Cantaloupe Inc (CTLP) 2014 Q3 法說會逐字稿

Good day and welcome to USA Technologies third-quarter and fiscal year 2014 earnings conference call. Today's conference call is being recorded. At this time, I would like to turn the call over to Veronica Rosa, Vice President of Investor Relations. Please go ahead.

Thank you and good morning. Before beginning today's call, I would like to remind our listeners that all statements other than statements of historical fact included in this call are forward-looking statements. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors including but not limited to business, financial, market and economic conditions. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and the Form 10-Q report for the quarter ended December 31, 2013. Listeners are cautioned not to place undue reliance on any such forward-looking statements, which reflect management's view only as of the date they are made. USA Technologies undertakes no obligation to update any forward-looking statements, whether as result of new information, future events, or otherwise.

This call will also include a discussion of certain non-GAAP financial measures that we believe are useful for understanding our ongoing operations. These non-GAAP financial measures are supplemental to and not a substitute for GAAP financial measures such as net income or loss. Details of these items and a reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued this morning and on the investor relations page of our website, www.USATech.com.

On our call this morning are Stephen Herbert, Chairman and Chief Executive Officer; and Dave DeMedio, Chief Financial Officer. We will begin this morning's call with a review of our results relative to strategic priorities, followed by a more detailed analysis of third-quarter results by date. Steve will return for some brief closing remarks before opening the call for questions. So at this point I'm going to turn the call over to Steve. Please go ahead, Steve.

Thank you, Ronnie. And good morning, everyone. The third quarter included some great progress and important milestones for USAT. Revenue of $10.4 million grew 16% and license and transaction fee revenues representing 86% of total revenues in the quarter grew 19%. More importantly, the steps we've taken to attract new connections to our service in vending, laundry, taxi, amusements, and other markets are yielding results with 22,000 gross connections at it in our third quarter, the highest we have ever achieved. With 20,000 net connections added in the third quarter, our total service base grew to 244,000, up from 196,000 as of March 31, one year ago, an increase of 24%. In addition, the third quarter included several important moves in vending and taxi and transportation that span beyond the quarter, giving us a very healthy pipeline for new connections going into the fourth quarter.

If you have already had a chance to review our press release, another big event for USAT that most likely jumped off the page was the $26.7 million deferred tax asset recognized in the third quarter. This recognition event moved our GAAP net earnings per common share to $0.75, while non-GAAP net per common share came in at breakeven.

For all of you who are not tax experts, like myself, essentially what this means is that based upon our recent earnings performance and our belief that we will continue to generate taxable earnings, this $26.7 million reflects a portion of future earnings on which the Company will not be required to pay tax.

We are also very encouraged by what we are seeing in the $120 billion self-serve retail industry that we address. There's a growing awareness among consumers, customers, and partners that a cashless transition is well underway. As I mentioned last quarter, this stage of an emerging market requires USAT to be assertive, flexible, and swift in executing strategies that drive market share and create competitive advantage. And we have done that. Strong connections, a solid pipeline, and a growing list of partners and customers that recognize the value of our end-to-end service platform are all very encouraging.

And not all of those accomplishments are reflected in current quarter results. Rather, as Dave will get into later, the revenues from a portion of our recent connections will flow in over time as license and transaction fees related to those new connections are fully realized. We believe the market opportunities in front of us, our leadership position, and the strategies we have in place to further develop our value in the marketplace will support our target over the next three to four years of $100 million in revenue and double-digit operating margins. As we drive towards these objectives, our top priority is to do what we can to continue to accelerate the rate of connections to our service and add value to those connections.

Our most significant opportunity lies in driving further adoption within our customer base. We have long disclosed that we believe our existing customers manage over 2 million potential connections, and we have continued to add to that opportunity with double digit growth in our customer base quarter after quarter. Industry sources estimate that there are over 14 million to 15 million connection points in the thousands of vending, taxi, commercial laundry, arcade, and kiosk operations in the US today.

During the third quarter the majority of our connections came from our existing customers. Although many customers are just starting out, USAT customers are seeing the benefits of cashless, and they continue to add connections. For example, we recently did a study of customers that have been on our service for approximately four years. Four years later the average number of connections with those customers grew 220%.

Our primary objective is to do what we can to help move these customers further along the adoption curve with greater speed by delivering value in multiple ways. Today many of our customers are seeing average transactions that are at least 30% higher when a consumer uses credit or debit versus cash. In addition, cashless gives our customers the ability to increase price without a decline in sales volumes that are typical in a cash-only environment. And cashless provides an increasingly important platform for data management and loyalty programs. What we are seeing as this market transitions is a building pressure for our customers to offer cashless to retain and win new accounts.

That said, overall cashless penetration is still low in the markets we serve, providing what we believe is a tremendous opportunity for future growth. In the third quarter our customer base grew by 47% compared to just one year ago, for a total of 6650 customers as of March 31. And with new integrated services that enable us to tap into micro markets, dining services and other aspects of these businesses, we are expanding our market opportunities even further.

Take micro markets, for instance. According to automatic merchandiser, the roughly 3000 micro market locations identified in their 2012 survey drove the equivalent in sales to almost 90,000 vending machines. So our ability to integrate with micro market technology should greatly expand our opportunity. To continue to move the industry forward, one of our strategic priorities is to introduce new products and services that further unleash the value of the connected cashless platform.

Two areas of increasing interest and opportunity are our recently introduced integrated payment services model and, as we have spoken of often on these calls, the emerging opportunities in royalty and mobile payments. Integrated payment services is a great example of how we have evolved our ePort Connect Service. It drives additional revenue from existing customers for USAT and, importantly, it's something our customers have asked for, for a number of reasons.

First, they are seeing good results with cashless in their vending business with USAT and they want to leverage that further. In addition, they want to be able to take cashless across their business to areas where they are not necessarily taking cashless today. Finally, their businesses have evolved and the opportunity to simplify and add value through USAT, for example, by integrating into their new micro market offerings with ePort Connect is very compelling.

For the operator it makes great sense. One payment processor, one data provider, one set of data, one customer service relationship across multiple facets of their business. Industry reaction to this new offering has been extremely positive. During the third quarter we signed a new agreement with The Pepi Companies for integrated payment services. Some of you might recognize the name because it was one of our first operators to go 100% cashless. Yet integrated payment services offers us the opportunity to substantially grow our relationship with this customer as we introduce USAT products and services horizontally across their vending and food-service spectrum.

Turning to another customer story, part of the healthy pipeline I mentioned is a large canteen operator that made the decision to dramatically accelerate cashless adoption in the third quarter, in part due to what they are seeing and hearing about cashless ROI in their own business as well as USAT's integrated payment services. In fact, we are working to help them rapidly deploy several thousand connections over what we anticipate should be the next one or two quarters with several thousand already deployed during our third quarter. With large companies like this moving forward into cashless in a thorough, swift, and strategic way, others in the industry are forced to keep up.

Mobile payment and related services also continue to be a hot topic within the payment community. With over 1 billion smart phones purchased in 2013 alone, mobile relative to USAT's product and service roadmap continues to be a priority. It's also an area where we believe USAT has an established advantage. Our early work with NFC has proven our theory that the self-serve retail market can be a valuable asset to digital wallet providers, to advertisers and app developers, all of whom are poised to benefit from reaching an entirely new subset of consumers never before reachable in an unattended cash-only world.

For example, our current mobile payment and fifth purchase-free program at Isis is already in 75,000 locations. The number of consumers taking advantage of this program is growing weekly with usage up 450% since [the title]. Strategically, the fifth purchase-free program helps USAT win business as operators come to acknowledge the importance of incorporating mobile as part of their cashless strategy. And for our partners it reinforces the value of the self-serve retail community as they strive to reach a broad-based population of consumers for their respective applications.

Our philosophy has always about supporting point-of-sale options in any form, which all drive connections to our service. We recently released a consumer app for our loyalty program that uses our new eBeacon mobile payment technology powered by Bluetooth low energy, or BLE. Now available in the iTunes store, our MORE. mobile app provides an easy and secure way for consumers to identify participating locations, purchase product and track their MORE. rewards on their smart phones. From the functionality perspective, it's bidirectional, meaning it can communicate at the point of sale to and from a smart phone, giving us the ability to, among other things, push offers to a consumer's phone. It's increasingly evident to us that the payment industry at-large recognizes the long-term implications of mobile, and USAT has continued to be at the forefront of this trend on behalf of our customers.

Recently we entered into a relationship with BYNDL, a mobile technology innovator. This should add important bandwidth to our innovative resources in mobile. BYNDL recognizes vending as an important [claims deal] for mobile apps, and they recognize USAT's scale and complementary strategic vision in this area. For example, we will be working with them to enhance our MORE. mobile app for gamification or hyper local offers, in other words, an offer or coupon delivered to your phone based upon your location.

These are all innovative services that we believe can drive new benefits for operators through targeted demand creation and greater insight as to consumer purchasing preferences. Our head start in building a comprehensive service platform continues to attract developers, manufacturers, and other partners that require a scalable and reliable service partner like USAT. During the third quarter, for example, we added several names to the list of technologies we now support on our service. Two micro market solution providers, Revive check out services and ECRS, plus an additional point of sale offering, AirVend's touchscreen technology. These new relationships allow us to further leverage our service infrastructure while providing our customers with the broadest selection of products and services under our turnkey ePort Connect solution.

We continue to work with a host of other third-party providers of self-serve retail applications, both large and small, who realize the advantage of the scale and expertise provided through USAT. Our work in adjacent markets beyond our core vending channel continues to move forward. In laundry we continue to add connections in the third quarter through our integrated offering with Setomatic Systems. This relationship targets the $5 billion commercial laundry space and has brought USAT approximately 7500 new connections to date. Another growing area is taxi and transportation. We have made tremendous strides in expanding our growth opportunities to reach this market and in the third quarter achieved 2000 new connections in this area. To date our strategies in taxi and transportation have yielded over 12,000 achieved or contracted connections, many of which represent part of our pipeline of new connections that I referred to earlier.

In summary, our established presence in the marketplace and the infrastructure we have created along the way continues to attract customers, manufacturers, and partners alike, all of which drives connections for USAT. We are clearly focused on driving financial performance, and the best way to do that, we believe, is to continue to gauge the pulse of adoption in the marketplace, the current competitive landscape, and to capitalize on existing customer opportunities to drive long-term value for our shareholders.

And with that, I'm going to turn the call over to our CFO, Dave DeMedio, for additional comments relative to third quarter results and our outlook for the remainder of fiscal 2014. Dave?

Thank you, Steve. Our results for the third quarter reflect continued progress in growing our recurring revenue base including a strong quarter of new connections that will benefit future periods. As Steve noted, our Q3 GAAP EPS included a $26.7 million benefit from income tax related to the reduction in our valuation allowance as we recognized deferred tax assets in the quarter. Under GAAP a valuation allowance can be reduced if we have determined that it is more likely than not that our net operating loss carryforwards will be realized to offset future taxable income of USAT. We took the conservative approach to this analysis, given, among other things, our crossover to profitability in 2Q of last fiscal year with the $26.7 million representing a little over half the total deferred tax assets. We will continue to reevaluate the need to keep some or all of the remaining $22.8 million valuation allowance on our deferred tax assets as we continue to grow taxable earnings.

Reflecting the deferred tax asset, GAAP net income for the third quarter was $26.9 million. After deferred dividends, GAAP earnings per common share was $0.75 for the third quarter. On a non-GAAP basis, which excludes the benefit of reducing our valuation allowance and the fair value of warrant adjustment, non-GAAP net income was approximately $322,000 for the third quarter compared to non-GAAP net income for Q3 of fiscal 2013 of $293,000. After deferred dividends, non-GAAP net loss per common share was essentially breakeven or zero for Q3, the same as Q3 of last year. In all, total revenues for the third quarter grew 16% to $10.4 million.

License and transaction fees grew 19% in the third quarter to $9 million. License and transaction fees are generated by monthly fees and transaction processing fees that stem from connections to our ePort Connect Service. And for the third quarter they represented 86% of total revenues. On a year-to-year comparative, growth was primarily impacted by the 21,000 deactivations that occurred in Q1 and Q2 of this fiscal year with the third quarter having no revenue related to these connections.

In addition, while we continue to replace those deactivations with new connections, revenues from some of those new connections will take a bit longer to materialize, as Steve mentioned earlier. For example, we have approximately 12,000 connections from Q2 and Q3 that won't fully materialize in terms of license and transaction fee revenue until Q1 of fiscal year 2015. This has a short-term effect of softening growth from license and transaction fees as well as respective gross margins, as you see in our results this quarter.

Gross profit of $4 million for the third quarter increased approximately 9% from $3.7 million for Q3 of fiscal year 2013. Gross margin came in at 38.3% from 41% for the same period last year, which was a particularly high quarter for us. Equipment margin was approximately 54%, a bit higher than usual due to a rebate adjustment, revenue earned under our Isis marketing agreement, and activation fees. Gross margin on license and transaction fees was 35.7%, down from 40.2% for the same period last fiscal year. Contributors to the margin decrease included the first half deactivations and various new sales and marketing programs. For example, in the program referred to earlier, if revenues attributable to the 12,000 connections had been fully realized in Q3, gross margin on license and transaction fees would have been closer to 38%. So for now, we are incurring the cost of services until those new revenues kick in.

As we indicated last quarter, we are still in the introductory stage of this market transition, requiring us to be assertive with sales, marketing, and product service offerings that add competitive advantage and market share. Other financial highlights for the third quarter include gross connections of approximately 22,000 with about 80% coming from vending customers in the quarter. In adjacent markets we drove a nice level of new connections in the quarter, with 10% coming from taxi and transportation and the remaining 10% from commercial laundry, amusement, and other market segments. Net connections for the third quarter totaled 20,000, a 100% increase from Q3 of last fiscal year. Market diversification efforts, cost-effective strategic partners, and increased sales and marketing support to drive adoption have all contributed to this substantial improvement in performance since Q3 of last year.

Existing customers as of last quarter drove about 75% of new connections in Q3. We handled $73.9 million in small-ticket transactions in the third quarter, a 36% increase over the prior-year quarter. Transaction volume of $42.8 million increased by 32% from the prior year. Currently, the ePort Connect network handles about $1 billion in transactions a year, supporting both cash and cashless transactions, which is a valued data and reporting service we provide for customers. Both GAAP and non-GAAP operating expenses were $3.6 million in the third quarter, up from $3.3 million in Q3 of fiscal year 2013, primarily due to increased headcount. Operating margins, both GAAP and non-GAAP, were 3.5% in the third quarter with greater expansion of operating margins anticipated for Q4.

Moving to cash and liquidity, we are focused on achieving sustainable positive free cash flow. We define free cash flow as cash from operations less capital expenditures as reported in the statement of cash flows. For our first-quarter free cash flow was negative $1.2 million. In our second-quarter free cash flow was negative $735,000, and this quarter it was negative $510,000, a steady marked improvement as we are closing in on our goal.

As we stated last quarter, while we would like to achieve free cash flow in our fourth quarter, the timing relative to achieving this target is dependent upon a number of factors including continued improvement in adjusted EBITDA and, on the other side of the equation, connection opportunities and mix of those opportunities relative to cash used for JumpStart. During the third quarter JumpStart was used for a little over 65% of gross connections, with other connections achieved through direct hardware sales, third-party hardware, or QuickConnect integration to our ePort Connect Service. We have also worked to lower our costs on these units and in the third quarter continued to ship our new lower cost ePort G9.

Our cash and cash equivalents as of March 31 stood at $6.6 million, up from $3.9 million as of Q3 of fiscal year 2013. For the remainder of the year we remain comfortable with cash on hand, continued improvement in free cash flow and our credit line of added bank.

Turning to our outlook for the full fiscal year, we continue to balance short-term goals with larger strategic wins that serve to drive further momentum in the business. For instance, in terms of further momentum in the business, Q3's record gross connections as well as the pipeline of orders we began Q4 with are encouraging signs as we wind down our fiscal year 2014, as revenues from these connections will begin to contribute to revenue in early fiscal year 2015. Based upon the way in which we began the fourth quarter and the manner in which we expect the quarter to unfold, many of the goals we have set for fiscal year 2014 are within reach. Two of these goals, however, present more of a challenge for many of the reasons we have previously discussed on this call. They are 40% year-over-year growth in adjusted EBITDA and 25% year-over-year growth in license and transaction fee revenues.

And with that, I would now like to turn the call back over to Steve.

Thank you, David. And thank you all for your attention this morning. I can't emphasize enough how encouraged I am by what I'm seeing in the marketplace and with our own improved execution in driving new connections for USAT. We had a record number of new connections for the third quarter. We are driving 20% revenue growth even after a major headwind for the year. We have a very healthy pipeline going into Q4, and we still have more upside to recognize from Q2 and Q3 connections, strategically reflecting the power of our service model to create added differentiation and new opportunities including more customers and more third parties that want to do business with USAT.

Lastly, if you caught the press release last week, we are very proud to be the recipients of Frost & Sullivan's 2014 North American award for customer value leadership in financial services and retail and in communications. Frost & Sullivan is a highly respected global research organization, and to have their 10-step research process validate what is happening in this industry and the leadership role played by USAT is simply another great milestone event for the USA team and for its shareholders.

And now, operator, we would be happy to take questions, so if you would please go ahead and provide instructions for our Q&A session. Thank you very much.

(Operator Instructions) Gary Prestopino from Barrington Research.

A couple of questions, so I will just try and take them one at a time before I get back in the queue. Could you maybe just, in terms of these deactivations and the change in the gross margin, where it has basically been down the last couple of quarters, could you explain how these deactivations impact that gross margin? And then, I guess the question going forward would be, as these annualize, would that gross margin get back to where it was, in the close to 40% range? Or has something changed in the industry competitively that will not allow you to do that?

Gary, thank you for your questions. This is Dave. Regarding the deactivations and how they impact margins, the deactivations that came off to the network, the 21,000 over the past two quarters, were at a slightly higher margin, slightly higher margin than some other connections that we had. And when you lose the 21,000, which is a significant component of our outstanding amount of connections, that tended to decrease margins as those came off of the network. And again, as I mentioned, this quarter, Q3 in particular, was the first quarter we had no revenue associated with those deactivations. In the prior two quarters we had partial recognition for maybe a month or two in each quarter of some of those deactivations.

Regarding outlook for future quarters, it's our goal to structure, particularly in the vending industry, our revenue targets and our billing to our customers to try to achieve a 40% margin. Given the -- certain marketing programs that we have put in place and begin to drive strategic growth in marketing -- excuse me, in market share, quarter to quarter that could be impacted, that 40%, depending upon the volume and the type of marketing programs that we put in place. Hopefully, that answers your two questions.

Sure, that's fine. I'll get back in the queue.

Mike Latimore from Northland Capital.

How would you envision CapEx playing out in the fourth quarter here? And is the new G9 going to be the primary hardware sold in the quarter?

It will, Mike. In terms of hardware coming out of this Company, by and large, other than things that we might sell with ePort Mobile or ePortGO, that's the primary hardware platform that's going out from an ePort perspective. So, we have the full benefit of that in this quarter.

Can I add to that, Steve? Mike, in addition, in terms of Q4 CapEx, it's really going to be depended upon how many connections in Q4 come from JumpStart. As you know, we are focused on achieving our goal for connections, which is -- it's a meaningful amount of connections that we need to achieve for Q4. So if we have a similar quarter in which 65% or a little over 65% come from JumpStart, we would probably have, again, a higher amount of cash used in the quarter for JumpStart. But with that said, if you look at the cash used in Q3 for JumpStart on a per-unit basis you will see a marked reduction in terms of the cash used on a per-unit basis. So, we are getting more connections now under JumpStart now with similar dollars that we are spending.

Got it. And can you talk a little bit more about the strong start to the fourth quarter? Is this a couple of big customers? Is it a broad-based demand? And what does the gross margin look like on some of these newer orders?

Mike, I'm not quite sure we were able to hear you clearly there. Would you repeat your question, please?

Sure. Sorry about that. In terms of -- you talked about strong demand starting in the start of the fourth quarter here. Can you talk a little bit about that? Is it a couple of big customers or is it more broad based across several customers? And then what does the gross margin look like on some of these new orders coming in?

Well, the customers -- there are a couple customers that make up a fair amount of the backlog. One would be the canteen operator that I mentioned, and another would fall into the taxi space. And by the way, Mike, not to digress, looking forward, one of the points I wanted to make and I didn't get to when Dave was talking about JumpStart expenditures -- going forward, I think there's some Intel that we provided in today's prepared remarks that gives you an idea that JumpStart as a percentage of our whole may change. And if you particularly look at laundry and taxi and partners like AirVend, just three examples that we talked about today, as you look out into Q4 and into next year, the dynamics with JumpStart will change in addition to Dave's comment of getting more for less with the G9. So I wanted to add a little bit on that capital question but also clarify on your question regarding your customers driving the backlog.

Alexander Renker from Sidoti.

This question is a little bit more general, but I'm curious. Do you have a sense of what profitability would look like if, at the expense of, say, growing taxi and laundry revenue, the Company were exclusively focused on vending? I guess that might be another way of asking what are some of the startup costs with a ramp in connections for taxi and vending, given that it's a small component of revenue at this point?

Well, Alex, thanks for the question. In terms of startup costs and development costs, those taxi customers, in particular, that we are bringing on today came through our ePort QuickConnect service, which is really a tool used for developers of other types of equipment other than vending machines to connect to our service. The onus really is then on the OEM of those devices, and the costs are on the OEMs to develop and integrate to our network. So there's a little startup and development cost that we put into this application, in particular. And in terms of market development we are using third-party resellers to help us sell into that marketplace and utilizing the footprint of those resellers to help us distribute our products.

Well, and Dave, if you don't mind if I add, in taxi and transportation as an example, Verizon is selling that solution for us. So not only do the systems integrators and the OEMs of the world do the development work to connect to our service, but we are also leveraging -- on the other end of the equation we are leveraging our partners such as Verizon, to use a big example, to drive distribution in the space. So to answer your question in a long-winded sort of way, the answer is no, there aren't a lot of startup costs. And it's really for laundry where Setomatic Systems did their own integration work and certified on our systems. And they are the feet on the street out there all day, every day, selling and installing the solution.

So it's a great question for a small company like ours. But I can tell you that the lion's share of the resources go into our core market, and that's vending. With our direct sales force and our operations people, et cetera, they spend the majority of their time on that market. But thank you for the question and I hope that helps.

Yes, it does, absolutely. Thank you.

Jim Gentrup from Val Vista Capital Management.

I just wanted to ask a couple quick questions. The seasonality that you guys usually have in Q4 -- have you already factored that into your guidance a little bit here, or do you expect that strong seasonal fourth quarter, as usual, for connections?

We typically do have a strong fourth quarter. And I don't think this fourth quarter should be any different in that regard. We are not counting on some giant spike. Where we are headed with the quarter is a somewhat predictable. So don't -- it will look much like past fourth quarters, but perhaps not quite as pronounced.

Yes. I'm just wondering like this year your gross adds every quarter have been sequentially higher. And I can't recall another year since I've been following you that you have had the sequential jump each quarter. So I just wanted to add that comment, I guess. It seems like you are gaining some momentum, especially on the gross add side.

I really picked up on that gaining momentum comment. That's very much what it feels like in the business right now, and just the way that given some of my prepared comments I talked about how customers are looking at things. The example of the compass operator I gave -- they decided to go to 60% of their base, from a small number to 60% of their base. And that's a big move. Customers are starting to behave in different ways, which is -- and particularly in vending, which is manifesting itself in our connection numbers and so forth.

The 12,000 that you talked about that were delayed or deferred in their licensing and transactions -- is that your typical delay or did you get them -- was there some sort of competitive negotiation where you had to push it out a little bit more?

Our customers typically need a little time to get their devices in. We happened to give -- as part of an overall transaction we happened to give a couple of customers a little extra time to do so. And so it's -- it was part of a process with a few customers.

Okay, but you did get the activation fees from those 22,000, correct, in Q3?

Or the 12,000. I really don't recall whether or not -- I don't recall whether or not we did get the activation fees on those specific customers.

No; I mean I guess I didn't ask the question correctly enough. The 22,000 gross adds that you put in -- you did recognize the activation fee in Q3, didn't you?

We did. Generally, every connection, particularly in vending, has an activation fee. Some other connections, those outside of vending like in taxi, we have different selling parameters with them. Some of those don't carry an activation fee. But generally, in places where we are able to charge an activation fee we charged an activation fee. Each customer is a separate negotiation, so there may have been some of the vending connections that went out that didn't have an activation fee charged. But in general, yes.

And that was one of the reasons we mentioned for an improvement in equipment revenue, activation fees for the quarter.

Okay. And then last question, if I may. The sales and marketing expenses have been pretty uniformly up throughout the year. Can you help us out a little bit -- I'm thinking -- you only have one quarter left. I assume that the same impact or a similar impact will be in Q4. But what about going forward? Are you continuing to add? Will we have other tick up next fiscal year?

Well, I think we've stated that we will continue to be aggressive in sales and marketing. And I don't think we're done adding resources in sales and marketing. So I think we haven't given guidance for next fiscal year, but I think generally, if you take away that we are going to remain aggressive in sales and marketing, and that may mean adding resources in that department.

All right. Thanks, guys.

Gary Prestopino from Barrington.

Dave, just for our purposes as we are trying to model Q4, I know you don't give direct guidance. But you kind of pulled back and said it's going to be challenging to get 40% year-over-year growth in adjusted EBITDA and 25% growth in license and transaction revenues. What ranges are you thinking here, so we at least have some idea of where we should bring our quarterly numbers into?

Gary, it's a good question. Generally, obviously, we are targeting to achieve those milestones. Conservatively, though, I think if we have another Q4 that's somewhat in line with the Q3, you are probably looking at adjusted EBITDA in the range of 27% to 35%. And in terms of license and transaction fee growth, in the range of 20% to 23%.

And then do you guys put any number on the amount of connections that are in your pipeline? Is that something you have stated in the past or you could share with us?

Gary, I don't think we normally comment on that, although I think it's safe to say we went into Q4 with what we would call a healthy pipeline.

Okay. And then in terms of just looking at the net ads sequentially, it has obviously increased pretty dramatically. That's obviously pointing to, number one, more adoption correctly within your existing base but going into some of these new vertical markets as well. Can you share some color on that?

Well, I think you hit the nail on the head. I can't remember the exact percentage. A large portion, Dave -- is it 70-odd percent?

75%.

75% of the connections for the quarter came from our existing base. That will continue to be the case. I think, Gary, as we gain momentum in our customer base. I think using that one example I did, going from a relatively small number and making the decision to go to 60% penetration -- these are new market dynamics that are very encouraging to us and support the fact that as we move into the fourth quarter and into next fiscal year that a lot of our business will come from the existing base. However, on the other hand, you've got things like, just to use two examples that we talked about today, taxi and transportation as well as laundry, picking up momentum; our partners are picking up momentum in terms of the number of connections that they are bringing to us. So, we are really hoping for a healthy mix of connection additions as we move forward.

Okay. Just to be clear here because we are taking notes as you are talking, you added 2000 new taxi connections this quarter. Was that from the existing business that you signed a couple of quarters ago that I believe was in Washington DC? Or was that a new taxi entity?

It was actually a new -- it was at least one, if not two, new partners.

Okay, two new partners. And then you also said -- my notes here again -- you have 12,000 in the pipeline or 12,000 that couldn't get connected in the quarter. Is that --

I think what we said, and Dave can elaborate on this if he wants to. But there were 12,000 connections that were out there that didn't impact -- they were in the total and they haven't impacted -- they didn't impact the third quarter.

So that's 12,000 connections --

That didn't impact -- that went out earlier in the year and they didn't impact Q3.

Okay. All right, thank you.

Mike Latimore from Northland Capital.

Hey, great. Just a couple other questions here. On the connections that were not JumpStart, how many were hardware sales versus, say, situations where there was a software endpoint?

Well, I can say the two -- well, Dave, you know what? I'm going to let you answer that. You have your arms around that better. Did you hear the question?

Yes, I did. Mike, roughly 80% of our connections came in vending. Of that, approximately -- well, let me back out. Of the 100% of all our connections, 10%, roughly, were ePort sales, which is part of that 80% that went to vending. So the remainder would have been under JumpStart. And then I had mentioned that 10% came in eTaxi. That was non-JumpStart. And then the other 10% that came in amusement, laundry, and other market segments were non-JumpStart.

Okay, got it. And then was EnergyMiser revenue big in the quarter or low or --?

Miser was down year-over-year quarter, comparatively. Miser is becoming less and less of a part of our business. It represented less than 3% of quarterly revenues this quarter. But from quarter to quarter it was down and it was one of the reasons for part of equipment revenue being down as well as some of the -- sequentially quarter-to-quarter Miser sales had been relatively down and flat from prior years. So it's becoming less and less a part of the total revenue of the Company.

And just last, on license and transaction gross margin, I know you have line of sight of getting to 40% periodically. But do you think this is -- the number in this quarter is sort of the bottom? Is this the floor? Do you view it as the floor?

I view it as a floor in terms of vending connections, yes. As we look out into the new fiscal years with some of these new market segments that we are getting into, and I think we got this question on a previous earnings call, what will these new connections do in terms of mix of GP margins? And we are going to get back to the market as these connections start to become a meaningful part of our overall connection base and start to materially impact the results. But in terms of where we are today and the amount of vending connections we expect to continue to get and expect to remain a majority of our connections going forward, I would expect that this would be a bottom, yes.

Yes. Thank you.

Jim Gentrup from Val Vista Capital Management.

Yes, the 2000 deactivations you had this quarter -- that was the correct number, right? 2000?

Yes.

Was that the same customer as previously? The same customer, large customer that deactivated 21,000? Is that the same one?

Some of those connections, yes, came from that existing customer.

The majority of all the deactivations that we have talked about came from the same customer. Everything else is de minimis. It's that one customer, and we are working our way through the customer a little bit faster than we anticipated, which is both good and bad. The good news is that we are getting it behind us. The bad news is that it gave us a little more headwind this year than we expected. But candidly, I would rather clean it up, get it behind us, and move on. It's a one-time event.

All right. Do they have many connections left?

They have about 6000 left. So those will go away over time, and from a financial perspective you have to think about it as we have the majority of it behind us.

And we had said on a previous call the amount of revenues associated with the remaining connections was approximately $175,000 per quarter. So, as Steve said, it's largely behind us.

That number actually would be lower than now, obviously?

Slightly lower as they removed some of those, yes.

All right, thank you.

Thank you. And that concludes our question and answer session for today. I would like to turn the conference back to management for any closing comments.

That wraps it up for us. I think if anybody has any follow-up calls, please call investor relations, 484-359-2138. And thanks so much for tuning in today.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.