Living up to its name, ex-Motley Fool Hidden Gems pick TransActTechnologies (Nasdaq: TACT ) showed quite a bit of action last week. Between Wednesday evening, when the company announced abysmal results for its first quarter of 2005, and Thursday morning, when traders began reacting to those results, the company lost 10% of its market cap -- $7.5 million. The next day, the stock reversed course and recovered 11% from the previous day's $6.82 close.
It's hard to say what the market found so appealing in TransAct on Friday. It's easier to put a finger on what drove investors away on Thursday. Revenues declined 21% year-on-year and 18% sequentially. Profits fared worse, plunging 85% against the year-ago quarter and 80% sequentially.
Gross margins dropped from 36% to 31%. Though revenues fell, operating costs actually rose slightly, magnifying the gross margin decline. As the cost of doing business ate into operating margins, they quite simply collapsed: down from 14% to 2%.
To get a fuller picture of just how badly the business performed this quarter, consider this fact: 12% of TransAct's $163,000 in recorded first-quarter profits came from interest on the company's still-sizeable cash hoard. The bad news: that cash pile appears to be shrinking. Three months ago, TransAct had $8.6 million in the kitty; the earnings release now shows just $7.6 million remaining. This ends eight consecutive quarters in which TransAct finished with more money than it started with.
Though the company declined to produce a cash-flow statement along with its earnings release, we can deduce from that decline in the cash stash that TransAct became free-cash-flow-negative in Q1. (To confirm that deduction, however, we'll need to await filing of the company's Form 10-Q with the SEC.)
For somewhat better news, it's worth remembering that TransAct did produce positive earnings in each of the four previous quarters, and positive free cash flow in the previous six. It's entirely possible, therefore, that TransAct is just currently traversing its own private "soft patch," and that patience with this investment will eventually be rewarded.
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Fool contributor Rich Smith has no position in TransAct Technologies.
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