Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

USA Technologies, Inc. (NASDAQ:USAT)

F3Q 2014 Earnings Conference Call

May 13, 2014 10:00 ET

Executives

Veronica Rosa - Vice President, Investor Relations

Stephen Herbert - Chairman and Chief Executive Officer

Dave DeMedio - Chief Financial Officer

Analysts

Gary Prestopino - Barrington Research

Mike Latimore - Northland Capital

Alexander Renker - Sidoti

Jim Gentrup - Val Vista Capital Management

Operator

Good day and welcome to USA Technologies Third Quarter and Fiscal Year 2014 Earnings Conference Call. Today’s conference call is being recorded.

At this time, I would like to turn the call over to Veronica Rosa, Vice President of Investor Relations. Please go ahead.

Veronica Rosa - Vice President, Investor Relations

Thank you and good morning. Before beginning today’s call, I would like to remind our listeners that all statements, other than statements of historical facts included in this call 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 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 Securities and Exchange Commission, including our most recent Annual Report on Form 10-K and the Form 10-Q report for the quarter ended December 31, 2013.

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 our ongoing 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 website www.usatech.com.

On our call this morning are Stephen Herbert, Chairman and Chief Executive Officer; and Dave DeMedio, Chief Financial Officer. We’ll begin this morning’s call with a review of our results relative to strategic priorities followed by a more detailed analysis of third quarter results by days. Steve will return for some brief closing remarks before opening the call to questions.

So at this point, I’m going to turn the call over to Steve. Please go ahead, Steve.

Stephen Herbert - Chairman and Chief Executive Officer

Thank you, Ronnie and good morning, everyone. The third quarter included some great progress and important milestones for USAT. Revenue of $10.4 million grew 16% and license and transaction fee revenues representing 86% of total revenues in the quarter grew 19%. More importantly the steps we’ve taken to attract new connections to our service in vending, laundry, taxi amusement and other markets are yielding results with 22,000 gross connections added in our third quarter, the highest we’ve ever achieved. With 20,000 net connections added in the third quarter our total service base grew to 244,000 up from 196,000 as of March 31 one year ago, an increase of 24%.

In addition the third quarter included several important news in vending and taxi and transportation that span beyond the quarter giving us a very healthy pipeline for new connections going into the fourth quarter. If you’ve already had a chance to review our press release another big event for USAT that most likely jumps off the page was the $26.7 million deferred tax asset recognized in the third quarter. This recognition event moved our GAAP net earnings per common share to $0.75, while non-GAAP net per common share came in at breakeven.

For all of you who aren’t tax experts like myself essentially what this means is that based upon our recent earnings performance and our belief that we’ll continue to generate taxable earnings, this $26.7 million reflects the portion of future earnings on which the company will not be required to pay tax. We’re also very encouraged by what we’re seeing in the $120 billion self-serve retail industry that we address. There is a growing (awareness) on consumers, customers and partners that a cashless transition is well underway. As I mentioned last quarter this stage of an emerging markets requires USAT to be a assertive, flexible and swift in executing strategies that drive market share and create competitive advantage and we’ve done that.

Strong connections, a solid pipeline and a growing list of partners and customers that recognized the value of our M2M service platform are all very encouraging. And not all of those accomplishments are reflected in current quarter results. Rather as Dave will get into later the revenues from a portion of our recent connections will flow in over time as license and transaction fees related to those new connections are fully realized. We believe the market opportunities in front of us, our leadership position and the strategies we have in place to further develop our value in the marketplace will support our target over the next three to four years of $100 million in revenue and double-digit operating margins.

As we drive towards these objectives our top priority is to do what we can to continue to accelerate the rate of connections to our service and add value to those connections. Our most significant opportunity lies in driving further adoption within our customer base. We won’t disclose that we believe our existing customers manage over 2 million potential connections and we have continued to add through that opportunity with double-digit growth in our customer base quarter-after-quarter. Industry sources estimate that there are over 14 to 15 million potential connection points in the thousands of vending, taxi, commercial laundry, arcade and kiosk operations in the U.S. to that. During the third quarter the majority of our connections came from our existing customers.

Although many customers are just starting out USAT customers are seeing the benefits of cashless and they continue to add connections. For example we recently did a study of customers that have been on our service for approximately four years. Four years later the average number of connections with those customers grew 220%. Our primary objective is to do what we can to help move these customers further along the adoption curve with greater speed by delivering value in multiple ways. Today many of our customers are seeing average transactions that are at least 30% higher when a consumer uses credit or debit versus cash.

In addition cashless gives our customers to the ability to increase price without the declines in sales volume that are typical in a cash only environment. And cashless provides an increasingly important platform for data management and loyalty programs. What we’re seeing as this market transition is a building pressure for our customers to offer cashless to retain and win new accounts. That said overall cashless penetration is still low in the markets we serve providing what we believe is a tremendous opportunity for future growth.

In the third quarter our customer base grew by 47% compared to just one year ago for a total of 6,650 customers as of March 31. And with new integrated services that enable us to tap into micro-markets, dining services, and other aspects of these businesses we’re expanding our market opportunities even further. Take micro-markets for instance according to Automatic Merchandiser there are roughly 3,000 micro-market locations identified in their 2012 survey drove the equivalent in sales to almost 90,000 vending machines. So our ability to integrate with micro-market technology to greatly expand our opportunity. To continue to move the industry forward one of our strategic priorities is to introduce new products and services that further unleash the value of a connected cashless platform.

Two areas of increasing interest and opportunities are our recently introduced Integrated Payment Services model and as we’ve spoken out often on these calls the emerging opportunities in loyalty and mobile payment. Integrated Payment Services is a great example of how we evolved our ePort Connect service. It drives additional revenue from existing customers for USAT and importantly it’s something our customers have asked for, for a number of reasons. First, they’re seeing good results with cashless in their vending business with USAT and they want to leverage that further. In addition they want to be able to take cashless across their business to areas where they aren’t necessarily taking cashless to that.

Finally their businesses have evolved and the opportunity to simplify and add value through USAT for example by integrating into their new micro-market offerings with ePort Connect is very compelling. For the operator it makes great sense. One payment processor, one data provider, one set of data, one customer service relationship across multiple facets of their business. Industry reaction to this new offering has been extremely positive. During the third quarter we signed a new agreement with The Pepi Companies for Integrated Payment Services. Some of you might recognize the name because it was one of our first operators to go a 100% cashless. Yet the Integrated Payment Services offers us the opportunity to substantially grow our relationship with this customer as we introduced USAT products and services horizontally across their vending and foodservice spectrum.

Turning to another customer story, part of the healthy pipeline I mentioned is a large canteen operator that made the decision to dramatically accelerate cashless adoption in the third quarter. In part due to what they’re seeing and hearing of that cashless ROI in their own business as well as USAT’s Integrated Payment Services. In fact we’re working to help them rapidly deploy several thousand connections although what we anticipate should be the next one or two quarters with several thousand already deployed during our third quarter. With large companies like this moving forward into cashless in a thorough swift and strategic way others in the industry are forced to keep up.

Mobile payment and related services also continued to be a hot topic within the payment community, with over 1 billion smartphones purchased in 2013 alone, mobile relative to USAT, USAT’s products and service roadmap continues to be a priority. It’s also an area where we believe USAT has an established advantage. Our early work of NFC has proven our theory that the self-serve retail market can be a valuable asset to digital wallet providers, to advertisers, and app developers all of whom poised to benefit from reaching an entirely new subset of consumers never before reachable in an unattended cash only world.

For example our current mobile payment and Fifth Purchase Free program at ISIS is already in 75,000 locations. The number of consumers taking advantage of this program is growing weekly with usage up 450% since the pike. Strategically Fifth Purchase Free program helps USAT win business as operators come to acknowledge the importance of incorporating mobile as part of their cashless strategy. And for our partners that reinforces value of the self-serve retail community as they strive to reach a broad-based population of consumers for their respective applications. Our philosophy is always been about supporting point-of-sale options in any form, which all drive connections to our service.

We recently released a consumer app for our MORE loyalty program that uses our new eBeacon Mobile Payment technology hovered by Bluetooth Low Energy or BLE. Now available in the iTunes store our MORE mobile app provides an easy and secure way for consumers to identify participating locations, purchase product and track their MORE rewards on their smartphones. From a functionality perspective it’s bidirectional meaning that can communicate at the point-of-sale to and from a smartphone giving us the ability to among other things push offers to a consumer’s form. It’s increasingly evident to us that the payment industry at large recognizes the long-term implications of mobile and USAT is continued to be at the forefront of this trend on behalf of our customers.

Recently we entered into a relationship with BYNDL, a mobile technology innovator. They shared important bandwidth to our innovative resources in mobile. BYNDL recognizes vending as an important playing field for mobile apps and they recognize USAT’s scale and complementary strategic vision in this area. For example we’ll be working with them to enhance our MORE mobile app for Gamification or Hyper-Local offers. In other words an offer our coupon delivered to your phone based upon your location. These are all innovative services that we believe can drive new benefits for operators through targeted demand creation and greater insight as to consumer purchasing preferences.

(indiscernible) in building a comprehensive service platform continues to attract developers, manufacturers and other partners that require a scalable and reliable service partner like USAT. During the third quarter for example we added several names to the list of technologies we now support on our service. Two micro-market solution providers to provide check-out services and ECRS plus an additional point-of-sale offering, AirVend’s touchscreen technology. These in relationships allow us to further leverage our service infrastructure while providing our customers with the broadest selection of products and servicer under our turnkey ePort Connect solution.

We continue to work for the host of other third-party providers of self-serve retail applications both large and small who realized the advantage of the scale and expertise provided through USAT. Our work in adjacent markets beyond our core vending channel continues to move forward. In laundry we continue to add connections in the third quarter through our integrated offering with Setomatic Systems. This relationship targets the $5 billion commercial laundry space and has brought USAT approximately 7,500 new connections to-date.

Another growing area is taxi and transportation. We’ve made tremendous strides in expanding our growth opportunities to reach this market and in the third quarter achieved 2,000 new connections in this area. To-date our strategies in taxi and transportation have yielded over 12,000 achieved or contracted connections, many of which represent part of our pipeline of new connections that I referred to earlier. In summary our established presence in the marketplace and the infrastructure we’ve created along the way continues to attract customers, manufacturers and partners alike, all of which drives connections for USAT. We’re clearly focused on driving financial performance and the best way to do that we believe is to continue to gauge the pulse of adoption in the marketplace, the current competitive landscape and to capitalize on existing customer opportunities to drive long-term value for our shareholders.

And with that I’m going to turn the call over to our CFO, Dave DeMedio for additional comments relative to third quarter results and our outlook for the remainder of fiscal 2014. Dave.

Dave DeMedio - Chief Financial Officer

Thank you, Steve. Our results for the third quarter reflect continued progress in growing our recurring revenue base including a strong quarter of new connections that will benefit future periods. As Steve noted our Q3 GAAP EPS included a $26.7 million benefit from income tax related to the reduction in our valuation allowance as we recognized deferred tax assets in the quarter.

Under GAAP valuation allowance can be reduced as we have determined that is more likely to not that our net operating loss carry-forwards would be realized to offset future taxable income of USAT. We took a conservative approach to this analysis given among other things our (cross-server) to profitability in 2Q of last fiscal year with a $26.7 million representing a little over half of the total deferred tax asset. We will continue to revaluate the need to keep some or all the remaining $22.8 million valuation allowance on our deferred tax assets as we continue to grow taxable earnings. Reflecting the deferred tax asset, GAAP net income for the third quarter was $26.9 million. After deferred dividend GAAP net earnings per common share was $0.75 for the third quarter.

On a non-GAAP basis which excludes the benefit of reducing our valuation allowance and the fair value of warrant adjustment non-GAAP net income was approximately $322,000 for the third quarter compared to non-GAAP net income for Q3 of fiscal 2013 of $293,000. After preferred dividends non-GAAP net loss per common share was essentially breakeven or zero for Q3 same as Q3 of last year. In all total revenues for the third quarter grew 16% to $10.4 million, license and transaction fees grew 19% in the third quarter to $9 million. License and transaction fees are generated by monthly fees and transaction processing fees that stem from connections to our ePort Connect service and for the third quarter it represented 86% in total revenues.

On a year-to-year comparative growth was primarily impacted by the 21,000 deactivations that occurred in Q1 and Q2 of this fiscal year with a third quarter having no revenue related to these connections. In addition while we continue to replace those deactivations with new connections revenues from some of those new connections will take a bit longer to materialize as Steve mentioned earlier. For example we have approximately 12,000 connections from Q2 and Q3 that won’t fully materialize in terms of license and transaction fee revenue until Q1 of fiscal year 2015. This was a short term effect of softening growth from license and transaction fees as well as respective gross margins which you see in our results this quarter.

Gross profit of $4 million for the third quarter increased approximately 9% from $3.7 million for Q3 of fiscal year 2013. Gross margin came in at 38.3% from 41% for the same period last year which was a particularly high quarter for us. Equipment margin was approximately 54% a bit higher than usual due to a rebate adjustment, revenue earned under our ISIS marketing agreement and activation fees. Gross margin on license and transaction fees was 35.7% down from 40.2% for the same period last fiscal year. Contributors to the margin decrease included the first half deactivations and various new sales and marketing programs.

For example in the program referred to earlier if revenues attributable to the 12,000 connections have been fully realized in Q3 gross margin on license and transaction fees would have been closer to 38%. So for now we’re incurring the cost of services until those new revenues kick in. As we indicated in last quarter we’re still in the introductory stage of this market transition requiring us to be assertive with sales, marketing and product service offerings that add competitive advantage and market share. Other financial highlights for the third quarter include gross connections of approximately 22,000 with about 80% coming from vending customers in the quarter. In adjacent markets we drove a nice level of new connections in the quarter with 10% coming from taxi and transportation and the remaining 10% from commercial laundry, amusement and other market segments.

Net connections for the third quarter totaled 20,000 a 100% increase from Q3 of last fiscal year. Market diversification efforts, cost effective strategic partners and increased sales and marketing support to drive adoption have all contributed to this substantial improvement in performance since Q3 of last year. Existing customers as of last quarter drove about 75% of new connections in Q3. We handled $73.9 million in small ticket transactions in the third quarter, a 36% increase over the prior year quarter, transaction volume of $42.8 million increased by 32% from the prior year.

Currently the ePort Connect network handles about $1 billion in transactions a year supporting both cash and cashless transactions which is a valued data and reporting service we provide for customers. Both GAAP and non-GAAP operating expenses were $3.6 million in the third quarter up from $3.3 million in Q3 of fiscal year 2013 primarily due to increased headcount. Operating margins both GAAP and non-GAAP were 3.5% in the third quarter with greater expansion of operating margins anticipated for Q4.

Moving to cash and liquidity, we’re focused on achieving sustainable, positive free cash flow. We defined free cash flow as cash from operations, less capital expenditures as reported in the statement of cash flows. For our first quarter free cash flow was negative $1.2 million and our second quarter free cash flow was negative $735,000 and this quarter it was negative $510,000, a steady marked improvement as we’re closing in on our goal. As we stated last quarter while we would like to achieve free cash flow in our fourth quarter the timing relative to achieving this target was dependent upon a number of factors including continued improvement in adjusted EBITDA and on the other side of the equation connection opportunities and the mix of those opportunities relative to cash used for JumpStart.

During the third quarter JumpStart was used for a little over 65% of gross connections with other connections achieved through direct hardware sales, third-party hardware or QuickConnect integration to our ePort Connect service. We’ve also worked to lower our cost on these units and into third quarter continue to ship our new lower cost ePort G9. Our cash and cash equivalents as of March 31 stood at approximately $6.6 million up from $3.9 million as of Q3 of fiscal year 2013. For the remainder of the year we remain comfortable with cash on hand, continued improvement in free cash flow and our credit line with added bank.

Turning to our outlook for the full fiscal year we continue to balance short term goals with larger strategic wins that serve to drive further momentum in the business. For instance in terms of further momentum in the business Q3 record gross connections as well as the pipeline of orders we began Q4 with are encouraging signs as we wind down our fiscal year 2014 as revenues from these connections will begin to contribute to revenue in early fiscal year 2015. Based on the way in which we began the fourth quarter and the manner in which we expect the quarter to unfold many of the goals we set for fiscal year 2014 are within reach. Two of these goals however present more of a challenge for many of the reasons we’ve previously discussed on this call. They are 3% year-over-year growth and adjusted EBITDA and 25% year-over-year in license and transaction fee revenues.

And with that I’d now like to turn the call back over to Steve.

Stephen Herbert - Chairman and Chief Executive Officer

Thank you, David, and thank you all for your attention this morning. I can’t emphasize enough on our current (indiscernible) but what I’m seeing in the marketplace with our own improved execution in driving new connections for USAT. We had a record number of new connections for the third quarter. We’re driving 20% revenue growth even after a major headwind for the year. We have a very healthy pipeline going into Q4 and we still have more upside to recognize from Q2 and Q3 connections.

Strategically reflecting the power of our service model to create added differentiation and new opportunities including more customers and more third-parties that want to do business with USAT. Lastly if you got the press release last week we’re very proud to be the recipient of Frost & Sullivan’s 2014 North American Award for Customer Value Leadership in Financial Services and Retail M2M Communication. Frost & Sullivan is a highly respected global research organization and to have their 10 step research process validate what’s happening in this industry and the leadership role played by USAT is simply another great milestone event for the USAT and for it’s shareholders.

And now operator we’d be happy to take questions, so if you would please go ahead and provide instructions for our Q&A session. Thank you very much.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Gary Prestopino from Barrington Research.

Gary Prestopino - Barrington Research

Hey good morning everyone.

Stephen Herbert

Good morning, Gary.

Gary Prestopino - Barrington Research

Couple of questions, I’ll just try and take them one at a time or I’ll get back in the queue. Could you maybe just in terms of these deactivations and the change in the gross margin where it’s basically been down the last couple of quarters. Could you explain how the deactivations impact that gross margin and then I guess the question going forward would be, had these annualized would that gross margin get back to where it was in the close to 40% range or has something changed in the industry competitively that will not allow you to do that?

Dave DeMedio

Gary, thank you for your question. This is Dave. Regarding the deactivations and how the impact margins. The deactivations that came off the network of 21,000 over the past two quarters. We are at a slightly higher margin, slightly higher margin than some other connections that we had. And when you lose the 21,000 which is a significant component of our outstanding non connections that tended to decrease margin as those came off of the network. And again as I mentioned this quarter Q3 in particular was a first quarter where we had no revenue associated with those deactivations. In the prior two quarters we had partial recognition for maybe a month or two in each quarter of some of those deactivations.

Regarding outlook for future quarters it’s our goal to structure particularly in the vending industry, our revenue targets and our billing to our customers to try to achieve a 40% margin. Given the certain marketing programs that we put in place began to drive strategic growth in market share. Quarter-to-quarter that could be impacted at 40% depending upon the volume and the type of marketing programs that we put in place.

Gary Prestopino - Barrington Research

Okay.

Dave DeMedio

So hopefully that answers your two questions.

Gary Prestopino - Barrington Research

Sure. That’s fine. I’ll get back in the queue.

Dave DeMedio

Okay. Thanks, Gary.

Operator

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital.

Mike Latimore - Northland Capital

Great. Thanks a lot. The – how would you envision CapEx plan in the fourth quarter and is the new G9 sort of can be the primary hardware sold in the quarter?

Stephen Herbert

It will, Mike. It’s – in terms of hardware coming out of this company by and large other than things that we might sell with ePort Mobile or ePort GO that’s the primary hardware platform, it’s going out from an ePort perspective. So we have the full benefit of that in this quarter.

Dave DeMedio

Can I – could I add to that, Steve. Mike, in addition in terms of Q4 CapEx it’s really going to be dependent upon how many connections in Q4 come from JumpStart. As you know we’re focused on achieving our goal for connections which is a – it’s a meaningful amount of connections that we need to achieve for Q4. So if we have a similar quarter in which 65% or a little over 65% come from JumpStart would probably have again a higher amount of cash used in the quarter for JumpStart. With that said if you look at the cash used in Q3 for JumpStart on a per unit basis you will see a marked reduction in terms of the cash used on a per unit basis. So we’re getting more connections now under JumpStart now with similar dollars that we’re spending.

Mike Latimore - Northland Capital

Got it. Could you talk a little bit more about the strong start of this fourth quarter, is this a couple of big customers, is it a broad-based demand and what does the gross margin look like kind of the recent orders?

Stephen Herbert

Mike, I don’t I’m not quite sure we were able to hear you clearly there. Would you repeat your question please.

Mike Latimore - Northland Capital

Sure, sorry about that, yes. In terms of – you talked about strong demand starting in the – start of the fourth quarter here. Could you talk a little bit about that, is that a couple of big customers or is it more broad-based process of several customers and then what does the gross margin look that like some of these new orders coming in?

Stephen Herbert

Okay. Well the customers there are a couple of customers that makeup a fair amount of the – that makeup a fair amount of the backlog. One would be the canteen operator that I mentioned and another would fall into the taxi space. And by the way Mike not to digress looking forward one of the points I wanted to make and you can get to when Dave was talking about JumpStart expenditures going forward I think there is some Intel we provided in today’s prepared remarks that kind of gives you an idea that JumpStart as a percentage of our whole may change. And if you particularly look at laundry and taxi and partners like AirVend just three examples that we talked about today. As you look out past – into QA and into next year the dynamics with JumpStart will change in addition to Dave’s comment of getting more for relapse with the G9. So I wanted to add a little bit on that capital question but also clarify on your question regarding the customers driving the backlog.

Mike Latimore - Northland Capital

Yes, okay. Thank you.

Operator

Thank you. And our next question comes from the line of Alexander Renker from Sidoti.

Alexander Renker - Sidoti

Hi, good morning.

Stephen Herbert

Good morning.

Alexander Renker - Sidoti

Just questions a little bit more general but I’m curious, do you have a sense of what profitability would look like if at the expense of say growing taxi and laundry revenue, the company were exclusively focused on vending. I guess that might be another way of asking, what are some of the startup costs with the ramp in connections for taxi and vending given that it’s a small component of revenue at this point?

Dave DeMedio

Well Alex thanks for the question. In terms of startup costs and development costs, those taxi customers in particular that we’re bringing on today came through our ePort QuickConnect service which is really a total use for developers of other types of equipment other than vending machine that connect to our service. The onus really is then on the OEM as those devices and the costs are on the OEMs to develop and integrate to our network. So there is little startup in development cost that we put into this application in particular and in terms of market development we’re using third-party resellers to help us sell into that marketplace and utilizing the footprint of those resellers to help us distribute products.

Stephen Herbert

Well if you (indiscernible) in taxi and transportation as an example Verizon is selling that solution for us. So not only do the systems integrators and the OEMs of the world do the development work to connect to our service, but we’re also leveraging on the other end of the equation we’re leveraging our partners such as Verizon to use a big example to drive distribution in this space. So to answer your question in a longwinded sort of way the answer is no, there aren’t a lot of startup costs and it’s really the thing for laundry where Setomatic Systems did their own integration work and certified on our system and their the fee on the street out there all day everyday selling and installing this solution. So it’s a great question for a small company like ours but I can tell you that lion’s share of the resources go into our core market and that spending we’re – with our direct sales force and our operations people etcetera they spend the majority of their time on that market. Thanks for that question. I hope that helps.

Alexander Renker - Sidoti

Yes, it does absolutely. Thank you.

Operator

Thank you. Our next question comes from the line of Jim Gentrup from Val Vista Capital Management.

Jim Gentrup - Val Vista Capital Management

Good morning. Can you hear me okay.

Stephen Herbert

Hear you, great.

Jim Gentrup - Val Vista Capital Management

Just wanted to ask a couple of quick questions. The seasonality that you guys usually have in Q4 I mean – have you already factored that into your guidance a little bit here or do you expect that strong seasonal fourth quarter as usual for connections?

Stephen Herbert

We typically do have a strong fourth quarter and I don’t think this fourth quarter should be any different in that regard it’s we’re not counting on some giant spike, it’s where we’re headed with the quarter is somewhat predictable. So it will look much like past fourth quarters but perhaps not quite as pronounced.

Jim Gentrup - Val Vista Capital Management

Yes, I just wanted like this year your gross ads every quarter have been sequentially higher. And I can’t recall and then hear since I thought you kind of – this sequential jump each quarter, so I just want to kind of had that comment I guess it seems like you’re getting some momentum especially on the gross ads like..

Stephen Herbert

Well I really picked up on that gaming momentum comment, that’s very much what it feels like in the business right now. And just away that given somewhat my prepared comments I talked about how customers are looking at things. The example of the Compass operator I gave they decided to go to 60% of their base from a small number to 60% of their base and that’s a big move. Customers are starting to behave in different ways which is and particularly in vending which is manifesting itself in our connection numbers and so forth.

Jim Gentrup - Val Vista Capital Management

The 12,000 that you talked about that were delayed or deferred the licensing and transaction. Is that a typical delay or did you get them – was there some sort of a competitive negotiation where you have to push it out a little bit more?

Stephen Herbert

Our customers typically need a little time to get their devices in. We happen to give as part of an overall transaction we happen to give a couple of customers a little extra time to do so and so it’s – it was part of a process.

Jim Gentrup - Val Vista Capital Management

Okay. But you did get the activation fees in those 22,000 drag in Q3?

Stephen Herbert

For the 12,000, I really don’t recall whether or not, I don’t recall whether or not we did get the activation fees on those specific customers.

Jim Gentrup - Val Vista Capital Management

No, I mean I guess I didn’t ask the question correctly enough. The 22,000 gross ads that you put in and you did recognize the activation fee in Q3, didn’t you?

Dave DeMedio

We do. Generally every connection particularly in vending has an activation fee. Some other connections those outside of vending like in taxi we have different selling parameters with them, some of those don’t carry an activation fee. But generally in places where we’re able to charge an activation fee we charged an activation fee. Each customer is at separate negotiation so there may have been some of the vending connections that went out that didn’t have an activation fee charge.

Jim Gentrup - Val Vista Capital Management

Okay.

Dave DeMedio

But in general yes and that was one of the reasons we mentioned for an improvement in equipment revenue activation fees for the quarter.

Jim Gentrup - Val Vista Capital Management

Okay. And then last question if I may. The sales and marketing expenses have been pretty uniformly up throughout the year. Can you help us out a little bit thinking you only have one quarter left and I assume that same impact or similar impact will be on Q4, but what about going forward, are you continuing to add what we have another pickup in next fiscal year?

Dave DeMedio

Jim, well I think we’ve stated that we will continue to be aggressive in sales and marketing and I don’t think we’re done adding resources in sales and marketing. So I think there – we haven’t guidance for next fiscal year but I think generally if you takeaway is that we’re going to remain aggressive in sales and marketing and that may mean adding resources in that department.

Jim Gentrup - Val Vista Capital Management

Alright. Thanks guys.

Stephen Herbert

Thank you.

Operator

Thank you. Our next question is a follow-up from the line of Gary Prestopino from Barrington.

Gary Prestopino - Barrington

Hey Dave just for our purposes as we’re trying to model Q4 I know you don’t give direct guidance. But you kind of pulled back and said it’s going to be challenging to get 40% year-over-year growth in adjusted EBITDA and 25% growth in license and transaction revenues. What ranges are you kind of thinking here so we at least have some idea of where we should bring our quarterly numbers into?

Dave DeMedio

Gary, it’s a good question. Generally obviously we’re targeting to achieve those milestones. Conservatively though I think if we have another Q4 that somewhat in line with the Q3 you’re probably looking at adjusted EBITDA in the range of 27% to 35%. And in terms of license and transaction fee growth in the range of 20% to 23%.

Gary Prestopino - Barrington

Okay. Alright. And then do you guys put any number on the amount of connections that are in your pipeline, is that something you’ve stated in the past or you could share with us?

Stephen Herbert

Gary, I don’t think we normally comment on that. Although – but I think it’s safe to say we went into Q4 direct what we would call a healthy pipeline.

Gary Prestopino - Barrington

Okay. And then in terms of just looking at the net ad sequentially I mean it’s obviously increased pretty dramatically. That’s obviously pointing to number one more adoption correctly within your existing base but going into some of these new vertical markets as well, do you show some color on that?

Stephen Herbert

Well I think if you hit their nail on the head I can’t remember the exact percentage. A large portion David it’s 70 odd percent.

Dave DeMedio

75%.

Stephen Herbert

75% of the connections to the quarter came from our existing base. That will continue to be the case. I think Gary as we gain momentum in our customer base I think using that one example I get going from a relatively small number and making the decision we go to 60% penetration. These are new market dynamics that are very encouraging to us and support the fact that as we move into the fourth quarter and into next fiscal year that a lot of our business will come from the existing base. However on the other hand you’ve got things like – just to use two examples that we talked about today taxi and transportation as well as laundry picking up momentum, our partners are picking up momentum in terms of the number of connections that they’re bringing to us. So we’re really hoping for a healthy mix of connection additions as we move forward.

Gary Prestopino - Barrington

Okay. Just to be clear we’ve taken notes as you’re talking. You added 2,000 new taxi connections this quarter. Was that from the existing business that you signed a couple of quarters ago that I believe was in Washington DC or is that a new taxi entity?

Stephen Herbert

It was actually – it was at least one if not two new partners.

Gary Prestopino - Barrington

Okay. Two new partners, okay. And then you also said my notes here again you have 12,000 in the pipeline or 12,000 that couldn’t get connected in the quarter or is that.

Stephen Herbert

I think what we said and Dave can elaborate on this if he wants to but. There were 12,000 connections that were out there that didn’t impact, we told they didn’t – they haven’t impacted – they didn’t impact our third quarter.

Gary Prestopino - Barrington

So that’s 12,000 connections.

Stephen Herbert

That did impact – that went out earlier in the year and they didn’t impact Q3.

Gary Prestopino - Barrington

Okay, alright. Thank you.

Stephen Herbert

Yes.

Operator

Thank you. And our next question comes from the line of Mike Latimore from Northland Capital.

Mike Latimore - Northland Capital

Hey great. Just a couple of other questions here. On the connections that were not JumpStart. How many were kind of hardware sales versus the situations where there was a software endpoint?

Stephen Herbert

Well the – I can say the two – well Dave I’ll let you answer that, you have your own, you have the question.

Dave DeMedio

Yes, I did. Mike, roughly 80% of our connections came in vending. Of that approximately if I only back-out of the 100% of all our connections 10% roughly were ePort sales which is part of that 80% that went for vending. So the remainder would have been under JumpStart. And then I had mentioned the 10% came in each taxi that was non JumpStart and then the other 10% that came in amusement, laundry, and other market segments were non JumpStart.

Mike Latimore - Northland Capital

Okay. And then was EnergyMiser revenue big in the quarter or low or.

Dave DeMedio

Miser was down year-over-year quarter comparatively. Miser is becoming less and less of the part of our business. It represented less than 3% of quarterly revenues this quarter, but some quarter-to-quarter it was down and that was one of the reasons for part of the equipment revenue being down as well as some of the sequentially quarter-to-quarter Miser sales have been relatively down and flat from prior years. So it’s becoming less and less the part of the total revenue of the company.

Mike Latimore - Northland Capital

Okay. And just last on license and transaction gross margin. I know you have fair line of getting to 40% periodically. But do you think this is the number in this quarter is sort of the bottom, is this the floor, do you view it as (floor)?

Dave DeMedio

Well I view it as a floor in terms of vending connections, yes. As we look out into new fiscal years with some of these new market segments that we’re getting into and I think we’ve got this call – this question on a previous earnings call what will these new connections do in terms of mix of GP margins. And we’re going to get back to the market as these connections start become meaningful part of our overall connection base and start to materially impact the results. But in terms of where we are today and with the amount of vending connections we expect to continue to get and expect to remain a majority of our connections going forward. I would expect that this would be a bottom, yes.

Mike Latimore - Northland Capital

Yes, thank you.

Operator

Thank you. And our next question is a follow-up from the line of Jim Gentrup from Val Vista Capital Management.

Jim Gentrup - Val Vista Capital Management

Yes. The 2,000 deactivations you had this quarter, that’s correct number, right 2,000?

Stephen Herbert

Yes.

Jim Gentrup - Val Vista Capital Management

Was that the same customer as previously, the same customer, the large customer that was deactivated the 21,000, is that the same one?

Dave DeMedio

Some of those connections yes came from that existing customer.

Jim Gentrup - Val Vista Capital Management

Is that an existing customer I am sorry, go ahead.

Stephen Herbert

The majority of order of deactivations that we talked about came from the same customer.

Dave DeMedio

Correct.

Stephen Herbert

Everything (indiscernible), yes. It’s that one customer and we’re working our way through that customer, a little bit faster than we anticipated which is both good and bad. But the good news is that we’re getting it behind us, the bad news is that it gave us a little more headwind this year than we expected. But candidly I’d rather clean it up cater behind us and move on, it’s a one-time event.

Jim Gentrup - Val Vista Capital Management

Alright. Do they have many connections left?

Stephen Herbert

They have about 6,000 left.

Jim Gentrup - Val Vista Capital Management

Okay. Thanks.

Stephen Herbert

So those will go away over time. And from a financial perspective you have to think about it as we have the majority of it behind us.

Dave DeMedio

And we had said on the previous call the amount of revenues associated with the remaining connections was approximately $175,000 per quarter. So as Steve said it’s largely behind us.

Jim Gentrup - Val Vista Capital Management

That number actually would be lower than now obviously?

Dave DeMedio

Slightly lower as they removed some of those, yes.

Jim Gentrup - Val Vista Capital Management

Alright. Thank you.

Operator

Thank you. And that concludes our question-and-answer session for today. I’d like to turn the conference back to management for any closing comments.

Veronica Rosa - Vice President, Investor Relations

That wraps it up. So I think if anybody has any follow-up calls please call Investor Relations, 484-359-2138, and thanks so much for tuning in today.

Operator

Thank you. Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: USA Technologies' (USAT) CEO Stephen Herbert on F3Q 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts