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Cantaloupe, Inc. (CTLP)

Q4 2014 Earnings Call· Tue, Sep 23, 2014

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Transcript

Operator

Operator

Good day ladies and gentlemen and welcome to the USA Technologies’ Fourth Quarter and Fiscal Year End 2014 Earnings Conference Call. (Operator Instructions) Please note today’s conference is being recorded. I would now like to hand the conference over to Stephanie Prince from LHA. Please go ahead.

Stephanie Prince

Management

Thank you, Karen and good morning everyone. This is Stephanie Prince from LHA and welcome to the USA Technologies’ fourth quarter and year end fiscal 2014 earnings conference call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer of USA Technologies and Dave DeMedio, Chief Financial Officer. Before beginning today’s call, I would like to remind everyone that all statements, included in this call, other than statements of historical fact are forward-looking statements. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to business, financial market and economic conditions. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K. 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 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 usatech.com. I’d now like to turn the call over to Steve Herbert. Steve?

Steve Herbert

Chairman

Thank you, Stephanie and good morning everyone. I will begin today’s call with a review of the accomplishments we achieved in fiscal 2014 and our progress toward achieving our long term goals, before discussing our operational plans for fiscal 2015. I will then turn the call over to Dave to review our financial results for the fourth quarter and our guidance for fiscal 2015. USA Technologies made significant progress in fiscal 2014, ending the year with record new connection growth in the fourth quarter. We increased gross connections in fiscal ’14 by record numbers, adding 76,000 new connections equal to 41% year-over-year growth. 84% of these gross new connections went into our existing customer base. New connections increased each quarter setting records in both the third and fourth quarters, reaching 25,000 gross new connections in the fourth quarter. At June 30, we closed fiscal 2014 with a new record of 266,000 connections to the ePort Connect service. We had anticipated stronger results for the fourth quarter and fiscal 2014, but the system integration for our most recent taxi partnerships is taking a bit longer than expected. As a result, revenue growth for the year came in slightly below our forecast of 20% to 23%. We now expect the integration work to be completed in the second quarter of fiscal ‘15 and to begin generating revenue from this effort in fiscal 2015. Turning back to fiscal 2014 results. We achieved record connections by delivering value to our customers, leveraging key partner relationships and continuing to invest in our business with aggressive marketing programs. These programs were designed to promote greater allegiance among our existing customers, expand connections per customer and to sustain our lead over the competition. We increased our customer count by 45% for the year, adding 2250 new customers…

Dave DeMedio

Chief Financial Officer

Thank you, Steve. I am going to start by reviewing our fourth quarter results before briefly reviewing the full year and our outlook for fiscal 2015. For the fourth quarter, total revenue was $11.2 million, an increase of 15.7% compared to $9.7 million in the fourth quarter of fiscal 2013. License and transaction fees were $9.5 million compared to $8.2 million in the year ago quarter, a 15.7% increase. These fees, which are comprised of recurring monthly service fees plus recurring transaction processing fees, accounted for approximately 84% of total revenue for both the current and prior year quarter. Growth was driven by the year-over-year increase in total connections to our ePort Connect service. Equipment sales were $1.7 million compared to $1.5 million in last year's fourth quarter. Equipment sales benefited from the record number of new connections in the current fiscal quarter compared to last year. Gross connections during the fourth quarter totaled a record 25,000, a 39% increase from Q4 of last year with approximately 86% coming from traditional ePort vending customers and 14% from customers in other vertical markets such as amusement, gaming and laundry. Of the gross connections, 84% came from existing customers. Net connections for the fourth quarter totaled a record 22,000, a 22% increase from Q4 of last year. The increase in gross and net connections we believe primarily reflects our success in increasing sales from our growing base of customers which grew to 7300 at June 30, an increase of approximately 45% from June 30 a year ago. Moving down the income statement, gross profit was $3.7 million, even with the year ago quarter. The gross margin was 32.7% compared to 37.9% in the fourth quarter last year. Gross margin on license and transaction fees was 33.1% compared to 37.1% last year. The…

Steve Herbert

Operator

Thank you, Dave and thank you everyone for joining us this morning. In closing, I just like to remember that we enter our new fiscal year with accelerating momentum for new connections coming off record set in the second half of fiscal ’14. Other positive factors that we anticipate include our 85% recurring revenue base, the $5.5 million in revenue we expect to record for the year from the expiration of grace periods, our aggressive marketing efforts directed at further penetrating our customer base and the anticipated spur to industry demand from the ApplePay announcement, coupled with our industry-leading NFC experience and near-term increasing opportunities in adjacent verticals such as taxi. With the achievement of critical mass with 266,000 connections and our growing market opportunity with new and existing customers, we foresee a clear path to the realization of our long-term goals. We would now like to open up the call for questions. Operator?

Operator

Operator

(Operator Instructions) Our first question comes from the line of Mike Latimore from Northland Securities.

Mike Latimore - Northland Capital

Analyst · Northland Securities

Just on the delay of 5.5 million that you will recognize this year, that’s completely separate from the taxi revenue, is that right or is there some overlap?

Dave DeMedio

Chief Financial Officer

Mike, that’s completely separate from any taxi revenue that we would expect for ’15, that’s just on the ePort terminals that were delayed under the service fee, grace periods.

Mike Latimore - Northland Capital

Analyst · Northland Securities

And then with regard to ApplePay, can all your NFC devices in the field sort of immediately accept that or is there something you have to do to be able to accept ApplePay?

Steve Herbert

Operator

Mike, they – our plan is that they will accept ApplePay. It may require what we call an over the year update to push a piece of software from our server to our devices. But at this point, we are led to believe we are in great shape. So at the most we will have to push from our server to our devices in an automated fashion software update.

Mike Latimore - Northland Capital

Analyst · this point, we are led to believe we are in great shape. So at the most we will have to push from our server to our devices in an automated fashion software update

And just to make the gross margin a little more simple – what do you think the license and transaction gross margin, what kind of range are you thinking for this year?

Dave DeMedio

Chief Financial Officer

Mike, the margins for license and transaction fee going into ’15 are going to be impacted by a couple items. Obviously any marketing programs that could be continued into ‘15 as we’re going to remain aggressive in getting connection and customer growth, in addition to sale-leaseback agreement, will impact gross margins to as much as the $165,000 per quarter. And then the mix of new vertical -- revenue from new vertical markets could impact this margin as well. So I think it will - I think margins will be stretched to get back to the 40% range that we were looking at achieving in ’14.

Operator

Operator

(Operator Instructions) And we have a follow-up from the line of Mike Latimore from Northland.

Mike Latimore - Northland Capital

Analyst · Northland

In terms of the operating expense in the fourth quarter, I know you went through a list but were there any one-time items that don’t repeat after the fourth quarter?

Dave DeMedio

Chief Financial Officer

There were, Mike. There’s roughly going to be about $200,000 to $300,000 that we would not expect to come into Q1. Q1 of ’15 is going to be less by several hundred thousand dollars than what we experienced in Q4.

Mike Latimore - Northland Capital

Analyst · Northland

And then you may have said this, but what percent of the connections were on JumpStart in the quarter?

Dave DeMedio

Chief Financial Officer

For the connections in Q4, they were a significant component of -- close to over 70% of our connection in Q4 were from JumpStart. As I think I’d mentioned in my script part that 86% of our gross connections came from traditional vending customers. So the majority of those connections came from our vending which took a greater reliance on JumpStart program.

Mike Latimore - Northland Capital

Analyst · Northland

And then with regard to the Setomatic deal, maybe getting 25,000 connections. How much of that would be incremental – and my recollection was you have several thousand already with them?

Steve Herbert

Operator

I think Mike, the incremental – and this is their goal, probably somewhere in the neighborhood of 16,000 to 17,000 would be incremental based upon the information that we have.

Mike Latimore - Northland Capital

Analyst · Northland Securities

And then just maybe help us think little bit more about EMV, that’s potentially a driver for the US market. How do you view EMV as it relates to your business, your customers’ business, is that impactful, not impactful, how do you think about EMV?

Steve Herbert

Operator

Certainly for fiscal ’15, we don't see contact EMV being impactful to our business. Because there is also a contactless standard which gets delivered through NFC technology. So when people think about EMV in the industry, they really think of contact EMV. And that's just -- we don't believe that’s something that will overly affect our business. All of that said, if we have customers who want to implement contract EMV, we have a solution for that. So – but we just – we don’t see our customers going in that direction.

Mike Latimore - Northland Capital

Analyst · Northland Securities

And then just last, I guess, you have a good connection outlook for the year. I assume it’s second half weighted as usual, no reason to think it’s more linear, anything like that?

Steve Herbert

Operator

Mike, typically we have seen connection – more of our connections coming in the second half of our fiscal year, January through June. We would anticipate the same thing occurring in fiscal ’15.

Operator

Operator

Thank you. And our next question comes from the line of Bill Sutherland from Emerging Growth Equities.

Bill Sutherland - Emerging Growth Equities

Analyst · Bill Sutherland from Emerging Growth Equities

Hey thanks. Just a couple, Mike kind of covered them all. But the deactivations at this point, is this kind of 2000 to 3000 a quarter, kind of a normal level you think going forward?

Steve Herbert

Operator

Bill, it’s Steve Herbert by the way. We have about – as of the June 30, end of our fiscal year, we had about 6000 deactivations -- we had about 6000 devices still on CCRs, the Coke bottle [ph] that we are talking about here, we have about 6000 units still on their system. We expect that over the course of the year and in fiscal ’15 they will continue to deactivate their devices, as they kind of go on their own way. But we really don't know how that will get spread out, if that’s what your question was.

Bill Sutherland - Emerging Growth Equities

Analyst · Bill Sutherland from Emerging Growth Equities

Well, obviously they have been the driving force of all that. But I was just wondering on a normalized basis, you’re going to have a little churn, just people going out of business and so forth. Does that -- about to maybe a 1000 a quarter kind of the normal routine stuff?

Steve Herbert

Operator

I think that’s probably a fair – that’s a fair estimation. There will be some level of churn and it’s really related more to customers moving things around, maybe deactivating things seasonally. It’s not so much from people walking away from our service. If you were to look at that retention rate, it’s a 99% retention rate. So the 1000 is really related to basically the movement of locations, just a fun fact for everyone. A vending machine moves 10 times in its life. And that’s a lot of locations. So things get moved around a lot and deactivate it, reactivate it and that alone will cause some churn.

Bill Sutherland - Emerging Growth Equities

Analyst · our service

I may have missed this, Steve but did you have any commentary like an update on the integrated payment, the progress with that?

Steve Herbert

Operator

Well, we did. We actually did talk about that. An update – I know you are familiar since we’ve talked about it, you are familiar with integrated payment and the update was that one of our recent implementations, one of our vending operators was at Sikorsky Aircraft, where in their -- actually Sikorsky headquarters in their micro markets -- on their vending machines and in their dining facilities, we’re providing all of the cashless payment capability. So that the employees can buy in a cashless manner anywhere they want to, within the facility. And in addition to that, the umbrella over the whole thing is the MORE program and the employees get reward with points or whatever it might be. So it not only drives efficiencies for our customer in terms of pulling up all the funds from one place and one supplier like us. But in the case of Sikorsky, they are driving additional sales, they are driving employee satisfaction. So it’s kind of a real life example of how we and our customer have been able to leverage integrated payment as a point of difference.

Bill Sutherland - Emerging Growth Equities

Analyst · Bill Sutherland from Emerging Growth Equities

And then – thanks for that – Dave, I know you gave color on kind of how to think about gross margins this fiscal year. But just to add to that, should we look for some sequential improvement in the course of the year, is that how it lays out do you think?

Dave DeMedio

Chief Financial Officer

There should be some improvement during the course of the year. A lot of it, though, has to do with any additional type of program that we may continue for ’15. But generally there should be some improvement particularly as these units from the grace period in fiscal year ‘14 start to build, because that ramp-up of $5.5 million through the year will be a slight ramp, it won’t be linear – it won’t be equal -- quarterly equal amounts through the fiscal year ’15, it’s going to be a slight building ramp over the fiscal year ‘15 as we build up the $5.5 million for the full fiscal year. So that should help with some sequential improvement.

Operator

Operator

Thank you. And we have run out of time for questions. I would like to turn the conference back to Steve Herbert for closing comments.

Steve Herbert

Operator

I just like to thank everyone for joining us this morning. We look forward to reporting back to you on our first quarter call in mid-November. Hope everyone has a great day.

Operator

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.