USA Technologies (USAT) is a provider of solutions for owners and operators of unattended point of sale devices like vending machines, kiosks, personal computers, photocopiers, and laundry equipment (among others).
Current State of the Business
USAT has shown excellent top line revenue growth over the last three years as it booked $12 million in revenue in 2009, almost $16 million in 2010 and close to $23 million in 2011. These figures represent an annual growth rate of close to 50% year over year for the three year period. The major issue holding USAT back from a higher valuation is that the business has consistently operated at a loss over the last three years, though the losses have narrowed dramatically as the company has added scale. In 2009, operating losses were nearly $16 million, and last year they dropped to a little less than $6 million.
Over the last year, the company also had a few non operating issues which affected their bottom line. First, the 'Durbin Amendment', affecting bank payment processing fees, initially made investors believe the company would have to change their pricing mechanisms. The key point here is the company renegotiated existing agreements with VISA and terminated their Mastercard arrangement, but the VISA situation is crucial in that it represents 75% of their processing business. The company disclosed the new agreement would keep margins essentially the same.
Another negative situation was the resignation of the CEO for posting comments on internet message boards regarding the status of the USA Technologies business. The company had to pay the termination and legal costs of the ex-CEO investigation but should be viewed as a one time event and not material to the overall business.
USA Technologies has almost 30 million (approximately) shares outstanding and its current stock price is 1.12 for a market capitalization of $33.6 million. As of September 30, 2011, the company had a current cash position of 11 million dollars and net debt, warrants, and liabilities of approximately 1.5 million dollars for a net cash position of $9.5 million. The total enterprise is currently valued at approximately $24 million dollars.
Again, the major issue affecting USA Technologies stock is the consistent operating losses, which averaged $1.8-1.5 million per quarter in 2011. There are one time charges expected in the next few quarters from the investigation into the ex-CEO's public comments and the costs related to the 'Durbin' Amendment and contracts with Visa (V) and MasterCard (MA).
The pertinent question for investors regarding USAT is whether they can continue to keep building their points of presence, which now total over 125,000. The company currently processes almost 25 million transactions worth over $40 million per quarter. A key development in this area was on December 20, 2011, USAT announced an agreement with the Unified Strategies Group (USG) to provide USG with solutions for cashless payments and DEX telemetry services to its members. The agreement is significant and material because USG is a buying consortium with over 700 vending companies representing 3.0 billion dollars of yearly sales, or approximately 33% of the U.S vending industry. (Here is a link to the press release.)
From a strategic point of view, this agreement adds the points of presence and more scale to the existing customer base and once fully implemented, should provide an improvement to company margins. The ePort solution has no upfront costs to customers, and will initially affect the company's costs, but as time progresses margins should slowly improve. How quickly the implementation takes place and all customers are serviced is an operational issue to consider as well. Still, in a few years time, it is not unreasonable to think USAT could become a much larger competitor in the payments processing business.