Lauren Sloane - Investor Relations Steve Herbert - Chairman and Chief Executive Officer Lee Maxwell - Interim Chief Financial Officer.

Gary Prestopino - Barrington Josh Elving - Feltl George Sutton - Craig-Hallum Mike Latimore - Northland Capital Markets.

Good day, ladies and gentlemen, and welcome to the USA Technologies Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to introduce your host for today’s conference, Lauren Sloane with Investor Relations.

Please go ahead..

Thank you and good afternoon everyone. This is Lauren Sloane, and welcome to the USA Technologies second quarter fiscal 2017 earnings conference call. With me this afternoon is Steve Herbert, Chairman and Chief Executive Officer; and Lee Maxwell, Interim Chief Financial Officer of USA Technologies.

Before we begin today’s call, I would like to remind you that all statements included in this call other than statements of historical 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 afternoon.

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 as 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. With that, I now like to turn the call over to Steve. Please go ahead..

Thank you, Lauren, and good afternoon everyone. Thank you for joining us to discuss the results of our second quarter of fiscal year 2017.

As revenue and connections continue to grow, we’ve returned to our profitability path we were on in the early part of last year and we’re obviously on track to reach our long term goals of 500,000 connections and a $100 million annual revenue run rate.

The second quarter marked the 29th consecutive quarter of year-over-year growth and the top line grew 18% from a year ago. I want to provide a high level commentary on the numbers and a general business update before I turn the call to Lee to discuss the financial statements in detail.

Taking a closer look at the second quarter, we had net connection adds of 21,000, bringing total connections to 469,000. This growth is consistent with our usual seasonal patterns as we historically see the most robust connection growth during the second half of the fiscal year.

We added 500 new customers in the quarter, bringing our customer account to 11,900. Revenue was $21.7 million of which $16.6 million was in the recurring revenue line of license and transaction fees and $5.1 million was in hardware.

In the second quarter alone, we processed 100 million transactions that amounts to $192 million on our ePort Connect Service. The tremendous growth in transaction dollar value has led us to believe we will be approaching an annual run rate of $1 billion in transaction by the end of fiscal 2017.

As stated during last quarter's earnings call, we expect to see increasing profitability as we move into the fiscal year and beyond. And I'm pleased to report that we earned $0.01 per share during the December quarter.

Our return to profitability was due not only to revenue growth, but also SG&A for the quarter declined $1.1 million quarter-on-quarter to $5.8 million. Nearly all the reduction was due to a decrease in professional services as our first-time SOX audit was completed in Q1, and we have completed and integrated the VendScreen acquisition.

That said we're leaving unchanged our SG&A outlook as a portion of the audit expense will recur as the year progresses. However, we are heartened by the leverage we see in the model and the fact that we grew our profitability during the quarter.

Moving now to the business overview, USAT provides the payment industries leading solution and most efficient ramp towards cashless acceptance in self-serve retail.

And as our data shows increased performance, we continue to drive aggressive growth through penetration into our existing customer base and into more locations in vending, kiosk, and other markets and through maximizing the value of these connections.

We see our customers increasingly choosing to connect 100% of their locations to our import connect service to realize the benefits of credit, debit, and mobile payment acceptance and drive the improved performance.

Again, this quarter, we made progress acquiring new customers helping existing customers to go 100%, and toward expanding the value of our connections. I like to discuss these initiatives momentarily. A significant new set of new customers added recently is the group of six Pepsi bottlers in North and South Carolina.

They are rolling out a combination of ePort Interactive and ePort G9 devices all connected to our ePort connect service, a total of more than 2,000 units.

We believe this is a continuation of the increasing adoption of cashless payment solutions and unattended retail and the addition of these Pepsi bottlers is a relationship that we believe will help build USAT’s momentum for future growth.

This quarter we added to our growing list of customers committing to 100% cashless payment technology with Ten M Corporation, a family-owned Canteen franchise based in South Louisiana. We’re working with Ten M to upgrade 1,000 of the company's locations to our ePort connect cashless systems.

Already Ten M has seen early positive results as their consumers are spending 42% more when they pay with the card versus cash.

We also added Colorado-based Premier services as a customer who is committed to offering cashless payments in 100% of their locations by implementing the ePort, USAT ePort Interactive and ePort connect platforms with our premium support services.

We are currently working with Premier Services to deploy our solutions on all of their vending, copy, and micro-market kiosks throughout the Denver area.

With the transition to 100% cashless, Premier Services aims to better align its payment offerings with the consumer's expectations and growing preference to pay with cashless option, either a smart phone or a credit or debit card.

Premier Services is also leveraging the full scope of our Premium Support Services to speed implementation and to broaden awareness of non-cash payment options in their customers’ locations.

Another exciting development announced at the Consumer Electronics show in conjunction with Apple is that we've begun to integrate our loyalty program with Apple Pay, which will allow operators in the unattended market to give their consumers the seamless loyalty and payment experience.

From the consumer's perspective when using Apple Pay at an ePort enabled location, a message regarding our more loyalty program will appear on their iPhone by offering the option to add the more loyalty program to their Apple wallet.

This offer or message will be pushed to the consumer via the ePort device marking a new error of two-way communication at point-of-sale. Consumers and partners can use this capability to take advantage of exclusive offers and discounts on participating machines connected to our ePort connect platform.

We’re also seeing improved locations performance as a result of point-of-sale advertising that our ePort Interactive platform is able to shop. In late November, we released the findings of a six-month study that tested targeted point-of-sale advertising of Apple Pay.

The inclusion was smart phone users showing digital advertising at point-of-sale through our ePort interactive platform or more app to use their phone to make a purchase and to spend more.

Specifically, we found that digital advertising on our ePort Interactive platform that highlighted a Apple Pay availability at the point-of-sale resulted in an increase in overall sale by 36.5%, and an increase in total transactions of 44.6%.

We're just scratching the service regarding the possibilities with advertising at point-of-sale and USAT is at the forefront of the industry with advanced solutions. We hope to partner with customers, consumer product brands, and enabling technologies to continue moving this forward.

The role of mobile payments is also worth highlighting as it continues to be a determining factor for our customers in their decision to move towards non-cash payments. At USAT, we’ve been investing in mobile capabilities for more than a decade to ensure our customers seamless mobile payment adoption.

Toward that end, we just announced the availability of the ePort connect platforms G10-S series, which has been certified for use on the Verizon wireless 4G LTE network.

The G10-S provides our customers with the latest in wireless technology with advances in the telemetry and cashless payment processing, in addition to innovative mobile wallet and consumer engagement services.

With enhanced functionality, we are able to offer our customers and improve more loyalty program with push messaging features in the G10-S which includes the Apple Pay loyalty integration we discussed earlier.

Finally, I’d like to take a moment to acknowledge the great people we have a USA Technologies and express how honored I am to work with them and for this company. We’ve received some important recognition by the industry for the work we're doing, including the 2016 Frost & Sullivan North America customer value leadership award.

Our growing customer list and deepening penetration into the market, which when coupled with outside recognition signals that USA is working in the right direction. The market is demanding cashless payment options and we’re positioned to capture that demand and increase performance for our customers.

Our strategic and financial progress are a testament to the growing momentum in the industry, and I’m positive it will remain well positioned to capture the transition to cashless and mobile payments across the self-serve retail market. With that, I’ll now turn the call over to Lee to review the numbers..

Thank you, Steve. Good afternoon everyone. USAT had a strong financial result this quarter. We achieved revenue and connection increases, significantly increased net income, positive net income per share, and strong cash generation from operations.

Now, to review the quarter, echoing Steve's comments on revenue and connections, net connections for the quarter totaled 21,000 compared to 20,000 in the second quarter of last year, and were approximately 4,000 deactivations, which we would consider a typical level.

Revenue was up 18%, including 22% growth in license and transaction fee revenue, and 6% growth in hardware. We added 25,000 gross connections in the quarter, compared to 23,000 gross connections in Q2 of last year. Connection growth is consistent with our normal patterns as our growth is primarily back loaded in the second half of the fiscal year.

We added 500 new customers and in the quarter with a total of 11,900, a 12% increase in customers from December 31 a year ago. We continued to derive increases in connections, primarily from deeper penetration of existing customer accounts. We continue to grow both the number and the dollar value of transactions.

This quarter we had 100 million total transactions, representing 192 million in transaction volume, increases of 32% and 39% respectively from last year's second fiscal quarter.

Year-over-year growth was driven by an increase in total connections to our ePort Connect Service, which drove our total connections to 469,000, representing a 27% increase from the $369,000 at the end of the same quarter last year.

Approximately 80% of gross new connections came from existing customers, which is a strong indication to us of the increasing move by our customers toward 100% adoption of our cashless technology.

Total revenue this quarter was our second highest quarter revenue ever, $21.8 million, an increase of 18%, compared to $18.5 million recorded in the second quarter of fiscal 2016. License and transaction fees were $16.6 million, compared to $13.7 million in the year ago quarter, representing a 22% increase.

These fees which are comprised of the recurring monthly service, plus transaction processing accounted for approximately 77% of our total revenue. Equipment sales were $5.1 million, compared to $4.8 million in last year's second quarter representing a 6% increase.

The increase is attributable to the increasing demand for cashless acceptance in our targeted markets, facilitated by our QuickStart program. QuickStart in straight sales accounted for approximately 93% of new connections added during the quarter, compared to 90% in the same quarter last year.

The company's QuickStart program with 60 month funding provided by third-party financing improves the company's cash flow from operations. Gross profit for the second quarter was $6.3 million, compared to $5.5 million in the year ago quarter, representing a 16% increase.

Total gross margins were 29%, an increase from 28% in Q1 of this year and a slight decrease from 29.6% in the same quarter a year ago. In terms of the L&T component there is an increase to 31.6% from last quarter’s 31.3%, and a decrease from 33.7% in the second quarter of last year. Our long term target remains in the low to mid-30s.

And we're working towards the high end of that range by reducing L&T costs and increasing revenue. In terms of the equipment margin, there was an increase to 21.2% from 18% in the same quarter a year ago, due to cost reductions with respect to our products this quarter compared to the same quarter of last year.

Consistent with our commentary on the last call, we reduced our operating expenses, compared with Q1. SG&A expenses were $5.8 million for the second quarter, a $1.1 million decrease from the prior quarter due principally to the reduction in professional fees related to first-time stock spotted expenses.

Despite the reduction in Q2, we expect quarterly SG&A expenses to be in the mid-$6 million range for the balance of fiscal 2017. For the quarter, adjusted EBITDA was $1.7 million, compared to $2.3 million in the comparable period last year.

The decrease was primarily due to increases in SG&A expenses, mainly professional services and marketing expenses. Operating income was $234,000 for the second quarter of FY17, compared to operating income of $594,000 in the corresponding quarter last year.

On a non-GAAP basis net income was $241,000 for the second quarter of FY17, compared to a non-GAAP net income of $686,000 in the same quarter last year. The decrease was primarily due to an increase in operating expenses that was partially offset by an increase in gross profit.

Please refer to the table and the non-GAAP reconciliations in the press release which have been posted on our website for additional information.

Net income on a GAAP basis for the second quarter of FY17 was $233,000 compared to a net loss of $874,000 for the comparable period a year ago, due primarily to $1.2 million charge for the fair value warrant valuation in the second quarter of fiscal 2016.

As you know, the warrants have now been exercised so the fair value charge will no longer affect future period financial statements. Looking now at the balance sheet.

Net working capital increased by $9.9 million to $14.8 million, as a result of the increase in current assets and a reduction of current liabilities, including the elimination of the warrant liabilities as of December 31, 2016.

Net cash provided by operating activities for the quarter was $1.1 million, an increase of $615,000 or 121% from the same period last year, due primarily to an increase in net income. This concludes my remarks, and now I would like to turn the call back to Steve. Thank you..

Thank you very much Lee and thank you everyone for joining us this afternoon. USA Technologies continues to move the market for unattended retail payments as we grow revenue, connections, and net income.

As we look forward, the entire fiscal year, we continue to expect to add between 115,000 and 125,000 connections for the year bringing total connections through our service through a range of 544,000 to 554,000 connections. We continue to anticipate revenue to be in the range of $95 million to $100 million.

With that, we would like to open the call for questions.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of Gary Prestopino from Barrington. Your line is now open..

Hi good afternoon Lee and Steve..

How are you, Gary..

Good, good, good.

Couple of questions here, number one, it still looks like your revenue per transaction or I would call your take rate continues to be moving down despite the fact that your volume per transaction is moving up, so again is that a function of I think last quarter you had said there was more MasterCard transactions, is that a function of card mix that that continues to deteriorate and what would be a - what will you think would be a steady state level for that metric?.

Gary, you are referring to, I’m sorry you are referring to the revenue - is it revenue per transaction that you are referring to or connections?.

Yes. No, revenue per transaction, it looks like it keeps moving down. It looks like, I get about almost $0.166 per transaction, it looks like it is moving down.

And I'm just wondering what is causing that to happen?.

Gary the overall average ticket, you probably saw I think what will happen is, maybe Lee and I will answer this question for you together, the overall average ticket for our customers or average spend, I think it’s in the five-quarter run somewhere in their earnings release.

The average ticket continues to go up, that is, it continues to go up over the last five quarters and probably over the last five years, and I think that’s somewhere around $1.92. So, I think of some other metric that you're looking at, I mean I will let Lee respond to that..

Gary, I think we’ve got a couple of things going on here, occasionally the company does do some strategic adjustments I guess I would say with some customers where we get some benefit, it doesn't necessarily happen immediately, but on the long run is better for us, it does reduce to some degree revenues in the near-term, but we gained some significant benefits going forward.

We also are working on that whole revenue aspect so that to the extent that we have some going in that direction that I just mentioned, we are actively working in the other direction to bring the L&T revenues are up. So that I think going forward to you're going to see a trend that’s not maybe what you’ve seen for a few quarters here at now.

So, those things do happen occasionally where we make some conscious decisions to benefit the company in the long run, which does produced a temporary little blip..

I think you are referring to working on the other side of the equation, if you're referring to L&T and I think that’s what you are talking about.

If you are referring to L&T, the things we're working on, on the other side of the equation Gary and I hope this is answering your question, we are working on the revenue side and the cost of goods side, for instance and I think we mentioned this on our last call, with certain customers we have begun actually at the beginning of this year, we began to take price specifically on processing with a select group of customers and we will begin to see the benefit of that as the second half of the fiscal year unfolds.

We also have been successful at negotiating some cost reductions on the service side, which we had a minor, I had a minor slice of benefit in the 12/31 quarter on some cost reductions on wireless, which will see the full benefit in the 3/31 quarter. So, I hope we answered your question..

Okay.

And then in terms of the S&A, I mean it was down from where you were guided, you mentioned there was pressure with t’s, so was there anything in there that you did not spend in the quarter that you're pushing out in the back half of the year because it was my understanding that there was some things to maybe increase sales, increased R&D or whatever because you're kind of leading us to a $6.5 million run rate for the back half of the year and I’m just trying to understand what happened in this quarter because the stock fees, down that is going to change in the ensuing next two quarters?.

The short answer Gary is, no there is nothing that was pushed out.

Having said that, the reason for the mid-60s on a go forward basis is that by design the Q2 activity both from our external auditors and our internal auditors and the company was at a lesser rate and going forward a lot of the activity Q3, Q4 will ramp up just as it did last year, not as much as it did last year because we’re in our second year, but it will be more, which is why this is nice to have a $5.8 million SG&A, but it will go up a bit, we are a growing company and we need to provide the right kind of infrastructure support and get the SOX activity done and it will ramp up in Q3 and Q4 and in Q1 frankly for next year..

As we stated in the prepared remarks we are holding to that guidance that we gave last quarter of mid-sixes..

And then lastly, as you increased your client base now, I think just trying to get an understanding of, if you look at all the potential connections that your client base has right now, where are you in terms of penetration of that base, are you still around 20% or is that a little too high?.

You know Gary, I think we are, I believe we're somewhere between 20% and 25%, it is probably a little high. We believe there is 12,000 customers or operating somewhere north of 2 million locations, so if you do the math, I would say 500,000 where we would be 25% of the way there, if they were at 2 million.

So, it’s, I think a good estimate is between 20% and 25% penetration..

Okay, thank you..

Thank you, Gary..

Thank you. Our next question comes from the line of Josh Elving from Feltl. Your line is now open..

Hi good afternoon..

Hi Josh..

So, I think Gary touched on a question that I wanted to push out a little bit better, I just want to maybe explain the way I understand the license line, kind of split between processing and then like a monthly service fee and I guess in looking at the license being up - the license line being up, let’s say about 22% in the quarter and gross dollar volume being up I think closer to 40%, where are you suggesting that your revenue yield, your processing revenue yield perhaps you had given up some pricing there such that the kind of monthly service fee was maintained somewhat, does that make sense?.

I think what Lee was referring to is the opposite. It’s on the monthly service fee, sometimes strategically we will make a decision to - we will make a decision to back off a bit on a monthly service fee with the customer and again it is typically strategic in nature and so forth.

So, it’s actually the monthly service fee that will sometime give relief on to position ourselves for a longer term gain.

On the processing side of the equation, what we’re doing and what I mentioned is that we’re actually taking that rate up, we have certain parts of our customer base, so we will be generating a little bit more revenue, we don't make a lot on the transactions, we don't make much at all, but we're going to squeeze a little more revenue out of the transaction side of the L&T line..

Okay that makes sense.

And then did you, I think Lee provided a couple of comments regarding license gross margin expectation, I think I missed it, do you still, are you still thinking that 32%-ish range over the balance of the year makes sense or where do you see that gross margin moving? And I guess in addition, how about equipment as well?.

Josh, we are going to hang chart with the low-to-mid-30s on our predictions for L&T margins and what we are trying to do as a result, particularly on the revenue side of the equation in the cost of goods side of the equation, we are trying to push ourselves up that curve. We really want to get move up the curve from the low to the mid-30s.

So this we are a very concentrated effort to get that done and I’m hoping next quarter we will see, for instance for the full quarter of the wireless benefit we will see something a little bit different. So, hopefully we will be working our way up that curve.

On the hardware side of the equation, I think we’ve said mid-teens and we’re coming in above that right now, which is great. Hopefully, we can stay in that range and that would be good. So hope that helps..

Okay, great. That is helpful.

And then in speaking about the SG&A, obviously there was a seemingly an over or an outperformance in the December quarter, 6.5 over the balance of the year on a quarterly basis, any color looking into 2018 and would we see that potentially grow with revenue growth albeit a lesser rate or how do we think about the outlook for SG&A in the 2018?.

Josh and I apologize, you broke up there, we didn't catch the question, I don't know what happened, but you broke up, so could you please repeat your question?.

Sure.

So you talked a little bit about SG&A expectations over the balance of this year at around 6.5 million, any color on 2018, should we expect that to grow with revenue growth in 2018, albeit at a slower rate?.

It would certainly be at a slower rate.

The mid-sixes that we are looking at and that we are thinking about for instance for Q3 and Q4 well for the most part be driven by the audit costs that we think will be coming related to SOX and getting through that process for the second time, I don't think it will be in anywhere near where we were last year, but as we go into 2018, I see some SG&A growth, I think we see that in the plan, but it’s not at a substantial rate.

Hope that helps?.

That's helpful.

Last question from me, just a little bit more color on connections in the quarter, I guess looking at the year-over-year growth, maybe a little bit slower than what you needed to do to hit your guidance for the full year, was there anything unusual in the quarter, with any push outs or can you kind of give us a little bit of color about your expectations versus the connection growth you saw in the quarter?.

Well typically we are always back loaded. We always keep within around [indiscernible] whether it is typically back loaded. In this particular quarter, really in any given quarter, we always have a lot of customers. We added 500 new customers and we were negotiating during the quarter with many, many customers.

And this was one of those situations, where a few pieces of business didn't come in the timing we expected, so they’ll fall into this quarter. That said, the amount of activity and the work that was done during the quarter as a part of these negotiations and the signals that customers are sending are very encouraging.

So that is the color you were looking for..

Good. Thank you very much..

Thank you. Our next question comes from the line of George Sutton from Craig-Hallum. Your line is now open..

Hey, gentlemen, good afternoon. This is Jason on for George..

Hey, Jason..

Wanted to dig into these monthly service fees just a little bit more. You talked about kind of giving relief on the monthly service fee side to some customers.

Just wondering if this is a product of the premium services, where you are trying to provide benefits to customers that are going to a 100%, or is this something you are doing to land new customers? I was wondering if you can give more context on where you are providing these discounts?.

That’s a great question. And it's actually, it’s not so much related to premium services, but it is related to two things that that you just mentioned.

First of all, when a customer wants to go 100% and it's a substantial commitment on their part, let's call it, a couple of thousand locations whatever that might be, we might give that customer some relief. Other customers and they’re early in the game.

They’re early in the game, they’re valuable, every customer that goes a 100% sends a message to the marketplace, hey, this thing is going to go all the way.

And just in the vending market, there are 6 million locations in the United States, got a long way to go in this market and we can create a lot of value for everyone, including customers and shareholders. So those 100% commitments are valuable. They are valuable strategically and they’re valuable in the way of number of connections.

So that’s one place, that’s a great example you brought up of where we might want to strategically give someone some relief on a monthly fee. On the other hand, you might had a very large early adopter who is capable of moving the market on their own, where you might want to give relief as well.

So those are two examples where you might do that on the monthly service fee..

Okay. On that same topic, just wondering if you can give some perspective on the funnel of customers that want to move to 100%. I know you've announced quite a few new names on this call and on past calls.

But are you seeing more interest from customers that want to make them move? Is it becoming an easier sell to get people to get to that 100% threshold?.

Well, if I said easy, somebody might check my door down. But I don't think it's fair to say easy. It's a pretty significant commitment on the part of a customer just in terms of the work they need to do.

But what I would say is that the dialogue regarding customers going 100%, it used to be that there would be a customer a quarter or a few customers a quarter that you’d be having a dialog like that with, now it’s dozens per quarter. And we’re in various stages of working with those customers and getting them to those commitments.

So that the fact is that, there are more conversations going on in that regard. And I think importantly and something that we all need to think about a little bit longer-term for the industry and I believe we talked about this before yourself and George and I and people from our company.

The industry is sending all the signals and using all of the rhetoric around connecting all the machines and having cashless capability and all the machines very much the same way that they brought dollar bill validators, dollar bill acceptors to the whole industry.

So the rhetoric in the industry as a whole, I think, is very important as well and that's something that we continue to hear..

Okay, thanks for the color on that.

Another question on a different topic here, but the - a nice win with the Pepsi Bottlers Group, wondering if is that a good proxy for what you're seeing for customer interest as far as the interactive ePort versus the standard ePort or was there something unique that caused higher proportion of interactive devices with this customer?.

I’m not sure if I remember this correctly, but the fact of the matter is I think they took what we had left and I think they had to take some gene on. So we sold everything we had in the quarter in terms of interactive. We continue to dial up that production and we still expect that to be about 20% of our mix for this fiscal year.

So the interest level is good and on the customer side and the interest level was very good, because of some of the test results we've put out, the interest level is good on the advertising side. And we expect to see some activity there. So putting those two together, just those two factors, I think that product line and service has a bright future..

Okay, great. Thanks guys..

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital Markets. Your line is now open..

Great, thanks.

Yes just, on the Pepsi announcement, I guess six bottlers, are they - are you six separate contracts or is there sort of a master agreement with some Pepsi organizations that helps to enable these deployments or usually say kind of six separate wins here?.

Well, Mike, actually it’s a little bit of both there’s an arrangement with that gets called Carolina Canners, there is an arrangement with that group. But the actual, if I remember correctly, the actual buying decision really comes down to each individual bottler.

They make their own decision, even though they’re part of a group, strategically they decided to go in this direction and we’re going to be doing some interesting things with over and above simply giving a cashless capability. But actually when you look at them, there are six individual bottlers who make their own buying decisions..

And then the volumes you talked about there, do you know what percent cashless that get these six bottlers to?.

Mike, I don't have that information, but just from my experience with Pepsi, seems like a long time ago now, I can guarantee they had more than 2,000 machines out there among those six bottlers. So we’re really just getting started with that. So, I can't tell you what percent penetration that is..

Okay.

And then in the December quarter how many of the - say, 25,000 gross ads were the ePort interactive?.

I would always think somewhere in the neighborhood of 20%, just think for the year that we'll probably land in that 20% range, I don't know exactly what it was for the quarter. But if I had to make a bet, we'd be right in that range..

Got it. And then just on the additional levers to get the license in transaction gross margin improved a little bit.

I guess, how important will sort of renegotiating with your card processor fee and sort of would they be willing to do that mid-contract, let’s say before they renewed it?.

Well, we’re constantly in dialogues with the people in the value chain on the card side. You’ve got the associations, notably Visa and MasterCard and we have constant discussions with them about various things, including pricing. And in addition, of course you have our key processor, Chase.

So, those conversations and I don’t want to call them negotiations, but those conversations are ongoing. Then there are other components, cost components, most notably the wireless, which is a significant component on the cost side for this service. Those are conversations that are ongoing as well.

But in particular we concluded one negotiation that, as I mentioned, benefited the 12/31 numbers just a bit and we'll see the full impact of that in the next quarter.

So, I would just think of that cost component, the various elements of the cost just - we're constantly in discussions with these companies regarding how we can take cost out of the system and provide more value for less, I mean that's what we're trying to do.

I mean, I think LTE is a great example, we're going to be giving our customers more bandwidth, greater speed, we're all accustomed to what happens to that is consumers and we're not taking their price up, so at least at this point, but - and of course we're not paying a greater price to get that additional capability..

Yep, got it.

And then just MasterCard as a percent of volume in the quarter, any change from the September quarter there, any material one?.

I don't think there was a material change, MasterCard debit has become - we talked about it last quarter, it's become a bit more of the debit card mix which really is still heavily dominated by Visa, I think Visa debit is somewhere in the neighborhood of 75% of all of the debit card transactions and most of our transactions are debit, so we've got the lion's share of it.

I don't think - to answer your question directly, I don't think there is a material increase of MasterCard debit in this particular quarter..

And just lastly, just to be clear, when you talk about mid $6 million, you're talking SG&A, so that excludes depreciation and amortization, is that right?.

Correct, that's right..

Okay.

And then what you expect D&A to be?.

Sorry, say again..

What do you expect depreciation and amortization to be only for quarterly?.

That's just similar from what we've seen, about 300 grand..

Yes, so 300 or 700 is something that….

So that 300,000, Mike, that I don't think we expect it to change notably..

Okay, thanks..

Okay, good, thank you Mike..

Thank you. Our next question comes from the line of Gary Prestopino from Barrington. Your line is now open..

Just a quick question, when you're talking about making accommodations to some dual accounts or account that I would assume are high transaction volume accounts.

Do you have any minimum transactions that they have to fulfill in order to uphold their side of the contract? You're giving up that monthly fee to a high transaction volume account, it would seem that they would have to make some commitment to you on a quarterly basis that they will do enough transactions to mitigate the loss of that fee?.

Yes, Gary, we're not giving that up entirely, we may get some ground on that, but that's really not where we're giving that relief.

We're giving that relief for a customer who is flipping their - they are flipping over to a 100% or maybe they're a very large strategic early adopter or an influencer of some type, but it's definitely not a one-for-one exchange.

And I think what you might be - one of the things you might be referring to is, if a customer who comes on via a QuickConnect Service, maybe with a kiosk where there is no monthly fee at all and we're making money based upon the transactions, is that what you are referring to?.

Yes, that's what I'm referring to, because I think in there was some talk of that, some accommodation for high-volume accounts, so….

That's a different - sure, that's a different animal. And just to be clear with everyone, we have certain customers who come on to the service, typically it might be a kiosk customer and they'll come on to the service and they don't pay a monthly fee at all.

We - they had - and Gary to answer your questions very directly, we have their - typically we have their transaction history, so we know what their average ticket is and we know what their annual volumes is going in.

So that we know typically we're going to make more, by the time they ramp up we're going to make more on that connection than a regular connection, because we make a nice spread, it's a high average ticket, our cost of doing a transaction is much lower, it's down in the high 2s or low 3s, so we can make in terms of percentages, so it's a nice spread.

And sometimes the average tickets are around $50, I mean, they can be very high. So, that's one more topic..

Thank you..

Sure..

Thank you. At this time, we don't have any more time for additional questions. I would now like to turn the call back over to Mr. Herbert for closing remarks..

I wanted to thank everyone for taking the time today to join us for our call. We feel good about the results that we reported for 12/31 quarter and everyone on the team is knuckled down to deliver good results for our third quarter, that we appreciate everyone's enthusiasm and support and look forward to reporting to you at our next interval.

Thanks and have a great evening..

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..