Cantaloupe Inc (CTLP) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to USA Technologies fourth-quarter FY15 earnings conference call.

(Operator Instructions)

As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Miss Lauren Stevens, Investor Relations for USAT. You may begin.

Thank you, and good afternoon, everyone. And welcome to the USA Technologies fourth quarter and FY15 earnings conference call.

With me on the call this afternoon, Steve Herbert, Chairman and Chief Executive Officer, David DeMedio, Chief Services Officer, and Duncan Smith, Chief Financial Officer of USA Technologies.

Before we begin today's call, I would like to remind you that all statements included in this call, other than the 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 SEC and in the press release issued this afternoon.

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 or loss or net cash used in operating activities. 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 afternoon, and which has been posted on the Investor Relations page of our website, www.USATech.com.

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

Thank you, Lauren, and good afternoon, everyone. Thank you for joining us to discuss our fourth-quarter and year-end results.

As a Company, USA Technologies finished the fiscal year with momentum and energy, adding 34,000 gross new connections and 31,000 net new connections in the fourth quarter. And achieving the highest revenue level in its history. We remain firmly on track toward accomplishing our long-term goals of reaching $100 million in revenue and half million connections by the end of FY17. In fact, based upon our recent performance, in addition to the trajectory of the market, we believe the Company could reach this goal before the end of FY17.

As customary, I'll provide a quick overview of the quarter, then give a strategic and operational update. Revenue for the quarter was $17.6 million, growing 57% from a year ago and a 15% increase from last quarter. Similar to last quarter, we saw a large increase in equipment sales, driven by the shift to QuickStart, our third-party leasing program we introduced in FY15.

QuickStart allows USA Technologies to record an up front cash sale of equipment, rather than rental income. Additionally, it has a positive impact on cash flow from operations. Our license and transaction revenue for the quarter grew 26% from a year ago. Revenue for the year was $58 million, comprised of $43.6 million in license and transaction revenue, and the balance, $14.4 million, in equipment revenue. Total revenue increased 37% from FY14.

With the addition of 31,000 net new connections in Q4, total connections to the ePort Connect service now stand at 333,000. This represents growth of 25% from the 266,000 connections we reported on June 30, 2014. We added 675 new customers, for a total of 9,600 customers on our ePort Connect service, a 32% year-over-year increase. And we again achieved a level greater than we ever had in the history of USA Technologies.

When we launched QuickStart, a key goal was to improve cash flow from operations. And the success of the program is reflected in our increasing cash position. We generated $2.7 million of cash flow from operations in the quarter, the second quarter in a row of being cash flow positive. Our cash balance increased to $11.4 million, and we continue to see a strengthening balance sheet. We anticipate to the expansion of the QuickStart program with the addition of more third-party financing companies.

We achieved our strategic plan to move the majority of our connections to QuickStart and outright purchases. Pursuant to the QuickStart program, the customer signs a five-year commitment with external leasing partners providing the customer financing.

QuickStart and outright purchases as a percent of new connections have increased to 76% in the fourth quarter, while JumpStart has decreased to 5%. Indicating a radical shift in the buying patterns of our customers. This shift to a hard five-year commitment on the part of our customers highlights a firm commitment to cash flows, and a long-term commitment to USAT as a service provider.

In the fourth quarter, our service handled more than 62 million transactions, 32% above a year ago. For a total transaction volume of nearly $113 million. We expect to achieve a run rate of $0.5 billion in transactions per year during the FY16.

A significant focus for us is to expand our presence in each of our current customers, and eventually capture 100% of their locations. A great example of this focus is the success of our customer, M&M Sales Company, a leading canteen franchise, with locations in southwest Louisiana.

At M&M, we connected 100% of their locations to the ePort Connect service. The service provides state-of-the-art cashless and telemetry services that enable and track the acceptance of cash, credit, debit and mobile payment such as Android Pay and Apple Pay through its NFC capable services. After implementation, the early results are truly impressive. They saw more than a 14% overall increase in sales in a three-month period.

To foster increased adoption of USAT's ePort Connect technology among customers like M&M, in the fourth quarter we rolled out a new premium support service. In short, it is a rapid launch program for customers that commit to connect a significant portion of their locations to our service. It is a process, data and results-driven program, which includes, among other things, marketing, advertising and logistics activity with our customers. The objectives are simple, maximize returns for our customers and accelerate adoption.

We experienced an overwhelming response to this offering in Q4, and saw some very encouraging usage statistics following the launch of the program. One of our customers saw an increase of 28% in sales during a three-month period as a result of the marketing efforts.

Meanwhile, the overall market is moving towards USAT's solutions. In our 2015 cashless knowledge base study, one of the highlights shows average cashless usage at locations connected to the ePort Connect service went up to 37% during a recent one-month period from 32% during a similar period a year earlier.

The nature of how consumers pay for goods continues to be in a state of metamorphosis, demanding new solutions, including mobile payment. Just today, Google launched Android Pay, their NFC-based mobile payment service. This marks another big step in the evolution of mobile payment. We are very excited to have worked with Google over the past number of months on their launch of Android Pay, and of course, by the millions of android users that will join the ranks of the millions of current Apple Pay users utilizing NFC mobile payment options. With the two largest mobile platforms mobilized and now using NFC payment, the opportunity for USAT is significant. Consumers are turning to touchless and NFC payments by the millions.

As you know, USAT has been at the forefront of enabling mobile payments, and we believe we represent the nation's largest NFC mobile payments footprint handled by one company, with nearly 300,000 locations in the US. These locations accept Apple Pay and Android Pay. And of course, as these systems gain traction generally, we believe the advantages to the self-serve retail market become obvious, including more convenience to the user, via the ability to play with a device consumers generally always have on hand, their phone, and to the operator of our locations, and increase in sales, average ticket and same-store sales.

Our customers know that maintaining an all-cash business is to the detriment of sales. Their own transaction data proves that adding our solution can make an immediate and continued positive impact on their business. As solutions like Apple Pay and Android Pay become the norm, our customers are positioned to benefit from the growing upside. At USA Technologies, we are committed to providing our users with the best technology and services to enable this evolution, driving positive business results for customers, while driving our own customer growth.

As previously announced, to continue USAT's growth, we created a Chief Services Officer role and appointed Dave DeMedio to fill it. As you know, Dave has been CFO for the last 10 years, and has helped guide the Company through growth and significant change in the industry. The appointment allows us to dedicate a C level executive to oversee the ePort Connect service, which represented 75% of the Company's total revenues during the FY15. In this new role, Dave will be responsible for continuing to provide and scale the highest level of service to our customers and their consumers, as well as delivering new and innovative services to these markets, like the newly announced premium support service we described earlier.

To fill the CFO role, we hired Duncan Smith, a seasoned finance veteran with a strong public company background. Duncan comes to us from Bryn Mawr Bank, a $3 billion NASDAQ listed bank holding company where he served as CFO and Treasurer since 2005. During his ten-year tenure, he oversaw all functions of the Company, as the Company experienced significant growth in key financial metrics, including an increase in its market capitalization from approximately $150 million to $500 million.

Duncan was an integral part of Bryn Mawr Trust's strategy of growth through acquisition, as it completed eight acquisitions in that 10-year period. Duncan and Dave are working together closely to ensure smooth operations, and to introduce Duncan to USAT. I would like to congratulate both of them on their appointments.

Before Dave reviews the financials, I would like to turn the call over to Duncan for an introduction.

Thanks, Steve. I just wanted to say how excited I am to be here, and to help enhance value for USAT's shareholders.

The time is right for USAT's cashless payment systems, and I believe the Company holds tremendous potential. Having spent the past decade as a CFO of a high-performing acquisitive public company, I believe I can help USA Technologies grow profitably and drive long-term shareholder returns.

Thanks, Steve.

Thank you, Duncan. Now, Dave will provide a review of the financial results. Dave?

Thank you, Steve.

I'm going to start by reviewing our fourth-quarter results, before briefly reviewing the full year and outlook for FY16. The gross connections during the fourth quarter were a record 34,000, compared to 25,000 in Q4 of last year. Net connections for the quarter totaled 31,000, compared to 22,000 in last year's fourth quarter. We added 675 new customers, ending the quarter with a total of 9,600 customers. This is a 32% increase in the customer count from June 2014, which we continue to believe is indicative of a broadening adoption and acceptance of cashless payments in the industries we serve.

For the fourth quarter, total revenue was $17.6 million, an increase of 57%, compared to $11.2 million in the fourth quarter of FY14, driven by the increase in equipment sales under our QuickStart program, which was introduced during FY15. License and transaction fees were $11.9 million, compared to $9.5 million in the year-ago quarter, a 26% increase. These fees, which are comprised of recurring monthly service fees plus recurring transaction processing fees, accounted for approximately 68% total revenue. Growth was driven by the year-over-year increase in total connections to our ePort Connect service. Equipment sales were $5.7 million, compared to $1.7 million in last year's fourth quarter, a 227% increase. Again, this increase is related to our QuickStart program, which is having a positive impact on equipment sales and cash flows we expected.

The uptake in QuickStart continued to grow during the fourth quarter, as the program accounted for approximately 53% of our gross connections, or 18,000 connections. And JumpStart continued to decline as a percentage of gross connections to approximately 5% of gross connections during the fourth quarter, as compared to approximately 15% of gross connections in Q3.

Gross profit was $4.8 million, compared to $3.7 million in the year-ago quarter. Total gross margins were 27%, down from 33% in the fourth quarter of last year. Due predominantly to a higher percentage of equipment sales, and the mix of those equipment sales, which favored one of our largest customers. This resulted in equipment sales margins of 13% for the quarter, compared to 29% in Q3 and 30% in the fourth quarter of 2014.

Gross margin on license and transaction fees was 34%, up from 33% in the year-ago quarter. This margin was sequentially lower than the 35% in Q3, due to the mix of lower margin transaction processing revenues, which represented 50% of license and transaction fee revenue in Q4, versus only 47% in Q3.

Selling, general and administrative expenses were $4.6 million in the fourth quarter, compared to $4.1 million in the year-ago quarter. The new premium support service program, the initiative Steve discussed, added to expenses, as did increased expenses in legal and executive recruiting costs.

For the fourth quarter, adjusted EBITDA was $1.7 million, compared to $1.3 million in the comparable period last year. Adjusted EBITDA was sequentially down from $2.4 million in the previous quarter, due to the lower gross profit from equipment sales and increases in SG&A expense. Again, please refer to the table and the non-GAAP reconciliations in the press release, and which has been posted on our website for more information.

Operating income was $93,000 for the fourth quarter of FY15, compared to a loss of $568,000 in the prior corresponding quarter. GAAP net income was $69,000 for the fourth quarter of FY15, compared with a net loss of $39,000 for the fourth quarter of FY14. On a non-GAAP basis, net income was $58,000 for the fourth quarter of FY15, compared to a net loss of $619,000 for the fourth quarter of FY14. Adjustments to arrive at non-GAAP net income include the non-cash portion of the income tax provision, and the change in the fair value of the warrant liability.

Turning to the year ended June 30, 2015, revenue was up approximately $58.1 million compared to $43.2 million in FY14, a 37% increase. Driven by a 115% $7.7 million increase in equipment sales, and an $8 million, or 22% increase in license and transaction fee revenue. Adjusted EBITDA increased slightly year over year to $6.7 million, compared to $6.5 million last year. Year-over-year growth in adjusted EBITDA was negatively impacted by our first-quarter of FY15. As well as the sale-leaseback arrangement, which occurred at the beginning of FY15, which was discussed on our previous calls. GAAP net loss was $0.8 million, compared to net income of $27.5 million for FY14. The FY14 benefited from a $26.7 million reduction of evaluation allowance on our deferred tax asset.

On a non-GAAP basis, net loss was essentially break-even at $20,000, compared to a net income of $189,000 for FY14. Again, adjustments to arrive at non-GAAP net income can be found in our reconciliation tables on our press release and our website. Cash as of June 30, 2015 was $11.4 million, an increase of $2.5 million from March 31, 2015. The increased cash position is directly related to the rapid uptake and success of the QuickStart program. As a result, free cash flow as defined by cash flow from operations, less cash used for the purchase of property for the rental or JumpStart program was a positive for its second straight quarter and a record $2.7 million for Q4.

Now turning to next year, I'd like to provide an outlook for the full FY16. We expect to add more than 75,000 net new connections, bringing total connections to our service to over 400,000. QuickStart will remain a popular program for our customers, and expected to drive positive free cash flows in FY16.

We expect total revenue to be between $69 million and $71 million. In addition, we expect to drive year-over-year increases of adjusted EBITDA and non-GAAP net income from results achieved in FY15. Longer-term, we remain on track to meet our stated goal of 500,000 connections and $100 million in revenue by the end of our FY17.

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

Thank you very much, Dave. And thank you, everyone, for joining us this afternoon.

In closing, the team at USAT is committed to building upon achievements of 2015, leveraging our leadership position, and capitalizing on key market trends to drive growth in connections, revenue, profitability and shareholder value as we move forward in FY16.

With that, we'd like to open up the call for questions. Operator?

(Operator Instructions)

George Sutton, Craig-Hallum,

This is Jason on for George. Steve, wondering if you can just talk a little bit more about the premium support service that you are offering to customers. Really what you are doing differently, how you are approaching these customers differently?

And then, if you can give any more details on how that has impacted the pipeline thus far. And then maybe some timing on when you rolled that out.

Sure, thanks for the question. The support program that we rolled out it's really -- it's a comprehensive approach with our customer that is a cross-functional approach. We engage with them at the marketing level, at the operations level, and even at the sales level in some cases.

Essentially, we take what is the most powerful database in the industry that allows our customers -- it allows us to point our customers to the best locations in which to mobilize cashless. We also work with them from a logistics perspective. And then finally, from a marketing perspective, we work with them and some of their larger customers, to really get a running start on bringing cashless and/or mobile payment to an account.

So it really is -- it's a comprehensive cross-functional approach getting engaged with the customer in a significant way. This is not something you can do with every up and down the street customer. We value all of our customers, but this service is one that really is reserved for customers who make a very significant commitment, if not a total commitment, to connect their machines to or their locations to our service.

Got it. That's helpful. Thank you.

I'm sorry, the second part, forgive me Jason, the second part of your question was what has it done to the pipeline? Well I think we've said before, our Business has not historically been a pipeline type business.

But it did have a very significant impact on our Q4 results. It helped drive that record quarter. And has carried over into what we believe is some very encouraging activity as we start 2016.

Okay, thank you. And then maybe you could talk a little bit more about mobile payments and Apple Pay and Android Pay. And we've talked about that as having -- being a conversation starter with companies.

And any update you have there, is that still a conversation starter and leads to customer adoption? Or is that driving purchasing decisions? Or just any updates on how those conversations have changed.

That's a great question, and I am glad you asked it. It has gone from a quarter or so ago -- it's gone from being a conversation starter, if you will, to really a driver. Our customers -- you have to remember, they've been investing along with us, in NFC, so they're somewhat up the curve on this capability.

But when they see the likes of Apple and Google and now Samsung Pay coming down the pike. They, at this point, they feel like it's a capability that they need to have. So it's gone from a conversation starter to really a driver of the business.

Okay. And then last from me, just any updates on the third-party lessors? Where it stands on adding additional financing companies? And then what characteristics, or qualifications you are looking for in potential additional partners?

I will defer to Dave on that.

Jason, good question. We do have two financing releasing partners on board today. We think those two partners today will be able to handle the volume and growth that we expect at least through FY16.

But as you know, this is a large market with many millions of machines, six plus million machines. That's a lot of capital that's needed. And Duncan comes from the banking industry. And I think between he and I, we'll be able to bring more partners on board as we go forward into the 2016 year.

I think we have four or five banking calls -- finance company type calls lined up for the next couple of weeks. So I think we should be able to come up with quite a few, and maybe we end up with, five, six sources as we go forward.

Okay, great. Thanks.

Gary Prestopino, Barrington Research.

A couple of things here. Number one, in terms of NFC enabled on your net connections, I think it was 31,000 net connections this quarter. The majority of NFC enabled, and what percentage of your connections are now NFC enabled?

Gary, thank you for your question. Of the 31,000 net connections that went out, 80% of those are ePort connections and 20% came from other types of connections, whether it be kiosk or laundry.

But of the 80% ePorts that went out, 100% of those were NFC enabled. We are not shifting today anything that is not NFC enabled that is an equal device.

Okay, so you're not shipping anything that's not NFC enabled on an ePort device.

Gary, it's Steve here. Regarding your question on the percentage of the base of 333,000. We are closing in on approximately 300,000 of those 333,000 being NFC enabled.

Okay.

So it's a very large portion in the base.

Great. Could you maybe elaborate a little bit on the gross margin on equipment sales was down pretty dramatically. You talked about some volume discounts for big volume uptakes. But in the quarter, you beat the sales number that the street was looking for.

Obviously, I think the EBITDA number came in light. And a lot of that variance is going to be on that margin. So could you explain what went on to there, and if we can anticipate that occurring going into FY16?

Gary, it's a good question. If you remember on our previous call, when we talked about equipment margins. We would expect, given that we had a pretty broadly dispersed sale base from our preferred customers, to our largest customers, to up and down the street customer, we would expect that equipment margin be more in the 20% range.

But in Q4, close to 90% of our ePort sales came from some of our largest customers who do have the best pricing. So it's good news/bad news. Unfortunately, the equipment margin for the quarter, the good news is those large customers are back ordering in larger quantities.

Okay. So then going into FY16, if you are ramping up with your best customers, we are going to expect to see that equipment margin come down year over year. Maybe not to the extent that it's at 13%, but somewhere at the 20% level, and that will continue as you ramp up connections.

But the question I would have is that, once you get to that steady state of where you said you were going to be at, what, about 500,000 connections and $100 million of revenue? At that point, where do you think -- are you still feeling comfortable with the 20% adjusted EBITDA margin, given what is going on with the equipment sales, or is that not something that you think is achievable?

I will address your first question with respect to the margin in 2016. I am not certain -- I don't believe that we are going to have the high percentage of connections coming from those larger customers through 2016 like we experienced in Q4. So I do think equipment margins can be more in that 20% range for 2016, as we have more widely dispersed customer sales. Given that, and expecting that to continue when we hit that half a million connection threshold, yes, I think adjusted EBITDA margins should start to approach -- can approach that 20% range.

Okay, so you still feel pretty good about that by 2017?

Yes.

And, Gary, it's Steve. Just to add to that, the fact that we continue to see growth in our SMB sales effort, small and medium business sales effort, all high-margin/low-cost of acquisition to business, yes, I think that mix will help us. So I just wanted to reinforce what you said there.

It's a good news story, in that you are adding connections, but it is degrading your margin on a short-term basis. I understand that. I am just trying to get an idea of going forward, as you hit that threshold, maybe as you stop growing your connections in the 30%, 40% range, what your margins could eventually look like. So, thank you very much.

Mike Latimore, Northland Capital Markets.

Congratulations on the year.

Thanks. I guess as long as we are talking about gross margin, any view as to what service gross margin might look like this year? (Multiple speakers) with the transactions today? Mike, thank you. I think obviously FY15 is going to be a low mark for that margin, because of things like the grace period that we endured this year, because of the impact of the sale-leaseback. Which will start to become less of an impact as we move forward.

So I do expect those margins on license and transaction fees to slightly increase again through 2016. As we again, we also too, we have the work with our new Chase processing, Chase payment type processing agreement, which will also have a positive impact to those margins, as well.

And then just in terms of -- I know part of your strategy is to obviously get connections, and then to add services on to those connections. Any qualitative or quantitative information about enhanced service adoption?

Mike, I think one good example is the premium service that we rolled out, the premium support service that we rolled out in the quarter. That's something that was very well received, and should have not only a positive impact on adoption, but should also, as we go forward and continue to operationalize that service, should have an impact on service revenues, as well.

Yes, okay. Got it.

Going back, if I could, just I want to interject. Going back to equipment margins as well, one of the things we didn't talk about is cost of goods sold. Obviously, our cost of goods sold is not going up, it is going down as the business continues to scale. So we will get some leverage there.

Okay. Then a year or so ago, you were giving a little bit more grace periods than average. Can you just give an update on -- are we back to more of a normalized environment now for these grace periods conditions?

We actually, there are no extended grace periods that this point. We give our customers a certain amount of time to go live on the service. And as far as I know, we haven't granted a single extension to anyone.

And further to that point, with QuickStart and using those third-party lease companies, those leasing fees and QuickStart fees start 30 days to 60 days after shipment. So they kick in right away. And it gives our customers an added incentive to get the units installed, and our service fee is beginning quicker as well.

Right. And then I wasn't sure, was it 76% or 56% of connections that were QuickStart?

It was 56% of gross connections. And the number I think Steve gave out is 76%, included units sold, as well to our customers. Whether it be a QuickStart or direct purchase.

I see that. Okay, got it. Great, thanks a lot.

Joshua Elving, Feltl.

So most of my questions were been answered. And I guess the quick question I had was, you talk about adding a lot of customers, 675 customers in the quarter. And I think one of the interesting statistics that you've provided in the past is that your existing customer base operates something in the neighborhood of 2 million vending machines domestically here.

Can you give us some sense how big the customers are that you are adding? Are there still large customers out there, or customers that operate significant networks of machines?

It really runs the gamut. I would say that a good portion of the 675 that we added, and Dave correct me if I am wrong, a good portion of the 675 that we added are on the smaller end of the equation. So they are smaller customers buying smaller quantities getting started.

That's the bad news. The good news is they are high-margin, low cost of acquisition. They're sold over the telephone, and they're sold at high margins. So that is good. But we still have significant runway with our 9,600 customers on the service in terms of continuing to penetrate those customers. But the large customers are not gone, we are not out of them by any means. And they are not limited to vending.

We are probably, at this point, in somewhere around 10 to 12 different self-serve retail verticals. Just to name a few, vending, commercial laundry, kiosk, and the list goes on, parking. So there's just a lot of things we are doing now.

Okay. And then real quick, just to make sure I am completely clear on this. The 76% of connections that were QuickStart, is that right to say 53% were actually QuickStart, 20% would fall into that outright purchase?

Yes, that's about right.

Okay. And then finally, on the equipment margin. The color you provided on getting closer to 20% next year, is there any benefit coming from the ability to -- because I want to say you mentioned in the past the potential to outsource the telemeter components of your offering. Is there any cost save associated with that? Do you have any specific plans in the near-term?

It's not something that we are planning to do in the near term. We do, however, have increasing leverage with both component manufacturers, like wireless modules. We have increasing leverage with component manufacturers, as well as the contract manufacturers who produce our devices.

So we expect to get continued leverage in that regard. And we have done some things to improve -- and Dave I think you talked about this in a previous call. We have done some work on the processing side to drive down our cost of doing business there, which really isn't reflected in the numbers so far thus far, right Dave?

Correct.

So I think the discussion about margin, one of the things that we all have to factor into this is that we have leverage on both the hardware side and the service side, as we go forward. Just from a cost of goods standpoint. And we have what I think is a very nicely developing balance in terms of the types of customers that we are bringing on, with the fourth quarter being a little bit of an anomaly.

It's a good news/bad news thing. You have a large customer who needs a -- they had a special initiative and there were some things that needed to get done, and that coincided with our support program.

So it worked out well for everybody. But it didn't work out well for margins, but I wouldn't expect that to continue.

Thank you very much.

Bill Sutherland, Emerging Growth Equities.

Just real quick, to clarify on the SG&A expense line in the quarter. The two things you called out, Dave, to what degree are they one time in nature?

I think both of those from a legal and the executive recruiting are one time in nature. There are probably, just to give you a dollar, approximately $300,000 to $400,000 in the $4.6 million of SG&A, are, I want to call them extraordinary, but they're one time in nature. They are not a part of our current run rate for SG&A.

Okay. That's good. And the weighting of new connections, I know you're last half, second-half weighted in your connection growth.

It was heavier this year because of the big dog that came in this quarter. Is it -- does it feel like on a normal basis it's like 60%, back half 40% first half? Because this year it was actually 68%.

Yes, it was -- well it was from a net perspective. We also had a fair number of de-activations.

Right. That was my next question.

In the first half. I will let Dave handle that one.

But the fact of the matter is that we'll probably, just because of the seasonality curve of our customers alone, we are always going to be a little bit back-loaded. One of the things that I think we need to think about is, we are in a market that continues to hit what I would call inflection points, we are in the middle of another one right now.

And all it takes is one inflection point in the first half of the year to change that dynamic. So, I guess what I am really saying there is we reserve the right to talk out of both sides of our mouth.

Steve, what do you mean by that? In that context, what are you talking about in terms of inflection point?

There are things that have occurred, things such as Apple Pay and other things that have moved the market, and moved them in a fairly significant way. So that is just one example. But those things happen and we can see. We are talking to these customers every day, and their buying behaviors are changing. And we see those things happen.

And that can overwhelm the normal seasonality. I get it. And what you are seeing in terms of deactivations, is that a normal rate to think about going forward now that you have got CCR out of the way and so forth?

Dave would probably have more detail on the full year. I think we still had a little activity in the front half of the year.

I'm sorry, Steve, I meant the quarter.

Okay. Dave, Can I ask you to address the quarter?

Thank you. So we did -- we had 3,000 deactivations bringing 34,000 gross to 31,000 net. I do expect that that will be more in line with the normal deactivation going forward.

Part of my role, one of the functions that I'm going to serve among many, is too, obviously, get out in front of any customer that is looking to possibly deactivate. Deactivation doesn't always mean that we lose a customer. The vending business is very transient. A vending machine moves 10 times in its life, and it could just be simply a deactivation for a short period of time. Where a customer loses account, asks us to deactivate and then it comes back online later. But getting out in front of any customer, large scale customer deactivations, it's something that I'm going to have an eye on. So I do expect deactivations to come down this fiscal year.

That's good color. Thanks, Dave.

So less than 1% on a quarterly basis, which is not out of the ordinary. And just building a little bit on what Dave said. The fact is that there is -- in all of self-serve retail, there is a substantial amount of movement. People activate and deactivate things for seasonal reasons, for all sorts of reasons. But I think to think about a 1% number at this point, is probably within the realm of good judgment.

Kevin Dede, Rodman.

Dave, could you add a little more color to the backdrop of your 400,000 forecast for 2016? What are some of the factors you've included? Any transparency to give us a little more foundation for the work that you've done there.

The 400,000 you were referring to is connections?

Yes, the net connection growth that you are expecting this year.

Well our gross connection number for the full fiscal year was 86,000 and 67,000 net. Obviously, we just talked about deactivations coming down. So given what we're seeing in the marketplace, as Steve talked about with some of the inflection points.

The new service that we initiated that allows customers to take larger quantities of units. We feel comfortable that we are going to be able to do at least duplicate what we did this year, if not more, which was 86,000 gross. So, as Steve said earlier on another question, it's not really a pipeline driven market yet.

We are very much ad hoc purchasing from our customers. But with a pulse on their purchasing needs, they're desires to continue to move forward with cashless, we feel very comfortable with those numbers.

So, I am wondering how much insight you have to some of your larger customer's budgeting. Giving that a lot of the fourth quarter was driven by some of the smaller ones, I am just wondering how much you see in the larger ones versus how much you might see in the smaller ones?

Kevin, we obviously, we're -- because of the nature of our Business, we have an ongoing relationship with our customers. And we are in frequent contact with them. So we do -- A, we have some visibility into what we think they will do and they think they will do. We also have insight into -- and this is really more the operative point. We have considerable insight into what we intend to encourage them to do. And we also have knowledge of the impact it can have on their business.

So we have a good feel for where these connections are going to come from. Our plans in this regard are built bottom-up. So there's a certain amount of insight that you have to have in that regard.

Fair enough.

If I was to say that another way, if your question is, do you know all where these connections are going to come from? Yes, we pretty much do.

Okay, fair enough. So you talked to the 675 customers that you have added. And you said that most of them were smaller. Can you talk to the overall industry, given Cantaloupe's activity and more notoriety there. Can you talk to the competitive environment, how you see your customer account growing to that might help substantiate your 400,000 thinking?

Kevin, I am not sure I follow your question. If there's a competitive component -- would you mind repeating it? Forgive me.

No problem, Steve. There are a lot of facets to it. I am just wondering how you perceive the competitive environment at this point, say versus a year ago? And how you see your customer win activity versus some of your competitors? Given that you are offering a full end-to-end solution where you competitors don't have the same level of service. That's one part of it. The other part of it is just the size of the competitors that you might be adding, and whether or not that helps support your net connection add for the year.

Sure, and the affect on that. Well from a competitive perspective, the landscape, I would say, the landscape over the last year hasn't changed that dramatically. There are really three companies out there that are making a significant impact on the business.

There are a number of companies and there are fine companies. And I don't mean to exclude them in a negative way. But there are really three companies that are affecting the landscape in a meaningful way. There's our Company, Crane is doing some work. However, Crane does business with us, as well. And there is Cantaloupe, and they continue to progress as a company, as well.

I think what we are seeing is, I think we are seeing growth in the business. As the market continues to open up, it is creating more opportunity for all of us.

With all due respect to our two largest competitors, I do think we are getting the lion's share of the growth right now. So, if there is a growth pie and it is cut up three ways, we are getting the largest slice of that pie. Because of a number of things, including what you just said.

Right. Okay. Can you speak to the Chase migration? Is that business complete? Or is that transfer complete now?

I will let Dave take that.

Kevin, yes, the movement of the transaction volume over to Chase was completed during the first quarter.

Okay.

So mid-quarter. So, I think that Q2 will be the first quarter of a full quarter of the impact. We will see some impact from Q1, but since it occurred around mid-quarter, not the full impact.

Kevin, my apologies for the interruption. But we would like the opportunity for others to ask some questions. So can we follow up with you after the call?

Sure, thank you.

Thank you very much.

Scott Billeadeau, Walrus Partners.

I just have a couple questions. Can you give me a sense for what penetration rate of your client base has an ePort now? I think I remember hearing 20% at one point, but obviously that's growing.

Do you have a sense? Is that something you track closely?

We certainly watch that with -- this is Steve Herbert. We watch that with our customers. And it really runs the gamut.

We have increasing numbers of customers, and fairly large customers with many thousands of locations, that are either at 100% penetration, or they are moving there. And then we have some customers who have been slow to adopt, who might be at say 5% or 10% penetration. So it's a wide range of penetration, but the goal is to get everyone to 100%. One of the things that helps us is something that we talked about in the call today. And that is something like Android Pay and Apple Pay.

One of the discussions that we have with our customers is if they are still largely a cash business, what we say to them is, you are taking all cash in most of your locations and the consumers clearly want to pay with credit and debit. And they'll spend 30% more if you allow them to do so. And by the way, with Apple Pay and Android Pay, with mobile payment, we are seeing approximately 45% increase in ticket.

But the thing that I think really shakes them up is when they realize they could be falling two payment methods behind. So when I talked about that as an inflection point, it's really shaking some of our customers by the lapels to think about the fact that consumers could be walking by their locations with two payment methods, a card and a phone, that they can't use in their retail locations. It's a sobering thought.

Yes. Do you have a sense within your customer base, all the machines those guys have. What percentage has been -- and I'm just trying to get a sense for how much you have got and seeing customer potential yet to come?

If you take the estimate -- someone used the number a little while ago of 2 million. If you take an estimate of 2 million potential self-serve retail locations and our base of 10,000 customers. And we're in 333,000 of those 2 million right now, that would give you an average of somewhere -- Dave is the CFO -- 15%, 17%?

So you were pretty close at your 20%. But that number, I think, is a deceiving number. In terms of where our customers are going on an individual basis and the things that are affecting their thinking.

Well I would think, as you said, the people that accelerate to 100%, because certainly on the being able to pay. But I would think on the flipside, in terms of what can be offered them. When I can see 100% of my machines, I can do lots of different things in terms of managing, inventory scheduling, all of that type of stuff.

And if I've got 80% of my machines dark, I can't do that. So I suppose it depends on the sophistication of your customer. And that kind of gets to my second question. Which was, just what are opportunities for the value-added services to, gee once I'm connected to every machine, there's lots of stuff I can provide a customer in terms of helping them manage routes or so forth.

Sure.

Well that's a great question. And one of the things that has been a big difference maker in our business is loyalty. We are able to run loyalty programs, for instance, people like Google with Android Pay.

We're set up -- I don't want to go too far back. But some of the work that we did with a company that they purchased, on loyalty, we will cross over into this relationship. And we are able to run loyalty programs for a customer or for a partner like Google. And that's something that's created a lot of excitement and enthusiasm in our customer base. I would say it's the best example right now. And at the other end of the spectrum, and very much related, is the premium support program, which is not only something that is related to logistics, but really gets into marketing and loyalty and leveraging that network connection.

Thank you. And that is all the time we have for questions. I'll now turn the call over for management for closing comments.

Well thanks to everyone for taking the time to join us for our earnings call today. We appreciate your continued interest and support, and hope you have a terrific evening.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's call program. You may all disconnect. Have a great day everyone.