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Greystone Capital recently released its Q4 2020 Investor Letter, a copy of which you can download here. Greystone is a privately held investment company. The investment firm seeks to simplify and add value by identifying opportunities in good and bad markets. During the fourth quarter of 2020, returns for separate accounts managed by Greystone Capital ranged from +28.0% to +57.2%. The median account return was +49.1%. You should check out Greystone Capital's top 5 stock picks for investors to buy right now, which could be the biggest winners of 2021.
In the Q4 2020 Investor Letter, Greystone Capital highlighted a few stocks and USA Technologies Inc (NASDAQ:USAT) is one of them. USA Technologies Inc (NASDAQ:USAT) offers consumer payment systems. In the last three months, USA Technologies Inc (NASDAQ:USAT) stock gained 26.3% and on January 20th it had a closing price of $10.67. Here is what Greystone Capital said:
"Clients now own shares of USA Technologies, a vending machine management business that provides a full suite of services to the vending and unattended retail spaces including cashless payment services, installation and servicing support, and enterprise software. If you’ve ever used a payment method other than cash at a vending machine, chances are you’ve come across one of USAT’s ePort terminals where you can buy a soda or bag of pretzels, no cash involved. USAT was founded in 1992 and has a long history of unprofitability and mismanagement which is partly why I believe an opportunity exists today, and what entered client portfolios as an interesting special situation has the potential to grow into a solid business with a positive transformation underway. Today, USAT isled by a new management team set on improving the business fundamentals, re-directing the core strategy and improving investor perception.
USAT is a business I’ve followed for some time as I like the industry including the attractiveness of the transaction / payments space as somewhat recurring revenue that can be recession resistant and sticky when tied to vending machines in the right locations. However, despite some positive characteristics, USAT was un-investable until recently as the story consisted of unprofitability, a revolving door in the CFO chair, a bloated cost structure, accounting issues and a poor culture.
Fast forward to today, and USAT is similar to our investment in Liberated Syndication, with the result of a lengthy activist battle ending with a new board and management team in place (including former Verifone Chairman/CEO Douglas Bergeron) who possess extensive experience in technology, software and payment processing among other things. In addition, before we even get to potential operational improvements, this new management team appears intent on addressing the incredibly large amount of low hanging fruit that should alleviate many investor concerns and help communicate the story in a more positive way. USAT has already checked off many of these boxes including a debt refinance, an equity raise to bolster the balance sheet and the disclosure of their SaaS business unit economics in future investor communications.
What I found interesting when getting up to speed with the positive changes being made at USAT was that the primary bearish arguments were made up of past management mis-dealings as well as the poor history of the business fundamentals. Part of my process when researching a new investment is trying to ‘kill’ the company by tearing down the investment thesis. When nearly all of the negative points relate to backward looking issues, that opens up the possibility for a favorable setup.
To help illustrate the opportunity, USAT has two separate business segments, Equipment and Licensing & Transactions. The equipment segment (responsible for 20% of revenues) is relatively straightforward, as USAT sells their cashless hardware readers to vending operators (a sticky product as once you’ve chosen a cashless operator, you’d be unlikely to switch it out following the install) which also allows USAT to gain access to the transactions side of the business as well as cross sell their vending management software platform SEED, which I will discuss more below. USAT will typically subsidize the hardware that allows cashless payments to be accepted, selling them at a negative gross margin in order to gain access to the potential recurring revenue side. Every time an ePort or cashless device is installed, USAT counts that as a ‘connection’, of which they currently have over 1.3mm. This growth in connections has without a doubt helped grow the installed base and should help with the software platform opportunity moving forward, but historically the growth in connections alone was prioritized over all else, including profitability. Moving forward, the new management team has committed to profitable growth so we will likely see a decrease in the connection growth rate but improvements in gross margins and profitability over time.
The Licensing & Transactions segment makes up 80% of revenues and consists of the share in transaction revenue as well as a monthly service fee for USAT’s cloud based vending management software. The cashless payment segment handles all elements of cashless transactions for vending owners, including serving as the merchant of record for those transactions, while the vending management software provides a platform for vending machine owners to run all elements of their business including inventory monitoring, price changing capabilities and route scheduling for restocking. The software has shown to reduce costs and improve efficiency.
As I mentioned above about a special situation turning into a good business, the software platform is where my hope lies in USAT realizing that goal. In 2017, USAT acquired Cantaloupe Systems, the logistics software provider for the vending and unattended retail spaces. The idea was to acquire a complementary platform in SEED to integrate into USAT’s payment systems as well as expand to new markets and develop a one-stop-shop for vending operators to run their businesses. I thought the acquisition was a positive move for a number of reasons, but until recently, prior management did a poor job of cross-selling and integrating the logistics platform into their existing customer base.
Today, its no secret where management’s focus lies as they have been vocal about wanting to improve the revenue mix geared more toward the software platform. This view is confirmed by USAT recently announcing a re-branding from USA Technologies to Cantaloupe Inc., reflecting their desire to focus on and grow the enterprise software side of the business moving forward. If they are able to execute, both recurring revenue and gross margins should improve, which should in turn make USAT less dependent on the transactions side of the business, which will improve gross margins further and help improve overall fundamentals. According to USAT, existing customers manage a fleet of machines over twice the size of their existing connections of 1.3mm, indicating a very good starting point to grow the SEED installed base. Finally, with a large portion of the current vending machines in existence not setup for cashless payments, and a potential TAM in the tens of millions, the runway for growth looks sizeable.
We were able to purchase shares at prices below 4x revenues for the entire business, which in my opinion fails to take into account the growing software platform, potential margin expansion, re-listing dynamics and non-recurring elevated costs rolling off of the income statement. As management (who made a commitment to do so) begins to disclose SaaS unit economics and if they are able to execute moving forward, I believe we have the chance to see revenue growth, margin expansion and multiple expansion in line with faster growing software and payments peers.
The situation at USA Technologies reminds me of watching certain NBA teams in the past who had their fair share of talent or a decent coach but were one or two pieces away from really contending. It’s not always linear but occasionally these teams get a new head coach that works, or the right role players that fit and are able to put the pieces of the puzzle together to contend for a championship or make deep runs into the playoffs. Think Nick Nurse being hired in Toronto as an example or Jason Kidd being added to the 2011 Dallas Mavericks team. It’s quite possible that the ‘players’ involved here represent the missing pieces needed to drive USAT forward, as the business is now being run by highly qualified and experienced people who clearly understand the opportunity set and have taken positive steps forward to begin delivering results.
For the sake of brevity, please refer to the longer more detailed writeup in the Appendices emailed to you."
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