Cantaloupe Inc (CTLP) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the USA Technologies second-quarter fiscal 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) I would now like to introduce your host for today's program, Lauren Stevens, Investor Relations for USA Technologies. Please go ahead.

Thank you. Good morning, everyone. This is Lauren Stevens, and welcome to the USA Technologies second-quarter fiscal 2015 earnings conference call. With me on the call this morning, Steve Herbert, Chairman and Chief Executive Officer; and Dave DeMedio, Chief Financial Officer of USA Technologies.

Before I begin today's call, I would like to remind you all that statements included in this call other than statements of historical facts 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 with our filings with the SEC.

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 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 USA Technologies' operations. These non-GAAP financial measures are supplemental to and not a substitute for GAAP financial measures such as net income and loss. Details of these items and the reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued this morning on the investor relations website at www.USATech.com.

I would now like to turn the call over to Steve. Go ahead.

Thank you, Lauren, and good morning, everyone. Thank you for joining us to discuss our second-quarter results. In addition to a solid financial quarter, we have made progress on several strategic initiatives. We believe we are seeing the continued acceleration of a transition in the self-service retail market that will benefit USAT over the long-term. Here's a quick overview of the quarter, then I will discuss some highlights.

In the second quarter, USA Technologies drove 12,000 net new connections, ending the quarter with 288,000 connections to the ePort Connect service, an increase of 29% over a year ago. Our revenue for the quarter was $12.8 million, a 21% increase from Q2 a year ago. We added 546 new customers to the service, a 39% increase year over year, for 8,450 total customers. In the second quarter, our service handled nearly 51 million transactions, 27% above a year ago. This equates to more than 89 million in transaction volume, a 29% year-over-year increase.

We continue to have strong customer retention, which we believe is due to our increasing value proposition and high levels of customer satisfaction. This quarter approximately 82% of our gross connections came from existing customers. As a reminder, our three-year goal is to reach 500,000 connections on our service and achieve $100 million in annual revenue. We believe we continue to make solid progress toward meeting that goal.

This quarter the most significant development for USAT and perhaps the payment industry as a whole was the introduction of Apple Pay. We, along with our customers, have been preparing for the anticipated widespread adoption of mobile payment for quite some time and have been investing in the necessary infrastructure to capitalize on the benefits of mobile payments for nearly a decade.

Resulting from our vision and market and technology leadership position, when Apple Pay was introduced, the rollout to our ePort Connect service was seamless. Since last quarter, we have seen Apple Pay make significant roads into a landscape. Our own stats are already proving there's an approximate 15% lift in average ticket when consumers use mobile payment technology versus traditional credit and debit cards. On Apple's recent earnings call they reported that Apple Pay makes up more than $2 out of $3 spent on purchases using contactless payment across the three US major card networks and is now working with 750 banks and credit unions.

USAT's nationwide rollout of new acceptance points for Apple Pay immediately adds approximately 200,000 self-serve retail acceptance points to the growing list of locations officially supporting Apple Pay. We believe this currently represents the largest footprint of Apple Pay merchant locations handled by one company.

We were thrilled to hear on Apple's recent earnings call when CEO Tim Cook specifically mentioned USA Technologies regarding the effort between our companies in bringing their advanced mobile payment service to our growing portfolio of self-serve retail locations. This is another indication of a significant inflection point in our industry, and we anticipate it to be a catalyst for increasing adoption of cashless and mobile payments in the self-serve retail markets that we serve.

Specifically, over time, adoption is likely to be spurred by the convenience and security of using Apple Pay for consumers' everyday purchases. USA Technologies has always sought to provide convenient security and an easy way to pay for consumers, who are less and less likely to carry cash.

At USAT we are excited by these trends as we view the increasing use of mobile payments as a catalyst toward our cashless solutions. The market size and increasing momentum towards cashless payments underpin our confidence in the long-term goals we have established.

Meanwhile, we continue to support the financial -- we continue to improve the financial fundamentals of our business. We spoke about the QuickStart program last quarter, and I'm pleased to report we accomplished a goal that we shared on last quarter's call by securing third-party financing for QuickStart. The benefit of QuickStart to our business could be significant. First, it allows us to continue expansion of the offering to our customers. Additionally, if our third-party leasing is successful, it should drive the Company to achieve increased cash flows from operations as a result of this activity.

During the quarter, we saw customers continue to a shift towards purchasing the ePort hardware via QuickStart, a five-year noncancelable lease and away from JumpStart, the month-to-month rental program. Due to our customers' need to accept credit and debit cards in mobile payments and the positive impact it has had on their businesses, they want a longer-term solution. And we, of course, value the resulting long-term commitment to our products and services. Dave will share additional details on this important development.

Moving on to another strategic achievement, subsequent to the quarter, in January we entered into an agreement with MasterCard where they will offer the Company a reduced interchange rate for their debit product. As a result, we welcome MasterCard debit transactions to more than 200,000 vending connections on our ePort Connect system. We believe this will drive consumer convenience and enable more purchases, which is an obvious benefit for the ePort ecosystem.

Looking toward the future, we believe we've made some important strategic decisions that have laid the groundwork for future success. For example, the investment in NFC capabilities is now paying off. QuickStart and the third-party financing should also prove to be beneficial in putting us on a path to free cash flow in the near term. Overall, the opportunity for USAT is clear and we are committed to maintaining our leadership position and expanding market share.

With the momentum garnered from the significant progress we've recently made, including Apple Pay, MasterCard, and QuickStart, we have increasing confidence in our ability to achieve our three-year objectives including our goal of reaching 500,000 connections to our service. Our strategy to achieve this goal is consistent with what we've stated before -- driving new customer connections, delivering greater value via each connection, and deepening penetration into our existing customer base. We continue to invest in our pipeline for growth and believe we are positioning ourselves to capture the immense opportunity we see in the self-serve retail market.

I'm now going to turn the call over to Dave for comments on our financial results for the second quarter as well as our guidance for fiscal 2015. Dave?

Thank you, Steve. Gross connections during the quarter totaled 14,000 compared to 17,000 in Q2 of last year. Of the total gross connections 82% came from existing customers and the balance from new customers. Net connections for the quarter totaled 12,000 compared to 7,000 in last year's second quarter. We added 550 new customers, ending the quarter with 8,450 total customers. This is a 39% increase in the customer count from Q2 of fiscal 2014, which we believe is indicative of a broadening adoption and acceptance of cashless payments in the industries we serve.

For the second quarter, total revenue was $12.8 million, an increase of 21% compared to $10.6 million in the second quarter of fiscal 2014 and a 4.6% sequential improvement from the $12.3 million we reported last quarter. License and transaction fees were $10.5 million compared to $8.7 million in the year-ago quarter, a 21% increase. These fees, which are comprised of recurring monthly service fees plus recurring transaction processing fees, accounted for approximately 82% of total revenue. Growth was driven by the year-over-year increase in total connections to our ePort Connect service.

Equipment sales were $2.3 million compared to $1.9 million in last year's second quarter. Our QuickStart program is having a positive impact on equipment sales. As Steve said, the QuickStart program is a noncancelable capital lease of ePort equipment. Because the customer is entering into a noncancelable agreement to purchase the equipment, we account for these terminals as a sale versus as a rental, as they are accounted for under JumpStart.

The uptake in QuickStart since its trial started in September has been impressive. From September to December, QuickStart has accounted for approximately 45% of gross new connections while JumpStart has fallen to just 15%. If you remember back to our last earnings call, we stated that because our customers are entering into noncancelable commitments, we believe it offered an opportunity for USAT and our customers to utilize traditional third-party financing sources.

We also said that we were pursuing third party leasing companies to provide financing options for the QuickStart program. As Steve indicated, I'm happy to report that last week the Company signed a vendor agreement with an equipment leasing company that allows USAT to sell its cashless hardware to the leasing company, who in turn will then lease the equipment directly to our customer. We believe this third-party leasing program, if successful, will increase free cash flow to the Company. We have considered free cash flows as cash flows from operations less our investment in the JumpStart program.

Just as an example, last fiscal year the Company used approximately $11 million in its JumpStart program. Had the third-party leasing program been in place for our JumpStart program and we were successful converting 50% of the JumpStart connections to a third-party lease, our cash flow used to finance our equipment would have improved by $5.5 million and free cash flows for the year would have been positive.

Gross profit for the quarter was $3.7 million compared to $3.8 million in the year-ago quarter. Total gross margin was 29% compared to 36% in the second quarter last year. Gross margin on license and transaction fees was 32% compared to 37% last year. As we described last quarter, the decrease in gross margin on license and transaction fees is partly attributable to the sale-leaseback transaction we executed in June 2014, where the rental payments are larger than the depreciation charge, resulting in a decrease in gross margins. As a reminder, the sale-leaseback is a three-year agreement.

The equipment margin was 18% compared to 34% in the year-ago quarter. This change reflects the shift of new connections coming from QuickStart and moving away from JumpStart, as previously discussed, as well as we did not charge higher margin activation fees on QuickStart connections added during this quarter.

Selling, general and administrative expenses were $3.5 million in the second quarter compared to $3.2 million in the year ago quarter, a 10.5% increase with approximately 50% of the increase due to non-cash expenses such as equity-related compensation and the reserve for doubtful accounts.

For the second quarter adjusted EBITDA was $1.7 million compared to $1.9 million in the comparable period last year. On a comparative basis results this quarter were impacted by $0.4 million of cash rental expense from the sale-leaseback transaction, which are not excluded from adjusted EBITDA.

GAAP operating income for the second quarter was approximately $0.1 million. Adding other income of approximately $90,000 and reduced by a non-cash tax provision of approximately $0.4 million, GAAP net loss was approximately $0.3 million or $0.01 per share.

On a non-GAAP basis we were breakeven or $0.00 per share for the second quarter compared to non-GAAP net income of $0.4 million or $0.01 per share in the same period last year. Cash at December 31 was $6.7 million. Uses of cash during the quarter consisted of the following: a $1 million repayment on our line of credit which leaves us with $3 million availability under the line, and several working capital timing changes such as a reduction in accounts payable of $2.3 million, an increase in inventory of $0.8 million, and a $1.1 million increase in finance and trade receivables, predominantly as a result of the QuickStart agreements entered into during the quarter.

And regarding these finance receivables, last week the same equipment leasing company that we entered into a vendor agreement with also paid us approximately $1.7 million in exchange for assigning our rights to all the future lease payments on approximately $1.7 million of certain existing finance receivables.

So looking out over fiscal 2015, we continue to 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 be in the range of $44 million to $47 million for an increase of 24% to 31%. And we also expect net new connections in the range of 66,000 to 76,000, for an increase of 27% to 46%.

We expect that margins will increase slightly as the year progresses, for several reasons. Contributions to our margin expansion will come as units under our extended grace periods start to bill, which we expect to ramp as the year progresses. New connections added to our network at the present time will also contribute to margin improvement as we are not currently offering the extended grace period.

Lastly, the sale-leaseback transaction impact will diminish on a percentage basis each quarter as we continue to grow revenue and gross profit. These improvements will be offset by any investments made in our growth strategies designed to drive connections, penetration, and share.

On balance we do expect adjusted EBITDA to increase sequentially throughout fiscal 2015 and to deliver growth over fiscal 2014 adjusted EBITDA. In addition, if our third-party leasing program is successful we would expect to see a reduction in cash flow used to finance our equipment in the second half of the fiscal year.

As an example, in the second half of last fiscal year, January 2014 to June 2014, we used approximately $6.3 million in our JumpStart program. Our goal for January 2015 to June 2015 would be to reduce the amount of cash we use to finance our equipment by 50% or less than $3.15 million.

Now, I would like to turn the call back over to Steve.

Thank you very much, Dave. Thank you, everyone, for joining us this morning. In closing, we believe we've delivered improved financial results combined with significant strategic progress with Apple Pay, our QuickStart program, and the MasterCard agreement. We believe we've positioned the Company for increased traction and continued success to deliver enhanced shareholder value.

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

(Operator Instructions) George Sutton from Craig-Hallum.

Congratulations on the new program for QuickStart. I'm curious, along those lines, how broad was your test and how broad will the availability of this leasing program be?

The test was fairly broad and involved a number of thousands of locations. And our expansion plans are to take the program beyond those thousands of locations and nationwide to a more broad customer base.

Now, in your statement in your release it says they may buy the ePort. I'm curious; will there be other hardware options that they will look at as well?

Well, there are a couple of ways that customers can acquire a device from our Company to come on the service. Actually, there are quite a number of ways. But when it comes to an ePort piece of hardware, they can, of course, purchase the device. And that purchase can be a straight-out purchase by writing a check or a purchase by way of a five-year lease. We see either of those as a purchase.

Then the second way is, obviously, through our JumpStart Program, which is the month-to-month rental, which, as Dave mentioned, has -- with the onset of QuickStart, has reduced substantially in terms of the amount going out of the door. It's important to note also that customers can connect to the service using devices that they might purchase from other companies or using software that's available from our Company that they can embed into their own devices.

And lastly for me, relative to the Apple Pay impact, I know it's increased a lot of phone calls and interest from customers. At what point do you expect to see the inflection, if you will, in the number of new connections as a result?

I think as we look downstream a couple of quarters our customers will want -- as they continue to see the benefit of mobile payment and particularly Apple Pay, another quarter or two, three down the road, we believe it's going to have something of a significant impact on moving connections and penetration. I like to -- there are other things that we believe will affect an increased number of connections, that being one of them. Sometimes I refer to -- I personally refer to Apple Pay as being a very nice tailwind for us right now.

Thanks, guys.

Mike Latimore from Northland Capital.

Thanks a lot. Yes, a nice quarter there. In terms of the adoption of the QuickStart model, you referenced an example of if 50% of the connections were QuickStart last year you would have had so much additional cash flow. Is that what you are generally thinking is like maybe 50% of connections going forward are going to be on QuickStart? Or what's the rough view on that?

Well, Mike, thanks for your question. Out of the gate from September to December results were actually even more impressive than the 50%. So we are hopeful that the program will be very successful. But at a minimum we are hoping to at least move 50%. As we more broadly open it up to all customers and across the market, we are hoping that we can move at least 50% over and hopefully be even more successful than that.

Great. And then what about the pricing to you guys on network fees and transaction fees under QuickStart? Is there a notable difference in the monthly fee that you get under QuickStart versus JumpStart?

That's a good point, Mike. Since the customer is not renting the device, the monthly fee that the customer will pay will be less because it will be less the rental component of the hardware. So if you are looking at license and transaction revenue sort of average fee per device, it would go down under QuickStart. But generally, margins would stay relatively the same, dollar margins. But revenue would go down because of the lease, the rental component not being in the monthly fee.

So the other part of the monthly fee doesn't really change? Is that what you're saying?

Correct, correct.

Okay, great. And then the gross margins you had this last quarter -- is that a good benchmark for the rest of the year?

I think it is, both in terms of equipment, provided QuickStart remains a solid portion of our connections, as well as the recurring, although we do expect slight increases in recurring for the items I mentioned. But generally, yes, in terms of where margins are going.

And then just over the course of the year would you think that operating cash flow would equal EBITDA? Or would it be a little less than EBITDA? Or how should we think about EBITDA versus operating cash flow for the full year?

Well, provided working capital assets and liabilities don't change significantly, operating cash should reflect very closely to adjusted EBITDA. And that also assuming that QuickStart agreements are financed through the third-party. So all of those being considered, yes, operating cash should start to trend towards adjusted EBITDA.

And then just last question -- MasterCard, you're being able to accept those transactions now. Any sense of how much incremental transactions might come from MasterCard?

It's hard to say. MasterCard debit is obviously a widespread product out there. So we would expect to see some sort of impact. But it's really very hard to tell. The added convenience for consumers to be able to do that we think will resonate not only with consumers but with our customers who want to make sure that their locations take all popular forms of payment.

Yes. Great. Thanks a lot.

Kevin Dede from H.C. Wainwright.

Steve, you mentioned the average ticket increase on Apple Pay of about 15%. I'm wondering if you could give us a few more parameters on that. Was that measured across your entire system? And over what time period?

It was actually 15%, Kevin, over all mobile payment transactions. So that could be a Softcard transaction or it could be, for example, an Apple Pay transaction. But it was a broad look across our whole base. I don't know off the top of my head the period of time, but it was a broad look across the base at mobile payment in general, not just Apple Pay.

Okay. How have you worked those figures into your sales and marketing program?

In a very simple manner, initially. It's based upon our data. It's really the same message that we delivered on the call today that we are delivering to our customers. When consumers pay at your locations they spend 15% more than credit and debit. And somewhere in the neighborhood -- the difference between mobile payment and cash is probably somewhere in the 40%s.

So it's a significant difference from cash and not an unmeaningful or minor difference from regular credit or debit. But it really is a very simple message to them -- higher average ticket.

There are other benefits we talk about related to Apple Pay like security. But on average ticket it's a simple story.

All right. Well, to me, that's the one that's most compelling to your customers. Right?

It is. It is, right now, without a doubt. With mobile payments a 15% increase in average ticket over credit-debit is significant. And when they look at it versus cash it's an overwhelming difference. And with security on the minds -- with data security on the minds of a lot of people, the added benefits that Apple Pay brings to the equation is also -- it's not a minor topic when we talk to our customers.

Can you refresh my memory, Steve, on your equipment cost? My understanding was that you folks introduced a new ePort unit sometime midyear last year. I'm wondering if you could give us some data on how the cost of that unit has changed for you and what your plans are for further cost reductions.

To answer the latter part of the question, as we do with all the products and services that we offer, we are always on a mission to deliver better value for our customers, whether that's through the old better, faster, cheaper axiom that people seem to use with hardware or when it comes to the service. That said, you specifically asked about the device that we have on the street today, the ePort device we have on the street. And the street price for that is somewhere between $200 and $270, depending upon the customer who might be buying, the volumes that they buy and so forth.

Okay. How do you see that changing going forward, Steve, at least medium to longer term?

Well, I think going back to the comment I made on hardware, we are going to continue to try to leverage scale, improvements in technology, and so forth to deliver greater value to our customers and also in an effort to deliver greater margins on hardware. So it's an ongoing effort. So the plan is to drive the cost of the device down continually.

Okay. So just a quick question on net new connections expectations for the balance of the year -- your projections are suggesting 66,000 to 76,000, yet we've seen, what, 22,000 net new for the first half. So it seems to me that your forecast of, what, 46,000 to 56,000 remaining, I guess, something in that order, or 44,000 to 54,000 -- is that right?

Correct.

Yes. Now versus, what, 42,000 last year, Dave? What gives you the confidence? Is it primarily the enticement that mobile payments are offering your customers?

Well, going back to last year -- and Dave, I know you probably have these numbers right at your fingertips. Going back to last year, it was very obvious that our year was back loaded. Dave, would you mind reviewing what happened in the back half of last year? That's one of the things that clearly gives us confidence. It's the cycle of our business. And we can go beyond that.

Kevin had the numbers right. It was 42,000 net connections in the second half of the last fiscal year. And what we would need this year on the second half would be 44,000 to 54,000 net connections to achieve that 66,000 to 76,000 net connection target.

Okay. All right. So it's really a back half loaded type of scenario that you are relying on, then?

It's partly that. It's partially the cycle of our business. In addition to that, we've talked about a number of things. We have a new way -- we have a new way for our customers to acquire equipment, to connect to the network. We have new ways for them to connect to the network that either, A, don't even require hardware through our QuickConnect program; or, B, other types of equipment that is available in self-serve retail to drive a connection to our service.

We also believe that mobile payment will continue to have an impact on adoption and, as I said before, provide a nice tailwind. So Kevin, it's really a combination of things. It's cyclical in nature, and there are several other developments in the marketplace that I mentioned that we believe will drive a strong second half.

Okay. Dave, just to follow up on the sale-leaseback commentary, at the end of the September quarter you quoted a figure -- I think it was $130,000 or so, a reduction in gross profit, and an EBITDA reduction I guess about the same as what you said hit you in the December quarter at about $400,000. I'm just wondering if that gross profit reduction is pretty consistent, too.

Q2, the December quarter, the quarter we are in, was slightly higher than the September quarter. So the impact on gross margins was more in the $165,000 range and the impact on adjusted EBITDA was a little over -- about $445,000. And that will be consistent. What we experienced in Q2 will be consistent now and stable for the next several quarters until the agreement expires.

And you said, what, that's a three-year, correct?

It's a three-year, yes.

Well, at what point, though -- I guess what I'm asking is you say those figures are consistent but you also, if I understood your commentary in the call correctly, that you expect it to have less of an impact because it's overwhelmed by (multiple speakers) --

On a percentage basis.

Yes.

Those numbers won't grow. So on a percentage basis they will become less of an impact.

Great, great, great. OK. Last question -- just on -- I guess it comes back to the QuickStart impact. Right? You are expecting a pretty good run in equipment sales for the balance of the year, right, to make your revenue number, somewhere north of $8 million to $9 million range in equipment sales for the full year?

Well, we don't have specific guidance on equipment sales. But I think the numbers that we had originally gave or the numbers we originally gave for total revenue really didn't take into account the full impact of QuickStart. Those numbers were presented at the beginning of the year, when QuickStart really hadn't even been introduced yet. So I don't think we need to rely upon a steep increase in equipment revenue to get to that revenue target.

Okay. Well, you've done a pretty good job of communicating the numbers, given all the balls that you have in the air. So kudos to you gentlemen on that. And thanks for answering my questions. I appreciate the help.

Gary Prestopino from Barrington Research.

(inaudible) questions here. And I'm still a little fuzzy on this whole gross margin issue. But prior conversations, prior calls -- I think basically you guys said that -- and correct me if I'm wrong -- your gross margin on license and transaction would get back into the 35%, 36% range. And now, if I recall, you said that the margins that we are seeing right now are probably going to be good for the rest of the year. Am I wrong in that statement in terms of what I thought I heard you say a while back?

So, we did say that license and transaction fee margins would slightly increase through the year. And we still expect that. We still expect that, so I do see license and transaction fee margins continuing to increase. They did increase from Q1 to Q2, 29% to 32%. I believe they will increase throughout the fiscal year.

But as we exit --

Total -- I'm sorry, Gary. Just total gross margins are going to -- because of the impact of equipment sales, total gross margins are going to be in the range of where they are currently.

Okay, I understand that, then. Okay, and that whole issue with the gross margin on license and transaction -- that just deals with the rental expense that's in there? The increased rental (multiple speakers) --

Partly. Yes, rental expense -- we still have an impact from the grace period. Not all the devices for Q2 have impacted the quarter in terms of revenue coming in. So those are the two most significant.

And you also mentioned that you are still not charging activation fees. Is that something you are going to continue to do throughout the rest of this year?

Well, we didn't charge them on the QuickStart. And it's a business decision moving forward as to whether or not we would continue to do that. I think, given the uptake in QuickStart and the benefits that it has on cash flow, I see it -- and I think Steve would agree -- we see it as a nice trade-off if we have to continue to not charge the activation fee on the QuickStart device, the trade-off being the improved cash flow.

But that really is a business decision moving forward. We'll see what the market dictates.

I think, Dave, your last point is a good one. The marketplace, Gary -- and good morning, by the way; thanks for your questions. The marketplace will have something to do with that. However, there are a couple of terrific benefits from QuickStart for the Company. A, Dave mentioned the path to free cash flow; and, B, we are getting long-term commitments out of our customers.

We are getting -- instead of having them on a month to month program, they are essentially signing to commit to the Company for five years. They are leasing a device which works on our service exclusively for a five-year period. So there are two terrific benefits there in terms of that business decision Dave mentioned regarding the activation fee.

All right. And just so I'm clear, QuickStart, right now, you are still using your own cash to buy the machine, but it's a lease program so you book it as a sale. Right?

Correct.

Okay. So with this new program that you have, can you explain to the best that you can -- I realize you have an agreement with this company. But when you have may buy and lease the equipment, what commitments does this finance company actually have in terms of taking these out of your hands and reinvigorating your cash pipeline? Is there any quantity limit, minimum that they have to commit to? Or is it just open-ended? And how would they decide whether they are going to do a transaction with you?

All good questions. The vendor agreement we signed does not have any specific commitment levels. They did agree to pay us $1.7 million for the lease payment rights under the $1.7 million that we have already written from September to December. So they've definitely shown an interest in wanting to take on these small leases.

So in terms of moving forward, the agreement that we put in place is kind of unique. It allows USAT to continue to be the servicing agent for the leasing company. So, we are still predominantly in charge of the collection of the lease payments and remittance to the leasing company on their behalf as well as the reliance on USAT to perform some of the credit underwriting on the customers as well.

So, that being said, ultimately the leasing company has the right to not accept the lease if they assume not to, for various reasons -- creditworthiness being one.

A couple points -- first of all, they got a very good look at our portfolio of customers when they agreed to do the $1.7 million transaction. So it doesn't appear as though we will surprise them with a customer profile.

Number two, Gary, as you know, when you enter into an arrangement like this there's a significant amount of work that gets done. So I personally think they are going to have a significant appetite going forward. And thirdly, not unlike other companies who offer third-party leasing for their products, this will not be the only source that we use as a Company. So we don't expect a bottleneck there.

And that $1.7 million that they paid you, was that for all of your QuickStarts that you generated September to December? Or was that just [45%]? What amount did they take?

They took all of the QuickStart agreements we entered into from September to December.

All right, that's good news. Then just a couple of quick questions and I'll get off -- what percentage of your connections, gross connections, were from vending versus newer adjacent markets this quarter?

So, Gary, 75% of our Q2 connections were from vending. 25% were from other vertical markets such as laundry, kiosk.

Okay. And just in terms of this whole Apple Pay, is there any way that your systems can actually tell whether a transaction is coming through Apple Pay? Or does it just say it's a mobile transaction overall?

We can see a mobile transaction versus another type of cashless transaction. Of course, we can also see cash, which is a big -- and our customers can, which is a big benefit to them. We currently do not parse out Apple Pay transactions. We are likely to do that in the future.

Okay. All right. And did you -- there's a lot of information here. Did you talk about what percentage of your transactions were mobile this quarter, or is that something you haven't shared with us?

I don't think that's a metric that we are putting out at this point. But it's one that we are likely to look at sharing in the future.

Okay. Thank you very much.

Bill Sutherland from Emerging Growth Equities.

Really almost all have been asked. I'm curious on QuickStart. What are the gating factors to offering it more broadly to the client base?

There are none now. We are in very good shape. We have a significant number of transactions under our belt, a number of thousands of locations with many customers. So we think we've figured out the way our customers want to enter into a transaction like this. And with the success of adding third-party financing to the equation, there really is no capital constraint as far as we can see. So I just -- I don't see a gating issue there.

Okay. Can you give us any sense of discussions or how you are thinking about other NFC payment technologies in your system?

You mean other mobile payment?

Yes.

Sure. Well, first of all, we currently accept essentially everything that's on the street. We accept Apple Pay. I would say the main players -- Apple Pay, Google Wallet, and Softcard. And we will continue to do that. Any NFC-based or other type of consumer activation of a payment, we are going to be there to accept it. We've already done work on Bluetooth, as an example. So even beyond NFC, we've laid down the infrastructure to make sure that the Company and our customers are really well positioned for any sort of consumer payment.

That's kind of a long-winded answer to your question. But we are in great shape on the other NFC-based mobile products.

But just not as impactful yet is the point?

No. No, I just don't think the other -- I don't think the other products other than Apple Pay -- they just don't have the legs. Apple Pay came screaming out of the gate with hundreds of banks on board, and their ability to change an ecosystem, much like they did with music and the mobile phone -- their ability to change an ecosystem is really well-established.

And I think many people who are watching this are thinking that they may have the same effect on mobile payment, which has been admittedly somewhat slow to get out of the gate. So we will see what happens, if they can work their magic again.

And then last for me -- obviously, the big step up in the net connection growth in the back half of the year -- obviously, there's seasonality just looking back. But maybe you can give us some sense of your visibility into it, based on the selling cycle or how the pipeline is set in terms of where things stand for that. Thanks.

Well, we are very confident in where the Company is headed with connections. The most important visibility that we have into the pipeline, of course, is our existing base. I think both Dave and I mentioned over 80% of our connections came from -- once again this quarter came from our existing base of customers, which is now right at 8,500 customers on the service who operate, let's call it somewhere in the neighborhood of 2 million locations.

So we are closing in on about a 15% penetration rate overall with some customers being at 100, some customers being lower. But our best visibility and the highest sense of confidence we get is really out of that existing customer base and the things that we see happening there.

There are also other opportunities on which the Company is working that are outside of that base that we are optimistic about as well. And I think we, in answering some of the other questions about connections, we've mentioned things like tailwinds with Apple Pay and other types of things. But, without a doubt, it's that existing base and our confidence in that base. That's really what gives us the greatest confidence and visibility.

Thanks, Steve.

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

We'd like to thank everyone for joining our call this morning. We appreciate everyone taking the time to hear about our most recent quarter and some of the developments that have taken place with the Company. So thanks again, and we hope everyone has a great day.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.