Cantaloupe Inc (CTLP) 2016 Q3 法說會逐字稿

Welcome to the USA Technologies third-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the conference over to Lauren Sloane.

Thank you. And good morning everyone. This is Lauren Sloane, Investor Relations, USA Technologies. And welcome to the USA Technologies third-quarter 2016 earnings conference call. With me on the call 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 and 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 rather 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 and do not a substitute for GAAP financial measures such as net income or loss.

Details of these items and a reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued earlier this morning 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, please go ahead.

Thank you, Lauren. And good morning everyone. Thank you for joining us to discuss our third-quarter results. USA Technologies drove record revenue in the quarter and made substantial progress toward our long-term goals, while also integrating in acquisition.

We're encouraged by our connections and revenue performance, reinforcing the fact that USA Technologies is a high-growth Company with a compelling revenue model. It is clear that the growing adoption of our ePort Connect Service continues to drive increasing amount of recurring revenue.

Let's look more closely at our financial statements, which demonstrate the Company's continued growth and progress. During the third fiscal quarter, we had net connection adds of 32,000; 26,000 of which were organic and 6,000 from our acquisition.

By comparison, we added 14,000 a year ago, and 20,000 last quarter, a 129% and a 60% increase, respectively. Our customer count is now 10,825 and 91% of new connections during the quarter were from existing customers.

Revenue of $20.4 million a record high for USAT, of which $14.7 million was in the recurring revenue line of license and transactions. Cash from operations was $4.3 million, in large part, a result of the continued success of our QuickStart leasing program. We're seeing a continued acceleration towards non-cash payments in the self-serve retail market as evident not only by our substance of increases in connections but also by increases in transactions, both number and dollars.

We processed more than 82 million transactions during the quarter, consisting of more than $151 million, and are now on an annualized run rate of more than $600 million in transactions. We see a much more robust ecosystem for unattended retail than ever, including delivering more value to each connection.

We recently launched the service that exemplifies our strategy to add more value to each connection, ePort Interactive. As you recall from last quarter we acquired VendScreen, which we integrated, rebranded and within a period of 60 days, leverage the asset to launch ePort interactive.

It is USAT's most progressive solution to date and one of the industry's most advanced cloud-based interactive media and content delivery management systems. It enables multimedia marketing campaigns, remote refunds, the delivery of nutritional information and enhances loyalty programs for the unattended and self-serve retail markets.

With nearly 11,000 customers and 401,000 connections, we're poised to leverage this new platform to change the way consumers interacted on unattended retail point-of-sale. In addition, as we continue to champion mobile payments, ePort Interactive is an additional asset, as it is NFC-enabled and compatible with mobile wallets such as Apple Pay, Android Pay and Samsung Pay.

When we view our user data, a clear message emerges. USAT has developed a track record of driving cashless and overall profitability for our customers in unattended retail. We believe in adding ePort Interactive to our portfolio will help further drive market penetration while also giving brand partners, such as Apple Pay, Chase and others unprecedented access to consumers.

Our vision is for every one of our customers' locations to have an interactive screen at point-of-sale, with the goals of increasing revenue, facilitating transactions and enhancing consumer interaction. In the meantime, we're seeing more progressive operators continue to move to cashless payments at 100% of locations.

In March, we announced RAWLS Distributing would rollout ePort Connect to 100% of its locations, as an increasing number of operators are doing. Further, they have enlisted our premium services support during the rollout, which provides companies access to a bundle of premium best-in-class support services including deployment planning, project management, installation support, training of staff, the marketing of cashless, mobile payment, loyalty programs and funding support.

Premium support continues to drive market penetration and accelerate operators' ROI for adopting cashless. It enables rapid deployment of cashless across our customer's entire business. Operators clearly understand the benefits of cashless payments but many do not have the resources themselves to scale their business in alignment with either their timing or their strategic plan.

The USAT premium support team are industry experts which have built a comprehensive program allowing our customers to not only deploy cashless acceptance on mouse but also maximize their cashless sales revenue and net operating profits. They engage with our customers and their staff to project plan their deployment schedule while launching custom marketing programs that propel consumer cashless usage, demonstrating the value of our ePort Connect Services and, now, the ePort Interactive Services. I'm proud of the team and their impact on the industry.

Returning to VendScreen for the moment, as expected, we saw a measured increase in the operating expenses in the quarter as a result of the acquisition. As we shared with you last quarter, when we went into the transaction, we had an integration plan that involved a cost rationalization, removal of redundancies and improved efficiencies. In the third quarter, we implemented that plan.

And we continue to expect to see initial benefits during the fourth quarter, with greater impact during the first quarter of the next fiscal year. Our goal is to continue to drive improved margins and profitability while maintaining the robust growth of the business. We will provide details in this prepared remark about the timing and scope, particularly of the initiatives regarding efficiencies.

Moving on to a general update. I'm pleased to report that on April 14, 2016, the United States District Court for the Eastern District of Pennsylvania, dismissed the class action complaint that had been filed against us in October 2015. While there's a chance of appeal before next week's May 17 deadline, we believe this is a positive development for our Company.

Toward the goal of preparing the Company for our next phase of growth, we strengthened the Board and made a change to the Management team. We added Rob Metzger to our Board of Directors. Rob brings with him a wealth of knowledge in finance and accounting, and notably dealing with public companies and capital markets. His extensive experience with the FinTech and payment space will help guide us as we continue our growth and pursue our goals, driving additional value for our shareholders.

For the Management team, we promoted Mike Lawlor to be the Chief Services Officer for the Company. His responsibilities include overseeing the delivery and growth of our ePort Connect Service, customer service and support, consumer engagement services, and strategic partnerships.

Mike will work with the Company's strategic payment, mobile and wireless partners to deliver world-class day-to-day customer services and support to the Company's nearly 11,000 customers on the ePort Connect Service; identify new opportunities that further accelerate USA's growth; and to expand ePort Connect's leadership position in the markets we serve.

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

Thank you, Steve. Good morning, everyone. Let's take a look at the numbers for the quarter. I will start by reviewing our third-quarter FY16 results before I turn to our outlook for FY16. To echo what Steve said, we added 38,000 gross connections in the third quarter compared to 24,000 gross connections in Q3 of last year.

Net connections for the quarter totaled 32,000 compared to 14,000 in the third quarter of last year, representing a 129% increase. We added 200 new customers ending the quarter, with a total of 10,825, a 21% increase in customer account from the March quarter of 2015.

We continue to derive increases in connections and revenues, primarily from deeper penetration of existing customer accounts. It is also worth highlighting that we continue to grow, both in terms of the number and the dollar value of transactions. This quarter, we had $82 million in transactions, representing $151 million in transaction volume, increases of 49% and 54%, respectively, from last year's third fiscal quarter.

Growth was driven by a year-over-year increase in total connections to our ePort Connect Service, which included 6,000 connections we obtained with the acquisition of VendScreen, driving our total connections to 401,000, which represents a 33% increase from the 302,000 in the same quarter -- at the end of the same quarter last year. Approximately 91% of gross new connections came from existing customers, which is a strong indication to us of the increasing adoption by additional connections by our current customer base.

Total revenue for the third quarter was a record $20.4 million, an increase of 33% compared to $15.4 million recorded in the third quarter FY15. License and transaction fees were $14.7 million, compared to $11.1 million in the year-ago quarter, representing a 30% increase.

These fees, which are comprised of the recurring monthly service fees plus transaction processing fees, accounted for approximately 72% of our total revenue. Equipment sales were $5.6 million compared to $4.3 million in last year's third quarter, representing a 31% increase.

The increase is attributable to the increasing demand for cashless acceptance in our target market of unattended retail facilitated by our QuickStart leasing program. QuickStart and [straight] sales accounted for approximately 93% of all connections sold during the quarter, compared to 89% 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 funded as often as possible by third-party lessors. Third-party leases are recognized as hardware revenue and as a result of third-party funding, they improve the Company's cash flow.

Gross profit was $5.7 million compared to $5.1 million in the year-ago quarter, representing a 10% increase. Total gross margins were 27.9%, down from 33% in the same quarter a year ago, due primarily to hardware sales incentives initiated this quarter and a one-time recovery occurring during the prior corresponding quarter.

Gross margin on license and transaction fees was 34.1% in the third quarter, a slight decrease from 35.3% in the year-ago quarter that was up from 33.7% in the second quarter of this year. Selling and general administrative expenses were $6.1 million in the third quarter compared to $4.3 million in the year-ago quarter.

The increase in these quarterly operating expenses year over year is due to nonrecurring VendScreen acquisition and integration costs, approximately $461,000, as well as increases in professional fees, approximately $548,000; salaries and benefits, $227,000; and bad debt, $202,000.

Nonrecurring expenses relating to VendScreen acquisition and integration activities include due diligence, evaluation, severance, legal, travel and professional services. As a reminder, last quarter, I spoke about our plan for the integration of VendScreen. As of third-quarter end, we have taken actions affecting salaries, benefits and professional fees which we estimate will save approximately $1.5 million annually versus costs that otherwise would have been incurred without these actions.

Going forward into this fourth-quarter and into the first quarter of next fiscal year, our SG&A will reflect these efficiencies and cost reductions. With these efficiencies, as revenues continue to grow, we expect operating expenses as a percentage of sales to decrease gradually over time.

For the quarter, adjusted EBITDA was $1.3 million compared to $2.4 million in the comparable period last year. The increase in gross profit of $0.5 million from $5.1 million to $5.7 million was more than offset by the nonrecurring VendScreen and other SG&A expenses referred to earlier. Again, please refer to the table and the non-GAAP reconciliations in the press release, which has s been posted on our website for additional information.

Operating loss was a loss of $595,000 for the third quarter of FY16 compared to an operating income of $730,000 in the corresponding quarter last year. This decline was due to nonrecurring costs incurred in connection with the acquisition and integration of VendScreen as well as growth related increase in professional fees, salaries and benefits, and bad debt. GAAP net loss was $5.4 million for the third quarter of FY16 compared with a net loss of $567,000 for the third quarter of last year.

Primary cause of the difference is the $4.8 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 loss was $87,000 for the third quarter, compared to a non-GAAP net income of $655,000 in the same quarter last year.

Adjustments to GAAP net loss to arrive at non-GAAP net loss include nonrecurring charges incurred in connection with the VendScreen integration and acquisition, professional fees incurred in connection with the class action lawsuit, which was dismissed in April of 2016. The change in the fair value of the warrant liability and the non-cash portion of the income tax provision.

In terms of warrants, we saw 634,000 warrants exercised this quarter at a strike price approximately [$2.60], raising over $1.6 million of cash. This leaves approximately 3.7 million warrants still outstanding, which would generate approximately $9.6 million if all were exercise. The expiration date of these warrants is September 18, 2016. After this date, the variations and the fair value of the outstanding warrants will no longer be reflected in our financial results.

In the fourth quarter so far, we have seen warrant exercises continue to bring cash to the Company. Our net working capital, defined as current assets minus current liabilities, decreased to approximately a negative $200,000, a significant decrease from $5.7 million in the same quarter of last year. The changes in the various working capital components, other than the warrant liabilities, netted to basically no change, with the inclusion of the warrant liabilities of approximately $6 million this quarter made the final difference.

Cash provided by operating activities was positive for the fifth straight quarter, as shown in the press release. Cash provided by operations was $4.3 million in the quarter but it should be noted that the increase in our payables was the primary driver.

Now turning to next year. I would like to update guidance for full-year FY16. We now expect to add between 93,000 and 95,000 in net new connections for the year, bringing total connections to our range of $426,000 to $428,000.

For the full year, we now expect total revenue to be between $76 million and $78 million. QuickStart will remain a popular program for our customers and is expected to drive positive cash, provided by operating activities during FY16.

Finally, we also expect to have year-over-year increases of adjusted EBITDA and non-GAAP net income from results achieved in FY15. Now, I would like to call back to Steve. Thank you.

Thank you very much, Lee. Thank you, everyone, for joining us this morning. In closing, in the third quarter, we continue to build USAT and expand our leadership in the unattended retail payments industry. As we indicated, we're expecting a strong fourth quarter with improving profitability as compared to this quarter.

As a result, we expect to surpass our initial revenue and connection expectations for 2016. We believe we're seeing an inflection point in the business and USAT is aggressively positioning itself to remain the clear leader for cashless payments in the self-serve retail market. With that let me open the call for questions.

Thank you.

(Operator Instructions)

George Sutton, Craig-Hallum.

Thank you. Steve, we've discussed the inflection that the industry is undergoing for the last few quarters and this quarter, obviously, demonstrates continuation of that. Could you discuss in a broader context, longer-term context, what you would anticipate over the next few years? And I think you've used quick service restaurants as an example of kind of where that curve might kick in. Where do you think we are relative to that? Thanks.

George, thanks for the question regarding the inflection point and where we think the industry is headed. Ultimately, if you look at this over the next number of years, we believe this market is headed to 100% penetration. Of the self-serve retail markets, vending will probably get there first but it's -- there are historical precedents for this.

The quick-serve restaurant industry is an industry that recently started off a number of years ago, started off with a number of locations that went cashless and then fairly rapidly, moved to 100% penetration. The -- in addition to that, one of the parallels that we look at in the vending industry, in particular, is what happened with the implementation, and I'm dating myself, I'm sorry to everyone.

But with the implementation of bill validators or acceptors in the mid to late 1980s, in the early days, operators, including myself, back in the days of Pepsi, we believed that it was really the top locations that would take this -- quote, unquote -- new payment technology.

And we very quickly learned that it would be necessary and applicable and useful in 100% of the locations. So those are a couple of examples of other markets that really lead us to believe that this market is headed to 100% penetration over a number of years.

Got you. Thank you for that. You gave a little bit more detail on this call around your premium support services. And listed a number of different services, many of which we were aware of, several of which we were not. Can you just give us a sense of how much that's differentiated you in the market? And how typical is it for customers to take that when they're getting more aggressive with their programs?

Well, I'll start with the last question first. How typical is it for a customer to take this? It's still, right now, the customer who wants to go to 100% in a relatively rapid fashion is the exception, not the rule. But the fact is that more and more customers are making that decision to go to 100%. So it's -- those customers who take on premium services are bit, are still a bit of an exception and I'm sorry, the first question. George, could you repeat that?

Relative to premium support services, I'm just curious, how much that's differentiated you in the industry? That's not something you were doing a year ago. It seems to be a big differentiator.

Well, it is. It's actually -- I think there are two things that are very important about it. One, it is a clear differentiator with our Company. It's not something that others do in the industry. One, simply, because they haven't put such a program together but another reason is they just don't have the experience.

We've onboarded 11,000 customers in 400,000 locations and we've helped dozens of companies with rapid mobilization. So we have a deep well of data, which we call our knowledge base, to pull from to help guide the effort and then we have this wealth of experience, having done this many, many times. So it really does, I believe, set us apart in the industry in terms of helping our customers not only implement but better leverage this type of change or investment in their business.

The other thing that I think is important to note, and this is something that we believe as a Company, our introduction of premium support services, whether it was four quarters ago or five quarters ago, I can't remember exactly when we did it. I believe we had an impact on the industry in having that dialogue, not only about going to 100% and the benefits of doing so, but offering that tool to help customers get there. So in part, I think our team can somewhat take credit for the inflection point that is occurring in the industry right now.

Understand. Thank you very much for taking the questions.

Sure.

Thank you. Mike Latimore, Northland Capital Markets.

Congratulations on the quarter, Steve. Great quarter. Just on the penetration opportunity, can you talk a little bit about the VendScreen service? What percent of the market do you think might take that over time?

Right. Well, yes in the -- I've used this expression with you, Mike. In the fantasy world, in which I live, it would be 100% right away because there's just so much value to be added there. However, being more realistic, as we head into next fiscal year, we're thinking somewhere in the 15% to 20% range. If we're saying the 20% range of all of our connections in the next fiscal year, that will be a good start.

If you think about where we would probably head next year on connections based upon what you just heard from Lee regarding the end of this year, that's not a small number. So that's kind of our -- we're wrapping our heads around a 20% number. We will prepare ourselves for something larger. But that's kind of what we're thinking.

Great. That would be a very rapid growth for VendScreen for sure. In terms of the adds in this quarter, kind of the pipeline, are you seeing any mix shift among your customers? Are small midsize guys getting more active or large? Or is it the normal broad-based mix there?

Yes. I would say that in this particular quarter, we had -- and it really does vary. It really does vary. Some quarters, we have a stronger SMB performance than others, meaning our smaller customers.

But in this particular quarter, with 91% of our business coming from existing customers and a number taking very large steps comparative to the past, I would say in the third quarter, we had a slight skew towards the larger customers. Now going into the fourth quarter and the first, that might not necessarily be true, but in this particular quarter, it feels like a little bit more of a nod to the larger customers.

Then last question on margin. Gross margin on the license and transaction. Is this a good number to think about going forward? Or do you see it inching up from there?

Well, I think we've said, if I recall what I've said last time, we're -- we want to continue to make our way a little bit north of there on L&T. We have some opportunities to do that, not only with new services that we're bringing to market but with some efficiencies that we're -- that we intend to affect with some of our partners who help us deliver the service.

Great. Thanks a lot.

Sure.

Thank you. Josh Elving, Feltl.

Hi, good morning.

Good morning.

So a couple -- just to kind of follow up on Mike's question. Just with regards to thinking about the licensed gross margin. I know, specifically, given various promotions and opportunities you see, perhaps there are times where you get more aggressive or less aggressive.

Could you maybe talk a little bit about the competitive environment today? What you see out there? Do you see the landscape changing at all? If it is, in fact, a positive environment for you, would that lead to some of those margins creeping up over time?

Right. Well, the -- thanks. Thank you for the question. Regarding the competitive environment, it's one that, obviously, no one's going to let -- we have a very commanding share right now. No one is officially measuring it.

I don't even want throw out a number today but we have a very commanding lead in the market, which by the way, we don't take for granted. We continue to push the envelope in terms of the things that we do for our customers and the service that we bring. All of that said, no one is going to let us cut a swath through this multi-billion dollar market all by ourselves.

We anticipate a competitive environment that will be robust and ecosystem that will have more and more participants. That said, what I would say, really during this fiscal year, we haven't seen any other major entrants, other than the folks that we typically participate with in the market. And it's interesting in that we both compete and cooperate with both of these companies, Cantaloupe and Crane.

Now, one word that you used. You used the word, discounting, and then kind of jumped to competitive activity. One of the things that I'd like to point out. And I think this, as people read through our, particularly, our 10-K, we -- when we make a concession on pricing, whenever we might do that, it's more times than not, it's a strategic move to dig more deeply into a customer in terms of penetration. That if you think about it, the deeper we dig in, as other entrants come into the marketplace, if customers have us in many thousands of locations, that the chances of us -- of them pulling us out are probably going to decrease as we dig in.

So what I'm really trying to say or we may take a concession to pick up a strategic piece of business. An example of that might be a Pepsi bottler or a Coke bottler, or something like that. It may be an important player in the kiosk space, or in the parking space, where we're trying to accelerate. We're trying to get that market to move as fast as vending. So our concessions, any concessions that we might make are really less reactive and they are more proactive in terms of continuing to position our Company as the leader and one that's firmly entrenched. I hope that helps.

That's great color. I certainly didn't mean to suggest you were being reactive.

No, no. I didn't think you were. I was taking the opportunity to make that point. So, sorry to take liberties with your question.

Fair enough. And then on the SG&A line, if I strip out some of the one-time components of that, probably gets me to a little bit more of a normalized number around $5.5 million in the quarter. Should I take that number as a run rate number, assume it grows a little bit as revenue grows? And then potentially from there, strip out some of the efficiencies Lee referenced? Is that the right way to think about it on a go-forward basis?

Josh, hi. This is Lee. It's a good question. We have -- and Steve has mentioned this before a couple times. We still have some one-time charges that we will see in Q4. So that modifies just stripping it out dollar for dollar, I would say. And we're a growing Company and anytime the Company grows, you do need to grow your SG&A a little bit as well.

There will be a decrease, absolutely, but we monitor that and we do what's required. There are things going both ways, really. Decreasing because of the recurring charges going away but at the same time, as we all know, we're in SOX 404 compliance mode and we do need to spend some monies in order to comply and do that correctly.

So to take the full amount out, I think is probably inappropriate. At this point, there will be a reduction though, obviously, from where we are in Q3.

Okay. Great. Thank you.

Thank you. Gary Prestopino, Barrington Research.

Hi. Good morning, everyone. A couple of questions here on, particularly, on the equipment gross margin. I think this also came out forth in Q4, you signed a fairly big deal with a customer and there was some kind of incentive to take the ePort. Is that what happened here? I mean, we're looking at a pretty big diminution of the gross margin on the equipment sales here.

Gary, It's Steve. I'll -- Lee may want to add something here but one of the pieces thing -- one of the pieces of information I think that you all don't have access to that will come through in the Q is there was an adjustment in the quarter a year ago of approximately $750,000 that actually helped equipment margins.

So that's something that contributes to the sort of the magnitude of the year-over-year change in equipment margins. So that was one thing that I believe affected that number. So it's not year over year as precipitous as it looks.

That said, there were -- so if you take some reduced Delta, there's still a change in equipment margins and as I mentioned, we did see a fair amount of activity, a good amount of activity with our larger customers and we -- along the way, made a concession here there, once again, strategically to dig in more deeply with those existing customers. I think it's 90 -- (multiple speakers) sorry, go ahead

No, that just plays into your strategy of getting the connections up. I'm just merely asking because even year over year, yes there's that $750,000 does add a negative comparison but then if you look at it sequentially as well, it was down.

So I just want to get an -- I'm just trying to get at why that was down so much in the quarter and if it has to do with the fact that you're accelerating connections and you had a big customer sign up, that's fine. That's what I want to get at.

Well, that certainly, I'd say that would certainly have contributed to it. Candidly, it's not -- it's something that's going to fluctuate. The mix is not -- we talked about it a little while ago; the mix is not always going to fall that way. So the answer to your question is that, in large part, you're right, that clearly is one of the contributors.

Okay. On the adjusted EBITDA calculation, was there anything of one-time in nature relating to VendScreen that you didn't back into the adjusted EBITDA number?

Not that we know. I mean, we did a pretty good analysis of all the ones that were nonrecurring. As I mentioned earlier, there will be continuing to be a few in Q4 but we captured all that we know in Q3.

Okay. So a lot of that growth in SG&A in the quarter or some of that is related to VendScreen? Just -- and then you're doing some restructuring there and getting the SG&A down, so that's positive. So okay, so a couple other questions here.

In terms of the 6,000 connections that were added from the acquisition of VendScreen, did you have any opportunity to drive some more organic growth there? Or is it just too early to even talk about that since you didn't know it was that long?

Well, I'm glad you asked that question. We sold everything we had, which we essentially got into business in February. I believe it was somewhere between 1,000 and 1,200 units that we had on hand; we sold everything that we had for the quarter.

I expect as we ramp up production, remember -- if everyone remembers, VendScreen only had about 5,000 existing connections, so let's call it, 6,000. Compared to us, it was not a lot. They hadn't produced a ton of devices.

So we're working very hard to ramp up that production. So the next couple of quarters, I would anticipate that we will be in a position of essentially selling everything that we have. And then of course, in answering Mike Latimore's question, you heard, Gary, where we expect it to go.

Okay. A couple more quick questions. Where do you stand on the third-party financing? You've got, I think two entities that you're working with. How close are you to signing others? Do you need others? Are they close to being maxed out, the two existing ones that you have?

Well, what I would say is that we have a very active effort in bringing on other lenders, other sources of leasing for our devices. I think we'll probably be concluding sooner rather than later, one or two of those.

The -- one of our suppliers, in that regard, and Lee, please correct me if I use banks buy and sell things so many times. I believe one of our suppliers was purchased by, was it BB&T? So they now have a new owner which is good, in that they have deeper pockets but we're going through a little bit of a transition with them with their new ownership. We're working on that as well. So we view that as a positive development.

Okay. And then just a couple more here. Do you -- if you start to displace your ePorts of your existing customer with the VendScreen product, what benefit does that bring to you from a revenue standpoint?

Gary, I'm sorry, you're going to have to repeat that question. It's sort of broke up.

Okay. Can you hear me now? What I'm asking is, you've got organic growth goals with VendScreen, but if you were to start replacing ePort's with the VendScreen on your existing clients, what benefit does that bring to you? I assume the transaction revenue stays the same or goes up slightly? What happens if you displace some of your existing ePorts?

Well, I'm going to answer that in two parts. First of all, we have a -- when one removes -- we're not going to get into the details today but when one removes an existing ePort and replaces it with an ePort Interactive, it has a substantive impact on that location.

So what we know is that performance that we've given customers to date markedly improves when you move to an interactive screen on multiple dimensions, which is great. That's a terrific thing. All of that said, our focus since, let's call our penetration rate with our existing customers, somewhere between, I don't know, 20% and 23%, let's call it 22%.

I don't want to spend a lot of time. Lee, I'm going to use you as an example. I don't want to spend a lot of time going back and retrofitting the existing locations that are connected. We'd rather take them forward and say, Lee, you're going to get -- here's what we've learned from G9 Q-interactive; your results are going to improve on parameters A, B, C.

So going forward, this is something that you should seriously consider. We're going to focus on the new connections. At some point, we'll probably circle back with Lee to some of those initial installations.

Okay. Thank you.

Thank you. Kevin Dede, Rodman.

Hi. Thanks for taking the question, Steve.

Sure. Good morning.

Just going back to Gary's question on the rollout of interactive. Do you speak to that specifically with regard, I know you offered a disclosure or disclaimer not wanting to go into much detail, but could you just talk a little bit about how your financing and pricing of that service might be different than what you're offering today? And when you think or whether or not you think you'll have to change those parameters? And offering your customers the standard ePort that you have now versus interactive?

Okay. Well, Kevin, I want to make sure, first of all, that I didn't confuse everyone. I'm glad you asked this question.

When I mentioned that performance improves, we have some test results that we will be putting out soon that clearly indicate a change in performance, a location, when comparing a location with our G9 product which is cashless, contactless, et cetera, moving to interactive, a number of things happening, including an increase in overall transactions and things like that. There's an improved performance.

Now moving over to your question regarding what the model might look like as we offer this to the marketplace. We've already gone out there and there are two things that are notably different about the model. The monthly fee will, in most cases, be higher because the customer, for instance, may say I want nutritional information at point-of-sale.

Their monthly fee for having that nutritional information at point-of-sale will be some amount higher on a monthly basis to connect to the service, remember, adding value to every connection. It's kind of somebody like adding a new channel to a network or whatever. You're charging more money there. So first and foremost, there will be a change in the monthly fee.

The device itself is also more expensive. So the device itself will cost more and hopefully give us an opportunity to make a little bit of -- a little bit more margin, with a, with what one would call a flagship product. So better pricing on hardware for us, in addition to that, the ability to drive increased monthly revenue per connection.

Okay. You mentioned the work that you're doing with BB&T and converting one of your finance suppliers. Does that, in any way, hinder or do you expect it to hinder your marketing effort on equipment?

No, no. What I meant to communicate there was BB&T actually purchased one of the leasing companies that we were doing business with. So what that means is that you had an independent leasing company with a certain amount of resources to bring to bear with leasing funds and now they're owned by BB&T.

So the good news is that they have deeper pockets and the other news is that we're simply working through that. They have new owners now so we're working through that transition of going from doing business with a small leasing company to a bank. But it's something that we expect the net effect of that to be positive.

Okay. You've offered premium support now for a couple of quarters, Steve. Can you talk to the effect it's had on winning customers to taking more equipment and building your penetration within them? What's -- is there any way to sort of gauge how these customers are receiving that additional service?

The additional service of --?

Premium support. The premium support. That you've offered lately.

The premium support. Well, it -- I have to say it's -- premium support has been a success in excess of our expectations. It is something that we expect our customers to continue to enthusiastically embrace. If you believe what I said that this industry is going to go to 100% penetration, that's a lot of work for a lot of companies. And they're going to need this type of help. It's -- something that, A, we not only have an enthusiastic response to now but, B, we're planning to expanding for the expansion of such services.

So is there any way to offer us any sort of metrics on gauging that penetration? How well your customer base has accepted it or is it something you're offering by machine-to-machine basis on just on a customer basis.

Well, premium services is something that we offer on a customer by customer basis. So the typical candidate for a customer for premium services would be, Lee, I'm going to use you as an example, again. Let's say that Lee has 5,000 machines in his market and he has maybe 2,000 on our service and he wants to get the rest of the 5,000 on this service. And he wants to do so in a way that is efficient and it's quick.

We move in with premium services and we essentially help Lee's team manage through that process. We engage everyone. Lee, as the owner of the business, all the way through to the accounting people, the marketing people, et cetera. Everyone has a job to do.

It's a well-thought out, well-honed execution plan to get all of Lee's locations up and running. So it's typically a customer by customer basis and that's a classic candidate. Someone who wants to move quickly and get to 100% penetration. The key motivator for someone like that is usually -- there are a number of things on the list but usually, it's the incremental net operating profits that Lee is seeing from his initial 2,000 locations and he says to himself, I don't want to leave that money on the table any more on the other 3,000 locations.

And I want to move in order to realize that. The other big motivator and we sometimes talk about this on our calls is mobile payment. Lee looks at that and he says -- he thinks to himself, how can I let consumers walk by 3,000 of my retail locations which these are the ones that don't accept any form of cashless. How can I let them walk by with two forms of cashless payments that I can't take: credit and debit cards as well as mobile payment.

So those are the two big motivators that make someone like Lee want to go from 2,000 to 5,000 quickly. That's -- candidly, that's been the greatest benefit to us as mobile payment. It's made people want to move more quickly, and not let consumers walk around with payment methods they can't use.

One last question if I may, Steve. I known I'm pushing the envelope on time and I apologize. But this one is kind of interesting and it relates back to George's question early on and your effort to break into more verticals outside of vending, vis a vis, the expense I see in retail. And the pressure in those -- or for on those operators by minimum wage requirements.

I noticed in Newark Airport, there seemed to be more attended -- unattended vending kiosks. I just want an understanding, from your perspective, on how important it is to sort of put that same sort of land grab philosophy in place that you have on vending in, say, in unattended retail kiosk and how you think we can start monitoring your progress there?

The -- well, what I would say is the dynamic you mentioned is something that everyone in the self-serve retail market, all of the customers that we do business with, whether it is in vending or in kiosk, and other markets, this is very much a topic of discussion. What positive impact can we, meaning the players in those industries, what can they expect in terms of growth as a result of increases in minimum wage? That is going to have some sort of positive impact. We don't know exactly what that would be.

In terms of really the only way for us to measure, cutting to your other question, the only way for us to measure our progress in the other verticals is, essentially, periodically, we will be announcing deals that show progress in that regard. And then obviously, we should be looking at connections in some of those markets as they continue to get more traction.

Right now, vending is getting a lot of attention because it's clearly hit an inflection point. But we continue to have concerted efforts to land customers in the kiosk space and some of these companies have global brands, some of the top brands in the world. We'll -- what I would say there is, stay tuned.

Fair enough. Thanks for taking all my questions, Steve. I appreciate it.

Yes. Thank you.

At this point, we do not have time for additional questions. I will now turn the call back over to Mr. Herbert for closing comments.

Well, I wanted to thank everyone for taking the time today to join us for our earnings call. We appreciate your interest in and support of our Company and very much look forward to reporting out to you on our next call. I hope everyone has a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.