Cantaloupe Inc (CTLP) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the USA Technologies second-quarter fiscal 2016 earnings conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference call may be recorded. I would now like to turn the conference over to [Lauren Sloan] with Investor Relations. You may begin.

Thank you, and good morning, everyone. This is Lauren Sloan, and welcome to the USA Technologies second-quarter 2016 earnings conference call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer; and Lee Maxwell, interim 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 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 with our filings with the SEC and in the press release issued earlier this morning. 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, among other things, evaluating USA Technologies' operating results. 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 earlier this morning and 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 morning, everyone. Thank you for joining us to discuss our second-quarter results.

We continued our strong growth in the quarter, improving our financial fundamentals on nearly every metric. USA Technologies is a high-growth Company with a compelling revenue model composed of a high proportion of recurring revenue.

In the quarter, we continue to execute well, driving an inflection point in the market towards our payment solution. Obviously, many significant events have transpired since our last call, and I would like to provide more context to them plus review the record-breaking quarter.

A quick summary of the financials reveals excellent performance. Net connection adds of 20,000; our customer count now numbers 10,625; revenue of $18.5 million, a record high for USAT, of which more than $13 million was in the recurring-revenue line of license and transaction. Cash provided by operating activities increased 117% from a year ago, a result of the continued progress of our QuickStart program.

Further, we held our expenses and delivered improving profitability. Adjusted EBITDA was approximately $2.3 million, growing 36% from a year ago.

The self-service retail market continues to move towards cashless payment, evident by our growing success here at USAT, by the exciting trends we are seeing within our customer base and in the overall cashless-payments market.

The USAT ePort Connect service processed 76 million transactions for more than $138 million in the quarter, a 54% increase from Q2 of last year. We are now on a run rate to surpass $550 million in annual transaction volume.

What these numbers tell me is twofold. One, our strategy to move the self-service market towards cashless payment is working. And, two, we are executing well on this strategy. To expand on that, our strategy is to add more customers, drive more connections into our existing customer base and to add value to each connection.

We continue to help customers achieve increased revenues by enabling them to accept non-cash payments at their self-service locations. Thus, we have been working with forward-thinking customers to enable all of their locations with ePort Connect. In this past quarter we announced that Downey Vendors and The Cuyahoga Group around joining a growing list of customers that are moving towards 100% deployment of the ePort Connect service.

Further, we are selling our premium support service to certain operators to expedite end-user adoption and leverage our knowledge base; increase customer awareness through marketing, planning and support.

As you may recall from last quarter, for the premium service we utilized our deep knowledge of the self-service industry to increase usage of devices by consumers, enable a more rapid movement to 100% acceptance and connectivity, and achieve a better, wider illustration of the impact of our products and services on a customer's business. It's a process-, data- and results-driven program which includes, among other things, marketing, advertising and logistical activity with our customers.

Perhaps most rewarding to both our operator customers and to USAT is the fact that it works. At one customer, in just four months new installations are already seeing a significant increase in average ticket, with cashless transactions 50% higher than the average ticket for cash. We are demonstrating that adding credit, debit and mobile payments increases revenue, and premium services is proving itself to be a strong accelerator of adoption.

Each connection to USAT becomes more valuable to our customers, and we seek to add value to each connection. At the quarter end, we made a significant step toward driving additional value to each connection through the acquisition of the assets of VendScreen. We look at this acquisition as a success from multiple views. VendScreen has developed what we consider to be the payment industry's most advanced cloud-based interactive media and content delivery system, and touch-screen point-of-sale devices for the self-service retail market.

This includes, among other things, consumer product information, including nutritional data, provided by the cloud-based capability. The interactive touch-screen technology is NFC-enabled and compatible with mobile wallets including Apple Pay and Android Pay, and supports instant refunds, couponing, advertising and real-time consumer feedback to the owner and operator.

In addition, we believe the technology has the potential to help grow customer loyalty, create return customers and drive recurring sales via USAT's MORE and Premier Services program. This transaction provides USAT customers with access to a greater breadth of payment technology capabilities and consumer engagement services. A key component is the technology and the ability to deliver interactive media and content to self-service locations. And here's where it really gets interesting: potential incentive and advertising by brands, products and sponsors.

This acquisition is really much more than a color screen for our operator customers. Consistent with what we have been saying on prior calls, we have been expanding our MORE loyalty program to national brands. We rolled out MORE to partners nationwide, and our plan is to extend the benefits to consumer packaged goods companies, retailers and other consumer brands 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.

With the technology enabled by our acquisition, we now have the ability to serve up dynamic and compelling content and incentives at the moment of purchase. We believe this is an opportunity for brands and our operators alike to engage with consumers well beyond a simple transaction.

As part of the acquisition of VendScreen we were able to retain certain highly experienced staff. Further, the team is on the West Coast, and we plan to leverage this as an opportunity to expand our presence there and potentially create a more robust infrastructure for sales, customer and technical support functions. I'd like to take a moment to welcome our new coworkers in our Portland, Oregon, office.

With the steps we are taking to drive change in the self-service retail market, we believe we are best positioned in the market to capture this opportunity. Our newly acquired capabilities broaden our competitive advantage and distance us from competitors.

We believe that helping our customers reach new levels of revenue and profitability, opening up enhanced consumer information and loyalty programs, and delivering media and incentives will propel USAT to greater revenue, profitability and shareholder returns.

We have also seen tectonic shifts in the payments market. In the past year, the industry has experienced more change than it has seen in the previous decade. Apple rolled out Apple Pay, followed by Android and Samsung Pay. We've heard from our payments partners that vending machines are often the gateway tap for first-time mobile purchasers. We have been seeing an increase in mobile technology use, particularly at colleges and universities by students, who are often the first to embrace new technologies.

And more and more merchants are setting themselves up to accept new forms of payment, from major drugstore chains and retailers to coffeehouses and laundromats. There's no doubt that simplicity and ease of use of mobile payments will catch on in a big way. This move towards mobile has acted as a catalyst on our customers to motivate them towards the ePort Connect service.

As a leader in mobile payments technology, we have developed a highly valuable strategic asset with our footprint of nearly 300,000 acceptance points for mobile payments, the largest such footprint in the United States. We are excited about the progress we have made at USAT and believe the shifts in the industry are signals of the positive momentum ahead.

I want to take a moment to welcome Lee Maxwell back to USA Technologies. He was the Company's CFO a number of years ago and has stepped into the role on an interim basis. I know he's highly capable of continuing the financial discipline required of public companies and managing the growth we are experiencing.

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

Thank you, Steve. And good morning, everyone. Before we begin, I'd like to take the opportunity to introduce myself and express my excitement to be filling the CFO role at USA Technologies. It's great to be back at the Company and working alongside Steve and his fantastic team.

Now let's take a look at the numbers for the quarter. I will start by reviewing our second-quarter fiscal 2016 results before I review our outlook for the full year 2016.

To echo what Steve said, we added 24,000 gross connections in the second quarter, compared to 14,000 gross connections in Q2 of last year. Net connections for the second quarter totaled 20,000, compared to 12,000 net connections in the second quarter of last year, representing a 67% increase.

We added 350 new customers in Q2, ending with a total of 10,625. Compared to Q2 last year, we had a 26% increase in customers, which we believe is indicative of the broadened adoption and acceptance of the cashless payments in the industries we serve.

It's also worth highlighting both the growth in transactions and transaction volume in dollars. We ended this quarter with 76 million transactions, which represents 138 million in transaction volume, increases of 49% in transactions and 55% in dollars compared to last year's second fiscal quarter. Growth was driven by a year-over-year increase in total connections to our ePort Connect service, which increased to 369,000 connections, representing a 28% increase from the 288,000 at the end of the same quarter last year. 89% of gross new connections came from existing customers.

Total revenue for the second quarter was a record $18.5 million, an increase of 44% compared to the $12.8 million recorded in the second quarter of fiscal year 2015. License and transaction fees were $13.7 million, compared to $10.5 million in the year-ago quarter, representing a 31% increase. These fees, which are comprised of the recurring monthly service fees plus recurring transaction processing fees, accounted for approximately 74% of our total revenue.

Equipment sales were $4.8 million, compared to $2.3 million in last year's second quarter, representing a 106% increase. The increase was related to our QuickStart program, which is having a positive impact on equipment sales and cash flows, as we expected. QuickStart in straight sales accounted for approximately 90% of all connections sold in the quarter, compared to 86% 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. Leases are recognized as hardware revenue and, as a result, improve the Company's cash flow.

Gross profit was $5.5 million, compared to $3.7 million in the year-ago quarter, representing a 47% increase. Total gross margins were 29.6%, up slightly from 29.1% in the second quarter of last year. We received higher and more stable gross margins on license and transaction fees, while the equipment gross margins tend to vary significantly due to the customer mix. Gross margins on the recurring license and transaction fees were 33.7% in the second quarter of this year, up from 31.7% in the year-ago quarter, a margin increase of 2%.

Selling and general and administrative expenses were $4.8 million in the second quarter, compared to $3.5 million in the year-ago quarter, and held steady from last quarter. The year-over-year increase is primarily due to the investment in people to support the Company's rapid growth and the launch in the premium support program. 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 our press release to allow investors better visibility to our operating cost. That would be table F.

For the second quarter, adjusted EBITDA was $2.3 million, compared to $1.7 million in the comparable period last year, resulting from higher gross profit. Please refer to table E and the non-GAAP reconciliations of table J in the press release, which has been posted on our website, for additional information.

Operating income was $594,000 for the second quarter of fiscal 2016, compared to an operating income of $51,000 in the corresponding quarter last year. This improvement is primarily due to the substantial increase in revenue, which more than offset the increase in operating expenses. It is important to note that operating expenses as a percent of revenue decreased from 29% in last year's quarter to 26% in this year's quarter. So we see leverage in operating expenses as revenue increases.

GAAP net loss was $874,000 for the second quarter of fiscal 2016, compared with a GAAP net loss of $261,000 for the second quarter of last year. Significantly, please note that the GAAP net loss for this quarter includes the impact of $1.2 million non-cash expense for the fair-value warrant liability adjustment. The adjustment was driven by an increase in the price of USA Technologies' common stock.

On a non-GAAP basis, net income was $686,000 for the second quarter of 2016, compared to a non-GAAP net income of $6,000 in the same quarter last year and a non-GAAP loss of $288,000 in the quarter ended September 30, 2015. Adjustments to arrive at non-GAAP net income include the non-cash portion of the income tax provision, due diligence and acquisition costs, and the change in the fair value of the warrant liability as shown in table J.

Our net working capital, defined as current assets minus current liabilities, has been steadily increasing over the past five years and is a measure of our strengthening liquidity position. Networking capital for the quarter increased to $9.9 million, a sequential increase from $7.5 million last quarter and from $2.6 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 G in the press release the consistent improvement in networking capital over the last five quarters as the QuickStart program has been implemented.

Free cash flow is defined as cash flow from operations less cash used for the purchase of property for the JumpStart rental program. And this was positive for the fourth straight quarter, as shown in table G of the press release. Free cash flow was $507,000 in the quarter, but it should be noted that we paid down accounts payable by $1.6 million, and our receivables collections were a bit slower than anticipated as we improved the QuickStart documentation process.

We anticipate expanding the number of our third-party QuickStart leasing companies over the next 12 months. Additionally, due to the success of QuickStart, competition among our leasing providers for our business could potentially increase our equipment sales margin.

Before turning to guidance, I'd like to discuss the financial impact of the acquisition. Our two organizations were similar in structure, with some overlap of functionality. We intend to execute a plan to extract efficiencies from the acquisition, and we expect to see those efficiencies begin to take effect during the next two quarters. From there, we anticipate the acquisition to begin to become accretive to earnings during the first quarter of the 2017 fiscal year.

Now 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 2016. We expect total revenue to be between $69 million and $71 million. We also expect to continue to improve year-over-year increases of adjusted EBITDA and non-GAAP net income from the results achieved in fiscal year 2015.

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

Thank you very much, Lee. And thank you, everyone, for joining us this morning.

In closing, in the second quarter we continued the momentum we built in the first quarter. And as a result, we're off to a great start for the fiscal year.

For 2016, we reiterate our goal of achieving more than 400,000 connections, and for the end of fiscal 2017 we reiterate the goal to achieve 500,000 connections and a $100 million revenue run rate. We believe we are seeing an inflection point in the business, and USAT is aggressively positioning itself to remain the clear leader for cashless payments in the self-service retail market.

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

(Operator Instructions) George Sutton, Craig-Hallum.

Superb results. And Lee, welcome to the call. I wanted to make sure I understood the seasonality. Obviously, these first two quarters represented 50% of your goal for the year. In the prior two years, from a net add perspective, it had only been 20% and 32%, respectively. So can you give us a sense in terms of what you are seeing seasonally and how that might influence the next couple of quarters?

Regarding the seasonality curve, just to repeat, we have seen in our last two quarters of the fiscal year historically greater activity. In the first two of this year, we've gotten off to a much faster start, which we really attribute to what we believe is an inflection point in the industry right now.

We don't know if the seasonality that we have experienced over the last number of years will continue into the back half of the fiscal year. I can offer some color just based upon the fact that a good amount of the activity in our business right now is coming from the vending industry because it has the most traction in terms of implementing what we are trying to do. The seasonality curve in that business is something that hasn't changed for decades. And what I mean by that is that, essentially, as these companies get new budgets and they head into the warmer time of the year, you typically see more activity out of them.

So I would expect that certainly we are not going to see -- just based upon that -- which, personally, I've seen in the vending industry for a number of decades; I'm dating myself --. But the fact is that that seasonality alone could continue to drive a stronger second half to us.

So I hope I'm answering your question and providing a little additional color.

I think you are. And relative to the VendScreen contribution, as we think about how you roll this out to your existing and new customers over time, how does this change your pitch from big-picture perspective relative to how you were going to market before?

That's a great question, and thanks for asking it. It changes our pitch in a couple of different ways. First of all, we have an opportunity from a pure device perspective for our customers to buy a little bit further out on the technology curve. They can buy a screening -- that's good -- and it has benefits for them. But most importantly, what it does is it changes the way that we talk about a connection. We are able to -- remember I talked in the prepared remarks about couponing and the ability to promote certain things at point of sale to further promote a loyalty program such as NORE.

Essentially, what it does is from a service perspective, when we are offering to the customer the ePort Connect service, we have essentially bolted on a module from a service perspective to say you have these additional capabilities that you can bring to point of sale in your market now. So if one were to use an analogy, in any network business what happens is a connection occurs and one starts to move more value through that pipe. And that's what we've said we would do all along, and that's what -- we've told our customers the same thing. So they are seeing an opportunity to extract more value through that connection.

Okay. And last question for me -- an interesting point Lee made relative to competition from the third-party lessors could increase your sales margins over time. Can you give us a little bit more of a sense of that competition?

Well, as you can imagine, when a program like this takes off the way QuickStart has, there are lots of companies in this particular space, equipment leasing. And I think we've gotten -- right now we have got 2 primary partners; we've gotten the attention of quite a few others. And they continue to vie for our business. Our current partners are great; you are doing a terrific job. However, we believe as the program continues to open up and volumes increase, that it will drive some price competition, and the cost of capital will go down and we'll be able to make a bit of a spread on that. So we're looking forward to that opportunity.

Okay, perfect. Thanks, guys.

Michael Latimore, Northand Capital.

Very good quarter there. Just curious about the -- you have some premium services today. Do you have a sense of how many of your customers or connections are using the enhanced services like loyalty and so forth?

Mike, it's -- the question is -- I think you asked about two services. One is the premium services and the other would be loyalty. Were you referring to the MORE loyalty program?

Yes.

Yes. I would say that it's a fairly small percentage at this point in terms of the number of customers who are actually leveraging more where the rubber meets the road, as they say. But I also think it's very safe to say that many of them have it on their roadmap. So they are busy building out their infrastructure, if you will, getting their machines on the network, on the service. And they clearly have plans to leverage the MORE program. So while the numbers now might be small, it's definitely on the radar screen of our customers. And, candidly, it's a significant selling point and a competitive point of difference that we have over others.

Yes, yes. And then the license and transaction gross margin, what are you thinking about that next couple quarters here?

Well, what we have said on past calls is that what everyone needs to think is somewhere in the mid-30s. And as you look back -- if you went back and looked at the last five or six quarters, you can see a steady progression towards that mid-30s number. At some point it might pop above that, but I would -- in a long-winded sort of way I would say think mid-30s right now. I think that's a very safe -- if one is working on a model, that's a very safe place to be.

And just last question -- are you seeing higher volumes coming out of MasterCard sort of transactions there?

I think -- well, first of all, regarding MasterCard, for quite some time, due to Durbin, we actually didn't accept MasterCard debit. And I guess it was about a year ago that we started accepting MasterCard debit again. And we did see a bump in MasterCard volume, obviously driven by MasterCard debit. So there has been a bit of a bump there. In terms of share, their share is relatively small; I believe it's single digits. It's not something that moves the market, if you will.

Thanks a lot. Good luck.

Will Sutherland (sic - Bill), Emerging Growth Equities.

Just a couple questions. I noticed license and transaction fee as a percent of connection -- or, I'm sorry -- per connection has moved from like a low single-digit decline several years -- last several years to a slight increase and an even better increase in the December quarter. So I just wonder if you could maybe provide color on the dynamic there and maybe the trend.

Bill, I'm sorry. If you could repeat that?

Oh, sure. The license and transaction fee per connection, it's in declining low single-digit until this year, and now it's beginning to go positive. It was up 2.5% in the quarter on an average connection. So I'm just curious if you guys have thoughts on that because it does -- it has a nice impact on the growth rate, obviously, kind of leverage your connection growth.

I think there are a number of things affecting that number. One would be -- from the perspective of license transactions fees per connection, just to repeat, some of the connections that we are adding to our service are micro markets which have a much higher average ticket and a much higher transaction volume. So that's the connection that has a completely different dynamic from a regular connection. That's one thing that I believe is affecting this.

I also -- if you look at what is happening with transactions in general, transaction volume -- I can't remember the increase; it's in the prepared remarks somewhere. It's up 40%, 50%. So that is driving the number as well. Those are two things that I think will drive that number.

In addition to that, as we continue to offer new services to our customers, it might be things like loyalty -- or whatever it is, we have the opportunity to charge more per connection. That's something else that I think will affect the number as well.

Makes sense.

And just for a little more color, a little more background, in general our average ticket across the whole business -- I mentioned the fact that our transaction volume is going up. Well, you might look at that and think, well, that's because your connections are going up. But there's another driver of that. And across our whole business, average ticket is going up for our customers. So that, too, is driving the numbers. So as you can see, there are many factors. But it's all good.

Yes, yes. And last, Steve, I think we are all scratching our head looking at this great momentum, thinking about the second half and then trying to square that with your continued revenue guidance range that you haven't changed. It just implies, if we were to actually think about it, inside that range, major just deceleration back half. You are not implying that, I assume, by keeping that range?

Well, we are certainly not implying a deceleration, if that's what you mean. We are just -- we are simply not prepared at this point to raise the numbers, to raise our guidance. That's something that could happen. But the -- if you look at the raw numbers, we are at 30 -- even if you remain flat -- let's say everything I said about the seasonality curve -- off George Sutton's question, let's say everything I said about the seasonality curve is wrong and we remain flat through the end of the year, that the strong start to the first half was an aberration, we are at $35 million. And if we remain flat through the end of the year, that's $70 million.

Exactly. That's my point.

I certainly don't want to give anyone the idea that we are expecting any sort of deceleration. But what I would say, again, is that we are not prepared at this point in time to raise that for the fiscal year, if that's what you're asking.

That was what I was asking, and I guess I'm going to have to take that as the answer. Thanks, Steve.

It's just not something we are prepared to do at this time.

Okay.

But I would say -- I do have to say I am very encouraged by the strong start that we had to the first half. For the last number of years, it is, without a doubt, the strongest start we've had to the first half. So it's very encouraging not only to me but to the whole team.

Great. Thanks, again.

Josh Elving, Feltl and Company.

A couple questions -- I think it's a fair question about the revenue guidance. Maybe just to beat a dead horse a little bit more, could you characterize it as that's the revenue guidance you put out at the beginning of the year? Yes, you beat expectations by a fair amount in the first two quarters? You are just adding in, layering in a little bit of conservatism over the balance of the year by not changing it?

I wouldn't say that we are being conservative. Let me repeat what I said: we are not prepared to move the number at this point at all. So repeat, again: very, very encouraged by the strong start to the first half. But I wouldn't call it being conservative. I would just say we are just not repaired to do it at this point. That doesn't mean we won't.

Okay, fair enough. On the license gross margins, you talked a little bit about how that was a little bit lower than some of the folks' expectations, a little lower than my expectation -- as well as the first quarter, now the second quarter. Heading into 2016, we were thinking a little bit more along the lines of 35% and maybe even drifting a little bit higher. I understand first quarter you had some spending on premium services, which -- and a couple other one-time items that impacted that gross margin a little bit. I got the sense it was going to be closer to 35%.

First of all, is there any seasonality in that gross margin? We've seen it fluctuate a fair amount over the past several quarters. It has been a little bit lower in the first half. It was a little higher in the second half of last year, first of all.

And second of all, is it just something we are going to have to be able to work with a little bit of wiggle from quarter to quarter? Is 35% a good number in the back half?

The answer to that -- I want to answer the easy one first: yes. Mid-30%s, 35% -- if you are modeling this thing out and you look back -- if you look back five or six quarters, you can see that we have been on a steady march to that mid-30%s range. Even though things might have popped up and down a bit, if you draw a line we are headed straight there. So if you are looking at the back half and one were to plug that in, I think it would be a safe assumption.

The good news is that over what one -- some people might not call five or six quarters the long haul, but I'll just call it the long haul for now. The trend is very much headed in the right direction.

Okay. And is it fair to say you control that direction? Because I know that this license gross margin -- and the business has changed a little bit. But it had been closer to 40%, going back a couple years ago. I know that there is a lot of incentives that drove that number lower. Just trying to get a sense, longer-term, do you anticipate balancing out here in the mid-30%s, like you've alluded to, over the balance of this year?

Yes, I do -- I will just say it again: I think that's where we are headed for the moment. That's a number that we are comfortable putting our finger on our range, we are comfortable putting our finger on.

To answer your question, we do have some control over that number, of course, as it relates to the pricing of our services and processing and so forth. So we do have some control over that. The numbers from the past, if you look back at the margins in this regard, it's been a very long time since we have been in the 40%s.

That doesn't mean we can't get there someday because one of the things we haven't talked about here as it relates to license and transaction fees is operating leverage. Now, as you move across 500,000 connections and 600,000, 750,000, we have leverage in our model that will also help to drive margins as well. So some of the upside, frankly, is just built in.

Okay, great. And then as far as -- I thought the gross dollar volume generated was extremely strong. And that has a little bit to do with your GDB per transaction, but also transactions were extremely strong. Is there any seasonality to GDB per transaction or expectation around transactions per machine?

Well, that's a great question. But first of all, transaction volume right now, as it increases, is being driven by a number of factors. Obviously, the number of connections to the service is driving overall transaction volume.

But what we also have, and we haven't talked about it during this call, is an increasing percentage of all of our customers' transactions for all 369,000 connections continue -- has just been moving up and to the right for years. And I believe we are somewhere in the 40% range now where 40% of all of our customers' transactions across the board are cashless. So you have more connections driving the transactions. You have an increasing percentage of the overall base moving to cashless transactions versus cash; in some locations, like in military, it can approach 100% of all of the transactions. In universities, as you can imagine, it's somewhere over 60%. So those two things alone will drive additional transaction volume.

And then finally, as we add other types of connections like kiosks with a much higher ticket, micro markets with a much higher ticket, those are things in self-service that, as opposed to an average ticket of, say, $1.75, $1.80 in the vending market, we have other customers that have a $9 or $10 average ticket. And as we get more of those customers, that will drive the transaction volume as well.

Right. Last question --

I might add that, as that volume goes up -- remember what I said about leverage in the model. As our transaction volume goes up and our average ticket goes up, our cost to process goes down. And that's just one example of a place that we have -- I referred to leverage in the model. We have leverage there. That's purely pricing leverage.

Right. Last question -- I know you probably have more opportunities in the United states than you can, I guess, handle. Obviously, the vending space is large globally. Do you have any interest in expanding globally?

We do; we certainly do as a Company. Our feeling here -- and this is something that we have said along is let's make -- excuse the expression. Let's make a buck in the United States first and get the Company on sound financial footing. And then, when it comes to international, we have some wonderful global partners. And the list is long. They're companies like Compass and Apple and Visa and MasterCard and Starbucks, and the list just goes on and on.

Our feeling is that what we will do and what you are very likely to see us do is go to international markets with those customers and/or partners in tow. So we are not following the Field of Dreams model, right, build it and they will come. We will have our customer and our partner in tow, and we'll know that it's a solid bet, if you will.

Great. Thank you so much.

Gary Prestopino, Barrington Research.

A couple of questions here -- not to get specific on modeling, but the back half of the year, particularly half of this quarter and Q4 -- what can we anticipate in terms of a drag from VendScreen on your adjusted EBITDA? Is it to the point where you would see some sequential decline in your adjusted EBITDA margin due to VendScreen?

Gary, thanks for the question. It's the -- what I would say about the VendScreen transaction in general is that we went into that transaction pre-transaction with a very clear plan to tap into efficiencies quickly. And the moment it was done, we began to implement that plan to tap into those efficiencies. The companies are really very similar; they are mirror images of one another.

So we will do that and are doing that. And sooner rather than later -- I think what we have said is a couple quarters out. Sooner rather than later, you will see this. We want to put this in an accretive -- put it in an accretive position. So that's something that we are squarely focused on right now.

And it did come with some revenue as well. So we don't anticipate a significant negative drag. There will be some one-time costs, as there always are, associated with absorbing this type of thing and working through the efficiencies. But we will quickly put those behind us and be on our way.

I think any effect in this regard will be far outweighed by the benefits of what will happen in the marketplace over the next couple of quarters.

Okay. Well, to the extent that you do have one-time costs associated with this, hopefully you will be able to segregate those out as you report Q3 and Q4 so we can get a true read on the Company's profitability.

Take that to the bank. That will definitely happen. It will be very, very clear.

A couple of other questions here. You mentioned something about advertising for VendScreen, which struck me as being very interesting. Had they been doing any advertising prior to you acquiring them? And if you are intending to do advertising, which I'm sure you are, is that a separate revenue stream (technical difficulty)?

The transaction revenue? Let's start with the end of that question. The fact is that it is an additional revenue stream for both us and our customers. And I'll give you a couple of examples. First of all, across all of our businesses, across all of self-serve retail and eight or 10 different verticals that we are serving like vending and laundry and kiosk, et cetera, we have payment partners who want their payment method to be what used to be called top-of-wallet. Now we have people vying for the consumer's attention in terms of what they might use to pay -- now they have multiple choices when they walk up. It could be a Visa credit or debit card, it could be a MasterCard, American Express, Apple Pay, Android Pay. So there's an intense competition. As the payment industry goes through what is this tectonic change, we are fairly certain that our payment partners are going to want to promote in that regard.

So, yes, it's a revenue stream. And not only is it a revenue stream for us, but it's a revenue stream for our customers. Essentially what would happen is there would be a revenue share in the case that we are moving content in that regard.

Another example might be a CPG company. Let's say that -- to use a vending example, let's say that Mars chocolates wants to promote certain brands that they have in any of our customers' locations. Well, they then would obviously pay, if you will, for airtime.

So we think that's a significant opportunity. And the nutritional angle is a good one as well. As the FDA continues to lay down new standards in what we call immediate consumption, where consumers are -- in the supermarket it's easy. You pick it up; it's got a label on it; you read it. But in places where there's immediate consumption of food, as we all know, the caloric information isn't always available. That capability is already built and tested and out there.

I guess the question I have is had the Company been doing this prior, or is this something new that you have can leverage from the acquisition with the advertising?

I'm not quite sure that in any significant manner the Company was doing it. I think they may have been doing some testing and things like that. But it's not something that was widely commercialized.

Okay. And, then, it's early in the year and the acquisition, but just a read on what your current customer base, if you are getting positive feedback level of interest from your current customer base, et cetera, in new products.

Yes. The feedback was -- when the transaction was announced, the feedback was swift. And it was very positive from our customer base. That's what I was told from our marketing and sales folks who were in touch with our top customers.

Our customers are smart. They know, now that they are putting their machines on a network -- and, of course, they are smart because we have been educating them for years. But they are smart on their own, too. They know that this is another way for them to leverage that investment of putting their machines on a network.

So not only have they been encouraging in their words, they have been encouraging with -- it's still very early. There has already been some buying from our customer base, which obviously was outside the VendScreen customer base. So we are very encouraged.

It's important to note -- I know that we announced this when we announced the acquisition of VendScreen. The VendScreen devices, the interactive devices, are already operating on our service. They have been certified on our service, and they are operating on our service all day, every day.

So what that means -- I'm surprised no one has asked the question about integration -- well, how long is it going to take you to integrate this in order to get any value out of it? Well, the fact of the matter is that that portion of it is already done. It's finished. We were already working together as partners when we decided to combine the companies.

Okay, that's good news. Then just a couple of quick questions and I promise I'll get off. Interchange as a percentage of license and transaction revenue, what does that stand at this quarter versus last quarter? I assume, as your average ticket is going up, that's going up too.

Interchange as a portion of -- can you repeat that?

License and transaction revenue. In that book there's -- in the LNC space in revenue and cost of goods sold, so it's just basically a flow-through?

Well, it's essentially a flow-through. But as a percentage, my -- I don't have the numbers right in front of me, Gary.

Okay, that's fine. I can get it later.

We can always follow up with you. But my inclination on that is that as a percentage of LNT it would go down as we get further leverage, as I mentioned a few minutes ago, on increasing average ticket.

Okay. And then just the last question -- is there anything that you guys can do to force conversion of these warrants so we can get rid of these line item, fair value of warrant change, every other quarter?

Well, the answer to that is yes. We can always take a shot at incenting these warrant holders in some way. They hold warrants at I believe it's $2.61. It's about $4 million and change warrants, I believe.

Right.

So we could. However, Gary, the warrants expire in September. So that's not far away.

Okay.

So we could either incent them or we could tough it out for another, say, quarter or two. But I know exactly what you mean. I feel your pain. When you see that adjustment and its effect on net income, it's just a little bit disappointing.

But the good news there, for those who haven't done the math, is there's $11 million of cash out there. And those warrants are very much in the money at this point, and of course that's good news for our Company.

Yes. I'm sorry; I completely forgot that they expire in September.

And then last question, I promise. What's the pro forma long-term debt now, post the VendScreen acquisition? What did you borrow, about $5.6 million for that?

Well, actually I think we only borrowed $3 million. We used $3 million on our line, and we used $2.65 million, ballpark, in cash.

Okay.

Candidly, we could have made it all cash, but we felt like we had the credit facility, let's be a little bit more conservative and utilize that credit facility. We felt like it was a reasonable course of action.

Okay.

Thank you. And at this point we do not have time for additional questions. I will now turn the call back over to management for closing comments.

Well, I'd like to thank everyone for taking the time for our call today. As I mentioned before, we are very enthusiastic about the first half of our fiscal year. We have a great plan in terms of continuing to drive the business for the second half. And, of course, we are also enthusiastic about the addition of the VendScreen asset and also of the team and actually the geographic capabilities that we get as part of that, which are going to be helpful in terms of driving growth and supporting customers.

So, again, thank everyone for your time today and your interest in our Company, and look forward to reporting back to you after next quarter.

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