"Transact was introduced anonymously as “Company 1” in our Q1’2021 letter. As Mark Twain said, “history doesn’t repeat itself, but it often rhymes” and in many ways Transact rhymes with our original investment in PAR. The company is transitioning away from a legacy hardware business and toward a food service/restaurant software business, yet the market has failed to notice what is going on beneath the surface. In this case, the legacy hardware business is specialized printers for niche applications, with the most notable being slot machine printers. Importantly, this business is actually much better than a casual observer would suspect.

As for the new software business, known as BOHA!, there are ~150,000 convenience stores in the United States, and virtually all of them are scrambling to improve their fresh food offerings in order to drive traffic and drive margin. Under FDA regulations, these “grab and go” offerings must be labeled with full nutritional information. Transact’s SAAS offering allows convenience store chains to update fresh food labels in real time from a centralized location as menu items and prices change. I have no doubt that competition will be fierce in this space. However, as Transact has already entered into long term contracts with several of the largest C-store chains, including industry leading 7-Eleven with ~14,000 doors, Transact’s competitive position should benefit from social proof.

BOHA! also recently began to sell software and labels into restaurant back of house to automate tasks such as food prep, time keeping, temperature monitoring and others. As restaurants struggle to keep up with rising wages and find workers, the trend toward automation of time-consuming, error prone tasks provides a favorable backdrop for continued adoption. While still small, through Q1 BOHA! revenue was growing 100%, and as the company recently started a partnership with Apple’s (AAPL) restaurant enterprise sales force and began selling to small and medium businesses rather than just enterprise accounts, it seems likely that growth will continue. This is confirmed by the company’s growing pipeline, which at present sits at $140M.

Ultimately, I think it is possible (likely?) that the company will sell the slot machine printer business and other small ancillary businesses in order to fully focus on the recurring revenue SAAS/labels business. The fact that they have already shut down multiple legacy businesses (that polluted the trailing financials) in order to focus on the future is by itself unusual behavior for a small company, where the incentives are more often toward empire building rather than value maximization. While the slot printer business sounds boring on the surface, digging deeper reveals a lot to like.

For starters, the industry structure is essentially a regulated duopoly as there is only one major competitor, and slot machine printers and the slot machines they live in must be approved by the gaming authorities in whatever locale they operate in. This means that slot machine OEMs can’t just switch printers without going back through the approval process. Additionally, the printer is a tiny fraction of the total cost of the finished product, yet is mission critical to the finished product; if the printer fails, the slot machine is just a giant paperweight. As such, slot machine OEMs care about quality much more than price. These attributes lead to high switching costs, pricing power, and ultimately high margins. To a strategic acquirer I believe this business could be worth a price that would be 50 - 75% of the current enterprise value. This would leave the SAAS/labels business trading at less than 2x recurring revenue, assuming they can fully penetrate previously announced customers, and giving no credit for whatever growth may come through the AAPL partnership and SMB effort. The APPL sales effort is essentially AAPL encouraging enterprise scale restaurants to use iPads while attaching BOHA!, and the new focus on SMBs is attractive because BOHA! can be self-installed, avoiding the delays that have plagued PAR’s rollout (and in my view separating PAR’s multiple from faster growing self-install peers).

There are more than a few moving parts here, and management needs to execute, but simply stated fast growing recurring revenue more often trades at a double digit multiple rather than a 2x multiple, and AAPL is determined to make inroads with the restaurant market, which bodes well for continued growth beyond previously announced customers. If things go as planned and the company is able to fully penetrate existing customers and benefit from their sales partnership with AAPL, I believe there is a path to multi-bagger returns looking out a few years. If things do not go as planned, the slot machine printer business should provide significant ballast, and in the near term the company should benefit from a significant cap-ex cycle in the slot machine world as casinos have yet to recover from Covid. It is also worth mentioning that there appear to be 3 activists circling the company at this point, and the company has recently strengthened its board, and taken steps to improve corporate governance.

Lastly, I would note that TACT stock is unusually illiquid for a stock that makes it to our top 5. As you know our partnership is designed to be able to mostly ignore liquidity constraints, and given sufficient liquidity in the rest of the portfolio and a severely skewed range of potential outcomes, I made TACT a large position. I suspect that the recent lack of liquidity is largely tied to owners knowing what they own, and potential buyers having not yet connected the dots. As the thesis plays out, liquidity is likely to improve substantially."