Cantaloupe Inc (CTLP) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the USA Technologies Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms. Lauren Sloane, Investor Relations with USA Technologies. You may begin.

Thank you, and good morning, everyone. This is Lauren Sloane, and welcome to the USA Technologies Third Quarter fiscal 2017 Earnings Conference Call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer; Priyanka Singh, Chief Financial Officer, and Lee Maxwell, Former Interim Chief Financial Officer of the USA Technologies.

Before we begin today's call, I'd like to remind you that all statements included in this call other than statements of historical facts are forward-looking statements. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited to, business, financial, market and economic conditions. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included with our filings with the SEC 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. Details of these items and the reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued earlier this morning and on the Investor Relations page of our website, www.usatech.com.

And with that, I'd now like to turn the call over to Steve. Please go ahead.

Thank you, Lauren, and good morning, everyone. Thank you for joining us to discuss the results of our third quarter of fiscal year 2017. Just over 3 years ago, we announced the set of ambitious goals that at the time, to some, seemed almost unachievable for a company of our size. Nevertheless, we had faith in our team, and our products and technology and in our ability to achieve the goal of 500,000 connections and $100 million revenue run rate by the end of fiscal 2017. As a company, we continued to work hard each quarter to build the company and to drive increasing value for customers and shareholders. We passed through 300,000 and 400,000 connections and this quarter, we passed through the 500,000 connections mark. Further, we drove revenue from a $40 million run rate to a $60 million annual run rate to an $80 million, and now we've achieved a $100 million run rate. We achieved our goals and we achieved them more than a quarter earlier than we had initially anticipated.

As I reflect on the past 3 years, it hasn't been without challenges. However, we maintained our resolve to diligently pursue growth. The moment is one of pride for the Board, the management team, the company and for me personally. I'd like to thank the entire team at USA Technologies for working so hard to achieve these goals, and most importantly, our customers and partners, for their commitment to our company.

Now let's move to the results. As you're likely aware, the third quarter generally is a more seasonally strong quarter for us and we again saw strength in our net connection adds, which were 35,000 bringing total connections to 504,000. We added 500 new customers, bringing our total customer count to 12,400. The third quarter marked the 30th consecutive quarter of year-over-year revenue growth and the top line grew 30% from a year ago. Revenue was $26.5 million, of which $17.5 million was in the recurring revenue line of licensing and transaction fee, and $9 million within hardware. In the third quarter, we continued to see tremendous growth in transactions on our ePort Connect service, as we processed more than $104 million transactions for more than $202 million in value. Overall, we continue to improve our operating and bottom line profitability while growing revenue, consistent with our operating goals.

Moving now to the business overview. USAT's the unattended point-of-sale industry's largest cashless payments provider and we're leading the industry towards both payment card and mobile-based solutions. We continue to expand our offerings to customers such as loyalty programs, interactive media and inventory management. The foundation for this activity is our ePort Connect service, a flexible platform delivering increased choices and utility for our operator customers, that maximizes the value we bring to each connection. Recently, at the NAMA OneShow, we highlighted the ability to integrate with third-party hardware and services to enhance the USAT offering. To expand on those a bit further, we're working with Ingenico, to provide our customers with more hardware options and where Ingenico will be able to leverage our QuickConnect service, as well as our ePort Connect platform for use with its NFC, contactless unattended payment solutions. The important aspect to this news, is that Ingenico is the first international multibillion-dollar mainstream payments hardware company that has entered the unattended retail market. We're very encouraged that Ingenico chose our company to help facilitate their entry into the market. It's an exciting development for us and for the industry. Given our position in the industry, when companies want to move into unattended retail, they choose USA Technologies to work with and our flexible, open, ePort Connect top line platform. Companies like Visa, MasterCard, Chase, Apple, and now, Ingenico. We believe USAT will continue to play a central role for operators, brands and technology partners. We also launched an alliance agreement with Gimme Vending, to utilize our platform to further help our customers maximize the value of each connection to our service. Gimme is the creator of innovative vending technology that gives vending executives better sales, inventory and servicing. The combination of USAT's ePort, cashless acceptance technology with Gimme Vending's software can equip self-serve locations with both cashless and online services capabilities. The app synchs restocking visits in real-time with the operators existing vending management system to populate large picture displays, through a friendly interface, typically on an iPad or similar device. Giving the rev operator real-time access to what and where products are located in the machine and to save time servicing machines, they also make it easier to plan in advance for the days restocking need of a route. At the NAMA OneShow last month, we also highlighted our loyalty program and its integration with Apple Pay. Consistent with what we've said on prior calls, our loyalty program helps drive repeat business for our operators and mobile payment capability is a trend that is accelerating adoption by our customers.

Joining these technologies together, via our engagement with Apple, creates benefits throughout the value chain, including the consumer, operator, Apple Pay and of course, USAT. When a consumer would purchase a product at an ePort enabled location with Apple Pay, we have the ability to push a message to the iPhone, with an opportunity to join the operators loyalty program. These capabilities are also being showcased by Apple and USAT this week, at TRANSACT, formerly ETA, an important payment industry trade event. It's really a view into the future of unattended consumer interaction. Also, our ePort interactive solution continued gaining traction in the market during the third quarter, with milestones accomplished on both the service offering and the hardware. On hardware, shipments of ePort Interactive were very robust in the third quarter. For the service offering, we've signed 2 contracts with multibillion-dollar global companies, as anchor advertisers, around which we intend to continue building our advertising program on the ePort Interactive platform. We're in the early days of this initiative, but it certainly looks to be off to a strong start. The unattended payments market continues to see growth in connections and capability and USA Technologies has been driving the market forward toward increasing connectivity. We continue to see the number of consumers in this market adopt cashless in increasing numbers, and are well positioned to continue driving our platform into additional location to benefit our operators. The achievement of our long-standing goals is a testament to our dedication, to our work and to the industry, and we look forward to continued growth. One important step we've taken toward ensuring our continuing success is hiring a permanent CFO.

I'd like to welcome Priyanka Singh to the company as Chief Financial Officer. With this position, we sought a highly experienced finance executive in the payments industry, who is accustomed to an environment of rapid growth and I'm thrilled Priyanka could join us as we continue to drive growth and profitability. We expect her to bring, among other things, further financial and operational efficiencies, as well as strategic insight for the business. I'd also like to take a moment to thank Lee Maxwell for his dedicated service as our interim CFO.

With that, I'll now turn the call to Priyanka to review the numbers. Priyanka?

Thank you Steve. Good morning, everyone. Before I review the financial results for the quarter, I'd like to take this opportunity to share my enthusiasm to be a part of the USA Technologies team and say that I'm excited to help continue the growth of the company.

Now to review the financials. Net connections for the quarter totaled 35,000, compared to 32,000 in the first quarter of last year. We added 40,000 growth connections, compared to 34,000 growth connections in Q3 of last year. There were approximately 5,000 deactivations, which we would consider a typical level. We added 500 new customers, ending the quarter at 12,400 customers, a 15% increase from last year. We continue to derive increases in connections, primarily from deeper penetration of existing customer accounts and we continue to grow both the number and dollar value of transactions. This quarter, we had $105 million total transactions, representing $203 million in transaction volume, increases of 24 -- 28% and 34% respectively from last year. Year-over-year growth was driven by an increase in total connections to our ePort Connect service, which was 504,000 at the end of third quarter, representing a 26% increase from the 401,000 at the end of the same quarter last year. Approximately 88% of growth new connections came from existing customers, which is a strong indication to us of the increasing move by our customers towards 100% adoption of our cashless technology. Revenue was up 30% this quarter, including a 19% growth in license and transaction fee revenue and a 60% growth in hardware. Total revenue this quarter was a record $26.5 million, compared to $20.4 million last year. License and transaction fees were $17.5 million, compared to $14.7 million last year, representing a 19% increase. These fees, which are comprised of recurring monthly service plus transaction processing accounted for approximately 66% of our total revenue. Equipment sales were $9 million, compared to $5.6 million last year, representing a 60% increase. The increases are attributable to an overall increase in demand for cashless acceptance in our stock markets, facilitated by our QuickStart program. Sale of our equipment, drive long-term higher margin L&T revenue. QuickStart and straight sales accounted for approximately 91% of new the connections added during the quarter, compared to 93% in the same quarter last year. The company's QuickStart program with 60-month funding provided by third-party financing improved the company's cash flow from operations. Gross profit for the quarter was $6.6 million, compared to $5.7 million from a year ago, representing a 17% increase. Total gross margin was 25%, compared to 27.9% in the same quarter last year.

Breaking down the margin, in terms of the L&T component, there was an increase to 32% from last quarter 31.6%. Our target remains in the low to mid-30s, and we're working hard to -- working toward the high end of that range by moving on both sides of the L&T equation. Reducing wireless and other costs, and increasing revenue to drive initiatives. And also leveraging upsell opportunities to drive more value generation from our existing installed base. In terms of equipment, the margin was 11.6%, consistent with the same quarter a year ago, which was 11.5%. As a reminder, this is within our guidance range of low to mid-teens. We want to remind everyone that our strategy towards equipment sales will be to use it as an enabler for driving long-term recurring revenue stream.

As we have said in the past, we are trying to move the entire market towards enabling 100% of locations to cashless and mobile payments. We believe that this will help of us serve as one of several catalysts towards that end. We continue to focus on our operating expenses, as we have discussed from prior calls. OpEx this quarter was $6.2 million, compared to $6.1 million in the prior quarter. SG&A expenses was $5.9 million in the third quarter, a slight increase in the $5.8 million in the prior quarter. While SG&A has been somewhat low in the last 2 quarters, we expect the incremental increases, as we focus on our annual software report assessment and year-end testing. As a result, we expect Q4 '17 SG&A to be in the mid- to upper $6 million range, consistent with our prior guidance.

For the quarter, adjusted EBITDA was $1.9 million, compared to $1.3 million last year. This increase was due to increased gross profit. Operating income was $419,000, compared to an operating loss of $595,000 last year. On a non-GAAP basis, net income was $345,000, compared to a non-GAAP net loss of $87,000 last year. This increase was primarily due to increase in gross profit. Please refer to the table and the non-GAAP reconciliations in the press release, which has been posted on our website for additional information, regarding our non-GAAP financial measures. Net income on a GAAP basis was $136,000, compared to a net loss of $5.4 million for the comparable period a year ago. As a reminder, in the third quarter of last year, our net income result was impacted by the $4.8 million non-cash expense for the fair value warrant liability adjustment. As you know, the warrants were exercised during the September 30, 2016 quarter, so the fair value charges will no longer affect future period financial statement.

Now looking at the balance sheet. Net working capital decreased $2.9 million from last quarter to $11.9 million, primarily as a result of the increase in accounts payable and accrued expenses. Net cash provided by operating activities for the quarter, was $0.8 million, a decrease from $4.3 million in the same period last year. This decrease was driven by an increase in payments to suppliers and increase in finance receivables from the QuickStart program, partially offset by a reduction in receivables.

This concludes my remarks, and now I would like to turn the call back to Steve. Thank you.

Thank you, very much, Priyanka. And thank you, everyone for joining us this morning. USA Technologies continues to move the market for unattended retail payments with our flexible platform, as we expand our offering, grow revenue, connections and net income. We continue to expect to add between 115,000 and 125,000 net new connections for fiscal '17, bringing total connections to our service to a range of 544,000 to 554,000. We continue to anticipate revenue to be in the range of $95 million to $100 million.

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

(Operator Instructions) And our first question comes from George Sutton with Craig-Hallum.

Hey good morning, it's Jason on for George. And welcome to the call Priyanka.

Thank you.

Steve, wondering if you can just step back and give us your thoughts on the growth opportunity in the industry. I know that we've talked about the low penetration rates here, but, what are the limitations to that growth? Are there any changes in the competitive environment? Is it more marketing dollars need to flow into the industry? Just any thoughts on any changes in the opportunity?

Sure. Thank you for the question. I love that question. I'll answer that question, and of course, this is a matter, it's largely a matter of opinion. I guess, I would call it informed opinion, as much as I can be informed. But nevertheless, here it goes. I would answer that question, first of all, by saying that we believe right now the industry is entering what we would call the next inflection point. We come to this conclusion by a number of factors: The behavior of customers, of course were just coming off of NAMA, where there was, you know, you have an unprecedented amount of customer interaction in a concentrated period of time. And then there's simply activity in the marketplace. So right now, and in this moment, we feel like that's something that's occurring. Of course, you only know for sure that an inflection point happened -- you only know after it happens. But that's kind of where we feel that we are now. From a growth perspective, as we think about this industry and let's just use the domestic number, the unattended retail space, we're still -- we're sticking to our number. We believe the number of Visa, MasterCard and Chase and other people that we deal with, and I think Ingenico believes it too, we need to talk about that. But the long-term prospects for a market that is largely unpenetrated and if at another inflection point with our company still in a pretty strong leadership position, I believe our long-term growth prospects are very good. And I think the growth prospects, that the industry are very good, because we believe, and others believe, that all of those locations will be connected at some point. So short-term inflection, we believe. Long-term, we believe that whole industry will get connected, we're in a leadership position, we're doing everything to take full advantage of that and protect it. I think one fact that we absolutely cannot overlook as a group here, is the fact that there are lots of good things going on, but Ingenico is a big company, everyone can -- many people already know who they are, but if you don't, I would encourage you to take a look. I think they are the number 1 or 2 point-of-sale manufacturer in the world, they're multibillion-dollars, they're in virtually every country. They would not enter a market if they didn't see millions of potential device sales. They just wouldn't do it. And I don't want to share too much about Ingenico, but they thought long and hard about this, and we worked with them for quite some time. So I think that is -- we're going to look back and their entry, we'll look back and see that, that was something of a bellwether moment.

Can you provide some more detail..

Sorry about the long-winded answer, but it's an important question about short-term and long-term growth.

Yes, I wanted to dig into Ingenico a little bit more, as you started to go in that direction. But can you give us more details on the nature of that relationship? What additional capabilities does USA Technologies gain, working with Ingenico when you go to market?

Well, first of all, the most obvious is, we have a hardware choice, and by the way, that hardware sale, it doesn't matter if we sell our device or somebody else's device, we still get hardware revenue. So let's just clear that up right away. Secondly, the -- we obviously have more choice for our customers, they've got a major league manufacturer, who has support all over the world for their hardware, so wherever we want to go, if we want to put devices out in the marketplace and support our customers, they have a service infrastructure that can help make that happen. The -- going a little bit further, obviously, once again, they have a global footprint and I would envision our company's working together, to push into the unattended market, both in the United States and outside. So on the micro level, new choices for our customers, big-time manufacturer, tons of capacity, not that we're constrained right now, but it's nice to have more capacity and more choice. And then as you look forward, lots of arms and legs and kind of feet on the street to help with growth in the future. There's a lot of ground to cover.

Okay. Just the last one for me. Any updates on the pricing environment that you're seeing right now? Are you changing anything with promotions? Or are you seeing anything in the market that's different from a pricing perspective?

Not since our last discussion, in our last quarter, there are no macro level pricing deviations in the market. The competitive environment is largely the same as it was from our last call. There are new entrants like Ingenico, but we see that as a good thing. We don't see it as a competitive threat.

Our next question comes from Mike Latimore with Northland Capital.

This is Nick Altmann on for Mike. First one, your connections guidance suggests that 4Q will be a record connections quarter by a pretty substantial margin. Can you guys just talk about how much visibility you have into that number? And whether or not it depends on a large order or 2 large orders, or is the pipeline pretty diverse there?

Well, great question. Good morning, by the way and thanks for joining us. First of all, the visibility -- the visibility is really an easy answer. If you look at where our business comes from, 80% of our business in any given quarter, I don't have the number in front of me for this quarter, but somewhere in the neighborhood, every quarter for the past, I don't know how many quarters, has come from our existing customer base. So our visibility goes to a very long list of customers and where we think our connections are going to come from. Your second question was, oh I remember now, forgive me. The -- are you reliant on a couple of big deals. Every quarter has a mix of what we call, what I call base hits, and then some bigger hits. It might be a home run, it might be a triple, but it really is typically a mix. Every quarter of up and down the street business and base hits and then some larger wins.

Okay. Just going off that, did your largest customer add any connections in the quarter?

Yes. Absolutely.

Okay. Okay, good. Okay. And then, what do you guys see license and transactions gross margin being in 4Q and I guess what are the levers to get there?

I can go ahead. So license and transaction margins for this quarter was up versus the prior quarter. And that's a great sign, and it's indicative of what we said in the prior quarter, in the short run, we are working on upselling this to the existing customer base, we're working on pricing and the third lever of that is our cost, whereas they're working on our transaction cost, as well as our wireless cost, we will see margin continuing to be in the low to mid-30s, as we've indicated in the past, and we expect to be in the same range for the next quarter as well.

And our next question comes from Peter Rabover with Artko Capital.

I just wanted to ask, if you guys had any comments on the aging, I guess, penetration of your customer base? So we've talked about this the past, but I guess customers that you've had for more than 1 year or 2 years. What's the penetration rate there versus the new customers? If you can comment on that, that will be great.

Good morning Peter, it's Steve. So, I want to make sure -- I want to make sure that we understand your question. Was the first part of your question related to the overall penetration rate of our existing customer base? And what that looks like?

Yes, and then if you could parse it out, to I guess like any detailed versus like 1-year-old customers, 2-year-old customers, et cetera? That will be great.

Right, okay. Well, the, first of all, if you look at our existing customer base, we have 12,400 customers now. They're probably somewhere there -- we believe the number of total connections is somewhere in the, let me get a little bit more specific, 2.25 million to 2.5 million range. And at 500,000 or so, we're somewhere in the neighborhood of 25% penetration. That's an average penetration rate. Then we have customers, Peter, that, they range from 5% penetration, they might be getting started and they're at 5% or 10% and we have some number at 50%. And then we have increasing numbers of customers that are moving to 100%. That is a huge thrust within our selling and marketing organization, pushing customers to the 100% mark. So to answer your question, again, just to repeat the penetration levels really run the gamut, but there are -- customers are moving to let's call it 50%, and 100%, and that's really where we're pushing on. And that's where the industry, this is one of the data points, when we say, we think we're at another inflection point, and we believe the industry is going to be a 100% connected, it's because in the industry and the customer base, are all saying that's where they're going to go.

That's great. Maybe, let me ask it another way. How long do you think it takes a customer to go from the average 20% to 100%? How many years from a timing perspective?

There is no single answer. And that's going to change. That -- the rate at which that happens is going to change. It started, the 100% movement that the customers going that way started at a very slow pace, and that pace is picking up. And if this -- if the adoption of this payment method, meaning cashless, in vending in particular, follows at the same pattern that and I'm dating my myself, the implementation of the dollar bill acceptor, if that follows that same pattern, there are at least 5 million more connections to get done in vending. And right now, let's say the industry is connecting at somewhere in the neighborhood of, let's call it 50,000 a quarter, maybe, well that would take 20 odd years to get done. That's not what's going to happen, and that's not what happened with dollar bill acceptors. You hit a point in time, where customers went to a 100%, in a very rapid fashion, so the industry was delivering dollar bill acceptors to the tune of 150,000, 200,000, 250,000 per quarter in order to get it done over a -- say a 4 to 5 or 6-year period. That has to happen, if it's to be done in a reasonable amount of time. So if history repeats itself, we're in for some interesting times. Now you can't ask me when that's going to happen, because that's the billion dollar question. Nobody knows the answer to that.

Fair enough. What do you think the bottleneck is right now, for you and maybe for the industry?

I don't think there is a bottleneck. I really don't think there is a bottleneck. I think the industry is moving, and the numbers continue to increase, both the actions and the rhetoric are all pointing in the right direction and the very same direction as last time. So I really don't think there's a -- I don't think there's a bottleneck. I think it's just a matter of time before we kick up, almost exponentially, from numbers that we're seeing right now. And of course, I want to make sure I qualify this, by saying this is a matter of opinion, you're asking me what I think the market might do, this affects you -- this would affect USA and anybody else using this space.

Fair enough. And you think you have the capacity to meet that kind of 200,000, 250,000 a quarter demand, if that takes off like a hockey stick, like both sales with your sales force and your equipment contracts et cetera?

I'm really glad you asked that question. We -- there are couple of us working in the company, that were working with Pepsi when the dollar bill validator thing happened. And unfortunately we were on the receiving end of essentially not having what was necessary to meet the needs of the market as it took off. It was actually Mike Lawlor, he's our Chief Services Officer, and we started a dialogue in the company, I mean it has to be 18 months ago, when we were thinking about this market, and we said, you know what, we're not going to let that happen to USA Technologies. So we started preparing a long time ago for the possibility of this happening. And I can't go through all of the examples, but we've gone -- you know who our partners are, Chase, Verizon, our manufacturers, we've gone to the supply chain, we've looked at our business across the board. And we've thought about, if volume goes from X to 5x to 10x, in terms of activations, devices and transactions and so forth, are we ready for that? We started preparing quite some time ago.

Comes from Josh Elving with Lake Street Capital.

So I have a couple of questions and I apologize if these have been addressed. But I just want to touch base. The higher equipment sales in the quarter, obviously, very strong. Was that due to higher price point terminal sales? Or can you maybe give us a little color as to why those were so strong?

The -- well, 35,000 -- they were higher sales of terminals. 35,000 terminals. And in addition to that, I think, further boosting that number would be kind of larger percentage of interactive devices as well. We've said that, I think we've said over and over that we think 20% would be our mix of interactive. I think that mix was a little bit higher in the quarter. So.

Okay. And then just trying to get a better sense, by the way congratulations on the trends that we've seen in the L&T gross margin. That does appear to be stabilizing, improving over the last several quarters. So that's fantastic to see. Maybe, can you offer up a little bit of additional color, is 32% still that target range for the L&T gross margin?

I think, as Priyanka had mentioned, she talked about margins a few minute ago. And our target range right now, remains the same. It's low- to mid-30s. And we're just going to continue to chip away at that, working on both -- working on it from a number of different dimensions that we've talked about in the past. Pushing on the cost side of the equation, trying to drive additional revenue, whether it's through pricing or additional service upsells. So that -- we're just going to continue to push that strategy and hopefully that number will improve.

Okay, and then last question for me. And again, I apologize if Priyanka mentioned this. On the SG&A, I've been having trouble getting my head around exactly, or how to model this line. And I know that there's been some Starbucks expenses in there that have kind of moved the numbers around a little bit. Can you maybe kind of talk a little bit about expectations for maybe the June quarter, and into next year? Maybe from an annual perspective or maybe just talk a little bit about the cadence, what the quarterly numbers might look like, given some of the year end, additional accounting expenses?

Absolutely. So SG&A has been a little bit light for the past 2 quarters. And as you indicated the trend is more back ended within the year. So we do expect, as we focus on our annual [software] program, and year-end testing, we do expect Q4 '17 at unit to be in the mid- to high 6s range which is consistent with our prior guidance.

And then, I don't know if the right term is seasonal but looking into 2018, maybe higher in the September and June quarters, lower in the December, March quarters, is that the right way to think about it?

Yes, the Q1 of '18 would have a similar trend. We do see our highest expenses in Q4 and Q1 of the following year. So we do expect that trend to continue this year as well.

That is all the time we have for questions. I would now like to turn the call back over to Mr. Herbert for closing remarks.

Thank you, operator. And thanks, to everyone for taking the time to join our call today. We sincerely appreciate your support and your interest in our company. And look forward to reporting back to you on our next quarter. Operator?

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