USA Technologies' CEO Discusses Q4 Results - Earnings Call Transcript

Sep. 6.12 | About: USA Technologies, (USAT)

USA Technologies, Inc. (NASDAQ:USAT)

Q4 2012 Earnings Call

September 06, 2012 10:00 am ET


Veronica Rosa - VP Corporate Communications & Investor Relations

Steve Herbert - Chairman and Chief Executive Officer

Dave DeMedio - Chief Financial Officer


Mike Latimore - Northland Capital

Matt Mccormack - BGB Securities

Sam Bergman - Bayberry Asset Management


Good day and welcome to USA Technologies' Fourth Quarter Fiscal 2012 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 and Investor Relations. Please go ahead.

Veronica Rosa

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 fact 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 events to differ materially for such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our most recent Annual Report, or Form 10-K and the Form 10-Q report for the quarter ended March 13, 2012.

USA Technologies' financial results for the quarter and full fiscal year ended June 30, 2012 will be reported in USAT Form 10-K that USAT intend to file with the SEC by its due date September 28, 2012.

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 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

On our call this morning are Steve Herbert, Chairman and Chief Executive Officer, and Dave DeMedio, Chief Financial Officer. Steve will begin our discussion this morning with an overview of the full fiscal year, and then Dave will go through fourth quarter and the financial highlights in more detail. Steve will wrap up the call with some comments regarding the business outlook before opening the call to questions.

At this time, I would like to introduce Steve Herbert, Chairman and Chief Executive Officer of USA Technologies. Please go ahead, Steve.

Steve Herbert

Thank you, Ronnie and good morning, everyone. Since Dave will be discussing the fourth quarter financial results, my comments this morning will be geared more to the full year and how that translates to what we are looking forward to in the business this fiscal year and further out.

Revenues for the fiscal year ended June 30, 2012, grew by 27%, fueled in large part by growth in license and transaction fees of 23%. As we continue to bring more connections and customers onto our turnkey ePort Connect service.

We also saw more of those revenues drop to the bottom line in fiscal year 2012 as we negotiated key partnership agreements and made improvement to our service and product platforms to improve margins, scalability and performance, and we began to see the results of those improvements in the second half, particularly in the fourth quarter with gross profit margin on license and transaction fees crossing the 40% mark demonstrating the leverage inherent in our service and business model.

In fiscal 2012, we expanded our customer base by 69%, and it's now tripled what it was two years ago. Going forward, we anticipate these 3,300 customers will be an important part of our growth story as we cultivate existing relationships and help drive further penetration in those accounts. As a result of these customer wins in fiscal 2012, our installed base of connections to our ePort Connect service grew by 38% from 119,000 to 164,000 as of June 30, 2012.

Fiscal 2012 was clearly packed with a number of important milestones for the business and certainly a number of unexpected challenges and events. We managed through the unintended consequences of the Durbin amendment and unexpected CEO separation and found ourselves engaged in a costly and distracting proxy contest right when the business was coming to scale. As you can see from the financial results for the fourth quarter, the contest related litigation cost the company $2.2 million in the fourth quarter.

Despite these challenges and distractions, the business itself did exceptionally well over the course of fiscal 2012. In January, 2012, we set forth our goal letter to shareholders as part of our CEO leadership transit. Over the course of this year, we made tremendous progress on each and every objective set forth in that letter. Delivery of value to our customers with continued additions to our product and service portfolio, improved governance and transparency including a reconstituted, highly qualified and actively engaged board and most importantly remarkably improved business performance as we carved out and continued to execute against an accelerated path toward profitability.

Positive adjusted EBITDA, as many of you remember, was the first milestone we start to reach in that path toward profitability. Positive adjusted EBITDA provides us with important insights regarding the cash generation of the business. Quite simply, it tells us that the core operations of the business are no longer burning cash. As many of you know, we achieved that important marker in the three fiscal quarter ended 3/31/2012, with adjusted EBITDA of $336,000. More importantly, we achieved that on a stronger base of reliable recurring revenues and gross margins now representing 81% of our overall revenues backed by connection and customer wins that offer continued opportunity for growth.

In the fourth quarter ended June 30, as we anticipated and communicated to shareholders, adjusted EBITDA would have been even stronger than our 3/31/2012, performance, slightly over $800,000 when including the cost related to the proxy contest versus the $1.4 million adjusted EBITDA last that's reported. While cost related to the proxy contest (Inaudible) in terms of that measure for the fourth quarter, the fundamental operations of the business strengthened nonetheless.

As Dave will walk through in more detail, we continue to feel good about our ability to support our growth going forward through a mixture of three things. Current cash on hand at June 30 of $6.4 million, cash expected to be generated from operations as well as our new credit line.

Net loss, which is before preferred dividends was $5.2 million for fiscal year 2012. On a non-GAAP basis, net loss was $3.8 million, compared to non-GAAP net loss of $5.1 million for fiscal '11, narrowing that every quarter as our top line and margins grew stronger. With that increased visibility, our next important milestone as we communicated to shareholders is profitability. Aside from and unexpected or unusual non-operational events, the steady growth in our recurring revenue base is taking us increasingly closer to profitability, which we've defined as non-GAAP net income, something we've publicly projected to achieve in the last quarter of calendar 2012, our second fiscal quarter.

Dave will take you through some of our financial assumptions around this goal, but strategically we view this target as a real turning point for our company. It speaks to the fundamental strength of our business model including the greater scale technical know-how and service quality we've developed to get there. Aspects of the business, we intend to fully leverage as we look to add value to the business for both, customers and shareholders in the years ahead.

In fiscal 2013, our priorities will continue to be shaped around our service delivery model, specifically by driving an accelerated number of new connections to our ePort Connect service and by creating more value from each of those connections for our customers and for our shareholders.

We believe the opportunity in the small ticket unattended point of sale market, a market where we have a solid reputation as an industry leader is bet. Our addressable markets includes a number of traditionally cash free industries such as vending, kiosks, laundry, car washes, soap and others amounting to an estimated $119 billion in transaction volume per year. Very little of which is yet to make the transaction to cashless payment and M2M technology. That equates to millions of potential connections to our service. In addition, the pace of the change in the payments face is clearly accelerating as new players and new forms of mobile based payments and related services attract both, consumer and payment industry interest.

We believe the kiosk market represents another powerful opportunity for us to leverage our turnkey and comprehensive ePort Connect service. Self-service retail comes in many forms, gaming, digital juke boxes, Sodo Group, carwashes, electric vehicle charging stations and many need a reliable cashless payment and M2M partner with a service model that was designed specifically for the unattended space.

Based on estimates from IBC and our own knowledge of this broad market segment, we believe our opportunity in the kiosk market is as large as the vending space with an estimated $45 billion and $42 billion in annual transaction revenues generated in these market areas, respectively that are opened for cashless payment. We also believe that important catalyst of the market adoption of cashless technology is mobile. We believe a compressive mobile strategy is vital into these market and it will continue to underlay our strategic framework in fiscal 2013.

As consumers increasingly look to pay via convenience of an NFC-enabled phone into a digital wallet and to enjoy couponing and other royalty programs that are emerging as a result, we anticipate that market adoption of cashless in our markets are prime to benefit, and for USAT, with approximately 50% set another way approximately 80,000 units of our connected base being an NFC-enabled, we represent valuable touch points for many of the key market stakeholders in mobile like Google Wallet, PayPal, ISIS and others in this emerging space.

As I like to say, a rising tide floats our boats and as market forces begin to converge and accelerate, I believe we are in a very strong position to benefit. Predominantly in vending and kiosk we now have 3,300 customers on our service, more than triple to count from few years ago. More than 450 of those customers were added in the fourth quarter, an increase of 8% versus fourth quarter a year ago. The highest we've seen over the same two years. Based on our own review of these accounts, we believe there are in excess of 2.5 million potential connections within our own customer base, a great opportunity for us as demand for cashless and M2M solutions intensifies.

In fiscal 2013, we've aligned our approach to these substantial market, consumer and customer opportunities around four major areas. Accelerating adoption in our core vending space, continued expansion into adjacent markets such as kiosk, leveraging partners to expand our distribution and sales coverage, and fourth expanding services that strengthen the value of USAT connection.

In vending, while the benefits of cashless adoption are clearly evident in the data coming through our knowledge base and more we are encouraged by several recent trends, the culture is still on a gradual adoption. Many operators are simply weighed down by the reality of an industry marked by low single-digit growth.

A major goal for us in fiscal 2013, therefore, is to accelerate adoption especially with existing customers and we believe we have a number of approaches that are unique to USA Technologies that will help our customers and USAT get there.

Most important to our customers and therefore to adoption is the value proposition cashless can provide. We are leveraging the largest pool of industry data available to help these business owners intelligently and effectively deploy cashless in the right locations and with the right tools. Customers like CMC Vending and Snackworks were recently featured in national publications like Vending Times and Automated Merchandiser, share common theme including the simplicity of our service, the value of our deployment planning services and vast knowledge base and financial tools such as jump start and our two-tier pricing program.

Secondly, we believe new services will have an impact on driving adoption as well, and as customer demands regarding payment in telemetry solutions get more sophisticated, we are beginning to see many of these operators recognize the benefit of integrating other technologies such as vending management systems. In fact, we recently completed our first integrated deployment planning under DEX partner program, the next level of deployment planning services, USAT can offer to help customers optimize cash flows through integrated technologies.

Based on this customer success to-date, I think we'll continue to see continued interest in solutions like this that are routed in cashless adoption with USAT. Lastly, it's important to take into account that Durbin for the Denver on the whole small ticket marketplace last year. Fortunately, however, we have a strong relationship with these and it has allowed us to negate this for USAT and its customers.

Turning to kiosk, we expect steady expansion into this complimentary market in fiscal 2013. Most of these customers utilize the software version of our front end technology, our ePort FP check in combination with our ePort Connect service. Last quarter we saw increased traction with AMI Entertainment as they ramped up on getting those juke boxes in Megatouch game machines. We expect this exclusive AMI relationship to be a solid contributor to our kiosk footprint in fiscal year 2013.

At the same time, we are making advancements that other kiosk customers and applications as well. Starbucks is expanding its single cut group copy kiosk equal corporation, electric vehicle charging station, battery charging stations, cell phone charging stations and more. We think developers in this area are increasingly recognizing our ePort Connect service as a valuable element to their product offering due to its turnkey nature. From a backend development perspective, we've now made it easier for those developers to connect to our service with the recent announcement of our QuickConnect web services. This web service speeds up the time to market for kiosk and our new developers who need a cashless payment and M2M capability incorporated into their solutions and devices. Expanding value of the USAT connection beyond our traditional ePort Connect package is central to our long-term competitiveness and customer value proposition. As a result, service expansion is the third plank of our platform for growth that we expect to more broadly develop in fiscal '13.

While two-tier pricing implemented in January 2012 was our first in this area. The majority of other services you see in this area will leverage the growing use of mobile technology. With more and more consumers utilizing their mobile devices as an alternative form of payment, we expect that prepaid and royalty programs could provide us with a highly profitable avenue for leveraging our core infrastructure in NFC footprint. Approximately 50% or 80,000 devices in our connected base are NFC-enabled, and almost 8% of our ePort Connect ions go to our NFC-ready G8, so we are in a great position to help customers and new business partners tap into this emerging market trend.

For example, we recently introduced several programs under development with customers and partners in concert with our mobile strategy including prepaid programs loyalty and couponing and most recently our ePort Mobile for mobile merchants. In terms of prepaid royalty, we've been testing the customers over the past few months in anticipation of commercial availability for second quarter fiscal 2013 and are looking forward to make some announcements over the coming month.

For those that might have missed ePort Mobile introduction a few weeks ago, this enhancement to our core offering allows us to tap into a whole new multibillion dollar segment of the unattended market that never had a viable option for cashless acceptance. Many of our customers in our existing base are diversified. In addition for example to servicing vending or kiosk locations, they have staff on the road delivering products and services which require payment, all of them are still taking cash, check or billable.

ePort Mobile provides another way for these existing customers to realize the benefits of connectivity and cashless payment technologies and for USAT it's yet another way that we are driving more connections to our service. After a period of customer trial, we expect to commercially launch ePort Mobile in the second half of fiscal 2013.

The fourth prong of our growth platform of our growth platform relates to expanding our sales coverage, essentially building the sales pipeline internally and via our joint marketing agreement with Verizon's M2M sales team. We've already closed sales as a result of a lead steaming from this strategic relationship and the pipeline is building nicely.

These Verizon M2M sales resources are trained to recognize our customers and benefit by connecting machine to machine technologies, a fast emerging and very visionary market space that we are excited to be a part of with Verizon as it continues to develop. The dominant theme bind all of these growth priorities in fiscal 2013 is working towards profitability. With 81% of our revenues steaming from our ePort Connect service getting there remains continued and steady progress and maximizing our turnkey platform while we leverage the capacity for growth we've brought into our service delivery platform.

I would like to wrap up the call today with some other comments on fiscal 2013 targets, but then first let me turn call over to Dave for some additional financial comments relative to the fourth quarter. Dave?

Dave DeMedio

Thank you, Steve. Total revenues for the fourth quarter of fiscal 2012 was $7.9 million grew 15%, up from $6.9 million in Q4 of 2011. License and transaction fees represented 81% of our total revenue mix for both, the fourth quarter and full year for fiscal year 2012, and therefore remains the largest contributor to overall top line growth and improved gross profit and gross profit margins.

Gross profit increased to $3.2 million from $2.4 million in Q4 2011, and actions taken earlier in the year specifically the negotiation of several important partner agreements helped drive the gross margin increase from 34% to 40%, a 6-point or 18% improvement. Growth in license and transaction fees is fueled primarily by connections, specifically the monthly service and/or JumpStart fees from those connections and processing dollars that relate to our ePort Connect service platform.

As of June, our total connected base 164,000 connections to our ePort Connect service. New connections in the fourth quarter totaled 16,000, a 129% greater than the same period last year, and our highest quarter of connections in fiscal 2012. These new connections will contribute to future license and transaction fee revenues as it generally takes 30 to 60 days in some cases for the ePort Connect and/or JumpStart fees to begin to hit the top line. For example, these 16,000 Q4 connections should add over $0.5 million in additional recurring revenue per quarter, and while the timing is dependent on when a particular connection was added within the quarter, the 16,000 connections in Q4 gives us added visibility regarding our December non-GAAP net income target, at least from the top line and gross margin standpoint.

Coming of this year-end push of 16,000 connections based on historical cycles, we would expect that the September quarter, Q1 of fiscal 2013, connections to be down, sequentially, but compared to Q1 of fiscal year 2012, we expected to be an increases. Approximately 90% of connections in Q4 related to traditional and non-traditional vending in the quarter was about 10% attributable to kiosk.

For the fiscal year kiosk has averaged about 20% of total connections. We have an exclusive relationship with AMI Entertainment for their Megatouch gaming kiosk and digital jukeboxes, so we continue to expect added connections on the kiosk side from this and other new kiosk opportunities Steve had mentioned in the work since fiscal year 2013.

We also handled 27.5 million cashless transaction in the fourth quarter representing $47 million and small ticket transactions, increases of 22% and 27%, respectively over the prior year. equipment sales comprise of ePort service activation fees, USAT's ePort branded devices and parts and our energy saving milder products to decreased 18% in the fourth quarter compared to a year ago, predominantly as a result of decreased EnergyMiser product sales. Going forward, we think the EnergyMiser line will continue to be a steady product for us, contributing on average approximately $2 million in revenue per year.

Operating expense were relatively consistent in the fourth quarter compared to the prior three quarters throughout the fiscal year. Outside of the proxy cost of $2.2 million and the cost of CEO separation in the second fiscal quarter of this year. Those of which are included in selling, general administrative expenses, operating expenses remained relatively consistent.

Operating margin was minus 33% for the quarter due predominantly to the proxy expense, but on a non-GAAP basis, which excludes these expenses for the current quarter and the impairment charge for Q4 a year ago, our operating margin improved considerably from minus 20% in Q4 a year ago to minus 5% in Q4 of fiscal year '12.

Outside of any unusual non-operating expenses in fiscal 2013, we should see a steady improvement here as we add scale to the top line with every new connection. Pertaining to unusual operating expenses we will have approximately $300,000 of final legal expenses related to the proxy contest litigation and August settlement agreement trailed into Q1 of fiscal year 2013.

As Steve mentioned, we are getting increasingly closer to achieving non-GAAP net income in our second fiscal quarter and will continue to be an important target for us for the full fiscal year as well. We are leveraging the infrastructure to grow recurring revenues while improving margins and controlling expenses, so outside of any unexpected events, we continue to expect to achieve non-GAAP net income our second fiscal quarter ended December 31.

As we initially disclosed, since some GAAP measures are difficult to control, specifically the accounting for the fair market value of warrant liabilities, our non-GAAP net income goal assumes there will be no change related to this line item on our statement of operations. This is the primary reason that we will be tracking our progress by presenting a non-GAAP view of net income and loss as we did this quarter, and to be clear, any expense or income related to the fair market value warrant liability is non-cash in nature. Also, note that the net GAAP net income measure is before preferred dividend which currently accrue two times a year in February and august for yearly total approximately $664,000. These non-GAAP reconciliations also are posted on our IR page of our website

For the fourth quarter of fiscal 2012, GAAP net loss applicable to common shareholders with the sales since there was no preferred dividend accrued during the quarter. GAAP net loss was $2.8 million for the four quarter of fiscal 2012. On a non-GAAP basis, which remove the adjustment for fair value of warrants, proxy cost of $2.2 million in the current quarter and the impairment charge in Q4 a year ago, non-GAAP net income loss narrowed to $374,000 for the quarter, and when you compare that to the non-GAAP loss of $634,000 in Q3, and the non-GAAP loss of $998,000 in Q2, the conceded operationally we are clearly making progress towards our profitability goal.

Moving to cash and liquidity, adjusted EBITDA has been a non-GAAP measure we have used to help track operational progress from a cash perspective. As promised in the third quarter, we crossed over into positive territory on revenues of $7.5 million and gross margins of 37%. This quarter, adjusted EBITDA loss was reported at $1.4 million, a proxy cost of $2.2 million was a main reason for this loss. Without proxy cost adjusted EBITDA would have taken a clear path of improvement from a loss of $366,000 for Q4 a year to positive $336,000 in the third quarter to positive $815,000 in the current fourth quarter. It's unfortunate the cost of the proxy contest clouded the continued momentum we have been achieving, but going forward our recurring revenue model is building and beginning to deliver improved results.

In fact, for the September quarter, we are looking at an adjusted EBITDA of minimum of $800,000, but we would like to cross the $1 million threshold, and this of course excludes the approximately $300,000 of proxy related cost that trailed into the September quarter. As a result of these improvements, from a cash planning perspective we believe that we are now much better positioned to fund and grow the business provided there are no unexpected non-operating events during the fiscal 2013 year.

Our cash resources available come in three forms. First, as I noted, growing adjusted EBITDA indicates that the business has potential to generate cash each quarter. Second, in July, we closed on a credit line with Avidbank that provides us access to additional capital at competitive terms with an interest of 2% above the primary with 4% to 5% in there were no warrant issued in connection with the agreement. Of course, third resource of cash was cash on hand at June 30, 2012. Our cash balance was $6.4 million as of June 30, compared to $6.2 million at the end of March.

On our cash flow statement this quarter, we will that we are now reflecting the use of cash for JumpStart connection in the investing section in the cash flow statement. In the quarter's non-GAAP reconciliation, which can be found on the IR page of our website, we presented quarterly breakdown of this change for fiscal 2012 and fiscal 2011.

The primary use of cash during the fourth quarter was approximately $2.4 million used for JumpStart units connected during the quarter, and JumpStart represented about 75% of our Q4 connections. Due predominantly to the year-end sales push of the program, this rate was a bit higher than the first three quarters of the fiscal year, but JumpStart accounted for approximately 60% of connections added during that period.

For the year JumpStart connections accounted for about two-thirds of all connections, the majority of which were attributable to the vending industry. Next year, we would like to see JumpStart as a percent of all connections go down to approximately 55% to 60% with the added potential for diversification via the kiosk market, where many customers only require our ePort SDK for now or new QuickConnect web service, which is intended to drive more developers and OEMs to our service network.

With that, I would now like to turn the call back over to Steve.

Steve Herbert

Thank you, Dave. In the fourth quarter and throughout the year, we've been diligently working towards the primary goal outlined in my first letter as CEO to shareholders in January. Profitability, and we will not have gotten here by stripping the company or staff, reducing the quality of our technology or breadth of services. Rather, we have and will continue to strengthen relationships with key partners like Verizon, Elavon, Visa and others.

We further diversified into new markets and trends like kiosk and mobile-based services. We invested in our service platform for added scalability and even greater turnkey service, and while many of our competitors are just at the early stages of building the kind of scale to support such a substantial untapped market, both on the top line and operationally, we achieved positive EBITDA on a solid base of recurring revenues during the third quarter of fiscal 2012, to point where every new connection contributes incremental cash flows to the business.

The team here is very excited about the business and the work we have underway for fiscal 2013. I hope many of the comments today regarding our plans for this fiscal year are helpful, and as increased visibility is something many of you have requested. In addition to those comments, some of our key measures that we are tracking closely for the 2013 fiscal year includes new connections of 60,000, 36% more than the 44,000 connections added in fiscal 2012, which will take our ePort Connect service base to approximately 225,000 connection, revenue growth of over 30% to approximately $38 million. Continued strong gross margins in the 40% range, non-GAAP net income as Dave just walked you through and cash generated from operations of approximately $4 million to $5 million.

Finally in closing, I want to thank everyone, our customers, our employees, our board members and most importantly our shareholders for their support during the year and during the proxy contest. The proxy matter has been settled. Both parties dropped all litigations, settled their disputes and they've accepted the results of the election.

With that, let's move onto Q&A talk about the business. Ronnie, I'll turn it over to you.

Veronica Rosa

Thank you, Steve. Before we open up the call for questions, please keep in mind that the purpose of today's call is to discuss the financial results for the business and we ask that your question be directed in that regard. Also, in order to provide an opportunity for listeners to participate, we ask that you limit your questions to one and a follow-up, and then return to the queue.

Operator, if you could please open the call and provide instructions for Q&A. Thank you.

Question-and-Answer Session


(Operator Instructions). Our first question comes from the line of Mike Latimore with Northland Capital. Your line is open.

Mike Latimore - Northland Capital

Just on the license transaction gross margin is in the 40% range. I think, you've guided to overall gross margin being about 40% for the year. I guess on that license and transaction gross margin line, is there an opportunity to expand that further or is that pretty good for this year as well for that specific revenue segment?

Dave DeMedio

Good morning, Mike, it's Dave DeMedio. Thanks for your question. For the fiscal year 2013, we expect that the margin to maintain in that low-40% range. The key contributor to that will be renegotiation. These are terms into 2013, which we feel confident about, but we would expect that margin would stay relatively at that same rate that we experienced in the Q4 current quarter.

Mike Latimore - Northland Capital

Okay. Then your connection guidance for the year looks pretty strong there. I guess, how much of an effect do you think the Durbin amendment is still having on your customer base if at all. I mean, do you think there's still somewhat of an impairment from that out there, or is there increase in comfort level?

Steve Herbert

Mike, it's Steve Herbert. Thanks for the question. It's a great question. I think in terms of adoption, it did slow things down a bit and it did have something to do with the way whole thing is rolled out in it's done very quickly and roughly. We were fortunate enough to have a very strong relationship with Visa and we mitigated the impact on the company as well as our customers, but to be sure, we believe, there is still some minor hesitancy as a result of the action that was taken.


Thank you. Our next question comes from the line of Matt Mccormack with BGB Securities. Your line is open.

Matt Mccormack - BGB Securities

In terms of the revenue guidance for fiscal year '12, just to clarify I guess, you are targeting double-digit revenue growth, but connection growth of 30%. Should we assume that license and transaction fees will grow in line with connections while equipment sales will be lower than they can validate as growth creator. Is that clear?

Dave DeMedio

Matt, this is Dave DeMedio. Thank you for your question. That is fair. The growth in revenue, into 2013 year is going to come largely predominantly all from growth in license and transaction fees. We expect equipment revenues to remain flat year-over-year.

Matt Mccormack - BGB Securities

Okay. Then a lot of talk about your strategy with the kiosk market, could you just give us information on the different economics possibly of a traditional ePort customer versus or vending customer versus customer on the kiosk in terms of the cost of the hardware and then also the transaction sizes, and possibly monthly fee. What the difference in economics between those two customers are?

Steve Herbert

Matt, it's Steve Herbert. By in large the customers in our kiosk market, the other down the street customer as I call them, really operate on the same model monthly fee and a transaction rate. There are certain kiosk customers that have, for instance, a very high average transaction we reflects our model and we have little to know monthly fee and we really make it up essentially a transaction fee whereby the company is making a threat. Very similar to the return that we get on our regular connection.

In addition to that, Matt, I believe you asked about the hardware. Most of our kiosk customers don't use an ePort. They use the ePort SDK software, which they install on the computer inside their kiosk and in many cases this is done in an OEM fashion. It's on the line, so AMI Entertainment is a classic example. They'll do a production run then they install our software as they go it comes off the line ready.


Thank you. Our next question comes from the line of Sam Bergman with Bayberry Asset Management. Your line is open.

Sam Bergman - Bayberry Asset Management

A couple of questions. Can you tell me since having Pepi Foods as a good reference point, should we expect another win or two this year from a similar company? It seems like it's been a while since you've had a win like that.

Steve Herbert

Sam, just to be clear, you are referring to the Pepi Food essentially going 100%?

Sam Bergman - Bayberry Asset Management


Steve Herbert

With our solutions?

Sam Bergman - Bayberry Asset Management


Steve Herbert

I think it's fair to say that one can expect more of that type of activity in this fiscal year.

Sam Bergman - Bayberry Asset Management

I think Dave had mentioned something about sequentially that connections would be up for the quarter, but down from the prior year?

Steve Herbert

The opposite, right?

Dave DeMedio

Sam, it's Dave DeMedio. The opposite, sequentially compared to Q4 of 2012, Q1 of 2013 will be down, but when we compare it as Q1 of fiscal 2012, we expect it to be an increase comparatively to quarter a year ago.

Sam Bergman - Bayberry Asset Management

What's the reason behind that?

Dave DeMedio

The reason behind that is the year-end sales pushes we had in the Q4, 16,000 connections in Q4 was the largest in the fiscal year 2012, and that pushed the this year and that pushed us through a 16,000 connection mark.

Sam Bergman - Bayberry Asset Management

Do you believe it will have an increase going into 2013, exclusive of that quarter?

Steve Herbert

I am not certain I follow the question. We would expect comparatively quarter-over-quarter, we continue to improve connections, but I think Steve mentioned and alluded to at the tail end of the discussion, we are expecting about 60,000 for the fiscal year and that will tend to be a increase quarter-over-quarter, but it's difficult to predict right now how each quarter will shake out.

Sam Bergman - Bayberry Asset Management

The recent agreement with I guess, Avidbank, has any funds been drawn on that credit line on that credit line or not?

Steve Herbert

Not at June 30. We closed the agreement in July, and we did access the line in July. We would expect to access that line routinely throughout this fiscal year as needed.

Sam Bergman - Bayberry Asset Management

Currently, what is the balance of that line?

Dave DeMedio

Today, I am not certainly where the balance stands. The availability are the agreement was for $3 million line of credit.

Steve Herbert

We'll access that line periodically and I think it will move up and down over time.


Thank you. (Operator Instructions). Our next question is a follow up from the line of Mike Latimore. Your line is open.

Mike Latimore - Northland Capital

Thanks. I just guess a minor things here. What do you think the stock-based comp expense might be per quarter going forward, and then second question is, do you feel comfortable with getting all the supplies you needed particularly in the NFC space?

Dave DeMedio

Mike this is Dave regarding your question on stock-based comp. I would expect that stock-based comp will remain similar to where it was in fiscal year 2012. There hasn't been a formal program announced, but I would anticipate that the stock-based program that was in place in 2012, the 2013 plan will be similar and would yield a similar expense.

Mike Latimore - Northland Capital

On the supplier question there, do you feel like you have the other supplies particularly in the NFC arena?

Steve Herbert

Sure. Absolutely, Mike. We have multiple suppliers in that space and we feel very comfortable with what we have access to.


Thank you. I am not showing any further questions at this time. I would like to turn the call back over to management for closing remarks.

Veronica Rosa

I think we are going to wrap up there. I want to thank everybody for their participation and for calling in, and we are at two conferences. One is tomorrow in Boston other is in New York on Monday. Those are which will be webcast and available on the Investor Relations page that we would like you to join in on one or both of those.

Thank you and have a great day.


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.

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 All other use is prohibited.


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