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Edited Transcript of USAT earnings conference call or presentation 8-May-18 12:30pm GMT

Thomson Reuters StreetEvents

Q3 2018 USA Technologies Inc Earnings Call

Malvern May 12, 2018 (Thomson StreetEvents) -- Edited Transcript of USA Technologies Inc earnings conference call or presentation Tuesday, May 8, 2018 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Monica Gould

* Priyanka Singh

USA Technologies, Inc. - CFO

* Stephen P. Herbert

USA Technologies, Inc. - CEO & Chairman

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Conference Call Participants

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* Gary Frank Prestopino

Barrington Research Associates, Inc., Research Division - MD

* George Frederick Sutton

Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Robert Paul Napoli

William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the USA Technologies Third Quarter Fiscal Year 2018 Earnings Call. (Operator Instructions) Also as a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Monica Gould, Investor Relations for USA Technologies. Please, go ahead.

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Monica Gould, [2]

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Thank you, (inaudible), and good morning, everyone. Welcome to the USA Technologies third quarter fiscal 2018 earnings conference call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer; and Priyanka Singh, Chief Financial Officer.

Before we begin today's call, I would like to remind you that all statements included in this call, other than statements of historical facts, are forward-looking in nature. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including, but not limited to, business, financial, market and economic conditions. A detailed discussion of the risk and uncertainties that could cause actual results and events to differ materially from such forward-looking statement is included with our filings with the SEC and in the press release issued earlier this morning. Listeners are cautioned not to place undue reliance on any such forward-looking statements, which reflect management's view only as of the date they are made. USA Technologies undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. This call will also include a discussion of certain non-GAAP financial measures that we believe are useful for, among other things, evaluating USA Technologies operating results. These non-GAAP financial measures are supplemental to and not a substitute for GAAP measures as such -- such as net income or loss. Details of these non-GAAP financial measures are presentation of the most directly comparable GAAP financial measures and the reconciliation between these non-GAAP financial measures as well as the most comparable GAAP financial measures can be found in our press release issued this morning, which has been posted on the Investor Relations section of our website, www.usatech.com.

And with that, I'd like to turn the call over to Steve Herbert. Steve?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [3]

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Thank you, Monica, and good morning, everyone. Thank you for joining us to discuss our third quarter fiscal year 2018 results. I'm going to start by updating you on our progress in integrating our acquisition of Cantaloupe systems. I will then provide a brief overview of the quarter and share some of our recent business highlights. After my remarks, I will turn the call over to Priyanka Singh, our CFO, to discuss our financial results and guidance in more detail.

Over the last 6 months, we've made significant progress in integrating Cantaloupe into our organization. Since closing on the acquisition, we have substantially completed the integration of the work and personnel of all major functions within the combined enterprise. Based on our successful execution, we were able to improve our L&T margin profile by swiftly and effectively leveraging our expanded service offering in the marketplace. As such, I'm pleased to announce that during the third quarter, we exceeded all of the long-term revenue margin targets that we put in place less than 6 months ago. Specifically in the third quarter, we achieved total gross margins of 33%, L&T margins of 41% and equipment margins of 11% compared to our long-term targets of gross margins in the range of 27% to 30%, L&T margins of 36% to 40% and equipment margins of 8% to 10%.

Consistent with the vision we set forth earlier in the fiscal year, we now have an industry-leading enterprise platform for the unattended retail market. This scalable platform supports our customers’ requirements for cashless payment, logistics, inventory planning and more. Our platform also addresses the vending and micro market segment through our Seed Markets module, kiosks through QuickConnect and office copy services through Seed Delivery. All of these end markets can be managed on our ePort Connect platform, which makes our solution both versatile and sticky. We're very pleased with the success we continue to achieve in cross-selling our new cloud-based analytics software into our existing USAT customer base. Moreover, we're seeing customers at multiple new services from our combined offering.

In the third quarter, we continue to sign agreements to add performance optimization elements of our acquired analytics software into their existing ePort Connect cashless payment base. Key factors driving our customers decisions to rapidly adopt our new end-to-end platform with the potential to improve operational efficiency, achieve scalability and maximize the investment they've already made in our market-leading ePort Connect platform.

Our largest cross-sell during the quarter was with a vending operator in the U.S. Midwest, who had previously transitioned to a 100% cashless on our ePort Connect platform. In the third quarter, this customer purchased our entire suite of analytics software, including Seed Pro and Seed Office for logistics in VMS replacing a competitor's VMS solution, as well as our Seed Markets micro market optimization solution and Seed Delivery, which automates deliveries with a smartphone or tablet. This implementation will allow this customer to fully leverage USAT's end-to-end enterprise platform for unattended retail, entirely replacing a competitor's legacy solution.

Importantly, some of our cross-selling opportunities also enabled us to expand our international presence. As you may recall, we gained a small international footprint in Australia and Latin America via the Cantaloupe acquisition. We are working with a partner in Australia to deliver an EMV payment -- EMV-enabled payment solution for approximately 6,000 locations with the potential for additional locations over time. We also won new business with a Canteen franchise in Canada for the deployment of some of our combined service, including EMV-enabled cashless, Seed Pro, Seed Office, Seed Delivery and Seed Markets. Again displacing a competitor solution with our end-to-end enterprise platform across nearly 7,500 locations.

With that, I'd like to briefly recap our third quarter performance. Revenue increased 35% year-over-year on a GAAP basis, marking our 34th consecutive quarter of year-over-year revenue growth. Given our increased scale and by continuing to leverage operating expenses, we were successful in converting this revenue growth to improving our non-GAAP profitability.

We expanded our customer base in the quarter with the addition of 550 new customers, bringing our total customer account to 15,600 on our ePort Connect service. These new customers will continue to add both connections as well as new services to existing connections and will drive our revenue and margin expansion over the coming quarters and years. Net new connections rose by 64,000 during the quarter bringing our total connection count to 969,000. Over 650,000 or 67% of our total connections are now NFC enabled, and we continue to maintain the largest footprint that accepts NFC-based mobile payments controlled by a single entity in the United States, if not the world.

Our service continues to be utilized by consumers at an increasing rate. We processed over 170 million transactions for approximately $380 million in value during the quarter. As a result, we exited the third quarter on an annual run rate of approximately $1.3 billion for transaction processes. This momentum enabled us to further solidify our #1 market share position domestically and achieve the same globally in our largest end market in calendar 2017, namely connected vending machines. This is according to a study published in April by IoT research firm, Berg Insight.

Moreover, our end markets continue to expand at a healthy pace, reflecting the inflection point we're seeing in the adoption of cashless and cloud-based technology solutions in the unattended retail market. For example, the global installed base of connected vending machines is expected to grow at a 16.2% CAGR from 2.6 million units in 2017 to 5.4 million by 2022, and achieve a 32% penetration globally according to Berg. Moreover, the kiosk market, which represents another substantial opportunity for our company and an important vertical for us, continues to expand at a healthy pace. Accordingly, to payments.com, the U.S. kiosk market is projected to reach $1 billion by 2021, led by the growth of food service, self-serve kiosks, beverage self-serve kiosks and check-in kiosks. As an example of our recent success in this market, we grew our QuickConnect connections, which are predominantly kiosk-based by more than 50% in the third quarter compared to the same last year. Growth in micro markets on our service drove much of this increase.

Now I'd like to turn to some of our other recent business highlights. We recently announced the expansion of our relationship with Ingenico with the completion of a 3-year strategic alliance agreement. We believe through our collaboration, both organizations are well positioned to capture additional market share, enter and proliferate new unattended verticals and help unattended retail merchants benefit from the power of IoT technology both here and abroad.

Our teams are now actively working together on a comprehensive go-to-market strategy and training each company’s respective sales organizations on broad opportunities. In addition, both companies have executive focus on high-priority near-term opportunities. We're also working with Ingenico to expedite the launch of a combined cashless and hardware -- cashless hardware and cashless payment services solution in North America. With this combined offering, among other things, we can provide unattended retail operators the option of using Ingenico's innovative payment hardware via USAT's ePort Connect service. Merchants can also gain access to automatic updates to payment software settings, security and point-of-sale insight data through our ePort Connect network, and the ability to layer on value-added services like consumer engagement, loyalty programs and payroll deduct. Through this expanded partnership, we're able to offer vending and other unattended retail markets best-in-class payment solutions that accept new and emerging forms of payments, along with USAT's ePort Connect suite of cashless payment, consumer engagement and loyalty services.

Lastly, during the third quarter, we completed 3 very well-attended technology summits across the country, which were focused on educating both Cantaloupe and USAT customers about our new end-to-end enterprise platform, share success stories on how we can help them increase revenue and operating efficiencies while decreasing cost and to discuss our technology roadmap. In addition to the cross-training and education we offered customers from both USA and Cantaloupe presented best practices, discuss the impact the services have had on their businesses and participated in panel discussion to an audience of their peers. We also had several strategic partners, including Apple, provide a glimpse into unattended retail trends and where the industry is headed from a payments perspective, as well as how the consumer shift to self-service is both leveraging existing technology and accelerating new advancements.

In closing we are very pleased with the continued momentum across our business and the many opportunities ahead of us to pursue new unattended markets, driven by the growing tide of digital payments trends including the increased volume of mobile wallet transactions and rising consumer demand for more unattended retail options that is giving rise to new disruptive shopping experiences such as Amazon gov. We're pleased that we're quickly approaching the 1 million connection milestone to our service. It's a historic milestone for our company, particularly just 1 year after crossing the 500,000 mark. Looking forward, we intend to expand our presence across unattended retail markets to take advantage of the inflection point we're seeing in the adoption of cashless and cloud-based technology solutions as a result of these trends.

With that, I'll now turn the call to Priyanka to provide a more detailed financial overview of our results. Priyanka?

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Priyanka Singh, USA Technologies, Inc. - CFO [4]

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Thank you, Steve, and thanks to everyone for joining the call. I'm particularly pleased with our ongoing execution, which has enabled us to deliver record third quarter financial results, while at the same time making considerable progress in further integrating Cantaloupe.

The strength and consistency of our business model is evident in our third quarter results. Total revenue grew 35% to $35.8 million. We also generated an almost 500 basis point expansion in our adjusted EBITDA margin as we benefited from significant operating leverage due to a growing scale. We've also successfully executed on opportunity to further increase our margin profile as we integrate the 2 companies and achieve anticipated cost synergies.

This quarter our gross margins expanded by more than 800 basis points to 33%, reflecting our acquisition of Cantaloupe, which added high margin recurring software revenue. Gross margins were also favorably impacted this quarter by the lower mix of equipment revenue. At 41%, our L&T margins are expanding. This expansion is driven by a higher software revenue mix and also the benefit from Cantaloupe's accretive margin profile.

Our long-term customer contracts and diversified offering provides us with a highly visible and high-margin recurring revenue stream. With our stronger combined offering, we control the full technology stack creating more value-generating relationships with our customers. We're also making tactical progress. Our combined sales force is now actively selling the full suite of USAT and Cantaloupe products. Our customers reaction is the most exciting part with us. It was evident at our recent technology summits that they recognized the potential of the new combined organization, and this is a testament of the opportunities that we believe lie ahead of us.

Now I would like to briefly review USA Technologies third quarter results and our outlook for the remainder of fiscal 2018. We had another strong quarter as we continue to drive top line growth while expanding our profitability. Our total revenues increased 35% year-over-year to $35.8 million. Our non-GAAP net income doubled to $0.04 per share. On a pro forma basis, total revenue increased 12% and license and transaction fees increased 25%. We continue to make strides in growing our connection base and customer count, as well as our diversified suite of services to an expanding customer base. We added 64,000 net new connections in the third quarter, bringing our total connection count to 969,000 connections, up 92% compared to the same quarter last year and within a striking distance of our 1 million connection goal. We also added 550 new customers, ending the quarter at a total of 15,600 customers, an increase of 26% compared to 12,400 customers in the same quarter of last year. With the growing customer base, existing customers accounted for 92% of our gross new connections in the quarter.

License and transaction fees increased 55% year-over-year to 27 million and accounted for 75% of our total revenue. Equipment sales were 8.8 million, which decreased 2% year-over-year. This decrease was driven by a large equipment sale made to a strategic customer towards the end of the same quarter last year. As we have stated in the past, equipment continues to be an enabler, helping us to deliver high-margin services to our end customers. In addition, we continue to experience quarter-over-quarter variability in equipment revenue depending on the mix of services sold in a given quarter. For example, during the third quarter, a portion of our cashless sales required a lighter configuration of equipment or no equipment at all as we were successful in upselling our combined offering to Cantaloupe's existing telemetry only customer base. These synergistic sales resulted in incrementally higher margin L&T revenue, however, since only additional cashless readers were needed for these units, it resulted in lower equipment revenue while still maintaining equipment margins and driving higher software revenue for the future.

Another factor impacting equipment revenue in the third quarter was our continued growth in the kiosk space. As Steve mentioned, we have grown additions to our QuickConnect service, which drives cashless conversion without any additional equipment sales by almost 50% this quarter compared to the additions made in the same period last year. With equipment continuing to be just an enabler and not always essential in newer verticals we grow in, we expect our gross margins to be favorably impacted by this trend as is evident in our gross margin trends this quarter. However, as in the past, we do expect variability in our equipment revenue and margins quarter-over-quarter depending on whether the sale requires a hardware unit or not.

Now turning to margin. Our L&T gross margins this quarter was 40.7%, which is an almost 900 basis point expansion compared to USAT's standalone margin of 32% last year. As I noted earlier, we have exceeded our long-term gross margins target of 36% to 40%, which we set just 6 months ago. We expect our L&T margins to continue to expand as we successfully drive additional services down the pipeline. Our equipment margin was 10.6% compared to 11.6% last year. We continue to expect equipment margins to be in the mid- to high-single digits for the remainder of fiscal 2018. At $4.3 million, our adjusted EBITDA more than doubled and we generated an almost 500 basis point expansion in our adjusted EBITDA margin, reflecting the scalability of our business, the strength of our revenue composition and the continued discipline around expense controls, as well as the impact of achievement of cost synergies surrounding our acquisition.

Now moving to expenses. SG&A expenses for the third quarter were $9.6 million, or 26.7% of revenue. Our SG&A expenses increased year-over-year due to Cantaloupe expenses as well as an increase in sales and marketing-related expenses as we continue to increase our market share. We expect SG&A expenses in the fourth quarter to be similar to the trends seen in the third quarter. We also expect that SG&A as a percentage of revenue will experience variability driven by the equipment revenue trends. However, this quarter SG&A as a percentage of L&T revenue decreased 130 basis points compared to the second quarter of this year. Based on the cost reduction actions that we've implemented, we've already realized $0.5 million of the announced $3 million annualized cost reduction measures. Our long-term target is to decrease SG&A expenses as a percentage of total revenue to the 15% to 20% range. However, there will be variability depending on the hardware sales achieved within the quarter.

Our adjusted operating income was $2 million compared to $0.5 million last year. Non-GAAP net income was $2.2 million or $0.04 per share compared to $6.6 million or $0.02 per share last year. This quarter we recognized a tax benefit of $2.1 million driven by a change in our overall expected tax rate resulting from a change in expected M&A expenses.

Turning to the balance sheet. Net working capital totaled $14.6 million at the end of the third quarter, up from $5.8 million at the end of last fiscal year. Our cash balance at the end of the third quarter was $17.1 million, up $4.4 million from the end of last fiscal year.

Overall, we're very pleased with our successful integration of Cantaloupe and with the company's continued momentum in growing our revenue, expanding our L&T margins and improving our profitability. We continue to derive increases in connection from deeper penetration of existing customers, and with our compelling combined offering, we're able to expand our footprint with new customers as well. We believe that our scalable financial model through our recurring revenue stream positions us well to capitalize on the growth opportunity ahead of us.

Turning to our outlook. Now that we're 6 months into the integration and additionally in light of my remarks regarding our strategy with respect to equipment sales, we now expect our full year fiscal 2018 revenue to be in the range of $138 million to $142 million. However, with the expanding L&T revenue and associated margins and our Q3 performance, we're raising our adjusted EBITDA guidance to be between $14.5 million and $15 million. We continue to believe that our total connections at the end of fiscal 2018 will range from 1.03 million to 1.07 million. We also continue to expect the Cantaloupe transaction will be accretive in fiscal 2018 net of one-time transaction and integration expenses and any purchase accounting adjustment.

This concludes our financial update. I will now turn the call back to Steve. Thank you.

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [5]

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Priyanka, thank you very much. I believe now operator, we will move to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Bob Napoli of William Blair.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [2]

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First question, on -- just on the --Ingenico partnership, on their call last week they mentioned a significant deal they signed in unattended segment that will ramp up along the year. Is that just referring to the same agreement or is that a specific contract that you guys are rolling out together in the -- at the back half of calendar '18?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [3]

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We believe they were referring to -- they didn't use a name, but we're fairly certain they were referring to this same 3-year strategic alliance.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [4]

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Okay. And the large Midwest cross-sell that you made, has that already rolled into the numbers? Or is that rolling in over the next -- still to come?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [5]

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I think that's still to come.

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Priyanka Singh, USA Technologies, Inc. - CFO [6]

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Still to come Bob.

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [7]

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They have some work to do. So that's still to come, which points directly to Priyanka's comment about us believing that there'll be a continued expansion of the margin numbers and so forth, particularly on L&T.

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Priyanka Singh, USA Technologies, Inc. - CFO [8]

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That's right.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [9]

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I guess that -- as it relates to that, do you guys -- are you thinking about updating your financial targets?

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Priyanka Singh, USA Technologies, Inc. - CFO [10]

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That's a good question, Bob. Definitely, as we enter into fiscal '19 guidance that we will provide towards the end of our Q4 earnings call, we will definitely look at updating our long-term guidance and all measures given the success that we've had in meeting most of them already.

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Robert Paul Napoli, William Blair & Company L.L.C., Research Division - Partner and Co-Group Head of Financial Services & Technology [11]

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Great. And then just on Cantaloupe, the integration, I mean, are the cost saves, you had a small amount, I guess, in the current quarter, so we should get a full run rate of the cost saves when? And just on the growth side, and this is more of a growth story than a cost save story I think on the Cantaloupe, do you have the team in place? I mean, obviously, one of the founders, I think, moved on. I don't think that was a surprise, but is the organization now -- are the expense synergies complete, we'll see that next quarter? And then from the growth perspective, is the team in place?

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Priyanka Singh, USA Technologies, Inc. - CFO [12]

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I'll address the expense synergies and I'll let Steve address the team. On the expense synergies, Bob, we feel really good about having been able to realize cost savings and synergies so quickly in the game. And we had announced our Q2 earnings towards the beginning of February, we had just completed that exercise and it went very well and we were able to see the results right away. There will be some amount of quartilization if you may off the additional savings that we'll see in Q4 having the full quarter's benefit. And obviously as we enter into fiscal '19, we will see the full benefit of the synergistic actions in 2019.

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [13]

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And Bob, regarding the team, yes, I've been around for a while, and I've -- as we just -- in my mind, we just have a world class team. We were sorry to see Mandeep go, one of the founders, but he's -- the man's a serial entrepreneur and he wants to move on to his next thing, which is fine. But the team is very strong, and I think it's probably important to note that his co-founder, Anant Agrawal, has actually relocated with his family to this area and is doing exceptionally well. And there are other very strong executives that have joined the team. So we'll miss Mandeep, but with all due respect to him, we have a very, very strong team. And look forward -- we look forward to leveraging that team going forward for the shareholders.

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Operator [14]

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Our next question comes from George Sutton of Craig-Hallum.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [15]

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I think one of the fascinating parts of the story is the -- all the unattended opportunities that are getting created for a variety of different reasons. And I wonder if you can give us a sense of the breadth of the things that you're looking at and able to work with? I mean, we've talked about things like touch tunes in [mini key,]but I'm curious, how broad are these opportunities? And how are you attacking it from a sales perspective?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [16]

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Yes. Thanks for the question, George. We -- one of the areas that we're seeing significant growth in, is something that we call micro markets. And those are -- think of it as a small Amazon gov. Of course, it -- and one that doesn't cost many hundreds of thousands of dollars. I don't know exactly what those things cost, but we've got some amazing technology. But we literally have thousands of these micro markets on our service, and consumers are able to go in and really pick up anything they want. It could be something along the line of food and beverage, but it could also be with the shifts we're seeing in retail, it could be things that we're typically buying in an attended fashion in retail. So that's something that we expect to continue to grow as retail goes through, what is nothing more -- it's just -- it's something less than a major, major shakeup. And those retailers are going have to find new ways and cost -- more cost-effective ways to get to consumers. So we're seeing a lot of activity there and in other places as well.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [17]

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If I look at the 550 new customers this quarter, could you give us a sense of the proportion that are related to unattended or the nontraditional vending?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [18]

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Well, I guess the best number we could give you there is related to our QuickConnect connections, which are -- they're just -- they're not vending. They are for -- by and large, they're not vending, so they're kiosk-oriented. It's a company trying to reach consumers in an unintended fashion, including things like micro markets. And Priyanka probably knows the exact numbers, but I'm going to estimate here. I believe we added somewhere near 4,500 new connections in that part of our business, which was the -- in the third quarter, which was a 50% increase over prior year. So that's a significant movement in business outside of that market. And in addition -- outside of the vending market. In addition to that, we're closing in on 100,000 overall connections in that part of the business. So it's -- and we've talked before. Personally, I have always been a fan, a big fan of the kiosk market as a very significant growth opportunity for us long term, and it's nice to see this type of traction.

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George Frederick Sutton, Craig-Hallum Capital Group LLC, Research Division - Partner, Co-Director of Research & Senior Research Analyst [19]

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Last, if I could, Priyanka, I just want to make sure I understand the equipment strategy going forward, particularly as Ingenico comes in as a large partner. Obviously, the equipment revenues were lower than expected, which we could care less about, but it's just an optical thing. I want to make sure I understand sort of how you're thinking about equipment going forward?

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Priyanka Singh, USA Technologies, Inc. - CFO [20]

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So on that George, equipment, like you said, right, it's just an enabler for us. We think about it. It's typically skewed in the second half of the year, so we do expect, as you can see in our guidance, we do expect Q4 to be relatively stronger in terms of hardware related cashless sales. And we expect that to play out. And specifically talking about Ingenico. We look Ingenico as a great partner potentially. No impact from fiscal '18 in the fourth quarter. But as we get into the fiscal '19, we do expect to start to gain traction on equipment with that partnership similar to the way we have with our other equipment manufacturers. And what's really exciting about Ingenico is, we'll now be able to source hardware with Ingenico, sell it internationally and be able to service it internationally in any part of the world. So I think that's going to be unique with the Ingenico partnership that we have not had so far.

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Operator [21]

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Our next question comes from Gary Prestopino of Barrington Research.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [22]

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Steve, you mentioned cross-selling activities starting to pick up. Is there any way you can maybe surround that with some metrics? And then talk about what the pipeline looks like going forward?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [23]

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Well, I'll start with the easiest one, Gary. The pipeline for that is really very significant. If you look at -- the largest cross-sell opportunity is with USA Technologies existing base. We have, what's today's count, 15,600 customers on that service currently, with almost 1 million connections. And as we know, those aren't fully penetrated. Those customers have anywhere between 2.5 million and 3.5 million locations in total. So the pipeline, if you can call it that, the pipeline is incredibly rich with customers that we already have. So I don't want to be overly optimistic, but I would expect -- if the trend that we're seeing now continues, I would expect this to have more and more of an impact on our business going forward, not particularly on the hardware side, but on the L&T side, which, of course, we know is -- that's the crux of our business. That's the most important part. So I hope that answers your question.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [24]

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Somewhat. Let me phrase it another way, all right. If you've got 1 million connections right now, all right? Realistically, how many of those potential connections are big enough to want to uptake the Cantaloupe cloud-based software in your opinion? Or is it all of them? Half of them? 3/4?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [25]

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Yes. I would say there's a small percentage Gary, that are -- they're really small operators. Anyone with the less than say 50 machines, there -- that's a company that is simply not going to be able to leverage in enterprise platform. They may be able to pick up one additional service, but when we think about selling 2, 3, 4 additional services, that's -- we're moving farther up the food chain. But those smaller customers are, they are de minimus in terms of the 1 million connections.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [26]

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Okay. All right. And then Priyanka, just to make sure I'm on the same page here. Starting in 2019, you're going to realize the full amount of the $3 million of cost savings that you were talking about?

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Priyanka Singh, USA Technologies, Inc. - CFO [27]

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That is correct, Gary. That is correct. We saw some of it in this quarter that we just closed. We will see most of it in the current quarter in Q4 and then the annualization of the benefit we'll see in fiscal 2019.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [28]

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In terms of that, and I haven't modeled it out, but in terms of the 15% to 20% of revenues that you think SG&A expenses can get to, is that really a 2019 event or are we talking a couple of years down the road?

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Priyanka Singh, USA Technologies, Inc. - CFO [29]

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That's a really good question, Gary. It really depends on our equipment sales. If you think about a quarter like this, a better metric is to look at SG&A as a percentage of L&T because you can see that quarter-over-quarter we've seen that go down. But because we had lesser hardware-related cashless sales, that resulted in -- the optics of it looks like SG&A as a percentage of revenue has not moved. It really depends on a quarter-over-quarter basis there'll be some variability, but I'm -- but over a long-term period, if you think about a 3- to 5-year period, annually we should be able to be in that range, in the 15% to 20% range.

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Gary Frank Prestopino, Barrington Research Associates, Inc., Research Division - MD [30]

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And then the last question, just deals with the -- my last question, the L&T margins. Have we hit a mark here of 40%-plus that can be assumed to be sustainable going forward? And this is just on the L&T gross margin.

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Priyanka Singh, USA Technologies, Inc. - CFO [31]

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Yes, we do believe so, Gary. We've been working very hard on all sides of the equation. The sales team has done a fantastic job with the cross sales, and we expect to see the benefit of that in the future quarters. On the cost side, we've been working very closely with our wireless providers. We're also looking at our card processing cost. So we're working on sides of the equation to ensure that we continue to be in this range going forward. And we're very pleased that we were able to hit this milestone within 6 months of the acquisition when we had set these targets for ourselves just 6 months back.

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Operator [32]

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(Operator Instructions) Our next question comes from my Mike Latimore of Northland Capital.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [33]

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I don't know if you can break the connections out this way but do you have either gross or net connections by cashless versus business optimization?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [34]

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Mike, that's probably something we have to follow-up with you on. Not at the fingertips right now, but we can get a little bit more granular with you on a one-on-one call.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [35]

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Okay, great. And then you talked a little bit about, I think, selling cashless into the Cantaloupe existing telemeter base. Is that a kind of a consistent ongoing opportunity? Or is that more periodic?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [36]

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Well it's significant. It's a significant opportunity. The -- Cantaloupe came over with a few hundred thousand connections, the large majority of which did not have cashless. So there is an opportunity there. There is a cross-sell opportunity there, but by a wide margin, the larger -- not to minimize that, that's a good opportunity for us, but the other cross-sell opportunity is much larger, a 1 million connections and the ability to selling multiple new services, a handful of them. So -- but it's nice to have that cross-sell opportunity both ways?

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [37]

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Yes for sure. And then I think in the past you talked about a 30% to 40% ARPU with selling Cantaloupe into the USA tech base. Is that still the right way to think about that?

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Priyanka Singh, USA Technologies, Inc. - CFO [38]

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That is the right way to think about it, Mike. As we converge, so like Steve indicated, a big chunk of Cantaloupe connections are not cashless. So obviously, they don't have the transaction processing run through, which impacts the ARPU from a transaction processing standpoint. But as we get more success in the higher-margin revenue, we do expect that to continue to grow.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [39]

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And then just last on Ingenico, this is a -- building a relationship, but Steve you mentioned you're working with them on some high priority items. I guess, can you give a little more color on that? Is that more of an international market? Is that vending? Is it kiosk? Or all the above?

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [40]

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We've got our arms around vending pretty tightly. So what you'll see -- and first of all, just to answer the first question. It's -- our initial focus with Ingenico will be in the North American market, and then we'll start to venture out internationally. They're in approximately 130 countries. So we have many to choose from and we have to sit down together and figure the priorities out. But the near-term opportunities that we're focused on are very likely to be outside of vending, perhaps a kiosk opportunity, one of their retailers may be looking to get outside of the bricks and mortar that they're in right now, they -- as you can imagine, they do business with virtually every major retailer in North America. So it would be opportunities like that, that we'd be pursuing with them. They have terrific coverage and a wonderful brand and great support in those markets. So we're looking to play to our strengths there, both fronts.

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Operator [41]

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This concludes our Q&A session. At this time, I'd like to turn the call back to Mr. Steve Herbert, CEO, for closing remarks. Please, go ahead.

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Stephen P. Herbert, USA Technologies, Inc. - CEO & Chairman [42]

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Thanks very much to everyone for joining our call today. Before we close, I'd like to extend my thanks to our customers, partners, our shareholders for their continued support and enthusiasm. I especially want to thank on behalf of the management team all of the employees in our combined company for their hard work and superior execution, particularly on the integration of the 2 companies. It's an honor to work with each of them each day. We're looking forward to updating everyone on our progress next quarter, and hope to see many of you at some of the upcoming investment conferences we'll be attending. And thanks again for your time. We sincerely appreciate your support, and look forward to talking to you soon.

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Operator [43]

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Thank you, ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.