Cantaloupe Inc (CTLP) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the USA Technologies Second Quarter Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Monica Gould, Investor Relations for USA Technologies. Ma'am, you may begin.

Thank you, and good morning, everyone. Welcome to the USA Technologies Second Quarter Fiscal 2018 Earnings Conference Call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer; and Priyanka Singh, Chief Financial Officer. Before we begin today's call, I would like to remind you that all statements included in this call, other than statements of historical facts, are forward-looking in nature. 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 day 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 non-GAAP financial measures are presentation of the most directly comparable GAAP financial measures, and the reconciliation between these non-GAAP financial measures and the most comparable GAAP financial measures can be found in our press release issued earlier this morning, which has been posted on the Investor Relations section of our website, www.usatech.com.

With that, I'd like to turn the call over to Steve Herbert. Steve?

Thank you, Monica, and good morning, everyone. Thank you for joining us to discuss our second quarter fiscal year 2018 results. I'm going to start by updating you on our progress in integrating our recent acquisition of Cantaloupe Systems, which closed on November 9. I will then provide a brief overview of the quarter and share some of our recent business highlights. After my remarks, I will turn the call over to Priyanka Singh, our CFO, to discuss our financial results and guidance in more detail.

We're very pleased to have completed the acquisition of Cantaloupe during our second fiscal quarter. With this combination, we're now able to offer an unprecedented value proposition for existing and prospective customers in the unattended retail market with a turnkey enterprise platform that can help customers increase sales, decrease their operational cost and enable them to run their businesses more efficiently. The combined platform provides a unique and scalable solution, well positioned to help USAT capture market share in nontraditional and emerging markets that also require a comprehensive payments and logistics solution to enable their business model.

As a reminder, the services we obtain via the acquisition of Cantaloupe bring highly complementary value-added, cloud-based and mobile services. Enabling customers, among other things, to manage their inventory, warehouse, accounting and other back office functions as well as dynamic routing, which optimizes delivery schedules. There's also a module that enables customers to optimize space to sales in each location. These value-added services offer customers the benefit of increased revenue from improved merchandising and reduced downtime, while decreasing route expenses. Adding these services to the consumer-facing services, such as digital payments and loyalty, the digital content included in our ePort Connect service offers an industry best-of-breed combination of services, which allows our customers to plug into an enterprise software platform to run virtually their entire business from the warehouse to the consumer.

Over the last 3 months, we've made significant progress in integrating Cantaloupe into our organization. We were able to move very quickly because the 2 companies had so many synergies. And, in addition, we knew each other well, having worked together on joint customers for a number of years. Since closing the acquisition, our primary focus has been on integrating our sales forces as well as on customer acquisition to drive revenue. We have integrated the work and personnel of several other functions within the combined enterprise. We have also made substantive progress toward creating efficiencies between the 2 organizations, which Priyanka will cover in more detail.

Our second quarter performance reflects the continued adoption of cashless payments and associated services in the unattended retail market. We expanded our customer base substantially in the quarter. With the addition of 1,800 new customers, of which 1,400 came to us through our acquisition of Cantaloupe, bringing our total number -- our total customer count to 15,050 on our ePort Connect service. These new customers will add both connections as well as new services to existing connections and will drive revenue growth and margin expansion over the coming quarters.

Net new connections rose by 311,000 during the quarter, with approximately 270,000 coming to us through our acquisition of Cantaloupe, bringing our total connection count to 905,000 on the ePort Connect service. Over 622,000 or nearly 70% of our total combined connections are now NFC-enabled. The addition of Cantaloupe NFC locations as well as new organic connections for the company for Q2 significantly increases what we believe was already the largest footprint that accepts NFC-based mobile payments, controlled by a single entity in the United States, if not the world.

Moreover, Apple has indicated to us that these locations represent the largest single deployment of Apple Pay, accounting for nearly 10% of the approximately 6 million Apple Pay acceptance points in the U.S. This underscores the importance of USAT as an enabler and a gateway for mobile payment partners. Second quarter revenue increased 26% on a pro forma basis from the year-ago period and increased 49% on a historical basis, which represents an acceleration in our top line growth and marks our 33rd consecutive quarter of year-over-year revenue growth. Given our increased scale and by continuing to leverage operating expenses, we were successful in converting this revenue growth to improving our non-GAAP profitability. Our service continues to be utilized by consumers at an increasing rate, including the 2 months of results from Cantaloupe in the second quarter, we processed nearly 145 million transactions for approximately $273 million in value. As a result, we exited the second quarter on an annual run rate of approximately $1.1 billion for transaction processing.

Now I'd like to turn over to some of our recent business highlights. We are very pleased with the early success we've achieved in cross-selling our new cloud-based analytic software into the existing USAT customer base. During the month of December alone, we signed 20 customer agreements to add one or more of the performance optimization elements and our new analytics software into their existing ePort Connect cashless payment services. Importantly, 70% of those customers chose both our Seed Pro optimization platform and Seed Office vending management system, or VMS, for managing back office functions. Key factors in driving our customers' decision to rapidly adopt our new end-to-end platform, with the potential to improve operational efficiency, achieve scalability and maximize the investment that they've already made in our leading-edge ePort Connect platform. For USAT, we were able to increase our revenue per connection, while bringing more value to our customers. And we added, approximately, 3,400 connections in the process as existing customers took the opportunity to also expand their cashless locations. We expect to begin generating revenue from these contract expansions in the fiscal third quarter. Our largest cross-sell during the quarter was the Canteen franchisee in the Northeast, who purchased our analytic software, Seed Pro and Seed Office for logistics and VMS, thus allowing this customer to fully leverage USAT's end-to-end enterprise platform for unattended retail. Moreover, Seed Pro's ability to leverage real-time data from connected machines simply made it more compelling for this customer to commit to an accelerated plan for deploying USAT's ePort Connect to 100% of their business. And in this particular case, the customer added 1,300 new connections to our service to bring them to 100% penetration.

Moreover, we just completed a very well-attended, 2-day technology summit for our customers to further introduce them to our newly acquired capabilities, share success stories of how USAT can help them increase revenue and operating efficiencies while decreasing costs and discussing our technology roadmap, which will enable customers to benefit from the latest innovations in this rapidly changing market. This was the first in a series of 3 customer events we plan to host across the United States this month.

In closing, we're pleased with the immediate momentum created through the acquisition and the addition of the Seed software services to our portfolio, but we are also looking forward to the future opportunity that it provides us to pursue new, unattended markets with a similar need for our comprehensive payments and logistics service. In addition, the growing tide of digital payment trends, including increased volume of mobile wallet transactions, in combination with a groundswell of consumer demand for more unattended retail options, is driving disruptive new shopping experiences like Amazon Go, further underscoring that unattended retail is not only here to stay, but remains a vital and growing blue ocean opportunity.

As leaders in the unattended retail space, we believe that USAT's not only well-positioned to take full advantage of these mounting trends, but that we offer these business the most comprehensive, innovative and scalable solution available to the unattended market today. We're very pleased with our rapid integration of Cantaloupe and the marketplace's initial response to our new comprehensive, end-to-end solution. This success is reflected in our strong second fiscal quarter results, and we are optimistic looking out to the back half of our fiscal year. I'm particularly pleased that we're now within striking distance of 1 million total connections to our service, a historic milestone for our company.

With that, I'll now turn the call over to Priyanka to provide a more detailed financial overview of our results. Priyanka?

Thank you, Steve, and good morning, everyone. We are pleased to report strong financial results for our first quarter as a combined company. Total revenue grew 49% to $32.5 million, which included, approximately, 2 months of contribution from the Cantaloupe acquisition, which closed on November 9. We also generated over 100 basis point expansion in our adjusted EBITDA margins, highlighting the scalability of our business model and demonstrating our ability to convert growth in top line performance into solid, profitable results. On a pro forma basis, meaning if we had Cantaloupe for a full quarter last year and this year, total revenues increased 26% year-over-year.

As evident by our strong financial results, our combined company will have a powerful business model and a compelling financial profile. Our business model features a high proportion of recurring revenue from a sticky customer base. In addition, we expect that the expansion of our solutions in adjacent verticals will continue to drive robust organic growth. We believe our highly competitive product suite as well as our ability to expand margins, due to our scalable technology, positions us to be able to drive sustainable earnings.

Now I would like to briefly review USA Technologies' second quarter results and our outlook for fiscal 2018. We are pleased to report another solid quarter with total revenues increasing 49% to $32.5 million and our non-GAAP net income of $0.02 per share. Our results in the second quarter was largely driven by our growing connection count and our continued execution on a large and growing market opportunity. We added 311,000 net connections in the second quarter, which included approximately 270,000 Cantaloupe connections from the acquisition on November 9 last year.

Adjusting for existing Cantaloupe connections, we added 41,000 net new connections during the second quarter. Our total connection count has grown to over 900,000 connections, which is nearly double our total stand-alone USAT connections at the second quarter of last year. We also added 1,800 new customers, which included approximately 1,400 Cantaloupe customers. We ended the quarter with a total of 15,050 customers, up from 11,900 customers in the same quarter of last year.

License and transaction fees were $22.9 million or 70% of our total revenue. Equipment sales were $9.7 million or 30% of total revenue. License and transaction fees increased 37.3% and equipment sales grew 88.6% year-over-year.

Now turning to margins. We continue to see L&T margins expand due to the impact of high-margin ancillary product. As we noted during our follow-on offering in July of last year, our intention was to pursue our acquisition opportunities that could be accretive and strategically complementary. We executed in this strategy and closed our acquisition of Cantaloupe in the second quarter. We are pleased to report that we are already seeing the benefits of our combination, specifically related to expanding our L&T margin. Our L&T gross margin this quarter was 37.2%, which is a 560 basis point expansion compared to USAT's stand-alone margin of 31.6% in the second quarter of last year. We continue to expect that our L&T margins will expand towards our long-term target of 40%.

Our equipment margin were 7.4% in the second quarter. As we have stated in the past and consistent with Cantaloupe's operations, our strategy is to use equipment sales as an enabler for driving long-term, higher margin, recurring revenue by leveraging the relationship made from the initial connection. We expect equipment margin to remain in the mid- to high-single digits for the remainder of fiscal 2018.

Moving on to expenses. SG&A expenses for the second quarter were $8.3 million or 25.6% of revenue. SG&A, as a percentage of revenue, decreased from approximately 26.6% last year, driven by increased scale, operating leverage and our focus on driving discipline and expense management.

Our adjusted operating income was $627,000, non-GAAP net income was $1.2 million or $0.02 per share. Non-GAAP net income excludes a noncash tax charge of $9.1 million or $0.17 per share, which is primarily related to the enactment of the U.S. Tax Cuts and Jobs Act and a $3.4 million or $0.06 one-time acquisition and integration-related expense. Our adjusted EBITDA at $2.9 million increased 68% year-over-year.

Turning to the balance sheet. Net working capital totaled $13 million at the end of the second quarter. Our cash balance was $15.4 million. We have been able to expand into a growing market while managing our costs efficiently. We believe that cost-reduction actions that we have implemented in a short span of time will result in annualized cost savings of approximately $3 million and that these actions position the company well to grow our revenue while improving profitability. Most of these will come from harmonizing our combined company's operations and streamlining profit costs.

Following our strong second quarter results, we are increasing our outlook for fiscal year 2018. Given the success we have seen so far with our combined offering, we are raising our revenue guidance to be between $140 million to $145 million and adjusted EBITDA to between $13.5 million to $14.5 million. We believe that our total connections at the end of fiscal year 2018 will range from 1.03 million to 1.07 million. We continue to expect the Cantaloupe transaction to be accretive in fiscal 2018, net of one-time transaction and integration expenses and any purchase accounting adjustments.

This concludes our financial update. I will now turn the call back to Steve. Thank you.

Thank you, Priyanka. And now, operator, we would like to open the call to Q&A.

(Operator Instructions) Our first question comes from Bob Napoli with William Blair.

Priyanka, in the revenue guidance, can you break that down further between L&T and equipment sales? I mean, do you expect very heavy equipment sales in the March and June quarters? A little -- a breakdown would be helpful.

So you're right, our second half of the year typically is more skewed towards equipment, and we do expect that trend to continue because of the seasonality of our equipment sales being more heavily focused towards the second half. So if you look at our performance in last year, that would be a good indication of how we expect the revenue to be.

Okay. Any -- how about a -- do you have a range for the L&T revenue for the full year?

We usually don't split it out, we had about 70% in second quarter, 30% equipment, expect it to be a little bit lesser than that as we get into the second half. I would say somewhere between 65% to 67%.

Okay. And then the cross-sells are -- I mean, that sounds like you're making a lot of progress there. Can you give any feel for what revenue that represents on the cross-sells? Or what is a reasonable revenue synergy? And then in fiscal '19 from cross-sells?

That's a great question, Bob. And yes, we're very pleased with the early success that we've already seen on the cross-sell side and we're excited to what that will mean in 2018 and 2019 fiscal. Revenue synergies, that's tough to quantify and tough to track because there is a part of the business that's organically growing and then how do we measure how much is related to cross-sell and revenue synergies. So we're not guiding to a number in 2019 right now. But what I can say is, if you look at our expansion on the L&T margin and a combined basis, they're pleased with that. And as the cross-sell opportunities grow and as we see more of an impact in fiscal 2019, we do expect our L&T margins to continue to expand.

Okay. And last question -- I mean, you've gotten a lot bigger, obviously, and your transaction processing volume has grown dramatically, I think, since you signed your contract with Chase Paymentech. And I think you probably have a pretty high rate on that, like, maybe 500 basis points of -- I mean, you should be able to reduce that materially, I would think. And I know that contract has another 2 years to go. But I would imagine they want your business and would renegotiate it. Are there opportunities to bring down that payment processing fee?

That's a great question, Bob, again. And those discussions are always ongoing. And if you look at our -- just in the USAT stand-alone basis, I think we've done a great job over the last 6 or 8 quarters of continually driving our L&T margins up, which has happened as a result of negotiating on our processing margins. And those discussions are continuing to happen, as we speak. And we do expect to see benefits from those as we grow in scale over the next couple of quarters.

Our next question comes from Gary Prestopino with Barrington.

Couple of questions here and not trying to nitpick or anything, but just want to get an understanding, this gross margin degradation on equipment. I know it's an enabler for the long-term L&T revenue, but is that because you're signing bigger and bigger deals? Or is there something actually going on within the industry that's forcing those margins down?

Gary, I think what you're going to see, and Priyanka you can expand on this, but what you're going to see is -- it's the same story, right? We've always said that we will flex on hardware in order to acquire the long term, sticky, recurring revenue associated with our services. And the stakes for that are now much higher, because if we had 4 services -- 4 core services previously, now we have 8. So the revenue opportunity associated with that hardware sale long- term is very significant. But I think what we'll see is the number will fluctuate.

And the only thing I'll add to that, Gary, to what Steve already said was, we've talked about equipment being an enabler for a while now driving long-term recurring, high-margin revenue. And at the end of the day, we view ourselves as a software company but not a hardware company. And we look at equipment merely as a way to drive that revenue. Secondly, with the acquisition of Cantaloupe, we're now able to provide a combined complementary product suite, which allows the customer to not just raise revenue, but also cut down costs. So it gives us a very unique ability to help drive the market to a faster inflection point, and it also help drive the market to a faster conversion. So with that, wherever we see a market-moving strategic customers, and we need to be flexible on margins, we are willing to do that if the customer makes a commitment to go 100% on all our services. Because at the end of the day, it will help drive the sticky, high-margin revenue in the future.

Okay. And then you talked about the cross-sells on the software, which is great. But can you maybe -- I know you're only 2 months into this, but I recall from conversations that the majority of Cantaloupe's connections were software-related, not cashless. Did you have any success in transitioning some of the legacy Cantaloupe connections to a cashless method of accepting payments?

Gary, we may have had some measure of success with that in the -- I guess, the final 6 weeks of the quarter when we were together. And of course, we'll continue to push in that regard. When you think about the two cross-sell opportunities, the -- there were approximately 1,400 customers that came over, the large majority of which have those particular software services and maybe not cashless. So there is an opportunity there. On the other side of the equation, the other cross-sell opportunity, there are 13,500 customers and many -- couple million connections in their base, as we've talked about over the years, that can take the services that came to us through Cantaloupe. So the size of those two opportunities is dramatically different, but they're both important. And it's nice to have few cross-sell opportunities.

Okay. And I would assume the majority of those 13,000, was it 500 customers that you had legacy, did they have any Cantaloupe software?

There was some overlap, Gary. I believe it was somewhere in the neighborhood of 30,000 to 40,000 locations. When the companies came together, and they were getting services from both companies but really very little. So we have a lot of what some would call whitespace, a considerable amount of whitespace within our existing customer base to sell these services, they're already connected to the service, so they're great candidates. And as I mentioned in the prepared remarks, now what has -- what appears to be happening is -- and this is what we thought, it's nice when things happen the way you plan them and the way you draw it up on paper, we thought that the additional value from the additional services, for example, from 4 services to 8, would also help speed up adoption and speed up customers moving to 100%. So we're really excited about that opportunity.

Sounds good. And then, lastly, Priyanka, as you're getting bigger on a connection basis, I believe you have 2 lessors out there for the equipment. Can you talk about the status of their ability to take on more of this equipment financing? And are you out there looking for other entities to finance the equipment for you?

So we are out there, we are now approximately about 5 different companies that we work with and pretty sizable, big names who can take much more volume than what we currently have. So we're set up pretty well to be able to manage the volume.

So you've got 5 now and that's an increase from what I remember when it was last discussed.

Our next question comes from George Sutton with Craig-Hallum.

Steve, I would have loved to have been a fly on the wall at the Technology Summit, but I was not. So I wondered if you can, kind of, walk through the discussions there relative to ROIs that you're starting to talk to customers about. Any sort of pushbacks you're seeing? It just doesn't make a lot of analytical sense to those of us that track this that everyone wouldn't have a full set of capabilities.

Sure. And George, thanks for the question, and sorry you weren't here. But the -- first of all, just from a subjective basis, Priyanka and I have been here with these customers for the last, what, 2 days? And the response is just terrific. It -- they very much see this as a combination of best-of-breed companies, they see tremendous value in a combination of these services and, clearly, the opportunity to get a better ROI on the connections that they bring on to their service. We don't have the numbers right in front of us that were put in front of our customers and some of the data was specific to them and, sort of, private. These are -- this wasn't a room -- we didn't invite a thousand customers, these are our top customers. We'll probably be meeting face-to-face with somewhere between 100 and 150 of our very top customers around the country. And so the numbers we put in front of them and ROI is really specific to them. And I'm not quite sure they'd want us to broadcast this. So I'm not -- I'm sorry to not be able to answer that directly, but it is a superior ROI to what they would have been able to get in the past.

Got you. And just a sense of why would customers knowing -- I mean, you've talked about ROIs just from having the cashless piece of this, let alone some of your new offerings that come from Cantaloupe. What sort of pushbacks are you getting? Is it still a logistic pushback? Is it is a dollars upfront pushback? It seems like you've satisfied those arguments.

What we have -- we've certainly -- from the perspective of the money upfront, so many of our customers are moving through the QuickStart program. It's gotta be in the 90s in terms of a percentage. And -- so we've taken that barrier successfully out of the way. The -- and the logistics piece through our deployment services and our premium services, we're taking that barrier out of the way. One of the strengths that the Cantaloupe team brought to the table was additional horsepower from a deployment perspective. If you think about the history of that company, their deployments were -- in the early days, their deployments were all 100% because they were connecting all of the machines to get data to route trucks. So a deployment for them from the very early days was a major undertaking. So they have a finely-tuned team to help take customers to 100% penetration, and we're able to combine those 2 teams and take the best of the best of our people and processes to go after that. So this is a long-winded way of saying, well, we've made progress against the logistics piece, which really is the loan -- it's really the loan substantive -- I don't know, it's a speed bump now, it used to be an objection, and now it's simply a speed bump in terms of time to get it done. Now we're able to really supercharge our deployment efforts with our customers. It was one of the nice things bringing the 2 companies together. So I hope that helps.

No, that helps. And one thing for Priyanka, as we think about your guidance raise of $3 million in revenues, and I know it's somewhat complicated talking about cross-sell, but can you give us a sense of what the impact of cross-sell is in that $3 million raise versus just your core business being stronger?

I'd say the bigger impact, George, of the cross-sell we'll see in fiscal '19. So there's some amount in that for the cross-sell. But you don't -- because it's L&T revenue -- it's per month, you'll see a bigger impact in fiscal '19. Most of the growth of the guidance raised by up $3 million is just core strength within the business.

Our next question comes from Mike Latimore with Northland Capital Markets.

In terms of the 20 new customers that you cross-sold in the quarter. Of that 20, how many are, kind of, replacing legacy technologies versus greenfield opportunities?

Replacing -- Mike, when you say replacing legacy, do you mean -- could you clarify that? I just want to be clear on this question.

Sure. Just other VMS vendors that might have been in it, any one of your customers. You're placing, kind of, competitor to Cantaloupe? Or are they all greenfield?

What I can say is, the largest customer -- I don't know how many of the 20, the largest customer happened to be using -- the one that I mentioned in the prepared remarks who went to 100% penetration, they actually are moving away from a competitor's solution. So I can give you 1 example, I don't know about the other 19.

Okay. That's helpful. And then of these 20 that you mentioned, are they, sort of, up and running? Fully deployed? Just want to get a sense of how quickly they go live.

Well, the fact of the matter is that they can move into the services fairly quickly. There's some amount of training that is necessary to help them fully leverage. There's new capability such as dynamic routing and so forth. But in terms of being able to, excuse the phrase, flip the switch and turn on that software, we can deliver the software to them, we just have to do a little hand-holding to ensure that they were able to use it most effectively.

Great. And then what should we think about in terms of network fees per connection when you add the analytics software to it? Is it a 30% uplift? This 60%, you have just kind of a range to think about?

I say about -- somewhere between a 30% to 40% raise would be a good number to begin with, Mike.

Okay. And then, in terms of the connection guidance, should we think of about a percent of those connection being, kind of, logistics software only? Or should we think about them being either cashless or cashless plus logistics?

Mike, I -- in terms of new connections as we're going forward, I would anticipate that a large majority of those would have both cashless and logistics capability. We don't know what that percentage will be. But I think it'll be a high mix. It's a very compelling offer to -- and solution for someone to able to plug in an unattended retail business and literally have a software -- a set of modules of software to run their business from start to finish, it's -- now I'm selling, but it's because we've been with customers. But -- they perceive it as being very compelling. So I would anticipate -- they might not take -- for instance, if there are 8 services, they might not take all 8. But I think they'll take a core of cashless and some of the logistics.

Got it. And then just last question, you may have given this early, but how much did Cantaloupe contribute to the December quarter revenue?

Revenue was about 15% of our combined number.

And we have a follow-up question from Bob Napoli with William Blair.

The -- so you signed a franchisee of Cantaloupe -- I'm sorry, of Canteen. Obviously, Canteen is a very large customer of yours. What are the -- what is the opportunity to expand that throughout Canteen? Is Canteen using another solution today and -- like the one franchisee was?

Well, actually, Bob, there are 2 sides to the Canteen organization. One are the corporately owned location and they're actually using -- I don't want to say exclusively, but a large, large majority, probably in the 75%, 80% range, are using our cashless capabilities, and I believe they moved over to 100% of at least a piece of the Cantaloupe solution. They also have some internal software that they've developed over the years. So on the corporate side, we have a very strong position there right now. And with the franchisees, we have a significant share of that business. And I think that's really going to be a terrific opportunity for us to take the whole solution to some of those customers and prospects, but also to do the cross-sell. There were -- any customer gathering that we have like this of key customers is heavily attended by Canteen franchisees, and the feedback was very, very good.

I guess a little bit confused. If the corporate is using almost 100% of Cantaloupe, then is -- wouldn't that be more of an overlap than 30,000 to 40,000 locations?

I'm not following you.

I think you had -- I thought -- maybe I misheard, but I thought you said that USAT -- the Cantaloupe was represented in only 30,000 to 40,000 locations.

Right.

And if Cantaloupe corporate is using -- I mean, that's got to be more than the 30,000 to 40,000 alone, doesn't it?

Yes, that was actually under a license. So it's a different -- it's sort of a different arrangement, we probably don't have time to dig into that now. But when we refer to that overlap, it was essentially 30,000 locations that were on our system with our device and using, kind of, the SaaS model and the full suite of services. So it's a little bit different.

Okay. Priyanka, just the -- it looks like this acquisition actually gets your L&T margins into the low end of your long-term target range or maybe even get you into the high end when we get a full quarter of this, and that's before any benefit on processing cost that you'll probably get. But the SG&A, on the other hand, is still, like, way above what your target range is. Do you think going from 25% on SG&A or 26% down to the range of 15% to 20% over the next 2 years is possible?

So let me tackle that question in 2 thoughts, Bob. Thank you for recognizing, and we're very pleased with where our L&T margins are in the first quarter of the combined company. And we're exactly where we said, we would be even (inaudible) the capital raise of 36% to 40%. As we navigate through the second half and then if we continue to see the great response in the cross-sell success, we very well could be in a position to raise from the 36% to 40% range that we've given, but we'll stick with that right now and see if we want to raise it as we get into our fiscal 2019 guidance. So that's on the L&T side. On SG&A, we've seen a steady decrease of SG&A as a percentage of revenue over the years. And now that the cross -- with the actions that we've taken, the cost synergies of $3 million reduction that we've given the guidance on an annualized basis, we will start to see the benefit of that as we get into fiscal 2019. So, obviously, that's the entire year's benefit we'll see in full fiscal, but there will be some element that will roll up into the second half of the year as well.

Great. And last question, just on the tax reform. If you're looking at over next year -- the next few years, a tax rate -- an adjusted tax rate that you would use for adjusted net income, what would that be?

So you can see that this year, obviously, this quarter, our tax rate is extremely unusual. We've got the one-time charge of approximately $9 million of that or a big part of that $9 million pertains to the one-time charge. For this fiscal year, with our M&A expenses, there is some permanent differences that we will see. But as we get into the next couple of years, I think, it should come down to the usual range of the 20% to 25% as we get out of the permanent differences for the most part.

At this time, I'm showing no further questions. I'd like to turn the call back over to Mr. Steve Herbert, Chairman and CEO, for closing remarks.

Thank you very much, operator, and thanks to everyone for taking the time to talk with us today. And I'd also like to thank all of you for your ongoing interest and support. And in addition, I really do want to compliment the team, the Cantaloupe team, the USA Technologies team. I don't know any other way to describe it other than the fact they hit the ground flying. Integration with companies can sometimes be difficult, and it's certainly not perfect, but I hope we can all agree that, by the results, it looks like we're off to a fast start. So I really want to thank all of our fellow employees in that regard. We certainly look forward to updating you, again, on our progress next quarter. And hope you have a terrific day. Thank you very much.

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