentral represents our largest to date.

I think the success we had in implementing this complex integration speaks well for our opportunities to further roll out the product with new domestic and international operators. I feel good about the many opportunities we see for our Epicentral system in 2015 and beyond.

Second the lottery was a very strong market for us in the first quarter 2015. We have orders in hand that point to another very strong quarter in the second quarter 2015 although not at the same level as the first quarter.

Third I’ll move on to our Printrex line of oil and gas seismic and exploration products. We previously noted that given the very dramatic slowdown in drilling activity, our focus for Printrex would be of maintaining the profitability of this product line.

I think we achieved that goal in the first quarter as higher margin consumable revenue for our Printrex 920 and Printrex 980 color printers rose year-over-year reflecting the installed growth base we have achieved. Growing this attractive revenue, recurring revenue business and making pinpoint price increases in our printer offering in 2015 will help us maintain the profitability of this business as the opportunity for the Printrex 920 color truck printer and our other black and white oil and gas printers and our 980 color office printers remain under pressure from an industry which has seen large scale lay-offs and dramatically lower drilling activity.

But we accomplished exactly what we said we would do maintain the profitability of this product line despite the industry headwinds. Fourth, a brief update on our opportunities for the new RESPONDER brand that addresses the machine-to-machine market.

We have garnered strong interest in an appreciation for the unique innovative solution and recorded our first sales of this product in the first quarter. We expect to benefit from an acceleration in sales of the RESPONDER printers in the second half of this year but I can say I’m thrilled that we shift our first units.

And finally, now to a line of food safety terminals and the ongoing roll out of these products which I purposely save for last in this discussion. Sales for our food safety terminals were up over three fold year-over-year.

This progress has reinforced our outlook, which contemplates solid year-over-year growth in 2015. It’s exciting to see the global industry awareness and customer acceptance from restaurant and food service operators.

We continue to grow our customer base for our food safety terminals as we transition away from selling predominantly to McDonalds and make headway with many other food service operators. We know we have developed an industry unique end user phasing solution that is garnering increasing market acceptance.

At the National Restaurant Association Show in Chicago next week, we will introduce some new update and innovations for the food safety and back of the house operations and we believe the product announcements will enhance the already market leading functionality our solutions provide. Our goal and objective has never changed.

We strive to be the leading provider of the terminal to the food industry and be an important and almost must have device in the back of the restaurant. Our goal with these updates and new innovation was to ensure ability to address the specific needs of restaurant and food service operators that have a lot of variability in their operations in terms of menu complexity and operating scale and needs.

By developing solutions that address the full potential of this market, we are ensuring TransAct’s ability to stay the leading edge of the technology innovation and carve out our place as the industry’s thought leader. We know there is not one size fits all solution for food safety terminals and by listening it to and working with operators across the industry with operators across the industry landscape, we believe our evolving products will enable TransAct to generate sustainable long-term growth.

So as you can see, we’re off to a solid start in 2015 and we expect this year to be one of revenue and profit growth. We set out to execute in the loan which I described to you a few months back.

To focus our growth opportunities which include our food safety terminals and Epicentral software and now our RESPONDER mobile printer. We’re also focused on capturing more of the gaming and casino printer market and managing our oil and gas business prudently during the industry downturn.

It’s all about sales. And finally, we’re actively managing our cost given the changes to the business are behind us.

I want to thank our employees for staying focused on our goals and objectives this year and we also want to thank our shareholders for your support. With that, I’ll turn the call over to Steve for a deep review of the 2015 first quarter results, after which I will make some summary remarks before we open the call to questions and answers.

Steve?

Thanks Bart. Good afternoon everyone.

2015 first quarter net sales were $16.2 million, up 19% compared to $13.6 million in the year ago quarter. As Bart pointed out earlier, Q1 benefited from strong lottery printer sales and higher sales of our food safety terminals as well as the quarterly sequential improvement in casino and gaming sales.

Looking at our sales by market for the first quarter, casino and gaming sales declined approximately $1 million or 15% to $5.6 million year-over-year primarily due to lower domestic sales of casino printers to our OEMs. However casino and gaming sales increased 12% on a quarterly sequential basis from Q4 last year which we believe is encouraging as we started out last year with a solid Q1 performance before sales really trailed off in the subsequent three quarters.

Lottery sales were up five-fold to $4 million from last year’s Q1 sales of $800,000 as GTECH took significantly more than the minimum required quantities. We expect lottery sales to again be very strong in Q2 although likely not as strong as Q1 before moving towards a more normalized level of sales in the second half of 2015.

Food safety, POS and banking sales were $2.2 million in the first quarter 2015, an increase of $0.5 million year-over-year. Sales for the 2015 first quarter reflects an over 300% increase in sales of our food safety terminals compared to the prior year which was partially offset by lower sales of lower margin banking and POS printers.

With the growing traction we’re gaining from some well-known restaurant brands for our food safety terminals, we expect to see continued positive sales trends throughout the balance of 2015. Total revenue for our Printrex branded printers was approximately $700,000 compared to $1 million in the year ago quarter as our sales were impacted by our oil and gas customers lower capital spending resulting from dramatically declining drilling activities caused by the steep drop in oil prices.

Given the current state of the oil and gas industry, we expect this trend will continue to impact our Printrex oil and gas printer sales throughout 2015. However we have taken pricing actions on both our Printrex printers and consumables to help maintain our profitability level even on the lower sales.

And finally, TSG sales were $3.6 million up slightly from the $3.5 million we recorded in the 2014 first quarter. Our gross margin for the first quarter was 40.2% compared to 42.1% in last year’s first quarter.

The lower gross margin this quarter resulted from a greater concentration of lottery printer sales which carried lower average margins. Even with over a third of our sales coming from lower margin lottery printer sales this quarter, our gross margin still broke 40% due to growing contributions from our higher margin new products.

We expect our gross margin to climb into the low to mid 40% range particularly in the second half of 2015 as sales of our new products increased and lottery sales moved to more normalized levels. Total operating expenses were $6.3 million for the first quarter compared to $5.1 million a year ago.

However excluding $1.7 million in lawsuit legal fees incurred in the first quarter of 2015. Operating expenses were $4.5 million down 11% year-over-year as we begin to benefit from the cost reduction initiatives we implemented in the fourth quarter last year.

Engineering, design and product development expenses for the first quarter were down $400,000 or 29% year-over-year reflecting lower product development expenses, as well as staff reductions resulting from our cost reduction plans. Selling and marketing expenses for the first quarter declined $100,000 or 7% to $1.8 million primarily reflecting lower variable expenses such as sales commissions and travel expenses.

G&A expenses for the first quarter were 1.8 million down slightly by 3% compared to $1.9 million in the first quarter of last year. In regards to legal fees associated with Avery Dennison lawsuit, in March we’ve reached the settlement agreement that resolved the dispute the both parties mutual satisfaction and as a result we do not expect to incur any material amount of legal fees related to this matter going forward.

As part of the settlement agreement we paid Avery Dennison $3.6 million in April a portion of which we funded with borrowings under our revolving credit facility that not had been previously be drawn upon. We expect to fully pay down this borrowing by early in the third quarter of this year.

In terms of our cost reduction plan, if you remember on our fourth quarter conference call, we explained that we spent significant time and resources over the last several years developing new high value products for new markets. With this product development phase now done and behind this, we can reduce these expenses going forward into 2015.

For that end we announced the cost reduction plan to realize at least the $1 million in annualized cost savings beginning in 2015. Through Q1, we actually are tracking ahead of this plan that at this point, we believe we will achieve more than our previously anticipated $1 million cost savings target.

GAAP diluted EPS for the first quarter of 2015 was $0.02 compared to $0.05 in the year ago period. Adding back the legal fees associated with Avery Dennison and lawsuit adjusted diluted EPS was $0.16 for the first quarter of ’15 compared to $0.05 year ago.

Adjusted EBITDA for the first quarter of 2015 more than doubled to $2.5 million compared to $1.1 million in the first quarter of last year. Turning to the balance sheet, we ended the quarter with $4 million in cash and we had debt outstanding as of the end of the first quarter, however as I mentioned little earlier we did take on some debt last month to help fund the settlement payment to Avery Dennison.

But based on our cash flow projections we expect to be debt free again in just a few months. During the quarter we retuned approximately $1.6 million of capital to shareholders through our quarterly cash dividend of $0.08 per share and the repurchase of 166,553 shares of our common stock for $1 million at an average price of about $6.12 per share.

After getting effect to share repurchase may through Q1, 2015 we have approximately $3.8 million remaining under our current $7.5 million share repurchase authorization and Monday we announced our regular quarterly dividend of $0.08 per share payable to shareholders of record as of the closer business on May 20. So we remain committed to return capital to shareholders even as we invest to support our sales focused growth plan.

As Bart mentioned we’re expecting a solid Q2, including another strong quarter for lobby printer sales and continued year-over-year improvement in sales of our food safety terminals casino printers. But we remain cautious Printrex oil and gas market given the continued impact of declining oil prices.

We continued to expect a better year 2015 as we focused on our sales execution and benefit from the cost savings initiatives we implemented last December. So all in all, 2015 is shaping up to be a much better year.

And at this point, I’d like to get the call back to Bart for some closing remarks. Bart?

Thanks, Steve. Before opening the call to your questions, I want to emphasize that the transformation at TransAct in my view is now on full year.

In 2015 we are focus on executing on our sales initiatives. We’re excited about our opportunities for the year ahead and look forward to a year of execution and improving year-over-year results.

With that let’s open up the call to your questions. Operator?

How are you Bart? First I want to say congratulations to you and your team on a successful quarter, well done.

Yeah, thanks Phil.

No worries, no worries. First question about, I guess I will just go through some of your verticals.

In the casino market, I was wondering if you expect to recover in line with market trends below or above.

We’re seeing some really good sales right now. Our second quarter is actually tracking ahead of our first quarter.

So we think we’ve not only grown market share, but we’re doing quite well in the marketplace. It's really up to the analyst to tell us what you think the industry is doing, what kind of slot machine sales are out there, but we are seeing not only the gaming casino printers.

The outlook being very strong right now but also seeing a lot of traction for Epicentral software system. So whether it's an industry thing or a TransAct thing, we came out of the first quarter strong and we are in the second quarter actually stronger.

Okay, good news for your guys. And moving on to food and safety, it sounds like a lot of that came from a significant contract with McDonalds which may be finishing up.

I’m curious as to what that relationship is with McDonalds if you're able to provide any more color and then following up with that, are you recording any other large accounts at the movement?

Yeah so food safety was really not McDonalds. The first quarter was McDonalds light for better word.

It's all the work that we’ve done over the last two years to go work with the other restaurant companies not everyone in the market, but a lot of them and the first quarter was really everything but McDonalds. I mean we sell to McDonalds every day.

But if you look at the incremental sales that we got in the first quarter, it was clearly not McDonalds. It was a host of restaurants that have decided to use our technology for the back of the restaurant.

One in particular is rolling out a couple thousand, but the success that we had in the first quarter was across many different restaurant companies.

Okay, great. My apologies for the confusion on my end.

Yeah, yeah, look, for us look for the last couple of years we’ve been trying to focus to shareholders it takes a while to go into a restaurant company and work with their operations people, their food safety people to change the way that they do their food safety practice. There is no doubt that these restaurants do hand written labels, they have a book, they have labels and there is no doubt that it's not successful for them.

Its costly, it causes waste of food, it causes waste of time. But it takes time to get it the restaurant companies to agree, okay we're going to change and like we said when McDonalds, McDonalds took about two years until we were done and they were starting to buy.

So all that work we did over to last two years is now coming through its sales. We literally see terminal sales everyday now.

We see the bookings almost every day and this is everything but McDonalds.

Got it. So you guys are fighting more our cake procedures and it's just takes a lot to build that relationship to convince them otherwise, okay.

Its like any business, like somebody going into your business and saying they got a better computer system and they probably would be right. And how quickly would your business change over, you want to test it, you want to try it out, you want to make sure the cost inline, you want to make sure everybody’s had a chance to look at it.

So it's like any business. When you come in with new technology they want to do their thing first, get ready for, we got to make the menu.

We got to make sure the menus are right, how they run the restaurants, the menus meet the way that they run their operations. So it just takes times and it's like any business that’s going to put a new technology, it just takes that time for them to get comfortable with it, test it, trial it and then roll it out.

Okay. Great, great.

And moving from there on to questions more about the operating structure in your margins you mentioned that on you are on your way to eking out about a million in annualized operating efficiencies. Do you intend for that to come a lot from R&D now that you’re kind of at the end of this development cycle.

Is that going to be balanced on the negative side by increases in sales and marketing as you’re focused on your sales efforts?

No, the operating structure, if you see the cost savings in the first quarter, pretty significant and we're probably going to run Steve you and agree it's probably going to run…

We're going to end up somewhere between $1 million and $1.5 million of savings on the year. Most of it is coming through in the operating expense line, but some of it is actually coming upstairs in the margin.

And on the selling and marketing expenses, as you know we hired a new Senior Executive. He is in those numbers.

So we don't expect any negative impact from sales and marketing expenses to impact our cost savings. That was built into our model.

so like when we hired our new sales executive, we had built in his cost with the model that after his cost came in, we would still reduce expenses by $1 million and we're running over that right now and I think Steve and I agree today, it's going to run between $1 million and $1.5 million for the year.

Got it, got it. More good news.

That's it for me, thanks guys.

Okay. Welcome.

Hi, good evening. Just wanted to get an update on GTECH and where that contract stands?

Yes, so thanks for asking. We've had a 20-year relationship with GTECH and we've extended the contract with them.

They had to go through a pretty big acquisition as everybody knows. We're very close with GTECH.

We're having a fabulous year with them. We're actually working on a new project with them for the second half of the year, which actually might improve our even outlook for the second half of the year with them.

We'll have more to say, but we're such close friends with them that we just look forward to the future with them and look, they've been through a major acquisition. So we're set with them.

We're in good position and like I said, we've even got some upside to our second half even with the good first half that we're having.

So that contract still has some decent time period to run?

It's going to run throughout. We're not going to get into specifics.

Like I said, they've got some things to do that they needed to get done and look we sell them -- we have a $0.5 million, over $0.5 million printers in the market with them. We've got a great relationship with probably our closest customer and we'll have more to say as things develop.

Like I said, we're in a wonderful position. We're having a great year with them.

Second half of the year can even be better than we think because of some projects that could be coming in. We'll have more to say as things develop, but like I said, we're very comfortable with where we are with them and I don't think they would say the same thing with us.

Right. Thank you.

Well, thank you everybody for joining us on today's call. A couple things, our Annual Meeting will be here at 10 AM in Hamden Connecticut on Thursday, May 14.

You're welcome to come and say hello and we'll give you some product demonstrations. Also next week if anybody is in Chicago the week, starting a week from Saturday is the National Restaurant Association Show.

We'll be there. We've got some good announcements coming and anybody that's ending up in Macau right after that will be at the Macau G2E Gaming Show.

With that, I thank everybody for your support. I thank our shareholders.

I thank our employees and we'll talk to you on our second quarter conference call in a couple of months. Thanks for joining us tonight.