Steve Herbert - Chairman and CEO Priyanka Singh - CFO Monica Gould - IR.

George Sutton - Craig-Hallum Robert Napoli - William Blair Mike Latimore - Northland Capital.

Good day, ladies and gentlemen, and welcome to the USA Technologies First Quarter Fiscal Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference 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' First 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 date they are made. USA Technologies undertakes no obligation to update any forward-looking statements whether as a result of new information, future events, or otherwise.

This call will also include a discussion of certain non-GAAP financial measures that we believe are useful for, among other things, evaluating USA Technologies' operating results. These non-GAAP financial measures are supplemental to and not a substitute for GAAP financial measures such as net income or loss.

Details of these items and a reconciliation of these non-GAAP financial measures to GAAP financial measures can be found in our press release issued earlier this morning and on the Investor Relations section of our Web site, 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 first quarter fiscal year 2018 results. Our first quarter performance marked a strong start to the fiscal year and reflects the continued adoption of cashless payments in the unattended retail market.

We expanded our customer base in the quarter with the addition of 550 new customers, the highest new customer count we have achieved in two years, bringing the total number of customers on the ePort Connect service to 13,250.

We believe that this new customer growth is indicative of the inflexion point we are seeing in the unattended retail market toward non-cash acceptance. Importantly, these new customers will convert to new connections and will drive our revenue growth over the coming quarters.

Net new connections rose 37% year-over-year in the first quarter to 26,000, bringing our total connection count to 594,000, of which approximately 500,000 or 84% are NFC enabled. We believe this is the largest footprint which accepts NFC-based mobile payments controlled by a single entity in the United States, if not the world.

First quarter revenue increased 19% from the year ago period to $25.6 million marking our 32nd consecutive quarter of year-over-year revenue growth. L&T revenue rose 22% year-over-year to 19.9 million while equipment revenue rose 9% to 5.7 million.

By continuing to leverage operating expenses, we were successful in converting this revenue to improving profitability. We reduced operating expenses both on an absolute basis and as the percentage of revenue in the first quarter. As a result, our adjusted EBITDA more than tripled to $2.3 million relative to the year ago period.

Our service is being utilized by consumers at an increasing rate. In the first quarter, we processed more than 121 million transactions for more than $239 million in value. Importantly, we achieved our goal of exiting the first quarter on a $1 billion annual run rate for transaction processing.

Now, I’d like to turn to some of our recent business highlights. We’re pleased to announce that we signed a new three-year agreement with Visa. Our partnership with Visa now spans approximately a decade and was an important catalyst that helped us drive acceptance of cashless payments in the unattended retail market.

Our partnership with Canteen, the largest automated merchandizing company in the United States offering vending, micro-market, office coffee and dining services to a large network of corporate owned and franchise locations, continues to generate momentum.

We recently announced transactions with two Canteen franchisees for our ePort Interactive and ePort G10-S devices, as both operators transition their business to 100% connectivity for cashless payments.

In September, we announced that Premier Food Service, a leading food service provider in Kansas, will upgrade more than 1,400 locations to our ePort Connect service and over 300 kiosks to our consumer engagement and loyalty program.

Last month, we announced that Berkshire Foods, the leading vending and food service company in Connecticut and New York, is widening its footprint with the addition of 1,000 new ePort Interactive and ePort G10-S units to its existing network of approximately 1,500 locations on our service.

Both transactions demonstrate not only the value of our partnership with Canteen but also the continued success of our VendScreen acquisition, which we’ve built into our ePort Interactive offering.

We believe that our success in integrating VendScreen and executing on the market opportunity the transaction offered will enable us to derive similar benefits, albeit on a much larger scale from our acquisition of Cantaloupe Systems which we announced yesterday.

We have noted previously that with our recent follow-on offering, we intended to pursue acquisition opportunities that would accretive and strategically complementary, further enhancing our product suite with additional value-added services or allowing us to expand additional verticals or geographies to drive further growth and greater returns for shareholders.

We believe that this highly complementary and strategic transaction achieves both objectives and will extend our position as the platform leader in market share, technology innovation and the partner of choice for our operator customers.

We expect the transaction to close later this week and after one-time acquisition and integration-related expenses to be accretive to our results in fiscal 2018.

Cantaloupe brings highly complementary value-added, cloud-based and mobile services such as those that allow customers to manage their inventory, warehouse, accounting and other back office functions as well as dynamic route scheduling which optimizes delivery schedules.

There is also a module that enables customers to optimize space to sales in each machine. These value-added services offer customers the benefit of increased revenue from improved merchandizing and reduce downtime while decreasing rent expenses by as much as 30% to 40%.

Cantaloupe is headquartered in San Francisco and has approximately 300,000 machines on their service with more than 1,300 operator customers in the United States, Canada, Australia and South America, thus enabling USAT to expand its footprint into new global markets.

With this combination we will be able to offer a new value proposition for the unattended retail market with the turnkey enterprise platform that can help customers decrease their operational costs, increase sales and better enable them to run their business more efficiently.

The team at Cantaloupe built an unequaled product and service portfolio and we are honored to have the opportunity to work with them to help catapult that great work into new and emerging markets as well as adding value to our combined customer base. We’re thrilled to welcome the exceptional team at Cantaloupe Systems to the USA Technologies family.

In closing, I’m very pleased with the strong start we had to the fiscal year. We are excited about joining forces with Cantaloupe and the comprehensive end-to-end solution we will be able to offer to both new and existing customers. We look forward to the many opportunities we have ahead of us.

With that, I’ll now turn the call to Priyanka to provide a more detailed financial overview of our results as well as the Cantaloupe transaction.

Priyanka?.

Thank you, Steve, and good morning, everyone. We are pleased to announce another stellar quarter with strong performance and growth across all key performance indicators. Total revenue in the first quarter of 25.6 million was up 19% year-over-year.

We added 26,000 connections reflecting the growth of 37% from last year, which highlights the consistent execution of our strategy to grow our share in the marketplace.

Our adjusted EBITDA of 2.3 million grew more than three-fourths compared to last year which we believe validates the scalability of our business and our ability to drive improved returns and margin expansion through top line growth.

In the first quarter, we reported significant new customer growth with the addition of 550 new customers, the highest number of new customer additions in a quarter in the last two years. We ended the quarter with 13,250 customers, an increase of 16% from the first quarter of last year.

Existing customers accounted for 82% of growth new connections in the quarter. I would like to provide a brief breakdown of our revenue in the quarter. License and transaction fees grew 22% to 20 million and represented approximately 78% of our total revenue. Equipment sales were 5.7 million, up 9% from last year. Now turning our attention to margins.

We are very pleased to see a steady sequential increase in our L&T margins over the last six quarters. L&T gross margins expanded 190 basis points to 33.2%. Our equipment margin was 10.3% in the first quarter compared to 20% last year.

As we have stated in the past, our strategy is to use equipment sales as an enabler for driving long-term, higher margin reporting revenue by leveraging the relationship made from the initial connection. Turning to expenses. SG&A expenses for 1Q was 6.7 million, down slightly from 6.8 million in the first quarter of last year.

Due to increased scale and operating leverage, SG&A as a percentage of revenue decreased from 51.5% last year to 26.3% in the first quarter of this year. This decrease of approximately 500 basis points reflects our continuing success to drive disciplined expense management while we continue to expand our broad line. Turning now to the balance sheet.

Net working capital totaled 46.7 million compared to 5.8 million in the last quarter. Our cash balance at the end of the first quarter was 51.8 million and increased net proceeds of approximately 40 million from our follow-on offering which we completed in late July.

As Steve discussed, yesterday, we announced that we have entered into a definitive agreement to acquire Cantaloupe Systems in a transaction valued at approximately 85 million. Cantaloupe will receive 65 million in cash and 19.8 million in USAT stock as consideration.

We plan to finance the transaction with cash on hand from our recent follow-on offering and through a new credit facility we’ve entered into with JPMorgan Chase. We expect the acquisition to close later this week.

This partnership would allow us to expand our leadership position and we are excited to leverage our combined platform to provide an end-to-end solution to our customers.

Combining USAT’s cashless ability in driving top line growth for the customers and Cantaloupe’s logistic technology to drive cost reductions, the combined value proposition would enable our customers to run their business in a more efficient and competitive way. Let me now provide a high-level overview of Cantaloupe’s financials.

Cantaloupe revenue is in the mid-20s on an annualized basis and has been drawing more than 20% over the last few years. Similar to USAT, more than 70% of their revenue is recurring in nature. We expect Cantaloupe to be accretive to our adjusted EBITDA margins.

As a result of this transaction, on a pro forma basis, including Cantaloupe for approximately eight months, we now expect combined revenue to be between 137 million to 142 million and adjusted EBITDA between 12.5 million and 13.5 million for fiscal 2018.

Net of one-time transactions and integration expenses and any purchase accounting adjustments, we expect this transaction to be accretive in fiscal 2018. We are delighted with our first quarter performance and expect continued positive momentum in fiscal 2018.

We believe that our acquisition of Cantaloupe will only further our efforts by enabling USAT to offer a few suite of end-to-end services to our existing customers and a turnkey enterprise platform to new customers. This concludes our financial update. I will now turn the call back to Steve. Thank you..

To wrap up, we’re very pleased with our first quarter performance and very excited about the opportunities that lie ahead of us. With that, we’d now be happy to take your questions.

Operator?.

[Operator Instructions]. Our first question comes from the line of George Sutton from Craig-Hallum. Your line is now open..

Thank you. And guys I’m particularly pleased with the EBITDA improvement. I wondered if you could give us a sense, Priyanka, what is built into your estimates relative to demand synergies that you might see from this transaction and then any cost synergies that you’re assuming..

George, for 2018 it’s not very significant. We have some revenue and cost synergies that’s built in, but nothing significant that we want to give out at this point..

Steve, would you be able to go through a very simple cross-sell example for us relative to bringing these two businesses together and how your sales force and how their sales force might be given more to sell?.

Sure, George, thanks and thanks for the kind words and question. A typical cross-sell is a great question because we get to sell the services that Cantaloupe offers to the marketplace which we described. Now there’s dynamic scheduling, space to sales capability, et cetera. These are services that we haven’t offered in the past to our 13,250 customers.

So with those customers for their existing installed base with us and as we go forward, we have a new set of very complementary services that we’re able to sell to them. So existing base and going forward a handful of new services to sell to those customers and very high margins..

Let me ask you in a different way.

When you look at your addressable market, how big is the addressable market post deal versus prior to the deal?.

The addressable market is largely the same in terms of unattended retail. I think the thing that changes for us, we’ve been talking about somewhere in the neighborhood of 15 million to 17 million potential unattended retail locations in the United States and now we have a couple of outlets into international markets.

So that will increase the total addressable market in that regard. But the TAM is largely the same. We simply have more services to sell to that market in the United States..

Understand. I’ll turn it over to others. Thank you..

Our next question comes from the line of Bob Napoli from William Blair. Your line is now open..

Thank you and congratulations on the Cantaloupe deal and good quarter.

A question, I guess, Priyanka on the guidance, the 137 to 142 of revenues, how much of that is Cantaloupe?.

Cantaloupe for fiscal '18 on an annualized basis is somewhere in the mid-20s, so you can assume mid to high teens for Cantaloupe for 2018..

Okay. And then the EBITDA increase, nice to see and then we’re thinking increased EBITDA guidance a little more than what we thought you might, which is great to see the confidence in that.

How much of the increase in EBITDA is coming from the acquisition versus the outperformance of the core business?.

That’s a really good question, Bob. Thank you for that. First of all, I’d like to just reiterate that we’re extremely pleased with our first quarter results especially on the EBITDA side, so thanks for the kind words.

The second thing is, as we think about the acquisition in itself, it’s extremely strategic, very complementary to our business model and we are pleased to see that it’s accretive in the first year in itself.

Thirdly, just given that we have signed yesterday and we haven’t really closed the transaction at this point and there’s still amounts of work that needs to be done around purchase accounting and financial reporting overall in the next couple of weeks and months, at this point we feel good about putting out a combined guidance for the company and as things evolve over the next couple of months and probably by the next quarter, we will give out more insight into our guidance and probably adjust it at that point..

Okay.

So most of the increase is due to just what your own core business versus the acquisition?.

It’s a combination of both. It’s more the acquisition. There is some amount of upside that we saw in the first quarter that we’re rolling into for the rest of the year as well..

Okay. And just so I understand the structure of the deal, the stock – the 20% stock.

Is that at a fixed price or is it at the price when you close the deal or what is the 20% stock tied to?.

Bob, it’s Steve. It’s essentially a bWAPP [ph] over a period of time..

Okay..

It’s a bWAPP over a period of time, so it’s not exactly on the day of closing..

And as my last question, I would expect you’ve known this company for quite a long time and have probably been partners with them or competing against them in some cases.

But what is your go-to-market strategy? How were you organizing? What does their sales force look like? And how was Maeve and her team, how does that sell? How are you going to sell the product? I would imagine you’ve worked – have some pretty good thoughts around that?.

That’s a great question. And just a preamble on the answer, what I’d like to say is yes. We have known the Cantaloupe people for quite some time. I’ve personally known the founders I think since they started the company, it was over a decade ago and we’ve always admired the work that they did and thrilled to have them be a part of our team.

In addition to that, our companies have worked together over the years. We have joint customers to the tune of tens of thousands of locations. So our sales people in certain cases have already collaborated with one another in selling our different sets of services to customers.

And then from a delivery and an operational and technical perspective we’re already delivering services together as we’re on this phone call today. So from a – and I know this is little bit longwinded, but I hope it’s helpful in setting the stage. From an integration perspective, it’s a lot like the VendScreen situation.

We can really hit the ground flying. And I can tell you that – so the sales teams having already worked together, they have a very good idea of how to wrap up the value prop into a platform sale and enterprise sale as opposed to just a cashless sale or just the back office software sale. So it’s far more advanced than one might think..

Thank you. I appreciate it..

Sure..

[Operator Instructions]. Our next question comes from the line of Mike Latimore from Northland Capital. Your line is now open..

Great. Congratulations on everything here; it looks great..

Thanks, Mike..

Just in terms of how we think about layering Cantaloupe into the model, I guess you mentioned 300,000 machines.

Is that going to show up in your connection count, meaning we should add 300,000 to connections for the quarter?.

Well, Mike, there’s – and I’ll – Priyanka gave the firm grasp on the numbers, but from a broad perspective, remember I mentioned we were in some locations together.

So the rough math if Cantaloupe is at approximately 300,000 locations on their various services and I believe it’s somewhere in the neighborhood of 40,000 or 50,000 that we’re actually serving together. So you can’t double count that. So on a very broad brush it would add approximately 250,000 to our net connection number.

Priyanka, is that about right?.

That sounds about right..

Okay, that makes sense. And then --.

That’s what you were getting at, right?.

Yes, definitely. And then you mentioned that 70% of revenue is recurring.

Is the other 30% hardware, professional services or what’s in the non-recurring piece?.

More than 70% is recurring, Mike, and the remaining is hardware. So they do have some hardware sales as well..

Okay, got it. And then I guess they have some international business.

Is that, I don’t know, what would percent of revenue international be at this point?.

It will be somewhere in the low to mid-single digits, not very significant at this point..

Okay, got it..

But excited that it gets us the footprint. As talked about, being international and having the footprint by the close of this calendar year, so we’re very pleased with this. It allows us to act on that..

Got it.

And then just in terms of maybe revenue synergies, how much of the opportunity here is, say, migrating current customers off of other, say, VMS onto Cantaloupe versus greenfield opportunities?.

Mike, that’s a good question. It’s hard to say what the percentages are. But in some cases with our customers, we may very well be displacing something like Streamware from Crane. So that would be the most likely service that would see some disruption from this combination..

Okay, great. Thanks a lot..

Thank you..

And at this time, I’m showing no further questions. I’d like to turn the call back over to Steve for any closing remarks..

All right. Well, thank you very much and thanks everyone for joining us for our call today. We’ve been working hard as I think you can all imagine and we’re just thrilled about what the future holds for our company and now our combined company with the Cantaloupe team. So we very much look forward to our next update after next quarter.

And again, thank you for your time and hope you have a terrific day..

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