Good day ladies and gentlemen, and welcome to the USA Technologies' Second Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] I'd now like to introduce your host for today’s program, Lauren Stevens, Investor Relations for USA Technologies. Please go ahead.

Thank you and good morning, everyone. This is Lauren Stevens and welcome to the USA Technologies second quarter fiscal 2015 earnings conference call. With me on the call this morning is Herbert, Chairman and Chief Executive Officer and Dave DeMedio, Chief Financial Officer of USA Technologies. Before we begin today's call, I'd like to remind you all that statements, included in this call, other than statements of historical facts 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 SEC. 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 USA Technologies 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 Web site at www.usatech.com. Now I’d like to turn the call over to Steve. Go ahead.

Thank you, Lauren, and good morning everyone. And thank you for joining us to discuss our second quarter results. In addition to a solid financial quarter, we’ve made progress on several strategic initiatives and we believe we’re seeing a continued acceleration of a transition in the self service retail market that will benefit USAT over the long-term. Here is a quick overview of the quarter, and I will discuss some highlights. In the second quarter, USA Technologies drove 12,000 net new connections ending the quarter with 288,000 connections to the ePort Connect servers, an increase of 29% over a year-ago. Our revenue for the quarter was $12.8 million, a 21% increase from Q2 a year-ago. We added 546 new customers to the servers, a 39% increase year-over-year for 8,450 total customers. In the second quarter, our service handled nearly $51 million transactions, 20% -- 27% above a year-ago. This equates to more than $89 million in transaction volume, a 29% year-over-year increase. We continue to have strong customer retention, which we believe is due to our increasing value proposition and high levels of customer satisfaction. This quarter approximately 82% of our gross connections came from existing customers. As a reminder, our three-year goal is to reach 500,000 connections on our service and achieve $100 million in annual revenue. We believe we continue to make solid progress toward meeting that goal. This quarter the most significant development for USAT and perhaps the payment industry as a whole, was the introduction of Apple Pay. We along with our customers have been preparing for the anticipated widespread adoption of mobile payment for quite sometime and have been investing in the necessary infrastructure to capitalize on the benefits of mobile payments for nearly a decade. Resulting from our vision and marketing technology leadership position…

Thank you, Steve. Grows connections during the quarter totaled 14,000 compared to 17,000 in Q2 of last year. Of the total grows connections, 82% came from existing customers and the balance from new customers. Net connections for the quarter totaled 12,000 compared to 7,000 in last year's second quarter. We added 550 new customers ending the quarter with 8,450 total customers. This is a 39% increase in the customer account from Q2 of fiscal 2014, which we believe is indicative of a broadening adoption in acceptance of cashless payments in the industries we serve. For the second quarter, total revenue was $12.8 million, an increase of 21% compared to $10.6 million in the second quarter of fiscal 2014, and a 4.6% sequential improvement from the $12.3 million we reported last quarter. License and transaction fees were $10.5 million compared to $8.7 million in the year-ago quarter, a 21% increase. These fees which are comprised of recurring monthly service fees plus recurring transaction processing fees, accounted for approximately 82% of total revenue. Growth was driven by the year-over-year increase in total connections to our ePort Connect service. Equipment sales were $2.3 million compared to $1.9 million in last year's second quarter. Our QuickStart program is having a positive impact on equipment sales. As Steve said, the QuickStart program is a non-cancellable capital lease of the ePort equipment, because the customer is entering into a non-cancellable agreement to purchase the equipment, we account for these terminals as a sale versus as a rental as they’re accounted for under JumpStart. The uptake in QuickStart since its trial started in September has been impressive. From September to December, QuickStart has accounted for approximately 45% of gross new connections, while JumpStart has fallen to just 15%. If you remember back to our last earnings call,…

Thank you very much, Dave. Thank you everyone for joining us this morning. In closing, we believe we’ve delivered improved financial results combined with significant strategic progress with Apple Pay, our QuickStart program, and the MasterCard agreement. We believe, we’ve positioned the Company for increased traction and continued success to deliver enhanced shareholder value. We'd like to open the call-up for questions. Operator?

Certainly. [Operator Instructions] Our first question comes from the line of George Sutton from Craig-Hallum Your question please.

Guys, congratulations on the new program for QuickStart. I'm curious, along those lines how broad was your test and how broad will the availability of this leasing program be?

Thanks. Thanks for the comment there. This is Steve Herbert. The test was fairly broad and involved a number of thousands of locations and our expansion plans are to take the program beyond those thousands of locations and nationwide to a more broad customer base.

Now in your statement and you release it says they may buy the ePort. I'm curious will there be other hardware options that they will look at as well?

Well, there are a couple of ways that customers can acquire a device from our Company to come on to service. Actually there are quite a number of ways, but when it comes to an ePort piece of hardware, they can of course purchase the device and that purchase can be a straight out purchase by writing a check or a purchase by way of a five-year lease. We see either of those as a purchase. Then the second way is, obviously, through our JumpStart program, which is the month-to-month rental, which as Dave mentioned has with the onset of QuickStart, has reduced substantially in terms of the amount going out of the door. It's important to note also that customers can connect to the service using devices that they might purchase from other companies or using software that's available from our Company that they can embed in their own devices.

And lastly for me, relative to the Apple Pay impact, I know it's increased a lot of phone calls and interest from customers. At what point do you expect to see the inflection, if you will, in the number of new connections as a result?

I think as we look downstream, a couple of quarters, our customers will want as they continue to see the benefit of mobile payment and particularly Apple Pay, another quarter or two, three down the road what we believe it's going to have something of a significant impact on moving connections in penetration. I like to -- there are other things that we believe will affect an increased number of connections that being one of them -- sometimes I refer to -- I personally refer to Apple Pay as being a very nice tailwind for us right now.

Thanks guys.

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital. Your question please.

Thanks a lot. Yes, nice quarter there.

Thanks, Mike.

Thanks.

In terms of the adoption of the QuickStart model, I mean, you referenced an example of -- if 50% of the connections were QuickStart last year you would have had so much additional cash flow. I guess, is that what you’re generally thinking is like maybe 50% of connections going forward are going to be on QuickStart or kind of what’s the rough view on that?

Well, Mike thanks for your question. Out of the gate from September to December, results were actually even more impressive than the 50%. So we're hopeful that program will be very successful, but at a minimum we are hoping to at least move 50% -- as we more broadly open it up to all customers and across the market, we’re hoping that we can move at least 50% over and hopefully be even more successful than that.

Great. And then what about the pricing to you guys on network fees and transaction fees under QuickStart? Is there a notable difference in sort of the monthly fees that you get under QuickStart versus JumpStart?

That's a good point, Mike. Since the customer is not renting the device, the monthly fee that the customer will pay will be less, because it will be less the rental component of the hardware. So if you're looking at license and transaction revenue, sort of average fee per device, it would go down under QuickStart. But generally, margins would stay relatively same dollar margins, but revenue would go down because of the lease -- the rental component not being in the monthly fee.

Right. So the other part of the monthly fee doesn’t really change, is what you’re saying?

Correct. Correct.

Okay, great. And then, the gross margins you have this last quarter, is that sort of a good benchmark for the rest of the year?

I think it is both in terms of equipment provided QuickStart it remains a solid portion of our connections, as well as the recurring although we do expect slight increases in recurring for the items I mentioned. But generally, yes, in terms of where margins are going.

And then just over the course of the year, would you think that operating cash flow would equal EBITDA or would it be little less than EBITDA or how should we think about EBITDA versus operating cash flow for the full-year?

Well, provided working capital assets and liabilities don't change significantly. Operating cash should reflect very closely to adjusted EBITDA, and that also assuming that QuickStart agreements are financed through the third-party. So all those being considered, yes, operating cash should start to trend towards adjusted EBITDA.

Got it. And then last question, MasterCard you’re being able to accept those transactions now, any sense of how much incremental transactions might come from MasterCard there?

Mike, its Steve. It's hard to say. MasterCard debit is obviously a widespread product out there. So we’d expect to see some sort of impact, but it's really very hard to tell. The added convenience for consumers to be able to do that, we think will resonate not only with consumers, but with our customers who want to make sure that their locations take all popular forms of payment.

Okay, great. Thanks a lot.

Thanks, Mike.

Thank you. Our next question comes from the line of Kevin Dede from H.C. Wainwright. Your question please.

Good morning guys.

Good morning.

Steve, you mentioned the average ticket increase on Apple Pay of about 15%. I'm wondering if you could give us a few more parameters on that. Was that measured across your entire system and over what time period?

It's -- it was actually 15%, Kevin, over all mobile payment transactions. So that could be a Softcard transaction or it could be for example an Apple Pay transaction. But it was a broad look across our whole base. I don't know off the top of my head the period of time, but it was a broad look across the base at mobile payment in general not just Apple Pay.

Okay. How have you worked those figures into your sales and marketing program?

In a very simple manner, initially it's -- based upon our data, it's the same -- it's really the same message that we delivered on the call today that we are delivering to our customers when consumers pay at your locations, they spend 15% more than credit and debit and somewhere in the neighborhood that the difference between mobile payment and cash is probably somewhere in the 40s. So it's a significant difference from cash and not -- not an unmeaningful or a minor difference from regular credit or debit. But it's a -- really is a very simple message to them higher average ticket. There are other benefits that we talk about related to Apple Pay like security, but on average ticket it's a simple story.

Well, to me, that’s the one that’s most compelling to your customers, right?

It is. It is right now without a doubt and with mobile payments of 15% increase in average ticket over credit, debit is significant and when they look at it versus cash, it's an overwhelming difference. And with security on the minds -- with data security on the minds of a lot of people that added benefits that Apple Pay brings to the equation, is also not a -- it's not a minor topic when we talk to our customers.

Can you refresh my memory Steve on your equipment cost? Now my understanding was that you folks introduce a new ePort unit sometime midyear last year. I'm wondering if you could give us some data on how the cost of that unit has changed for you, and what your plans are for further cost reductions.

Okay. Well, as we do with -- to answer the latter part of the question, as we do with all the products and services that we offer, we’re always on a mission to deliver better value for our customers whether that's through the old better, faster, cheaper axiom that people seem to use with hardware or when it comes to the service. That said, you specifically ask about the device that we’ve on the street today, the ePort device we’ve on the street and we -- the street price for that is somewhere between $200 and $270 depending upon the customer who might be buying the volumes that they buy and so forth.

Okay. How do you see that changing going forward, Steve, at least medium to longer term?

Well, I think going back to the comment I made on hardware, we are going to continue to try to leverage scale improvements in technology and so forth to deliver greater value to our customers and also in an effort to deliver better -- greater margins on hardware. So it's an ongoing effort. So the plan is to drive the cost of the device down continually.

Okay. So just a quick question on net new connections expectations for the balance of the year? Your projections are suggesting 66,000 to 76,000 yet we’ve seen what 22,000 net new for the first half. So it seems to me that your forecast of what 46,000 to 56,000 remaining, I guess, something in that order of 44,000 to 54,000, is that right?

Yes, correct.

And -- yes, now versus what 42,000 last year, Dave, what gives you the confidence? Is that primarily the enticement that mobile payments are offering your customers?

Well, going back to last year and Dave I know you probably have these numbers right at your fingertips, going back to last year its very -- it was very obvious that our year was back loaded. Dave, would you mind kind of reviewing what happened in the back half of last year? That's one of the things that clearly gives us confidence. It's the cycle of our business and we can go beyond that.

And Kevin had the numbers right. It was 42,000 net connections in the second half of last fiscal year and what we would need this year on second half will be 44,000 to 54,000 net connections to achieve that 66,000 to 76,000 net connection target.

Okay. All right. So it's really a back half loaded type of scenario that you are relying on then?

It's partly that. It's partially the cycle of our business. In addition to that, we’ve talked about a number of things. We have a new way for our customers to acquire equipment to connect to the network. We have new ways for them to connect to the network that either: A, don't even require hardware through our QuickConnect program or B, other types of equipment that is available in self-serve retail to drive a connection to our service. We also believe that mobile payment will continue to have an impact on adoption and as I said before provide a nice tailwind. So Kevin, it’s really a combination of things. It's cyclical in nature and there are several other developments in the marketplace that I mentioned -- that we believe will drive a strong second half.

Okay. Dave, just to follow-up on the sales leaseback commentary, and at the end of the September quarter, you quoted a figure I think it was of $130,000 or so, a reduction in gross profit and then EBITDA reduction I guess about the same as what you said hit you in the December quarter at about $400,000. I'm just wondering if that gross profit reduction is pretty consistent too.

Well, Q2 the December quarter, the quarter we are in was slightly higher than the September quarter. So the impact on gross margins was more than $165,000 range and the impact on adjusted EBITDA was a little over about $445,000.

Okay.

And that will be consistent -- that what we experienced in Q2 will be consistent now and stable for the next several quarters until the agreement expires.

And you said what that's -- that's a three-year correct?

It’s a three-year, yes.

Well, at one point though that, I guess, what I'm asking is well you say those figures are consistent, but you're also -- if I understood your commentary in the call correctly, that you expect it to have less of an impact because it’s overwhelmed by …?

On a percentage basis, yes, those numbers won’t grow. So, on a percentage basis it will become less of an impact.

Great, great, great. Okay. Last question just on, I guess, it comes back to the QuickStart impact, you're expecting a pretty good run in equipment sales for the balance of the year right to make your revenue number somewhere north of $8 million to $9 million range in equipment sales for the full-year?

Well, we don't have specific guidance on equipment sales. But I think the numbers that we had originally gave -- with the numbers we originally gave for total revenue, really didn’t take into account the full impact of QuickStart. Those numbers were presented at the beginning of the year when QuickStart really hadn’t even been introduced yet. So I think -- I don’t think we need to rely upon a steep increase in equipment revenue to get to that revenue target.

Okay. Well, you’ve done a pretty good job of communicating the numbers, given all the balls that you have in the air. So kudos to gentlemen on that and thanks for answering my questions, I appreciate the help.

Thanks, Kevin. I appreciate it.

Thanks, Kevin.

Thank you. Our next question comes from the line of Gary Prestopino from Barrington Research. Your question please.

Questions here and I’m still little fuzzy on this whole gross margin issue, but prior conversations, prior calls, I think basically you guys said that and correct me if I'm wrong, your gross margin on license and transaction would get back into the 35%, 36% range. And now if I recall, you said that the margins that we’re seeing right now are probably going to be good for the rest of the year. Am I wrong in that statement in terms of what I thought I heard you say a while back?

Gary, so we did say that license and transaction fees margins would slightly increase through the year.

Right.

And we still expect that -- we still expect that. So I do see license and transaction fee margins continuing to increase. They did increase from Q1 to Q2 29% to 32% and I believe that will increase throughout the fiscal year.

But as we exit …

Total -- yes, I’m sorry Gary, just total gross margins are going to -- because of the impact of equipment sales, total gross margins are going to be in the range of where they are currently.

Okay. All right, I understand that and -- okay, and that whole issue with the gross margin on license and transaction, that just deals with the rental expense that's in there? The increase in …

Partly. Yes, rental expense, we still have an impact from the grace period. Not all the devices have for Q2 have impacted the quarter in terms of revenue coming in. So those are the two most significant.

And you also mentioned that you're still not charging activation fees, is that something you're going to continue to do throughout the rest of this year?

Well, we didn't charge them on the QuickStart and that's a -- it's a business decision moving forward as to whether or not we’d continue to do that. I think given the up take in QuickStart and the benefits that it has on cash flow, I see and I think Steve would agree, we see it as a nice trade-off, if we have to continue to not charge the activation fee on the QuickStart device, the trade-off being the improved cash flow. But that really is a business decision moving forward. We will see what the market dictates.

I think, Dave your last point is given that the marketplace -- Gary, and good morning by the way. Thanks for your questions. The marketplace about something you do with that. However, there are a couple of terrific benefits from QuickStart for the Company. A, Dave mentioned that the path to free cash flow and B, we’re getting long-term commitments out of our customers, we're getting -- instead of having them on a month-to-month program, they’re signing -- they’re essentially signing to commit to the Company for five years. They’re leasing a device which works on our service exclusively for a five-year period. So there are two terrific benefits there now in terms of that business decision, Dave, mentioned regarding the activation there.

All right. And then just so I’m clear, QuickStart right now you're still using your own cash to buy the machine, but it's a lease program so you book it as sale, right?

Correct.

Okay. So with this new program that you have, can you explain to the best that you can, I realize you have an agreement with this company, but when you have may buy and lease the equipment, I mean, what commitments does this finance company actually have in terms of taking these out of your hands and reinvigorating your cash pipeline. I mean is there any quantity limit that -- minimum that they have to commit to or is it just kind of open-ended? And how would they decide whether they're going to do a transaction with you?

All good questions there. The vendor agreement we sign does not have any specific commitment levels. They did agree to pay us $1.7 million for the rights -- the lease payment rights under the $1.7 million that we’ve already written from September to December. So they’ve definitely shown an interest in wanting to take on the small leases. So in terms of moving forward, the agreement that we put in place is kind of unique. It allows USAT to continue to be the servicing agent for the leasing company. So we are still predominantly in charge of the collection of the lease payments and remittance to the leasing company on their behalf, as well as the reliance on USAT to perform some of the credit underwriting on the customers as well. So that being said, ultimately the leasing company has the right to not accept the lease if they assume not to for various reasons creditworthiness being one.

I think a couple -- a couple of points. First of all, they took a good -- they got a very good look at our portfolio of customers when they agree to do the $1.7 million transaction. So it doesn't appear as though we will surprise them with a customer profile. Number two, Gary, the -- as you know when you enter into an arrangement like this, there is a significant amount of work that gets done. So I personally think they’re going to have a significant appetite going forward. And thirdly, that not unlike other companies you offer third-party leasing for their products, this will not be the only source that we use as a company. So we don't expect a bottleneck there.

And that $1.7 million that they paid you was that for all of your QuickStarts that you generated September to December or is that just 45% -- what amount did they take?

It took all of the QuickStart agreements we entered into from September to December.

Right. That's good news. And just a couple of quick questions and I will give up. What percentage of your connections were -- gross connections were from vending versus new adjacent markets this quarter?

So Gary, 75% of our Q2 connections were from vending. 25% were from other vertical markets such as laundry, kiosk.

Okay. And then, just in terms of this whole Apple Pay, is there any way that your systems can actually tell whether a transaction is coming through Apple Pay or can it just say it's a mobile transaction overall?

Gary, its Steve. We can see a mobile transaction versus another type of cashless transaction. Of course, we can also see cash, which is a big and our customers can receive the big benefit to them. We currently do not parse out Apple Pay transactions. We are likely to do that in the future.

Okay, all right. And did you -- there is a lot of information, did you talk about what percentage of your transactions were mobile this quarter or is that something you haven't shared with us?

I don’t think that’s a metric that we are putting out at this point. But it's one that that we are likely to look at sharing in the future.

Okay. Thank you very much.

Thank you.

Thank you, Gary.

Thank you. Our next question comes from the line of Bill Sutherland from Emerging Growth Equity. Your question please.

Hey, good morning guys.

Good morning.

Really almost all have been asked. I’m curious on QuickStart, what are the gating factors to offering it more broadly to the client base?

Now they’re not now. We are in very good shape. We have a significant number of transactions under our belt, number of thousands of locations with many customers. So we think we’ve figured out the way our customers want to enter into a transaction like this and with the success of adding third-party financing to the equation, there really is no capital constraint as far as we can see. So I just -- I don't see a guiding issue there.

Okay. Can you give us a sense of discussions or how you’re thinking about other NFC payment technologies in your system?

You mean another mobile payment? Sure. Well, the first of all, we currently accept essential everything that's on the street. We accept Apple Pay. The main -- I would say that the main players Apple Pay, Google Wallet and Softcard and we will continue to do that. Any NFC based or other type of consumer activation of a payment, we are going to be there to accept it. We have already done work on Bluetooth as an example. So even beyond NFC, we have laid down the infrastructure to make sure that the Company and our customers are really well positioned for any sort of consumer payment. But that’s kind of a long winded answer to your question, but we're in great shape on the other NFC based mobile products.

They’re just not as impactful yet is the point?

No, I just don’t think the other -- I don't think the other products other than Apple Pay, they just don't have the legs. Apple Pay came screaming out of the gate with hundreds of banks on board and their ability to change an ecosystem, much like they get with music and the mobile phone -- their ability to change an ecosystem is really well established and I think many people who are watching this are thinking that they may have the same effect on mobile payment, which has been admittedly somewhat slow to get out of the gate.

Yes.

So we'll see what happens if they can work their magic again.

And then last from me on obviously the big step up in the net connection growth in the back half of the year, I mean, obviously there is seasonality just looking back, but may be you can give us some sense of your visibility into it based on the selling cycle or how the pipeline kind of is that in terms of is set in terms of where things stand for that? Thanks.

Well, we’re very confident in where the Company is headed with connections. The most important visibility that we have into the pipeline of course is our existing base. I think both Dave and I mentioned, over 80% of our connections came from -- once again this quarter came from our existing base of customers, which is now right at 8,500 customers on the service who operate, let's call it somewhere in the neighborhood of 2 million locations. So we are closing in on about a 15% penetration rate overall with some customers being at a hundred, some customers being lower, but our best visibility and that the highest sense of confidence we get is really out of that existing customer base and the things that we see happening there. There are also other opportunities on which the Company is working that are outside of that base that we are optimistic about as well. So and I think we -- in answering some of the other questions about connections, we mentioned things like tailwinds with Apple Pay and other types of things, but without a doubt it's that existing base and our confidence in that base, that's really what gives us the greatest confidence and visibility.

Okay. Thanks, Steve.

You bet [ph].

Thank you. This does conclude the question-and-answer session of today's program. I’d like to hand the program back to management for any further marks. End of Q&A

We like to thank everyone for joining our call this morning. We appreciate everyone taking the time to hear about our most recent quarter and some of the developments that we -- that have taken place with the Company. So thanks again and we hope everyone has a great day.