Stephanie Prince - LHA Steve Herbert - Chairman and CEO Dave DeMedio - CFO.

Gary Prestopino - Barrington Research Jim Fitzgerald - Northland Capital Josh Nichols - B. Riley Kevin Dede - H.C. Wainwright.

Good morning, ladies and gentlemen, and welcome to the USA Technologies' First Quarter Fiscal 2015 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I'd now like to turn the call over to your host, Ms. Stephanie Prince from LHA. Ms. Prince, you may begin..

Thank you, Bridget, and good morning everyone. This is Stephanie Prince, and welcome to the USA Technologies' first quarter fiscal 2015 earnings conference call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer of USA Technologies, and Dave DeMedio, Chief Financial Officer.

Before we begin today's call, I'd like to remind you that all statements, included in this call, other than statements of historical fact are forward-looking statements.

Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited to business, financial market, and economic conditions.

A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the SEC.

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 understanding USA Technologies operations. 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 a reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued this morning and on the Investor Relations page of our Web site, www.usatech.com. I'd now like to turn the call over to Steve Herbert.

Steve?.

Thank you, Stephanie, and good morning everyone. I will begin today's call with a review of the first quarter highlights before discussing our operational highlights for fiscal 2015. I'll then turn the call over to Dave to review our financial results for the first quarter, and our guidance for fiscal 2015.

In the first quarter, USA Technologies continue to make progress toward meeting its long-term goals of reaching 500,000 connections and $100 million in revenue in three years. In the quarter, we added 10,000 net new connections ending with 276,000 connections, a 27% year-over-year increase.

We also added 600 new customers, a 41 year-over-year increase, or 7900 total customers on our ePort Connect service. In the first quarter, our service handled nearly 49 million transactions, 26% above a year ago. This equates to over 89 million in transaction volume, a 31% year-over-year increase.

Transaction volume continues to increase faster than the number of transactions, clearly illustrating the sales gains that cashless payments can generate for our customers. Growing proof of our value proposition is translating to customer satisfaction and greater stickiness of our customer relationships supported by our 99% customer retention rate.

17% of new connections in the first quarter went to customers in adjacent self-serve retail markets such as the commercial laundry, kiosk, and amusement verticals. This compares to 14% in the fourth quarter of fiscal '14. 83% of new connections were sold through our traditional vending market.

Part of our connection growth is from our growing presence on U.S. Navy bases through our relationship with NEXCOM, in which we now have nearly a 1100 connections on the ePort Connect Service. We're continuing to aggressively and proactively invest in our business to drive new connections, customers, revenue, and earnings growth.

In the first quarter, we began offering the QuickStart program on a trial basis to our preferred customers, in order to determine whether it would move us closer to realizing our long-term growth objectives, while also reducing new and existing customer reliance on JumpStart.

QuickStart is a five-year non-cancellable capital lease program for equipments compared to JumpStart, which is a monthly rental program. We believe that shifting customers through the leasing or purchase of hardware will improve our ability to generate free cash flow.

We received an excellent reception to QuickStart from these customers in the first month of the program. Dave will get into some additional details in a few minutes.

From our perspective, this switch in customer behavior from short-term month-to-month engagements to longer term commitments is further evidence of the market acceptance of our value proposition and our growing reputation for reliability and innovative services.

We also think that widening adoption, as demonstrated by the 41% increase in our customer base at the same time that we sold 84% of our gross connections into our existing customer base, points to an approaching tipping point in the markets we serve in the payment industry.

And of course, mobile and cashless payments are now regularly in the news, following the introduction of Apple Pay. At USA Technologies, the Apple Pay start-up went seamlessly, with our NFC terminals accepting payment without issue.

As many of you know, virtually all of the terminals were currently shipping our NFC-enabled allowing for the continued expansion of our NFC footprint. Apple Pay has clearly created excitement in our customer base.

Since the announcement, we've been receiving various inquiries from customers, including the desire to upgrade for mag stripe terminals to NFC-enabled terminals, as well as requests for Apple Pay point-of-sale materials for consumers. We've also been receiving more inbound calls from potential new customers.

New and existing customers are turning to us for high value add solutions because we have among other things, over a decade of experience in self-serve retail cashless payments, over three years experience with mobile payments, and the largest NFC-enabled payment network with approximately a 160,000 locations and growing.

We're drawing from this deep experience and our market-leading position to drive growth from a position of strength as we aggressively invest in our business to widen our market lead.

As we progress through fiscal 2015, we're beginning to realize the benefits from the investments we've made in our customers and marketing programs, including the grace period program we had in place during fiscal 2014, and the QuickStart program that we expect to expand as well.

We also continue to leverage our competitive advantage, which is led by our ability to offer one streamlined end-to-end solution that can integrate diverse services.

For example, we recently worked with a customer to implement our integrated payment services, which enables cashless payment and consolidated reporting across multiple types of point-of-sale locations, and the MORE program and prepaid loyalty program in a large industrial account.

The impact from this program on our customers' business has been substantive, including a 33% increase in total monthly sales revenue across the entire industrial account after four months from implementation.

This mirrors the experience of our other customers who have implemented the MORE prepaid and loyalty program where the average ticket has increased to $2.42 with a MORE prepaid or loyalty transaction versus a $1.83 average ticket for credit or debit.

The conclusion is that these programs are not only a strategic competitive advantage that can drive growth for USAT, but they are also increasing incremental revenue or same-store sales for our customers.

With the increasing momentum in the cashless payment industry and our market-leading position, we're continuing to push assertively toward our three-year growth objectives that include reaching 500,000 connections to our service.

Our growth strategy is focused on increasing the number of new connections to our ePort Connect service, deepening penetration of our existing customer base, and adding new customers, while continuing to add new and innovative services.

With our aggressive growth strategies, a robust pipeline, and widening adoption of cashless payments and self-serve retail, we believe that we're well positioned for future growth.

Before I turn the call over to Dave, I wanted to let you know that we recently learned USA Technologies has been named to the 2014 Deloitte Technology Fast 500, a ranking of the 500 fastest growing technology, media, telecommunications, life sciences, and clean tech companies in North America.

We're excited and proud to have achieved this recognition. I'm now going to turn the call over to Dave for comments on our financial results for the first quarter as well as our guidance for fiscal 2015.

Dave?.

Thank you, Steve. Before getting into the detailed quarterly result, I want to highlight a significant one-time item that negatively impacted this quarter's financial results. That being the $410,000 charge related to the anticipated settlement of a billing dispute we have with a customer, which was recorded to cost of services.

This charge had the effect of reducing gross profit and margins from license and transaction fees, adjusted EBITDA, and net income for the first quarter of fiscal '15. Another item that impacted the quarter's results was the QuickStart program we made available to customers during the quarter, which I will explain in more detail later.

Gross connections during the first quarter totaled 13,000, compared to 14,000 in Q1 of last year. Other gross connections this quarter, 83% of these new connections were traditional vending, compared to 58% in the year ago quarter.

So, although total gross connections were a 1000 less, connections from traditional vending demonstrated improvement quarter-over-quarter. The remaining 17% of gross connections for the quarter came from other vertical markets such as kiosk, amusement and gaming, and laundry. Of the total gross connections, 84% came from existing customers.

Net connections for the quarter totaled 10,000, compared to 3,000 in last year's first quarter. Our customer base increased approximately 600 customers during the first quarter, and we ended the quarter with approximately 7900 total customers.

This is a 41% increase in the customer count from Q1 of fiscal '14, which we believe is indicative of a broadening adoption and acceptance of cashless payments in the industries we serve. For the first quarter, total revenue was 12.3 million, an increase of 21% compared to 10.1 million in the first quarter of fiscal '14.

License and transaction fees were 10.2 million compared to 8.5 million in the year ago quarter, a 19.4% increase. These fees which are comprised of recurring monthly service fees plus recurring transaction processing fees, accounted for approximately 83% of total revenue.

Growth was driven by the year-over-year increase in total connections to our ePort Connect service. Equipment sales were 2.1 million compared to 1.6 million in last year's first quarter, driving the increase in equipment sales during the quarter with the QuickStart program.

The QuickStart program is a non-cancellable capital lease of the ePort equipment, because the customer is entering into a non-cancellable agreement to purchase the equipment, we account for these terminals at a sale versus a rental as they are accounted for under JumpStart.

So why did we make QuickStart available? Well, our key imperative of the company is to increase free cash flow. One way to accomplish this is to promote purchase of equipment and to reduce the cash we use under the JumpStart program.

We believe QuickStart is a program that could facilitate that shift, so we offered it on a trial basis, and we were encouraged by the results we saw after just one month of the program, which began in December.

For example, approximately 35% of gross new connections for the quarter were under the QuickStart program and those were predominantly with existing customers who previously ordered equipment under the JumpStart program, hence JumpStart dropped to approximately 20% of gross connections for the quarter compared to approximately 65% in Q4 of fiscal year '14.

We believe the willingness of our customers to opt into a non-cancellable commitment to purchase the hardware is significant for several reasons. First, the commitment to purchase the hardware supports our belief that cashless is becoming an increasingly important technology for our customers in the industries we serve.

Second, it demonstrates our customer's faith in USAT as a long-term service provider. And third, and perhaps most importantly, it represents an opportunity for USAT and our customers to utilize traditional third-party financing sources for the sale of an acquisition of the ePort hardware.

As such, we are currently in discussions with third-party leasing companies regarding providing financing options for the QuickStart program.

If successful, this could allow USAT to reduce and perhaps even eliminate at some point in the future the use of USAT's cash for the customer's acquisition of the ePort hardware, thereby improving free cash flow. Again, we are encouraged by the opportunity surrounding this program.

Gross profit was 3.1 million compared to 3.5 million in the year ago quarter. Total gross margin was 25.6% compared to 35.4% in the first quarter last year. Gross margin on license and transaction fees was 28.6% compared to 36.4% last year.

The most significant item impacting both total gross margins, and license, and transaction fee gross margins was the one-time charge of $410,000 related to the customer dispute previously discussed. License and transaction fee margins were also impacted by two additional items which we discussed in our last call.

First, the larger impact of the two items is the extended grace period marketing program, which we had in place mainly in the second half of the fiscal '14, and are not currently offering.

This program had the impact of delaying the monthly service fee, plus we were required to begin depreciating those terminals to cost of services when they shifted to the customer. The second item was the sale leaseback transaction, which shifts the depreciation for the JumpStart units sold under the agreement to a higher quarterly rental expense.

I'd like to quickly review the sale leaseback transaction in order to ensure that everyone understands why we did this and the financial impact. As you may recall in June 2014, we entered into an $8 million sale leaseback agreement for the ePort devices with Varilease Finance.

We undertook this transaction in order to unlock capital for growth, as well as other possible strategic opportunities. We received the remaining $5 million under this agreement during the first quarter of fiscal 2015 after receiving $3 million in the fourth quarter of fiscal '14.

Essentially this transaction replaces an asset that we were depreciating with a higher monthly cash rental expense. As such, the impact or reductions in license and transaction fee gross profit was approximately $134,000 for the quarter, due to the higher rent expense, and the impact of reduction to adjusted EBITDA was $380,000.

Since the rental payments will remain consistent over the sale leaseback agreement period, the financial impact to margins and the adjusted EBITDA on a percentage basis will diminish each quarter as we continue to grow revenue and gross profit. The equipment margin was 11% compared to the 30% in the year ago quarter.

This decline reflects the impact of purchases set incentives that were coupled with the QuickStart program during the first quarter. Selling, general and administrative expenses were $3.6 million in the first quarters compared to 3.3 million in the year ago quarter, a 9.1% increase.

Approximately half of the $0.3 million increase is due to non-cash expenses related predominantly to an increase in the reserve for doubtful accounts and equity-related compensation. For the first quarter, adjusted EBITDA was 0.9 million compared to 1.5 million in the comparable period last year.

Results this quarter again were significantly impacted by the one-time charge of $410,000 as well as $380,000 in the sale leaseback transaction. GAAP operating loss for the quarter was approximately $0.7 million, adding other income of approximately $245,000 and a tax benefit of $360,000. GAAP net loss was approximately $61,000 or $0.1 per share.

On a non-GAAP basis, we recorded a net loss of approximately 0.4 million or $0.1 per share for the first quarter compared to non-GAAP net income of 0.1 million or zero cents per share in the same period last year.

Cash and cash equivalent in September 30th were 10.9 million, proceeds from the sale leaseback agreements contributed $5 million of cash this quarter. After the quarter end, we were paid $2.5 million on our line of credit giving us $4.5 million of current availability.

Looking at over fiscal 2015, we continue to expect total revenue to be in the range of 51 million to 53 million for a growth rate of 20% to 26%. License and transaction fee revenues estimated to grow to 44 million to 47 million for an increased 24% to 31%.

And we also expect net new connections in the range of 66,000 to 76,000 for an increase of 27% to 46%. We expect that margins won't increase as the year progresses for several reasons.

In order of magnitude, contributions to margin expansion will come as units under the extended grace period start to bill, which we expect to ramp as the year progresses. New connections added to our net worth at present time will also contribute to margin improvement as we're currently not offering the extended grace period.

Lastly, the sale leaseback transaction impact will diminish on a percentage basis each quarter as we continue to grow revenue and gross profit. These improvements would be offset by any investments made in our growth strategies designed to drive connections, penetration, and share.

On balance, we do expect adjusted EBITDA to increase sequentially throughout fiscal '15 and to deliver growth over fiscal '14 results in both adjusted EBITDA and non-GAAP net income. Now, I'd like to turn the call back over to Steve..

Thank you very much, Dave, and thank you everyone for joining us this morning. In closing, we remain excited about the future of USA Technologies and our growing market opportunity with new and existing customers. We believe that we're well along the path to realization of our long-term goals. We'd now like to open the call up for questions.

Operator?.

Thank you. [Operator Instructions] Our first question is from Gary Prestopino with Barrington Research. Your line is open..

Hi, good morning, guys. A couple of questions here; first of all, Dave, how much did you pay down on the credit facility this quarter? I didn't quite get that..

For September's quarter, we did not pay it down. It was the same at the end of the June quarter. Subsequent to September 30, we paid down 2.5 million. So the balance subsequent to September 30 is $2.5 million, which leaves availability under the line of 4.5..

Okay, and just in terms of when you are presenting your adjusted EBITDA, why didn't you back out that $400,000 charge? And for your debt covenants, does that $400,000 charge get backed out for the adjusted EBITDA calculation?.

So, the $400,000 charge related to the sale leaseback or the customer?.

The customer..

Okay. Well, from not backing out from a customer perspective, we anticipate it's going to be a cash item. So it really shouldn't be backed out of adjusted EBITDA, we felt. In terms of our covenant with the bank, we entered into an agreement, an amendment with the bank to adjust that item out..

Okay..

So from a bank perspective, it was adjusted out..

Okay.

And then just on the inbound calling since Apple Pay has been introduced, could you say that you are starting -- I know you mentioned that it was getting good traction, but are you really getting a tremendous amount of interest from your client base in these NFC apparatuses for Apple Pay?.

Gary, it's Steve Herbert, good morning by the way. Thanks for your questions. The interest level has been very high. It's manifested itself in several ways.

Customers that have invested, if you will, with us, in building up that NFC infrastructure, they're interested in leveraging it, so their questions are about point-of-sale material that can alert consumers that they can use the Apple Pay at those locations.

We also have other customers that in the past have gone with mag stripe only solutions, their interest level is in a potential trade-off or swap out to NFC type technology.

And then, we have other customers, simply reaching out with the question of, "Can I accept Apple Pay, and if so, what can I do to maximize that?" So the questions are -- they're really over the lot, but I'd say their response has been very good, and our transition was really seamless. That iOS 8.2 came out for iPhone 6, consumer's downloaded it.

I think at one point they had a million downloads in something like three days, and it's -- they immediately started using it at our customer's locations. So from a technological standpoint, it's gone very well..

Then is it -- for new clients that want to get the ePort with the NFC chip in it, is it a higher-cost product versus a non-NFC?.

Not at this point, no..

Okay. And then last ….

Gary, it made a difference in the past, but it no longer makes a difference. So we show very, very little mag stripe only product. Dave, it's got to be 1% or less..

It is..

Yes..

Okay, and then as we get through the year with the reduced impact of the delays in the monthly fees, do you think that your license and transaction gross margins, even with the sale leaseback now component of what you're doing, can they get back into the high 35%, 36% or could you give us some directionally where you think that gets to?.

Yes, Gary. We do expect the license and transaction fee margins to improve, to right around what you had indicated, 35%, possibly 36% as we go out through the fiscal year. But it will be a ramp as those fees begin to come into the P&L.

Actually, if you add back the $400,000 customer dispute right on the -- was incurred this quarter and reported the cost of services, the margins were right around where you and several other analyst had thought they'd be for the quarter. So we're on target with what we said last quarter..

Right, yes, I know. I realize that. I'm just trying to get an understanding of how -- with what you're doing with QuickStart, how that impacts the margin and how things would change. So, all right, thank you..

Thank you. And our next question is from Mike Latimore with Northland Capital. Your line is open..

Hi, guys. This is Jim Fitzgerald sitting in for Mike Latimore. My first question here is regarding Apple Pay.

What are you guys hearing from your vending operator customers regarding Apple Pay, and is that still in the analysis phase? Then I guess a second question building off of that, are you seeing more interest and increased plans for cashless because of it?.

It's Steve Herbert here, and thanks for the question. First of all, what we're hearing from our operators are some of the things that I mentioned when Gary asked the question.

We're getting questions from our existing operators about if they have an NFC footprint already; they're asking questions about what they can do to more fully leverage Apple Pay with their customer base or with consumers in their markets.

So they were looking for any guidance they can get out of us on point-of-sale material, maybe increasing your number of locations, et cetera. And to answer that much as one of the types of questions we get.

Another, I think I mentioned, those that are mag stripe only from some old work that might have been done in the past, I could call that part of the legacy devices out there. They were looking for a way to tradeoff and of course we're making that available for them. And I think your other question was do you see this stimulating the overall business.

Is that essentially what your second question was?.

Yes. Just the increased plans for cashless..

Right. Well, that's -- I can say this, it's definitely not hurting.

I've not been in direct contact with the customer that has said ongoing to do instead of X, X plus 10 because of Apple Pay, but what we do know is that when you put together all the pieces regarding the reaction to that rollout in the marketplace, we're certainly expecting an impact on connections for the fiscal year.

It will have some impact, what that is we don't know, but it's definitely not going to hurt..

Okay.

And when do you think that impact would start to show up in your numbers?.

I would think in the quarter that we're sitting in and then the back half of the fiscal year. It's definitely going to impact the numbers in some way. I wouldn't say that it would be very substantial, but it will have some positive impact and already has..

Okay, great.

Then, I guess, if there are hundreds of millions of EMV chip and PIN cards next year in the US, how do you think your customers will react to that? Do you think they will have a desire to change systems or will they need to change systems? What are your thoughts around that?.

Jim, thanks for the question. First, every EMV chip or EMV card that's going to be issued is still going to have a mag stripe on the back as well. So customers will -- card holders will still be able to use that card in a traditional manner with the mag stripe.

The one thing that changes in October is the liability shift for certain fraud transactions, not everyone, but certain fraud transactions would shift to a merchant, who is not processing from an EMV compliant terminal.

Now, given the nature of the vending industry, I'm not necessarily sure what the uptake will be from our customers wanting to go to EMV. We're certainly going to have an EMV compliant device available for them to take come time of October 1, 2015, when that liability shift occurs.

But again given the nature of the vending industry and the small ticket size, I'm not necessarily certain what the uptake will be..

Okay, great.

And then one last question from me; can you guys just touch on any interesting partnership activity you see right now?.

Well, there are several things going on. One, we mentioned, I think we mentioned at least one during the call and that was I worked with NEXCOM on navy bases. They've severely been rolling out our service on navy bases across the United States.

I think we're actually if why as well at Pearl Harbor, and as I understand if we're getting ready to go to Guam with them. So we're -- that's a relationship that we announced some time ago and it's recently picked up momentum.

So just from a pure connection and revenue perspective, kind of a meat and potatoes thing, I think that's a good example of a partnership, a customer relationship that we feel good about.

Dave, would you have anything to add in that regard?.

I do, and this relates to our card processing partner. So, that relationship and the agreement with them is expiring in the next six months. And any new agreement or any new partnership agreement that we would then or in to with the card processor, we believe it's going to help improve and should help to improve transaction processing margins.

Given the scale we achieved over the three year agreement with them, the improvement and number of transaction volume has grown. I would expect that any new agreement we would enter into would be favorable to the company. And that would help improve the margins from transaction fees.

So, that's also from a service partner perspective, something that I think you can look forward to..

Okay. Thank you, guys. I appreciate that..

Thank you. And our next question is from Josh Nichols with B. Riley. Your line is open..

Hi, yes.

Looking at the transition from JumpStart over to QuickStart, relatively new, but one is what kind of take rates are you guys seeing and what do you expect longer term for the transition?.

The take rate for the quarter was fairly substantive. It was somewhere in the range of 35%, and you can see that, I think Dave outlined in his prepared remarks the movement of JumpStart, down from the 60% range to the 20% odd range.

So essentially what you're doing is you're moving, conceptually you're moving customers off of USA Technologies capital and our goal is to move them through the negotiations that Dave mentioned with third-party lenders, move them onto a long-term lease. So the take rate was very good.

What we -- I don't know that we have a projection for the long-term. I don't know that it would be as high as a 35% take rate, we don't know that.

But what we do know is that if everything plays out the way that we have planned moving customers in that regard and moving that QuickStart transactions to third-party financing, we're looking forward to a very positive impact on free cash flow. That was really the goal at the end of the day strategically..

And regarding the new connections at amusement, laundry and what have you, is there a particular really bright spot where the Company is seeing a lot of growth or any comments on what they are seeing as far as different avenues for growth, but in the subset?.

The commercial laundry business is one that (A) I think performed fairly well in the quarter, but we also have a partner in Setomatic Systems that is very, very active in terms of driving our solution into the marketplace. In a nutshell, they sell payment solutions and technology in commercial laundry all day every day.

They're essentially our distribution and service on, and they use our service exclusively. One of the things that we've recently done is we've extended our mobile payment and loyalty program over to that channel of business which has really created some excitement for them in terms of driving new locations.

And I think recently they made a statement that over some period of time I can't remember how long it was, but I remember hearing out in public in Setomatic Systems, 25,000 incremental connections. So that's -- (A) It's performing well, and (B) Our partner is very active and optimistic.

That's one that I'd point to look at in the future in terms of some potential movement..

And last question for me is looking here, it looks like the average transaction size increased pretty substantially sequentially, about $1.83 versus $1.76. Any granularity or additional info you could provide on what management thinks is driving that? It's such a big jump..

Sure, well, two reasons; one is our -- some of our new integrated payment services that we're offering, so some of our vending customers for example signed up for online type processing. It's a card not-present service. So these companies have other business beside vending and which they may need to accept payment on.

This service allows them to accept credit cards, they might typically have accepted checks in the past for accounts receivable. They tend to have higher average ticket sizes, much higher actually. You could see transaction sizes of several hundred dollars.

So that helped the up takes and the transactions from those services help increase the ticket size. And then of course I think as Steve mentioned, generally vending transactions are going to start to continue to grow. The industry is raising price points when they adopt cashless that they're increasing prices inside the machines.

So those two things what's driving that price increase or the average ticket increase..

Well, thanks. I appreciate it..

Thank you. Our next question is from Kevin Dede with H.C. Wainwright. Your line is open..

It's Kevin Dede.

Dave, could you just review your assumptions for SG&A expenses for the balance of the year? Just remind me how your selling activities specifically impact that line in supporting loyalty programs?.

.

:.

Right, okay.

Then the loyalty program is really an impact on gross margin then, correct?.

It would be a positive impact..

Positive, all right, okay..

Positive, right. The loyalty and prepaid program would be a positive impact on margins just from a transaction perspective a prepaid transaction costs us a fraction, a tiny fraction of what a credit debit transaction.

So that's -- If you see our prepaid activity going up, when you hear us talk about that going up in a good market reception to that, every prepaid transition carries a much higher margin for the company..

And Kevin just -- you may know that just to be clear the loyalty aspect is not a USAT loyalty. It's our vending operators, who are providing the loyalty incentive to their consumer..

Or a partner..

Or a partner..

Such as a mobile payment partner who perhaps we have right now as an example, Kevin, we have this shift purchase free program out there with Softcard, formerly ISIS. I think we're in 85 or 90000 locations with that and all day everyday consumers are doing mobile transactions using a Softcard mobile wallet as well. And their shift purchase is free.

That is funded by our partner. So those -- we'd only anticipate if that was your question. We don't anticipate the loyalty component with the loyalty reward coming from USAT would come from some sort of partner..

Right, right, right, right. Okay. Then Dave, I know you touched on the equipment gross margin again and regarding the switch from Jump to Quick.

Could you just go over where you think those margins would have been otherwise?.

When we did the shift to QuickStart increased the part we accounted for it as a sale, it increased both equipment revenue and equipment cost per sales. But we coupled the program, the QuickStart program with some other incentives during the quarter. It was really those other incentives that impacted the margin.

QuickStart in and of itself doesn't necessarily impact margins. The only thing QuickStart really is it's a capital lease. So the only thing we're dealing under a capital lease is traditional vending, it's a matter of what you sell a product for and what is the interest rate you're -- the rate you're discounting those payments at.

So these other incentives that we offered during the quarter impacted the margin. Now, if we go back if we did not offer QuickStart and those connections is 35% of the connection came in as JumpStart margins probably in equipment would have been closer to historical. It would have been closer to the 305 margin that we saw in the previous quarter..

I think it's important to know that, Kevin, the -- I think the thing to look -- there's couple of things think about here. First of all, we brought this program to market QuickStart, which is something we had done in the past which you really don't want us to talk about, but we brought it back to market on a limited basis.

Really if you think as a litmus test, just see where the market was in terms of the willing to use their own cash or make a long-term commitment to moving in that direction. Remember, our ultimate goal is free cash flow. This is program we are very encouraged by what we saw. And I think the thing for anyone out there was thinking about modeling this.

what do you want to think about is the reductions, some reduction in JumpStart and thereby working capital moving over to potentially free cash flow, and really the things that happened during the quarter, during that limited rollout to essentially what we call our preferred customers and a few others that's a bit of an anomaly.

The thing to pay attention to, is and I think somebody asked a question earlier what percentage and I'm going to leave it to Dave to try to answer this question at some future date but what percentage of our customers do we think over the long call will move to quick start.

In a scenario where its funded by third-party financing and therefore we're not using USAT's capital to get there and it's going to free cash flows. I hope you follow that. I think you do..

And Kevin, just one more point with respect to that, it is on a trial basis. So when the program is officially launched we intend that it's going to be officially launched with financing sources in place. .

Okay, so that begs another question, Dave.

With a third-party financier involved, is it your evaluation or their evaluation of the leasee?.

Well, that will depend upon the program that we're able to put into place with the third-party. We're talking on the number of different programs, direct relationships with lessor the vending operator and/or USAT possibly being the lock box for the lessor. So there's a number of programs we're discussing right now. So it could vary..

Okay, fair enough. Just going forward on the equipment margin line, granted you offer a consolidated view. I am just curious about how you see these programs affecting the equipment line going forward.

It's just difficult to tell from where I'm sitting on what your plans are in terms of your preferred customer and a few others, and how extensively you have been able to penetrate that base?.

Kevin, thanks. I think from a -- I'm not 100% certain cutting into that. I think generally once the program is officially launched and our intention is to have the financing in place, I don't -- we're anticipating that there won't be any historical change to traditional both license and transaction fee margin and/or equipment margins.

It would help, again, it would help increase equipment revenue but cost of sales would increase as well. But margins we don't anticipate being impacted..

Even so, at the end of the day; at the end of the day it's viewed 80-20 rule. 80 % of the impact here is going to be on the movement of customers away from our capital and onto someone else's capital. That's the thing for all of us to keep our eye on.

If we're able to come anywhere close to the results that we got in the recent quarter that we're all going to be very happy about the impact, the reduction in capital that it takes on a quarterly basis just to drive our connection number and what that might translate to down the road in terms of free cash flows.

That's what I'd emphasize form a modeling perspective..

Right, okay. I guess what I am still curious about is where you -- I get the direction, Steve, don't get me wrong. I understand the objective. It's just not clear to me how much -- from a sales and marketing perspective, what your team is putting an emphasis on.

Is it still -- is it JumpStart to an extent with certain customers, QuickStart with your preferreds, or -- what's the best way to look at that, do you think, for an outsider?.

I think you raised a good point; another thing that -- I just want to take the opportunity to make this point, Dave. You may have covered it. You may have covered it, but I'm going to go ahead and say it anyway.

An interesting dynamic that also occurred during the quarter is that the customers in purchased equipment, the number or connections that came through purchases went up. So let's be very clear about it. We're emphasizing purchases with customers. That number moved from 20% to 28% of connections during the quarter.

That was primarily driven by a segment of our business that we've talked about before, that's growing fairly rapidly is what we call SMB, Small to Medium Business, a high margin lost cost of acquisition sale. Those customers typically buy, and we push very hard -- we're pushing very hard to continue to get them to buy.

We're also -- because of the fact that we rolled out QuickStart on a limited basis in the quarter, we're also continuing to offer JumpStart.

So right now, right this minute, as we sit here today, there's a heavy focus on purchase, there's still a focus on JumpStart, and based upon the results that we've gotten from QuickStart and the negotiations that Dave mentioned, that really put a bowl on the whole thing in terms of moving where the capital comes from to a lesser extent there's emphasis on QuickStart.

Now, where that shakes out in the future; it's our belief and our hope and our intent to have most purchases shake out in the category of purchase and QuickStart. So there is longwinded answer to your question, but I hope that helps..

Oh, no, it absolutely helps. Yes, thanks for that..

Okay, good. You bet..

Thank you. And I'm not showing any further questions; Mr. Herbert, please proceed with any closing remarks..

All right, very good. Well, I just want to thank everyone for joining us this morning. We look forward to reporting back to you on our second quarter call in mid-February. I hope everyone has a great day, and a very nice weekend..

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