Cantaloupe Inc (CTLP) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the USA Technologies first-quarter fiscal 2016 earnings conference call. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to turn the call over to Lauren Sloane. You may begin.

Thank you and good morning, everyone. This is Lauren Sloane, and welcome to the USA Technologies first-quarter 2016 earnings call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive 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 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 and in the press release issued yesterday 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 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 USAT's 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 a reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued yesterday afternoon and on the investor relations page of our website at www.USAtech.com.

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

Thank you, Lauren, and good morning, everyone. Thank you for joining us to discuss our first-quarter results.

USA Technologies had a great start to the year and we believe we are demonstrating increased momentum and execution on our plan to drive non-cash payments into the self-service retail market. We are capitalizing on the cashless payment trends and delivering on our strategic goal of continuing to move our customers towards connecting 100% of their locations.

In the quarter we added 20,000 gross new connections and 16,000 net new connections. Revenue was $16.6 million and we continue to be on track toward achieving our annual guidance and our long-term goals of reaching $100 million in revenue and 0.5 million connections by the end of fiscal 2017.

Our revenue grew 35% from a year ago with license in transaction revenue growing nearly 27% and equipment revenue growing 78%. QuickStart, our third-party leasing program, again drove equipment sales. As a reminder, QuickStart allows USA Technologies to record an upfront cash sale of equipment as opposed to JumpStart where we recognize rental income in the license and transaction line.

Further, QuickStart has allowed us to dramatically improve cash flow from operations going from a cash usage from operations of $1.4 million to a cash generation of more than 350,000, a swing of $1.7 million compared with the quarter a year ago.

We added 20,000 gross connections and 16,000 net connections in Q1 and total connections to the ePort Connect service now stands at 349,000. This represents growth of 26% from the 276,000 connections we reported in Q1 last year. Connections drive license and transaction revenue which is the recurring high-margin revenue stream for USA Technologies.

We added 675 new customers for 10,275 total customers on our ePort Connect service, a 26% year-over-year increase again hitting a record number of customers for USAT.

In the first quarter, our service handled approximately 69 million transactions, a 41% increase from a year ago and a 10% increase from last quarter. Total transaction volume was more than $126 million. Clearly our service is gaining momentum and we are on track to achieve a run rate of $0.5 billion in transactions per year during the 2016 fiscal year.

Evidence of our momentum is shown by the growing number of customers choosing USA Technologies to equip 100% of their locations with the ability to take non-cash payments.

We have recently announced three large customers that have entered into multiyear strategic agreements which involve purchasing thousands of ePort Connections that connect to the ePort Connect service to provide state-of-the-art cashless and telemetry services that enable and track the acceptance of cash, credit and debit cards and mobile wallet payments such as Android Pay and Apple Pay.

We are finding that our operators experience a significant increase in sales after implementing our services. In one of our case studies over a 14-month period beginning at installation, cashless payments grew 96% while cash grew 6%. Operators can lift prices in their locations since they are no longer limited to the fiscal currency in a consumer's pocket. The data from our knowledge base clearly conveys that cashless payment options provided to consumers is a catalyst for our operator's business as consumers are no longer searching for bills or picking pocket lint from their change.

We are now projecting credit and mobile usage will hit 40% in our customers' locations by this time next year in locations that are equipped with our ePort cashless payment technology.

Great results are driving more and more of our customers in traditionally cash-based markets, vending, commercial laundry, parking, self-service, coffee kiosks and other types of locations to connect 100% of their business to our service.

As we discussed last quarter, we are fostering increased adoption of USAT's ePort Connect technology among large customers by offering our new premium support service. In short, it promotes cross functional engagement by USAT with customers who made a commitment to connect a significant portion of their locations to USAT's service.

We utilized our deep knowledge of the self-service retail industry to increase usage of devices by consumers, enable a more rapid movement to 100% acceptance in connectivity, and achieve a better, wider illustration of the impact of our products and services on our customers' business.

Our premium service is a process data and results driven program which includes among other things, marketing, advertising and logistical activity with our customers. The objectives are very simple, maximize returns for our customers and accelerate adoption.

The initial response to this offering in Q4 of last fiscal year carried over into Q1 and we saw continued excitement and results and we believe the availability of this new set of services has been a key component of our customers' decision in making the commitment to equip 100% of their locations with ePort.

The overall payment trends continue to be a tailwind for USAT as we made early investments in NFC and mobile payments and that technology is now beginning to gain mass adoption. For example, Apple recently reported that Apple Pay is seeing double-digit growth in transactions month after month. Google's Android Pay is successfully being implemented in more and more outlets.

As you know, we have been supporting mobile payments for close to a decade and have been a resource with these companies as they have introduced their NFC-enabled devices and payments methods as we represent the nation's largest NFC mobile payments footprint handled by one company. As these ecosystems gain traction, mobile payments represent a significant upside to our business and our transaction volume.

We believe the advantages of mobile payment to the retail market are obvious including more convenience to the user via the ability to pay with a device consumers generally always have on hand, their mobile phone, and to the operator, an increase in sales, average ticket and same-store sales.

Along with mobile payment, we pioneered loyalty programs in the self-serve retail industry. More, our loyalty program was originally designed to provide USAT customers the ability to offer custom rewards and discount offers for products purchased at their ePort enabled locations where loyalty, repeat business and a greater understanding of their consumers' purchasing preferences.

We took best practices from traditional retailers and uniquely applied them to the self-service retail industry. We recently rolled out more to partners nationwide and we can extend the benefits to consumer packaged goods companies, retailers and other consumer brands that now have the ability to partner with USA Technologies to leverage our large footprint of acceptance points to promote their brand, build loyalty, incentivize purchasing and generate new revenue streams through consumer product promotions, offers, advertising and discounts.

Further, given the mobile payments evolution, we can leverage our past experience with implementation of mobile payment based loyalty to benefit our mobile partners such as Apple and Google. For consumers, it means incentives and discounts for loyalty. For our customers, it means it means increased sales and profitability. For USAT, it leads to very interesting possibilities with global brands and partners.

Our business fundamentally helps our customers improve profitability through increased sales. No longer are they two payment methods behind with the first being consumers preferred payment choice, credit and debit cards and now mobile. It is clear that maintaining an all cash business is to the detriment of sales in their businesses. Their own transaction data proves that adding our solution can make an immediate and continued positive impact on their business.

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 growth.

Now I would like to briefly comment on the 10-K filing delay and associated issues. As you know, we filed a Form 12b-25 on September 29 for an extension of the due date of the 10-K because we were still in the process of evaluating the material weakness in our internal control and preparing the required disclosure. The material weakness was identified late in the process of finalizing our 10-K.

Prior to the filing of our Form 10-K on September 30, we addressed and re-mediated the significant deficiency related to the amount of bad debt reserves attributable to the uncollected customer accounts. In his comments, Duncan will further elaborate on this matter and I am satisfied with the steps taken so far relating to the allowance attributable to these uncollected customer accounts.

Now Duncan will provide a review of the financial results. Duncan?

Thank you, Steve. Good morning. I'm going to start by reviewing our first-quarter results before I review our outlook for fiscal year 2016.

We added 20,000 gross connections in the first quarter compared to 13,000 gross connections in Q1 of last year. Net connections for the quarter totaled 16,000 compared to approximately 10,000 in last year's first-quarter which represents an increase of 6000 or 60%.

We added 675 new customers ending the quarter with a total of 10,275 customers, a 30% increase in customer count from September quarter of 2014 which we believe is indicative of a broadened adoption and acceptance of cashless payments in the industries we serve.

For the first quarter, total revenue was $16.6 million, an increase of 35% compared to $12.3 million in the first quarter fiscal year 2015. License and transaction fees were $12.9 million compared to $10.2 million in the year-ago quarter, a 27% increase. These fees which are comprised of the recurring monthly service fees plus recurring transaction processing fees accounted for approximately 78% of our total revenue.

Growth was driven by a year-over-year increase in total connections to our ePort Connect service which increased to 349,000 connections representing a 26% increase from the 276,000 in the same quarter last year.

Equipment sales were $3.7 million compared to $2.1 million in last year's first quarter, a 75% increase. The increase is related to our QuickStart program which is having a positive impact on equipment sales and cash flows as we expected.

QuickStart and straight sales accounted for approximately 90% of all connection sold during the quarter compared to 70% in the same quarter last year. The Company is focusing its direct sales effort and pricing terms to favor the QuickStart program with 60-month leases and improves the Company's cash flow through third-party leasing companies.

Gross profit was $5 million compared to $3.1 million in the year-ago quarter representing a 61% increase. Total gross margins were 30%, up from 20% in the sequential quarter and from 26% in the first quarter of last year. We received higher and more stable gross margins on license and transaction fees while equipment gross margins tend vary significantly due to the customer mix.

The increase in overall gross margins is attributable to an increase in equipment sales of margins of 23% for the quarter compared to 13% in Q4 and 11% in the first quarter of 2015.

Gross margins on license and transaction fees was 33%, down slightly from 34% in the sequential quarter and up from 29% in the year-ago quarter. Margins have increased from the quarter ended September 30, 2014 as the year-ago quarter contained additional costs in the cost of services that were not recurring.

Q1 fiscal year contained approximately $300,000 of transition and conversion related costs that are not expected to continue going forward that account for about 2.3% of margin and that would bring us up to about 35% if you backed out those nonrecurring type items.

Additionally, we have not fully realized the benefits of the new payment processor and we expect some cellular cost reductions in some of the upcoming quarters.

Selling and general administrative expenses were $4.8 million in the first quarter compared to $5 million in the linked quarter and $3.6 million in the year-ago quarter. The increase in operating expense year-over-year is due to the investments made in people to support the Company's rapid growth and a launch with a premium support program. The changes in the composition of SG&A from Q4 2015 to Q1 2016 are primarily in personnel related costs including stock-based compensation, sales incentives and about $130,000 in base compensation, partially offset by a 50% reduction in account charge-offs.

As revenues continue to grow, we expect operating expenses as a percentage of sales to decrease gradually over time. However in the near-term, there will be variations from quarter to quarter based on business needs. We have included a five-quarter table of SG&A costs in this press release to allow investors better visibility into our operating costs.

For the first quarter, adjusted EBITDA was $1.7 million compared to $946,000 in the comparable period last year resulting from higher gross profit partially offset by increases in operating expenses. Adjusted EBITDA in Q1 2016 of $1.7 million was higher than the linked quarter adjusted EBITDA of $1.3 million due to slightly higher gross profit and slightly lower operating expenses. Again, please refer to the table and the non-GAAP reconciliations in the press release which has been posted on our website for additional information.

Operating income was $112,000 for the first quarter of fiscal 2016 compared to a loss of $666,000 in the corresponding quarter of a year ago. The year-over-year improvement is primarily due to a $1.9 million or 61% increase in gross profit partially offset by increases in SG&A. First-quarter operating income was up sequentially from a loss of $357,000 in Q4 2015 again due to higher gross profit.

GAAP net income was $360,000 for the first quarter of fiscal year 2016 compared with a net loss of $201,000 for the linked quarter and a net loss of $61,000 in the year-ago quarter. Increased revenues in combination with higher gross margins contributed to these increases.

On a non-GAAP basis, net income was $44,000 for the first quarter of 2016 compared to a net loss of $392,000 in the linked quarter and a net loss of $747,000 in the year-ago quarter. Adjustments to arrive at GAAP net income or non-GAAP net income include the non-cash portion of income tax provisions and a change in the fair value of the warranty to warrant liability.

Our net working capital defined as current assets minus current liabilities has been steadily increasing over the past five quarters and is a measure of our strengthening liquidity position. Net working capital for the quarter increased to $7.5 million, a sequential increase from $6.2 million last quarter and from $2.1 million in the same quarter of last year with the QuickStart program being the primary driver of this change.

You can see from the bottom rows of Table F in the press release the consistent improvement in net working capital over the last five quarters as the QuickStart program has been implemented.

Free cash flow as defined by cash flow from operations less cash used for the purchase of property and for the rental for JumpStart program was positive for the third straight quarter as shown in the press release. Free cash flow was only $300,000 in the quarter but it should be noted that during that quarter from the fourth quarter to the first quarter we did pay down accounts payable by over $1 million and our collections were a little bit slower than anticipated as we improved the QuickStart documentation process.

We anticipate expanding the depth and breadth of our third-party QuickStart leasing relationship over the next 12 months. Additionally due to the success of the QuickStart leasing program, competition amongst our leasing providers for our business could potentially add a basis point or two to our equipment sales margins.

Before turning to our outlook, I would like to comment on the internal control matters that we disclosed in the 10-K that was filed on September 30, 2015. With regards to the analysis support and documentation around the allowance for the uncollected customer accounts that are not collected through our normal procedures, that process has been addressed and remediated and was in effect as of September 30.

Additionally, we are changing the balance sheet classification of these uncollected accounts commencing with the September 30, financial statements. The uncollected customer accounts and their related allowance no longer reflected in accounts payable where they have been reflected on a consistent basis in all prior periods but are now reflected in accounts receivable. The new accounting classification is more appropriate now as the amounts have been outstanding for longer time periods and are larger in the aggregate than was anticipated when the accounting process was established many years ago.

Additionally, we are considering several additional business process improvement changes in order to reduce the number and amount of these customer accounts that are not collected through our normal procedures. These process improvements may include direct invoicing, a process to charge the particular customers checking account for the amount due and a process for early identification of connections that go into a negative balance position. We anticipate these process changes will be implemented in stages over the next six to nine months.

Our work around other aspects of identified internal control deficiencies is ongoing and is expected to continue through the year and will be evaluated and tested as part of our fiscal year-end process that will be documented in our 10-K for the fiscal year ended June 30, 2016.

Additionally, one of my primary focuses over the upcoming quarters will be to identify opportunities to improve, streamline and or strengthen other processes and functions throughout the finance structure of the Company including a review of staff skill sets.

Now turning to next year, I would like to reiterate guidance for full-year fiscal 2016. 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 is expected to drive positive free cash flows in fiscal year 2016. We expect total revenue to be between $69 million and $71 million.

In addition, we expect to improve year-over-year increases of adjusted EBITDA and non-GAAP net income from results achieved in fiscal year 2015.

Longer term, we remain on track to meet our stated goal of 500,000 connections and 100 million in revenue by the end of fiscal 2017.

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

Thank you very much, Duncan. Thank you, everyone, for joining us this morning. In closing, we had a great start to fiscal 2016. We are committed to accelerating our growth and achieving our long-term goals by 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 fiscal 2016.

With that let us open the call for questions. We would now like to open up the call for questions. Operator?

(Operator Instructions). George Sutton, Craig-Hallum.

Thank you, guys. Nice results. So as we try to break down the growth that you have seen and look forward in terms of where the big opportunities come from if we think through, you have got QuickStart, you have got the new payment technologies like Apple and Android, you've got the premium service offering, you have now the new -- or the renewed loyalty effort. As you think forward, how do you see those four breaking down in terms of your total opportunity and what kind of duration would you expect from those opportunities?

So George, it is Steve Herbert. Thank you for the kind words regarding the quarter. I just want to make sure that we understand your question. What you are asking is how do we expect those four key drivers -- by what degree do we expect those four key drivers to drive our business going forward and for how long?

Correct.

I am sorry to not answer your question very directly. It is really hard to tell. Certainly, a very -- what I can say is a very important driver in kind of the near-term, the things that we have been seeing over the last couple of quarters, the emergence of mobile as a viable, very visible payment method has seriously gotten the attention of our customer base.

I made a comment in my prepared remarks about falling two payment methods behind. That is a conversation that we have with our customers now and they are shall we say moved by it and I don't mean to be sarcastic.

Another key driver and I don't know the percentages, but another key driver is this whole notion of premium services and taking hard data to our customers as a part of that process and really showing them this is what will happen across your entire business. They now have enough of a base where we can extrapolate the numbers across their whole business and they will believe it. They believe it more than they did in the past and that data combined with the services that we are putting in front of them to implement is really a powerful one-two punch to motivate them to get them to go. So if I were going to rank one and two, those two would be tied for first.

How long those things will impact the growth curve we don't know. But it is not a one or two quarter phenomenon. This is something that will affect the business over many quarters. So I hope that gives you enough.

Look, I asked a purposely hard question to give you some ability to talk through those items so that was very helpful.

Relative to the Chase relationship, you did get some benefit from the new processor relationship. I believe you mentioned there is more to come, I just wanted to make sure we understood how far we are into that benefit and then Chase themselves has come out with a new payment capability and I wondered how that might influence your opportunity?

I think, and Duncan will correct me if I'm wrong, I think as we move through this quarter, we should see close to the full impact of the savings that we expected with the movement to Chase. This quarter and certainly as we move into the third quarter, we expect to see the full impact. And with regards to your comment about Chase's payment method for those on the call who don't know, Chase recently I believe it was at an event called Money 2020 a few weeks ago, a payment trade event, they announced I believe it is called Chase Pay or the Chase Wallet and it is very similar to something like Apple Pay or Android Pay. And to the extent that it motivates our customers another fairly serious mobile payment method out there with a global brand, to the extent that it impacts our customers' decisions to move forward in a more rapid fashion in outfitting their base and connecting it to our service, that is the best impact that we can hope for in the near-term.

We don't know what the adoption will be of their wallet. That will depend entirely on their marketing effort and their ability to compete with particularly Apple. They have an uphill battle ahead of them I think but we will see.

Perfect. Thanks for the thoughts, guys.

Gary Prestopino, Barrington Research.

Good morning, everyone. A couple of questions here. First of all with this new professional services offering that you have obviously elevated your SG&A expenses in Q1 and is it safe to assume that throughout the rest of the year these expenses will be elevated to the point where they were at about 29% of sales in this quarter? So that is the first question.

Good morning, Gary. This is Duncan. As I said in my remarks, over time we expect the SG&A as a percentage of sales to drop but from quarter to quarter, you are going to have a blip up, blip down different components. But when we are looking at that SG&A cost for that premium service, we are pricing it and we are building it in such that it should generate enough incremental revenue to more than offset the expense. So as a percentage of revenue, it should remain steady or drop going forward relative to that component.

Thanks for that. And then you mentioned there was a $300,000 nonrecurring item in your license and trans gross margin for transition costs, is that transitioning from one processor to another?

Primarily, yes. There is overlap, all this doesn't happen on one day so you have trailing transactions and trailing costs and then you have some ramping up. And then we have also had change in the mix a little bit of I believe the Chase debit card I guess has been reintroduced and is probably a little bit more costly in the mix. But yes, we anticipate -- so and there were some cellular costs in there cleaning up a few things.

So we anticipate on a go forward that we will see some benefit or more benefit as Steve said on the payment processing, a little bit this quarter but most of it should come in, start coming in next quarter to see the full benefit of the new processor.

As far as cellular, cellular prices are always periodically going down just like your own cell phone, you have to always check your bill. But as we are a large customer of the cellular providers and we are using a lot of data, it gives us some pricing power. So we anticipate being able to bring some dollars to a reduction of SG&A as a percentage going forward on the cellular component.

But yes, I would say there is about 2.5% of 250 basis points of cost in there that I would say in general shouldn't reoccur and therefore that should bring that number up to around the 35% give or take a couple of basis points.

Okay and then just a couple of other real quick ones. It looks like by my numbers here your revenue per transaction was down almost 10%, your volumes per transaction were up about 0.5%. Is that just a function of mix from different card payment types that your revenue per transaction has gone down year-over-year?

We will have to take a harder look at that but there has been definitely a change in the mix of the cards. I mentioned Visa debit which carries a higher cost and that mix has gone up quite significantly because I think for a while there I don't think we were accepting or it wasn't being accepted by our servers.

I'm sorry, I misspoke there, MasterCard debit. So that is a higher cost piece that is making up a higher percentage of the transactions than we anticipated underneath that contract (inaudible) .

It may be a slightly higher cost but it does -- although not taking MasterCard debit for some time didn't have an overly adverse effect on our business, the ability to take it has made certain customers happy particularly at places like Citibank where the employees couldn't use their Citibank MasterCard debit card which is an account of ours through a partner. So it has made -- forgive the humor -- but it has made certain customers happy even though materially it is not a gigantic impact on transaction flow if the ability to take it in a small percentage of places has made a few people a little bit more happy.

Okay, last one and then I will let somebody else go and jump in. You mentioned that you did a study or somebody commissioned a study that said credit in mobile will be about 40% of transactions among your customer base in fiscal 2017. Is that correct?

That is essentially, Gary -- it is Steve here -- based upon our knowledge base. We track very closely across -- everyone knows the size of our customer base and location is very large. We track cashless transactions as a percentage of all transactions. And going back just a few years, cashless transactions were somewhere in the teens, in the mid to high teens and now we are moving to the point what we are saying is we are going to be somewhere in the neighborhood of 40% of all of our customers' transactions being cashless. And this is in a business that before we weighed in with our customer was 100% cashless or cash. So it is, it is a company estimate but it is based upon the knowledge base that we look at on almost a day-to-day basis.

So where are you now?

Somewhere in the neighborhood of 37% I believe so we are not talking about -- this is not a monumental projection. It is a fairly modest projection if you will.

Thank you so much.

Josh Elving, Feltl.

Good morning. So a couple of questions. One, just a follow-up on the licensed gross margin. Just wanted to maybe get a little bit more color there. I understand the one-time impact which pulled down the license gross margin from expectations a little bit here in the first quarter. I think it was my understanding that we would see some continued ramp in that license gross margin throughout 2016. You kind of alluded to 35%, Duncan, 35% give or take a couple of basis points throughout 2016. Is that the new normal for the license gross margin because as I recall this used to be an upper 30% gross margin business and I just want to see if that is the new normal?

Certainly it was lower than 35% this quarter as I explained. So if you back out that amount we talked about, that gets you to 35%. So going forward, what we said was we haven't seen the full benefit of the payment processing service, so there could be a couple of basis points there.

And also on the cellular side, we could see a couple of basis points on the cellular side. But I can't predict them until they happen, but I do anticipate some. I just don't know how much and I don't want to go on a limb and make a number up because I don't have a number.

Fair enough.

There is some potential; how about that?

Okay. The Company previously talked in its long-term Outlook about getting to 0.5 million connections that could theoretically drive $100 million in revenue. As you think about the long-term outlook, you continue to talk about getting to 500,000 connections. Do you still feel that can drive $100 million in revenue?

We wouldn't say it if we didn't believe it, so we continue to be confident about our ability to drive that revenue and drive that number of connections by the close of fiscal 2017.

On an annualized basis.

The $100 million would be on an annualized basis and the 500,000 connections of course is a number that we feel we can reach by the end of fiscal 2017.

Great. Thank you very much.

Bill Sutherland, Emerging Growth Equities.

Thanks. Good morning, Steve. Good morning, Duncan. I am curious, thinking a little bit about the cadence of your connection adds each quarter. In the past you have kind been weighted in the back half of your fiscal year and I am just curious given kind of the adoption acceleration you are seeing now if it gets more level or is there still that back end?

Bill, that is a great question and we as recently as yesterday, Duncan and I were discussing what one would call seasonality or whatever it is. And I think one of the things that we all have to remember is that we are in a seriously dynamic emerging market right now. So in the past years, we have seen typically the past couple of years at least we have seen a slow start to the fiscal year and a ramp as we have gone through. In this particular year driven by a number of things that we have already talked about, we had a particularly strong start. So does that mean that things will flatten out this year? If I had a crystal ball I could tell you. What I do know is that it gives us, it gives us confidence that we can get to the guidance number that we put out there.

But I can't say to you due to the dynamic nature of the market, I can't say to you that the connection number would move up exponentially or in a marked way as we go through the fiscal year. It will pick up some but the quick start, the good start that we had this fiscal year is indeed encouraging. How is that for a non-answer?

Pretty well. So on QuickStart, this is statistically insignificant I think. I will just lead in with that. But the percentage of QuickStart was slightly lower than the prior quarter, the sequentially prior quarter and I am guessing it is noise but I just thought I would throw it out there.

I think we are always going to have some of the JumpStart connections that are hard to predict. But generally somebody who is doing the JumpStart may not qualify for the leasing credit terms. Because remember, these are independent third-party leasing companies and you have to follow all of the rules of banking and documentation. You have to supply driver's licenses and all kinds of stuff (multiple speakers).

So we are looking at some additional providers of leasing to maybe have some different credit card tiering but at the same time some people just don't want the 60-month commitment.

Duncan, I think that is a great point and this is something, this is not a question that -- this is a question that has come up before and we believe that JumpStart will continue to be an offering that our customers, some of our customers take. As Duncan said, one reason might be that they don't qualify for leasing, another reason might be that they are on the smaller end of the spectrum, they fall into what we call our SMB customer group and typically if you have a JumpStart customer, they are going to fall into that category, into the smaller customer group. Having that as a selling tool is something that we don't want to give up and I think I have said that in previous calls.

Last one and I apologize because I think you probably addressed it, Duncan, I am juggling another call. But on SG&A which at this level I know you are looking for scalability there, but is the best way to think about it going forward as kind of creeping up from this level that you had in the first quarter?

Do you mean total dollars or do you mean (multiple speakers)?

I mean dollars, right.

I think the dollars are going to go up. We have I think I mentioned we have got compliance costs. This year we are going to be a 404 Sarbanes compliant company so that means additional auditing fees and additional costs to meet those requirements.

We are always developing. One of the things we will though is -- and maybe in past -- if we had an R&D project that maybe provided long-term benefit, I think we may have chosen to just expense that. So what I am going to look at is if we have an R&D that provides an enhanced service process that has future benefit over an extended time period, we will capitalize that which would reduce the SG&A.

As far as bad debts and the thing with bad debts is (inaudible) recovery. So maybe hopefully we will see some recoveries down the road. We are in the process of billing out trying to bill out those uncollected balances and we have a process where we are going to start debiting customer accounts about $20,000 a day like a little piece. But over two quarters we will see how good our estimates are and maybe we will have some recoveries there. But I'm not promising anything but potentially you could see some benefit there on the bad debt side.

So total dollars will go up. We will be adding a few staff here and there to support our growth but hopefully it will be as a percentage of revenue over time declining.

Okay, thanks again.

Mike Latimore, Northland Capital Market.

Great to see the strong start to the year here. I guess just on the license and transaction gross margin, Duncan, is the full benefit of the new processor and cellular costs going to be in the December quarter or in the March quarter, just want to get a clarification on that?

March quarter. Got it. And then on the gross adds this quarter, was there kind of normal diversity to that or was there like a major contributor to it?

You mean as far as the mix?

Yes.

I think what we had last quarter was highly concentrated in larger customers. This quarter was more of a mix so there was a little bit of everything. The last quarter was highly concentrated in the lower margin clients.

Okay, got it. On the equipment sales when you sell to like the lessor let's say, is it typically both a reader and a telemeter that they are buying or is there a big percent that are buying just one or the other?

Mike, it is Steve. In virtually all cases our customers are buying both an NFC and magstripe reader along with our telemetry unit. We call that our G-9 so it is a two-piece device but virtually all of our customers are buying both pieces.

Last question, is it fair to continue to assume deactivations are in that 1% range still going forward?

I think that is a very fair estimate at this point.

Great. Congratulations again.

Kevin Dede, Rodman.

Good morning, gentlemen. Steve, would you mind just kind of going over some of the industry dynamics a little bit for us? Now you are over 10,000 customers. Could you give us a rough ballpark on how many machines you think your customers manage?

Sure, that is a great question. We continue to feel comfortable that our customer base operates somewhere just north of two million locations and therefore that existing customer base of course represents our best opportunity for growth in the near-term. I don't have the number in front of me for this quarter but in previous quarters somewhere in the neighborhood of 80% of our connection growth on a quarter-to-quarter basis was coming from that customer base

Yes, this quarter I think it was 86.

I didn't have the number in front of me but it continues to be our best opportunity for new business for a number of reasons including the fact that we have great data on how their locations perform when they utilize our solutions.

Okay. Could you speak to and obviously this is probably a sensitive topic but could you speak to at all what you think the number of machines that Cantaloupe and Crane our operating?

You know, I really can't. I don't know, Crane doesn't, Crane doesn't publicize a number because of course they are a much larger public company and it is just not something they put out and Cantaloupe is private. And as I always say, they are both fine companies and we are close with the leadership in both of those companies and with all due respect to them, I do think we continue to dominate the business in terms of market share. I don't know what that number is but I do think we continue to get -- and I said this on the last call -- we continue to get the lion's share in any given quarter of the new connections that are available in the marketplace as it opens up.

Do you think you have a feeling for given that you have 2 million, you are not clear and what they have, are you still thinking there are about 6 million total available in North America?

Well, in the vending business there are somewhere in the neighborhood of 6 million vending machines depending upon whose number you look at. Of course we are focused on more than vending and we have presence in a number of verticals that you can see in our material. So we look, in the self-serve retail markets in which we have presence, we still quantify that at somewhere in the 13 million to 15 million locations range in terms of total market potential. We do have, our greatest presence and our strongest market continues to be vending.

Okay, Mike, I mean in addressing Mike's question, you talked to the G-9. I'm wondering how flexible your system is and whether or not your system is capable of taking over a customer that might be willing to change say if they were an existing Cantaloupe or Crane customer. Could you, would you have to retrofit a machine there or could you pretty much readily have that machine come onto your system without too much trouble?

What a fun question. I really like that. I'm glad you asked it because we don't talk about it enough.

Sorry to interrupt but we have time for one more question.

Our system I believe is the only system in the marketplace that has the ability to accept many types of devices including Crane's device, the old MEI devices, we have customers who don't even have a device for instance a kiosk manufacturer who use ePort software to connect to our service. We have many tens of thousands of connections as a company that either use someone else's device or they connect to us with no device.

We are really agnostic in that regard. We would like to make the hardware sale, that is great and in some cases we actually sell the hardware of other companies. But the important thing to remember is that our service not unlike a typical payment processor even though we are not a typical payment processor, not unlike someone like First Data or Chase or whoever it might be we are able to accommodate multiple types of devices. And obviously we see that as a growth opportunity as different companies continue to bring new devices to market.

So, Steve, you mentioned no device. You kind of lost me on that. I don't understand how you would have a connection at all if that was the case.

Well, essentially let's take a kiosk and I don't want to go too far in the weeds, but take a kiosk for example, you don't need an ePort device in a kiosk because there is a computer at the heart of virtually every kiosk. We have software that our customers actually build in, they install it on the assembly line and their device comes off the end of the line, it might be a digital jukebox or whatever it might be, and that is a real example, it comes off the end of the line. Our ePort software is installed on that kiosk and there is no ePort. All there is -- and I know everyone little sees the little black block leader that you would find on something where there is a place to swipe your card or use an NFC type payment, but it is not an ePort device.

So it wouldn't necessarily have a wireless connection but perhaps a wired one?

It might. It might be wireless, it might not. It depends upon how they are connecting to the service. We sell our service to them just the same but in that case, we don't necessarily sell them an ePort device.

So just sort of back to the ubiquitous coverage capability that you offer. Are you looking at talking to customers that you know may already have some machines on competing solutions?

You are going to have to repeat that. I'm sorry.

No problem. Okay. So 675 new customers, I am just wondering if you think any of them might have solutions provided by your competitors?

I can't answer that. I really don't know. I couldn't say. There is so much new business out there that us taking business from a competitor is not something that is normal. However, the other scenario that you laid out having a customer come to us who has purchased devices from another one of these companies, they have come to us and said look, I don't necessarily like service B over here and I'm not trying in any way to disparage those services, it is just a customer would come over and say look, we would like to be on your service. That is the scenario that has happened and that is kind of a competitive move but the other scenario you described is not something that happens very often.

At this point we don't have time for further questions. I will turn the call to management for closing comments.

Thank you very much everyone for taking the time today to discuss our Q1 results. As I said, we are very encouraged to be off to what we believe is a fast start to the fiscal year and the team is hunkered down and working hard. So thanks for your continued support and we look forward to reporting back to you soon. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.