Cantaloupe Inc (CTLP) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the USA Technologies fourth quarter and fiscal year end 2014 earnings conference call.

At this time all participants are in a listen-only mode. Later we'll conduct a question and answer session and instructions will be given at that time.

(Operator Instructions)

Please note today's conference is being recorded.

I would now like to hand the conference over to Stephanie Prince from LHA. Please go ahead.

Thank you, Karen and good morning everyone. This is Stephanie Prince from LHA, and welcome to the USA Technologies fourth quarter and year-end FY14 earnings conference call.

With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer of USA Technologies and Dave DeMedio, Chief Financial Officer.

Before beginning today's call, I would like to remind everyone all statements included in this call, other than statements of historical fact, 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 the 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.

Listeners are cautioned not to place undue reliance on any such forward-looking statements, which reflect managements view only as of the date they are made. USA Technologies undertakes no obligation to update any forward-looking statements whether as a 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 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.

I'd now like to turn the call over to Steve Herbert. Steve?

Thank you, Stephanie and good morning, everyone. I'll begin today's call with a review of the accomplishment we achieved in FY14 and our progress towards achieving our long term goals, before discussing our operational plans for FY15. I'll then turn the call over to Dave to review our financial results for the fourth quarter and our guidance for FY15

USA Technologies made significant progress in FY14, ending the year with record new connection growth in the fourth quarter. We increased gross connections in FY14 by record numbers, adding 76,000 new connections equal to 41% year-over-year growth.

84% of these gross new connections went into our existing customer base. New connections increased each quarter setting records in both the third and fourth quarters, reaching 25,000 gross new connections in the fourth quarter.

At June 30, 2014, we closed FY14 with a new record of 266,000 connections to the ePort Connect service. We had anticipated stronger results for the fourth quarter and FY14, but the system integration for our most recent taxi partnerships is taking a bit longer than expected. As a result, revenue growth for the year came in slightly below our forecast of 20% to 23%. We now expect the integration work to be completed in the second quarter of FY15 and to begin generating revenue from this effort in FY15.

Turning back to FY14 results, we achieved record connections by delivering value to our customers, leveraging key partner relationships, and continuing to invest in our business with aggressive marketing programs. These programs were designed to promote greater allegiance among our existing customers, expand connections per customer, and to sustain our lead over the competition. We increased our customer count by 45% for the year adding 2,250 new customers and ending the year with 7,300 total customers on our ePort Connect service.

We had great success with our SMB or small to medium sales initiatives. SMB accounted for 16% of our sales mix in fiscal 2014 and we expect this contribution to increase going forward. Cost of customer acquisition through this channel were low and we are continuing to expand this part of our sales team.

For the full year, we handled nearly 170 million transactions, equal to approximately $300 million, a 34% year-over-year increase. Transaction value per connection has been increasing, demonstrating the increased volume that cashless payment generates. We believe that this has lead to increased customer satisfaction and stickiness of our customer relationships.

In the fourth quarter, we handled 47 million small ticket, unattended retail transactions, a 29% year-over-year increase. On a dollar basis, transaction volume totaled nearly $83 million, a 32% increase. To broaden adoption of our ePort Connect solutions, extend our sales reach beyond vending into adjacent markets, and remain innovative in our service offerings, we continued to leverage existing partnerships and sign new partnerships during the year with OEMs and other distribution and technology partners.

We've also been adding partners in mobile to fill out our service offerings. In the fourth quarter, we signed a strategic alliance with BYNDL, a provider of mobile marketing and support services for unattended retail. The BYNDL system delivers innovative offerings to consumers via mobile devices, collects data for data analytics and based upon these analyses, targets demand creation through loyalty programs, coupons and location-based offers.

One of our goals as a market leader is to stay ahead of the curve in introducing new value-added services. During FY14, we introduced and rolled out our more loyalty program with the Fifth Purchase Free reward. We leveraged this capability to enable our partner Softcard's mobile payment and loyalty program at 85,000 of our NFC enabled locations nationwide. Softcard, one of our strategic partners and the joint venture among AT&T, T-Mobile and Verizon, was formerly known as Isis.

Our experience with about half million Softcard mobile payment transactions, representing nearly 100,000 reward purchases earned under the Fifth Purchase Free program, is that in locations where mobile payment is available, average cashless, particularly mobile cashless transactions, are significantly higher than cash. And mobile payment transactions are also higher than standard credit/debit cashless payment transactions, validating one of our main selling points to our customers.

For example, based on our experience with mobile payments thus far, the average ticket for mobile payment purchases in our customer locations is approximately $1.70, compared to an average cash purchase of $1.16, and an average credit/debit card purchase of $1.53. We also introduced and rolled out our integrated payment services, which is opening additional avenues of growth such as micro markets and dining services. This service integrates payments across our customers multiple point of sale locations helping them to drive top line growth and participation.

Unlike our competitors, USA Technologies delivers a solution for each of these applications in one streamlined end-to-end solution, which gives us a significant competitive advantage. For example, in partnership with one of our customers, a vending operator, we're rolling out integrated payment services and our more loyalty program to the corporate headquarters of Sikorsky Aircraft. This solution allows our customer to drive efficiencies by combining cashless payments in their micro markets, dining and vending locations operated at Sikorsky into a single solution.

So not only is this integrated service highly efficient for our customer, enabling them, among other things, to account for and settle all cash and cashless transactions through our USA live reporting portal, but at Sikorsky, it enables them to deliver the convenience of cashless payment at various types of locations. Combined with our more loyalty program, which spurs increased purchases and increased employee satisfaction through customer outreach, loyalty rewards and cross-promotional opportunities.

In the fourth quarter, we introduced ePort Online, which expands the capabilities of our integrated payment services further by giving customers a convenient way to accept credit and debit payments for goods and services online from any computer or mobile device. And to retain secure encrypted customer account information for scheduled and subscription payment. In less than one month, we signed up over 800 of our existing customers for this new service.

We are of course excited about the potential for ApplePay. Apple's NFC-based mobile payment system, that is launching in several weeks, is expected to galvanize consumer awareness of NFC-based mobile payments. Simply put, we think ApplePay marks a tectonic shift in our industry.

Apple has built a strong foundation by partnering with the largest banks, payment processors, and retailers to ensure buy in from many of the key participants in the payments ecosystem. We are going to accept ApplePay at our growing base of NFC enabled locations.

Since we currently have what we believe is the largest NFC enabled footprint in the US payment industry with 150,000 locations representing 70% of our installed base, we believe ApplePay would help validate and further fuel adoption of our services.

And through our experience working with Softcard for the past three years, including driving adoption of mobile payments at 85,000 of our NFC enabled locations nationwide for the past year, we believe we're ahead of the curve in understanding the requirements and opportunities of wide scale implementation and adoption of NFC-based mobile payment and associated marketing programs, such as loyalty.

Just yesterday, we announced an NFC-based mobile payment and loyalty program for the commercial laundry market in conjunction with our strategic partner, Setomatic Systems. Setomatic expects that by the end of 2015 more than 25 of their SpyderWash Elite laundry locations supported by our ePort Connect service, will support NFC-based mobile payments. We believe that like ApplePay, Setomatic's use of NFC can only help propel growth for our services.

We are also nearing the completion of our integration work with our taxi partners, which we expect to be completed in the second quarter. Once completed, we expect to have in place a strong foundation for growth in the taxi industry. With our ePort GO offering that was introduced last year and designed specifically for the $11 billion taxi industry and a partnership with Verizon's wireless team to help drive sales, we anticipate capitalizing on this opportunity more fully in FY15.

At 266,000 connections to our service, we're now more than half way to our three year goal of 500,000 connections to our service. For FY15, our growth strategy is centered around further advancement toward these goals by continuing to increase the number of new connections to our ePort Connect service, deepening penetration of our existing customer base, and adding new customers, while continuing to bring new and innovative services to our customers. We believe that our existing ePort Connect customer base that currently numbers around 7,300 customers, remains our most fertile sales territory, with at least 2.25 million additional estimated locations that remain cash only and a target for our solution.

In closing, we believe our expanding base of customers and connections represents a broadening adoption of cashless technology in the industries we serve and we see momentum continuing in the new fiscal year. With a robust pipeline, aggressive marketing initiatives, and an important catalyst from ApplePay, we believe that we're well positioned to drive growth and strengthen our leading market position.

I'm now going to turn the call over to Dave for comments on our financial results for the fourth quarter and our outlook for fiscal 2015. Dave?

Thank you, Steve. I'm going to start by reviewing our fourth quarter results before briefly reviewing the full year and our outlook for FY15.

For the fourth quarter total revenue was $11.2 million, an increase of 15.7% compared to $9.7 million in the fourth quarter of FY13. License and transaction fees were $9.5 million compared to $8.2 million in the year ago quarter, a 15.7% increase. These fees, which are comprised of recurring monthly service fees plus reoccurring transaction processing fees, accounted for approximately 84% of total revenue for both the current and prior year quarter.

Growth was driven by the year-over-year increase in total connections to our ePort Connect service. Equipment sales were $1.7 million compared to $1.5 million in last years fourth quarter. Equipment sales benefited from the record number of new connections in the current fiscal quarter compared to last year.

Gross connections during the fourth quarter totaled a record 25,000, a 39% increase from Q4 of last year with approximately 86% coming from traditional ePort vending customers and 14% from customers in other vertical markets such as amusement and gaming and laundry. Of the gross connections, 84% came from existing customers.

Net connections for the fourth quarter totaled a record 22,000 a 22% increase from Q4 of last year. The increase in gross and net connections we believe primarily reflect our success in increasing sales from our growing base of customers, which grew to 7,300 at June 30, 2014, an increase of approximately 45% from June 30, a year ago.

Moving down the Income Statement, gross profit was $3.7 million even with the year ago quarter. The gross margin was 32.7% compared to 37.9% in the fourth quarter last year. Gross margin on license and transaction fees was 33.1% compared to 37.1% last year. The margin was impacted by the costs associated with connections under our extended grace periods, as well as deactivations from one large customer that occurred during the fiscal year.

As you may recall during the FY14 year we offered extended grace periods for new terminal placements. This action had a two-fold impact. One, monthly service fees were delayed. And two, we recorded expense, such as depreciation related to those terminals, in costs of services. As a result, gross margins on recurring revenues were negatively impacted. However, in FY15, we anticipate recognizing approximately $5.5 million in incremental annual license and transaction fee revenue from the units deployed during FY14 under the grace period program.

The equipment margin was 30.3% compared to 42.2% in the year ago quarter. This decline reflects certain sales incentives and to a lesser extent fewer sales of our higher margin EnergyMiser equipment.

Operating expenses were $4.2 million in the fourth quarter compared to $3.5 million in the year ago quarter. Approximately $0.3 million of the $0.7 million increase over the fourth quarter year ago related to the benefit from one-time expense reductions in the year ago quarter. Such as the reversal over an over accrued expense, as well as a contractual third party reimbursement of certain development costs.

The remaining increase of $0.4 million reflects increases of $0.2 million due to increased compensation expense, predominantly as a result of an increase in employees; $0.2 million due to sales commission and other performance based compensation arrangements arising from the record number of gross new connections for the quarter; and $0.2 million in increased professional service and other miscellaneous expenses. These increases were offset by a reduction in depreciation and amortization.

For the fourth quarter, adjusted EBITDA was $1.3 million compared to $1.6 million in the comparable period last year. GAAP net income was essentially breakeven at a loss of approximately $39,000 or $0.00 per share. This was the result of a GAAP operating loss for the quarter of approximately $568,000, which was benefited by a reduction of approximately $542,000 and our tax expense provision for FY14. On a non-GAAP basis, net income was a loss of approximately $92,000 or $0.00 per share for the fourth quarter compared to non-GAAP net income of $160,000 or $0.00 per share in the same period last year.

For the full fiscal year, revenue was $42.3 million compared to $35.9 million in FY13, a 17.8% increase. License and transaction fee revenue totaled $35.6 million compared to $30 million, an 18.6% increase. Adjusted EBITDA was $6.5 million compared to $5.8 million last year. GAAP net income was $26.9 million or $0.78 per share compared to $0.2 million or $0.01 per share for FY13.

GAAP net income for FY14 includes $26.7 million or $0.75 per diluted share related to the partial recognition of our deferred tax asset. Non-GAAP net income and after preferred dividends was $87,000 or $0.00 per diluted share compared to $250,000 or $0.01 per diluted share for FY13.

You may remember that in our third quarter of FY14, we recognized a $26.7 million benefit related to an approximate 50% reduction in our income tax valuation allowance. We did this as we expect to utilize this asset to tax protect future taxable earnings that we anticipate generating having established a track record of GAAP profitability for the past few fiscal years. We will continue to evaluate the need to keep some or all of the remaining $22.8 million valuation allowance on our deferred tax assets.

Our cash and cash equivalents at June 30, 2014 were $9.1 million up $6.6 million at March 31 with proceeds from the sale lease back agreement contributing $3 million to this increase. With respect to our capital resources in addition to the cash on hand, in June 2014, we extended the maturity date on our line of credit with Avidbank until June 21, 2015. In addition, we were successful in expanding the availability on the line from $5 million to $7 million.

Also in June 2014 we entered into an $8 million sale lease back agreement for our ePort devices with Verilease Finance. This transaction allowed us to finance our ePort JumpStart units that we rent to our customers over a long term period, with long term financing. The proceeds from the sale will be used to provide gross working capital. In addition, we are exploring utilizing a portion of these proceeds for other purposes, including the possible purchase of some of our outstanding securities.

We received a cash infusion of $8 million from the sale of approximately 30,000 ePorts. Of which $3 million was received during fiscal year 2014 and the remaining $5 million in July 2014 or Q1 of our fiscal year 2015.

There are several impacts from the sale lease back transaction to the statement of operations moving forward. Essentially, this transaction replaces an asset that we were depreciating the cost of sales with a cash rental expense. The quarterly cash rent expense is approximately $660,000, which will be reduced by the amortization of deferred gain on the sale or approximately $210,000 per quarter for a net expense recorded of approximately $450,000 per quarter. Because this is a cash expense versus depreciation expense, we will not exclude this expense from the calculation of adjusted EBITDA as we did when we were depreciating the asset prior to the sale lease back agreement.

Lastly, the quarterly net rental expense of $450,000, which will be reported to cost of services, is approximately $165,000 greater than the quarterly depreciation previously being recorded. Which will have an impact on gross margins from recurring license and transaction fee revenue as well as net income over the 36 month agreement due to the higher expense.

Looking forward to FY15 we plan to drive connection growth through our expanding customer base, aggressive marketing programs and strategic partnerships. As Steve previously mentioned, we also expect demand for cashless payment systems to be bolstered by the recent announcement introducing ApplePay, a new NFC enabled mobile payment system.

We expect total revenue to be in the range of $51 million to $53 million for a growth rate of 20% to 26%. License and transaction fee revenue is estimated to grow to $44 million to $47 million for an increase of 24% to 31%. We expect net new connections in the range of 66,000 to 76,000 for an increase of 27% to 46%. And with respect to profitability, as Steve has mentioned on previous earnings calls, in an environment of accelerating adoption in an emerging market for services such as ours, we are going to remain aggressive in investing on driving connections, penetration and share.

We believe it is important to secure these connections and customers now in order to acquire the long term benefit of recurring revenues. And therefore we have made a strategic decision to sacrifice some near term margin in order to more rapidly scale the business and realize the operating leverage of our business model. That said, we do expect adjusted EBITDA to increase sequentially throughout FY15 and we expect to deliver growth in adjusted EBITDA and non-GAAP net income for the full year, over FY14 results.

I would now like to turn the call back over to Steve.

Thank you, Dave and thank you everyone for joining us this morning.

In closing, I'd just like you to remember that we enter our new fiscal year with accelerating momentum for new connections coming off record set in the second half of FY14.

Other positive factors that we anticipate, include our 85% recurring revenue base, the $5.5 million in revenue we expect to record for the year from the expiration of grace periods, our aggressive marketing efforts directed at further penetrating our customer base, and the anticipated spur to industry demand from the ApplePay announcement, coupled with our industry leading NFC experience. And near term increasing opportunities in adjacent verticals, such as taxi.

With the achievement of critical mass with 266,000 connections, and our growing market opportunity with new and existing customers, we foresee a clear path to the realization of our long term goals.

We would now like to open up the call for questions. Operator?

Thank you.

(Operator Instructions) Our first question comes from the line of Mike Latimore from Northland Securities.

Great. Thanks a lot. Hi, guys.

Good morning, Mike.

Good morning. Just on the delay of $5.5 million that you'll recognize this year, that's completely separate from the taxi revenue? Is that right or is there some overlap?

Mike, that's completely separate from any taxi revenue that we would expect for 2015. That's just on the ePort terminals that were delayed under the service fee grace period.

And then with regard to ApplePay, can all your NFC devices in the field sort of immediately accept that or is there something you have to do to be able to accept ApplePay?

Yes, Mike, our plan is that they will accept ApplePay. It may require what we call an over the air update to push a piece of software from our server to our devices. But at this point, we're lead to believe we're in great shape. So at the most we'll have to push from our server to our devices in an automated fashion, a software update.

And just to make gross margin a little more simple, what do you think the license and transaction gross margin, what kind of range are you thinking for this year?

Mike, the margins for license and transaction fee going into 2015 are going to be impacted by a couple items. Obviously, any marketing programs that could be continued into 2015, as we're going to remain aggressive in getting connection and customer growth.

In addition the sale lease back agreement will impact gross margins to as much as the $165,000 per quarter. And then the mix of new vertical revenue from new vertical markets could impact margins as well. So I think margins will be a stretch to get back to the 40% range that we were looking at achieving in 2014.

Okay, thanks a lot, good luck.

Thanks, Mike.

Thank you. (Operator Instructions)

We have a follow-up from the line of Mike Latimore from Northland.

Great, thanks. I'll just keep going down my list here. In terms of the operating expense in the fourth quarter, I know you went through a list there, but were there any one-time items that don't repeat after the fourth quarter?

There were, Mike. There's roughly going to be about $200,000 to $300,000 we would not expect to come into Q1. Q1 of 2015 is going to be less by several hundred thousand dollars than what we experienced in Q4.

And then you may have said this to me. What percent of the connections were on JumpStart in the quarter?

Well for the connections in Q4, they were a significant component of close to over 70% of our connections in Q4 were from JumpStart. As I think I'd mentioned in my script part that 86% of our gross connections came from traditional vending customers. So the majority of those connections came from our vending, which took a greater reliance on the JumpStart program.

And then with regard to the Setomatic deal maybe getting 25,000 connections, how much of that would be incremental? My recollection was you have several thousand already with them.

Yes, I think, Mike the incremental and this is their goal, probably somewhere in the neighborhood of 16,000 to 17,000 would be incremental based upon the information that we have.

Okay, got it and then just maybe help us think a little bit more about EMV. That's potentially a driver for the US market. How do you view EMV as it relates to your business, your customers business? Is that impactful, not impactful, how do you think about EMV?

Yes, certainly for fiscal 2015, we don't see contact EMV being impactful to our business. There is also a contactless standard, which gets delivered through NFC technology.

So when people think about EMV in the industry, they really think of contact EMV. And that's just, we don't believe that's something that will overly affect our business. All of that said, if we have customers who want to implement contact EMV, we have a solution to that. So but we just don't see our customers going in that direction.

Got it. And then just last I guess you have a good connection outlook for the year. I assume it's second half weighted as usual, no reason to think it's more linear or anything like that?

Mike, typically we've seen connection -- more of our connections coming in the second half of our fiscal year or January through June. We would anticipate the same thing occurring in FY15.

Okay, thanks a lot.

Our next question comes from the line of Bill Sutherland from Emerging Growth Equities.

Hi, thanks. Just a couple, Mike kind of covered them all. But the deactivations at this point, is this kind of 2,000 to 3,000 a quarter kind of a normal level do you think going forward?

We -- Bill, it's Steve Herbert by the way. We have about as of the 30th of June, the end of our fiscal year, we had about 6,000 deactivation. We had about 6,000 devices still on CCRs, the [Coke bottler] that we're talking about here, we had about 6,000 units still on their system.

We expect that over the course of the year in FY15 they'll continue to deactivate their devices as they've kind of gone their own way. But we really don't know how that will get spread out, if that's what your question was.

Well obviously they've been the driving force of all of that, but I was just wondering on kind of a normalized basis -- you're going to have a little churn just people going out of business and so forth. Does that amount to maybe a thousand a quarter, kind of the normal routine stuff?

I think that's probably a fair, that's a fair estimation. There'll be some level of churn and it's really related more to customers moving things around, maybe deactivating things seasonally. It's not so much from people walking away from our service.

If you were to look at that retention rate, it's a 99% retention rate. So the thousand is really related to basically the movement of locations of just a fun fact for everyone. A vending machine moves 10 times in its life and that's a lot of locations. So things get moved around a lot and deactivated and reactivated and that alone will cause some churn.

I may have missed this Steve, but did you have any commentary like an update on the integrated payment, the progress with that?

Well we did, we actually did talk about that. The update, I know you're familiar since we've talked about it, you're familiar with integrated payments and the update was that one of our recent implementations with one of our vending operators was at Sikorsky Aircraft. Where in their -- actually Sikorsky headquarters in their micro markets on their vending machines and in their dining facilities, we're providing all of the cashless payment capability.

So the employees can buy in a cashless manner anywhere they want to within the facility. And in addition to that the umbrella over the whole thing is the more program. And the employees get rewarded with points or whatever it might be. So it not only drives efficiencies for our customer in terms of pulling up all of the funds from one place and one supplier like us. But in the case of Sikorsky, they're driving additional sales, they're driving employee satisfaction. So it's kind of a real-life example of how we and our customer have been able to leverage integrated payments as a point of difference.

Great and thanks for that. Dave, I know you gave color on kind of how to think about gross margins this fiscal year but just to add to that, should we look for some sequential improvement in the course of the year? Is that how it lays out do you think?

There should be some improvement during the course of the year. A lot of it though will have to do with any additional type of programs that we may continue for 2015. But generally there should be some improvement, particularly as these units from the grace period into FY14 start to bill.

Because that ramp of $5.5 million through the year will be a slight ramp, it won't be linear or it won't be quarterly equal amounts through the FY15. It's going to be a slight building ramp over this FY15 as we build up the $5.5 million for the full fiscal year. So that should help with some sequential improvement.

Okay, that makes sense, thanks guys.

We have run out of time for questions. I would like to turn the conference back to Steve Herbert for closing comments.

Well I'd just like to thank everyone for joining us this morning. We look forward to reporting back to you on our first quarter call in mid November. Hope everyone has a great day.

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.