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Operator: Greetings, and welcome to the TransAct Technologies’ Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Gardella, Investor Relations. Thank you, sir. You may begin.

Ryan Gardella: Thanks, Karl. Good afternoon, and welcome to TransAct Technologies’ third quarter 2023 earnings call. Today, we will 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, Steve DeMartino. Today’s call will include a discussion of the company’s key operating strategies, the progress on those initiatives and details on our 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 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 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’d like to turn the call over to John. John?

John Dillon: Ryan, thank you. And good afternoon, everyone. And thank you for joining us today. So, I’m pleased with our progress, we’re making it operationally across the organization, and I am happy to report fairly solid results for the quarter. That said, I’m the first to acknowledge that we’ve still got some work to do. There’s a lot of work to be done and changes that we’ve made and continue to make, are going to take some time. It always takes time to produce the results that we know we need, and we know that helps the company deliver the future that we want. So on the top line, results were in line with basically what we expected for the quarter and discussed in the last call. Net sales $17.2 million, was down sequentially year-over-year 4% and approximately 14% down sequentially.

The sequential decline was a result of lower casino and gaming sales, and I’ll talk a little bit about that shortly later on the call. Operationally, I believe we made an incredible amount of progress and are very much on the right track to getting the business back to a place of sustainable strength. And before I jump into the results on a by market basis, I want to talk a little bit about some of the specific initiatives that we have underway. So first, as we talked in prior calls, after an extensive reorganization of our FST sales team and our go-to-market GTM strategies, not only do we believe – I believe that we have the right pieces in place. And that’s people, and process and the organization to kind of make things happen. But we’ve also refocused our attention on the part of the market that’s the best place for us to win.

And we expect to see results from these changes in the first half of 2024. The BOHA! platform, including the new T2 Terminal, are high-end enterprise-grade products. They are designed for enterprise-type customers. These are bigger customers that are more complex and more sophisticated. And as such, we should be focusing on enterprise level opportunities. So with that objective in mind, what we’ve done is we focused the sales team on basically the top 1,000 organizations in the United States and their operations internationally abroad to sell the BOHA! platform. So, this requires us to be more focused on – lead generation, the lead to closed metrics, and customer acquisition cost, CAC. These are areas that we really believe are important to learning how the business operates, what works, what doesn’t work, how do we improve the stuff that needs improvement?

How do we do more of the stuff that works and works well? In addition, we performed what you would consider a thorough scrub of the pipeline. And the good news is we are beginning to see quarter-over-quarter growth embedded and qualified leads. That’s a sign of early progress. And in addition, as part of our commitment to transparency, it’s my intention to publish a pipeline metric beginning next quarter as well as number of net new logos for the FST business. I think that, along with the units sold, are all pretty good vectors to indicate whether we’re making the progress we want to make and whether that progress is solid. So I’m hoping to start producing those sort of metrics next quarter. And to take a side bar here, a side note, I think, the best way to look at metrics is over a temporal period.

In other words, having just a particular number with no context as to what it was before and what we think it’s going to be in the future, it’s sort of worthless. I want to know if something is going up or down, and is up good or is up bad, is down good or is down bad. And then if it’s up and it’s good, let’s do more of that. If it’s up, and it’s bad, let’s do less of whatever it is that’s causing that. I think that’s the best way to instrument your business. And so we’re really focused on that. Now I will point out that, as I’ve mentioned before, these are long, intensive processes. These improvements take time to be implemented and for us to expect at least continuous return is not realistic. It’s really something where we are going to iterate and we are going to optimize the measurement of these things and how we manage the metrics and what they tell us over time.

Also, along with this – process, looking into the pipeline, I’m pleased to announce that we have one formal or approval from a global QSR to sell our new BOHA! Terminal 2 into their stores overseas and with U.S. approval pending, but expected. This is a multi-thousand unit opportunity for us. And what we have already seen is the first few orders from this win. So it’s very exciting for us, and I wanted to let you know that. It is hard, however, to predict the penetration rate and the cadence of sales at this time because different franchisees buy at different rates and things like that, as you all know. But we will provide you a more fulsome update when possible. I would also like to mention the cost cutting and rebalancing of our teams and organization as a whole.

We reported that in our press release, and I think, it’s a really important aspect the way we’re running the business. During the quarter, we began the cost-cutting effort that included eliminating approximately 10% of our workforce through a combination of attrition and selective headcount reductions as well as cutting our cost sales in marketing, G&A, and engineering. And when completed, more or less in the fourth quarter, we estimate that these actions will produce an aggregate operating expense savings of approximately $3 million on an annualized basis. And we will see those – the full effect of these cuts in 2024. So with our organization streamlined and focused, we believe we’re better positioned for long-term success and enhanced profitability.

And I’ve asked Steve during his portion of the call to go over the details on the third quarter numbers shortly. The third and final initiative I want to mention before jumping into results involves the fourth quarter development that, I think, we should share. In the coming weeks, we intend to engage with an advisor for the C-suite, the Board of Directors, to help us seek and lock down elements of our long-term strategy for our business. We believe an independent, external third-party perspective will be important to help us make decisions about areas for TransAct to focus to ensure that we maximize value for shareholders and stakeholders. And in that regard, we will provide update on this initiative as they become available. So let me discuss some results and updates on our two major markets: First, foodservice technology, FST.

Total revenue was $4.2 million, up about 13% year-over-year. Also, we are pleased to announce that the quarter produced our highest recurring revenue for FST at $3.1 million, the first time this number was over $3 million. We sold 710 new terminals in the quarter, bringing the total number of online terminals to 13,795. While I’m disappointed in the sequential slowdown, we’re confident that the changes we’re making on the sales side will result in more momentum in 2024. And that we should probably start seeing some uplift in the numbers from our global QSR win in the fourth quarter of this year. As a reminder, the BOHA! sales cycle is typically long, it’s somewhat complex. It’s sort of a land and expand strategy because usually, they start small, but then they can continue to buy over time and that becomes a longstanding relationship that really pays dividends.

It takes the HQ, the headquarters, to sort of grant us a green light to engage with their franchisees. And this is typical with some of the most established and sophisticated franchises. And we’re well on our way to getting those approvals on some key accounts, and we’re optimistic that these approvals will begin to yield results as we move into 2024. Next, on the casino and gaming side, casino and gaming revenue for the quarter was $9 million, up approximately 17% year-over-year, but down 26% sequentially. And let me provide an update on the two major forces shaping the sales in this duopoly market. First, from a competitive standpoint, we have seen only minor re-entry into the market from our main competitor. But frankly, we have yet to see much, if any of the pricing or market share erosion that we might have expected by now.

A businessperson in a technology center, surrounded by software engineers.

And while we cannot be sure when these efforts will develop and these effects will develop, we’re still fairly confident that this dynamic will shift at some point in the next few quarters. It’s just hard to predict. And then second, on the inventory side, we have heard and are now continuing to hear, perhaps a bit louder that the OEMs, the people who buy our systems and put them in their machines, are indicating that they are in somewhat of an oversupply position and are slowing their order rates accordingly. This was the largest reason we saw a slowdown in this quarter, and likely we’ll see something similar in the fourth quarter, would expect a similar percentage decline in that period. So at this stage, we would continue to estimate that our go forward net sales run rate in the market should be, as I stated in the last quarterly report, about 15% to 20% higher than our pre-COVID historical averages before.

However, we think this new run rate may not be fully in effect until 2024. Finally, let’s go over the outlook for the remainder of the year. Given my comments on this call, we believe the most prudent approach is to raise the low end of our current net sales guidance to a range of $72.5 million to $73.5 million for the full year, and to raise our adjusted EBITDA guidance to a range of between $9.5 million and $10.0 million for the full year. These ranges take into account all the points I’ve discussed today, and we will update you with guidance for 2024 on our next call. So I believe we have made good operational progress so far and have plenty of reasons to be confident as we move into 2024. We’ve been making progress on the FST side of the business as we focus the sales team and as I mentioned, and we’re focusing on the top 1,000 organizations in the TAM, the total addressable market.

In the U.S. and their operations abroad, we are in the process of optimizing the business with a $3 million reduction in spend, which we expect to experience in the full year 2024. We won approval to sell our BOHA! terminal to the overseas stores, a global QSR and expect U.S. approval to follow. And the pipeline is scrubbed and the pipeline is growing, and we believe that we will see continued sustainable pipeline growth going forward. And the lastly – last point is that we intend to engage an advisor to give us guidance as we consider long-term direction for the business. That’s really my formal report here. And I’ll now pass the call over to Steve for a more detailed review of the numbers. Steve?

Steve DeMartino: Thanks, John, and thank you everyone for joining us. Let’s jump right into the third quarter results. As John mentioned, total net sales for the third quarter were $17.2 million, which was down 4% compared to $17.9 million from the same period last year. Sales from our Food Service Technology market, or FST for the third quarter were $4.2 million, which was up 13% from the prior year period, and 9% sequentially. This increase was largely due to record highs in both BOHA! software subscription revenue as well as label sales. We sold 710 new terminals during the third quarter, bringing us to a total of 13,795 online terminals in the market at the end of Q3. Our recurring FST sales, which includes software and service subscriptions as well as consumable label sales for the third quarter reached a record high $3.1 million, which was up 22% compared to $2.6 million in the prior year period.

Our ARPU for the third quarter of 2023 was $929, fairly consistent with ARPU of $936 in the third quarter of last year. On a sequential basis, ARPU was up 19% compared to $782 in the second quarter, largely due to the record recurring revenue we realized in the third quarter of 2023. As a reminder, we are currently selling some BOHA! terminals with no recurring revenue attached to them to start. While this presents an opportunity to sell recurring elements in the future, in the near-term they represent a drag on our ARPU number. Our casino and gaming sales were $9 million, up 17% from third quarter of 2022 on the strength of domestic sales, which were up 43% year-over-year. However, sales were down sequentially 26% from the second quarter, the second quarter’s level of $12.2 million, primarily due to OEMs working down high levels of printer inventory they stockpiled during the supply crisis earlier this year that’s now eased.

We expect this trend to continue into the fourth quarter. POS automation sales for the third quarter decreased 69% from the prior year to $1.6 million. This was a result of a return to a more normalized level of sales compared to last year when the chip shortage limited our competitors’ ability to supply product, therefore making our sales unusually high. We believe this quarter represents normalized levels for our POS automation sales, and we expect to see this trend continue into Q4 and into 2024. Moving to TransAct Services Group or TSG sales. For the third quarter, TSG sales doubled, up 101% year-over-year to $2.3 million. This increase was largely due to higher sales of spare parts and service for our legacy lottery printers. Though we had a strong third quarter of these sales and expect a similar fourth quarter, sales of legacy lottery printer spare parts are sporadic, they’re difficult to predict and can vary significantly from quarter-to-quarter.

Moving down the income statement now. Our third quarter gross margin was 51.9%, which was down sequentially from 54.5% but up from 45.9% in the prior year period. This comes as a result of an improved mix of higher margin casino and gaming printer sales, as well as the continued positive effect from two rounds of price increases we instituted in 2022 and were able to maintain through the third quarter 2023. However, looking forward, we do expect to see some downward pressure on our gross margin in the fourth quarter due to lower expected sales volume. Our total operating expenses for the third quarter remained relatively consistent, decreasing by 1% to $7.7 million. And on a sequential basis, after removing the effect of a $1.5 million severance charge for the termination of the former CEO in the second quarter, our operating expenses declined 5%.

This sequential decline resulted from initial savings achieved from cost cutting efforts we began to put in place late in Q3. We expect these cost reduction initiatives to have an even greater impact on our Q4 operating expense level. However, we don’t expect to achieve the full effect from the cost cutting initiative until 2024, which we believe will be about a $3 million annualized cost savings expected to be realized ratably throughout 2024. Breaking down our operating expenses a bit more. Our engineering and R&D expenses for the third quarter increased 26% to $2.5 million. The increase was largely due to higher incentive compensation as well as additional software resources and increased outside testing fees for new product launches. Our selling and marketing expenses decreased 13% to $2.4 million for the third quarter on a year-over-year basis, largely due to cost reduction initiatives, including reductions in headcount, trade shows and overall marketing spend.

Lastly, our G&A expenses decreased 8% to $2.8 million for the third quarter. The decrease was largely due to lower stock and incentive compensation expense from the termination of our former CEO, as well as post-go live support for the implementation of NetSuite we incurred in the third quarter of last year that didn’t repeat. We generated operating income of $1.2 million, or 6.9% of net sales in Q3 2023 compared to $387,000 or 2.2% of net sales in the prior year period. Note that our operating margin last year was negatively impacted by lower gross margin, resulting largely from COVID-related supply chain issues. And on the bottom line, we recorded net income of $906,000 or $0.09 per share compared to $528,000 or $0.05 per share in the year ago period.

Our adjusted EBITDA for the quarter improved to $1.7 million compared to $1.2 million for the third quarter last year. And as John mentioned, for the full year 2023 we now expect to generate total adjusted EBITDA of between $9.5 million and $10 million. And lastly, our balance sheet remains solid. We finished the quarter with $11.6 million in cash and the minimum required $2.25 million outstanding borrowings on our credit facility with Siena Lending. And with that, I’d like to turn the call back over to John for any closing remarks. John?

John Dillon: I want to thank you all for joining and listening, and I want to thank everyone for their support and feedback. We are dedicated to generating value for all of our stakeholders and shareholders and are providing a new level of transparency to the business for everyone. As always, should you want to speak on anything TransAct related, please reach out to me or Ryan in IR and we can set up a call.

Steve DeMartino: Yes. We could probably open up the call for questions now.

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Operator: [Operator Instructions] Our first question comes from George Sutton with Craig-Hallum Capital Group. Please go ahead.

Unidentified Analyst: Hey guys, this is James on for George. Thanks for taking my questions. John, as you look at the current pipeline, how do you kind of describe the mix between convenience stores, QSR, and then other potential verticals you might look to address?

John Dillon: Well, it’s interesting on that point, because when we first got into the business, we thought restaurants would be a really hot space. But restaurants are still recovering, frankly, from the pandemic, whereas convenience stores and people doing grab and go. And even if you think grocery in-store sushi, those markets are really good and we’re finding a lot of traction there. So I think the restaurant market space is one we’re still interested in, of course. But we’re finding that QSR, large QSR chains and stores with grab and go and also food service management companies are probably the hottest space. And as we refocus the sales organization on, if you will, the more sophisticated potential customer, there are more insertion points and it’s a more sophisticated sales process.

And we’ve done some training, we’re learning what those businesses really need and we’re seeing some pretty good traction as we move the opportunities through the pipeline. And as I mentioned before, we’ve added an improved lead generation process. It’s targeted. It’s not account based marketing, but it’s close to that. We’re tracking funnel metrics at the top of the funnel, and we’re tracking market qualified leads, marketing qualified leads, sales qualified leads, and we’re looking at the yields at each one of the steps. And I’m really pleased with the progress the team’s made. And in general, I think I can give you a pretty health check or give you a pretty grade on the health check for the team right now. And again, I think large QSRs, grab and go, and in particular, sushi in grocery stores are probably the three hottest markets for us, followed by food service management.

Unidentified Analyst: Great. And congrats on signing the global QSR. Can you sort of talk about the sales process and sort of some of the initial feedback from that customer and sort of why they selected BOHA!?

John Dillon: Well, honestly, it’s a great product. We’ve been in this business for a while. We’re very good at engineering. We’re also very good at listening to our customers. And the feedback we’re getting, not just from that particular QSR, but others, is that this is the product that we’ve been waiting for and we’re really excited about it. And candidly, our sales team is excited about it. It always helps when the sales team believes in the product and is excited about the opportunity. When you think about the alternative, now that I’m here as a Chief Executive, I walk around at grocery stores and everywhere, and I see tablets sitting on the shelf and power blocks and things like that, and I look at labels and they’re kind of crummy and the ink is smeared, if that’s what it is, or they don’t stick on right. And there’s tons of opportunity, and we’re really enjoying the opportunity to wave into that with a brand new suite of products.

Unidentified Analyst: Great. And then just lastly, for me, sort of on engaging the advisor and what sort of sounds like evaluating some strategic options. Can you just sort of speak to all the options that are potentially on the table there?

John Dillon: Well, yes, we’re pretty smart group of people, at least we like to think so. We got a lot of experience on our Board of Directors, and my job is to help shepherd the company into the future. And we wanted to have an outside advisor that could help us understand the lay of the land, the competitive landscape, who’s doing what and where we fit, and help us make sure that we’re on the right track. And not that I’m presaging any particular outcome. I mean, we really want to have outside perspective because a lot of times you get too close, you got your blinders on, because you’re so focused on what’s today or what’s the next quarter. We really need to look over the horizon a little bit and make sure that we’re considering all the options. And anything that’s a good option, and even options we haven’t even considered, we want to make sure that we fully consider.

Unidentified Analyst: Great. Nice results, guys.

John Dillon: All right. Thank you.

Operator: [Operator Instructions] Our next question comes from Jeff Martin with Roth Capital Partners, LLC. Please go ahead.

Jeff Martin: Thanks. Good evening, guys. John wanted to get a sense on the $3 million expense reduction effort. Will there be offsetting growth initiatives next year that you’ll be investing in? Just thinking about it from a modeling point of view.

John Dillon: I wouldn’t say that we’re going to go into any meaningful adjacent verticals, although I think that’s a possibility in the future. Right now, I’m making sure that we’re ship shaped and that we can sail through the hazards and the seas ahead. We’re not cutting back on initiatives to develop and expand the business, but we want to make sure that everything that we’ve got working now is working well, sort of like running on an engine that has all the cylinders firing and nice, smooth camshafts, so everything is efficient. And then from there, I think, that’s a springboard into other initiatives from a growth standpoint. And I will make one other comment, Jeff, is that I think the TAM for FST is enormous.

I think it’s underpenetrated at this point. There are competitors out there, but we believe that it’s very substantial. And right now, we don’t have a headroom problem in any sort of fashion that I’m concerned about. So sky is the limit there, and we just need to demonstrate that we can go there, we can win and we can expand our participation in that opportunity.

Jeff Martin: Yes, great. And then in terms of the top 1,000 organizations you’ve identified, how are you parsing those out? How do you assign them to different parts of the sales organization? And do you have structured teams for that? Just curious kind of maybe a little more of a look under the hood in terms of the sales and marketing engine that you’ve taken the lead generation focus with and kind of reconfigured?

John Dillon: So, really diving in and looking at what’s in the TAM, the total addressable market, and then what product we have and then where should we sell it and without any guidance, we’ll take a call from anybody we will sell them something. We have customers that have one terminal, we have customers that have 1,000 terminals and the question is if we have a long sales cycle and we have a product that offers benefits for larger organizations it would not be fully appreciated at the low end of the market in terms of the amount of spend, and the amount of required features and capabilities of the technology, it’s sort of, we might be considered overkill or let’s just say, there are other products that are maybe cheaper that do less, but is sufficient for the opportunity for a single mom-and-pop operation or something like that.

So, what I did was I had the team saying, well, let’s look at what’s the serviceable part of the TAM. Where should we go and where should we sell? And I said, why don’t we do an exercise and look at the different sub-verticals within FST, and that was like convenience, foodservice management, restaurants, grocery stores and convenience stores. And we said, let’s focus on – let’s take a look and see how many people, how many organizations out there if we won the business, could we sell them 50 units? Let’s just draw a line there and see how big the TAM is. And it turns out that if you look at the number of opportunities or the number of units that you could sell, if you won 100% of everybody over 50 units versus everybody else, it turns out that, that’s about two thirds of the market opportunity.

And for us, that turns out to be about 1,000 organizations. So what we’ve done is we basically split the sales team up in about five buckets and each of the five buckets, restaurant, convenience, FSM, QSR and the grab ‘n go folks. And they are targeting – they know exactly who they’re supposed to sell to, we’re doing lead generation based on that and importantly is that we’re building assets that help the sales team progress the sales opportunity from step by step from, if you will, first contact to close and even the stuff after you close the deal to implementation and training and support and service to make sure that end-to-end, the customer and transactor are fully aligned with – equal motivation to get the goal congruency with a successful customer that loves the product and buys more.

And if you sell one unit, the customer to a one unit opportunity, you’re never going to sell another unit. And in these larger units that become larger opportunities, that become lighthouse accounts, then the account management and the quality of our service and the talent of our people, really makes a difference. I mean, we’re not selling a commodity product, and we want to make sure that we’re selling where the value is appreciated where we can capture a good margin for a good product that tackles much more complex problems. So, that was kind of the exercise, and we’re doing a lead gen associated with each of those five sub buckets, and we’re nurturing the leads through the sales funnel and then we hand them off to the sales team. And with Tracey Winslow, who’s running our revenue generation process, she is our CRO she is on top of this every day.

And we’re making really good progress. From an opportunity standpoint we’re making sure that we stay in touch with the opportunities. I would never say this arrogantly to a customer, but our product is good. And it’s sort of like sooner or later, you are going to need what we have. And we want to make sure that we have a chance to help you understand what it is so that we have an opportunity to engage. So if a customer says, “I’m not interested”, it’s really more of a “not no”, but a “not now”. There’s other initiatives that they have, maybe building out more stores and maybe automating the front of the house. But sooner or later, we are going to be – we’re probably going to be one of the companies that you consider for the back of the house, and we want to make sure that we’re front and center.

And that’s sort of the attitude we’re taking. So in some cases, the sales cycles may be long, sometimes they may be quick. But all of that focuses already seems to pay off in terms of what I am seeing in the pipeline.

Jeff Martin: Great. I really appreciate the color there. And then one more, if I could, on the QSR win, I wanted to clarify that I heard correctly. That basically is an international hunting license and then the U.S. is to follow, meaning the U.S. is not part of that initial several thousand units. Is that correct?

John Dillon: It’s not part of the opportunity yet, but we expect that to follow.

Jeff Martin: Okay, great. And then just wanted to clarify as well that you’ll be selling software modules on this, it’s not a terminal only type of arrangement?

John Dillon: Well, in each case, the ultimate franchisee will have some say into what applications they may or may not want. So it is hard for us to predict, but we expect there will be software for sure.

Jeff Martin: Great. Thanks for your time.

Operator: There are no further questions at this time. So that concludes our Q&A Session for today. I would now like to turn the floor back over to John Dillon for closing comments. Please sir, go ahead. End of Q&A

John Dillon: I would like to thank all of you for joining us. And as I mentioned before, if you want to follow-up with us, you can reach out to me personally or you can reach out to our IR firm and contact Ryan and be happy to set up an appointment for a chat about the quarter and any other topics that are related to TransAct.

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