Good morning, ladies and gentlemen, and welcome to the USA Technologies Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Ms. Lauren Sloane, Investor Relations with USA Technologies. You may begin.

Thank you and good morning everyone. This is Lauren Sloane and welcome to the USA Technologies third quarter fiscal 2017 earnings conference call. With me on the call this morning is Steve Herbert, Chairman and Chief Executive Officer; Priyanka Singh, Chief Financial Officer; and Lee Maxwell, Former Interim Chief Financial Officer of USA Technologies. Before we begin today's call, I would 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 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 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 earlier this morning and on the Investor Relations page of our website www.usatech.com. And with that, I would now like to turn the call over to Steve. Please go ahead.

Thank you, Lauren, and good afternoon everyone. Thank you for joining us to discuss the results of our third quarter of fiscal year 2017. Just over three years ago, we announced a set of ambitious goals that at the time to some seemed almost unachievable for a company of our size. Nevertheless we had faith in our team and our products and technology and in our ability to achieve the goal of 500,000 connections and $100 million revenue run rate by the end of fiscal 2017. As a company we continue to work hard each quarter to build the company and drive increasing value for customers and shareholders. We pass-through 300,000 and 400,000 connections in this quarter we pass through to 500,000 connection mark. Further we drove revenue from a $40 million run rate to a $60 million annual run rate to an $80 million and now we've achieved $100 million run rate. We achieved our goals and we achieved them more than a quarter earlier than we had initially anticipated. As I reflect on the past three years, it hasn't been without challenges. However we maintained our result to diligently pursue growth. The moment is one of pride for the board, the management team, the company, and to me personally. I'd like to thank the entire team at USA Technologies for working so hard to achieve these goals, and most importantly, our customers and partners for their commitment to our company. So let's move to the results. As you're likely aware the third quarter generally is a more seasonally strong quarter for us and we again saw strength in our net connection ads which were 35,000 bringing total connections to 504,000. We added 500 new customers bringing our customer count to 12,400. The third quarter marks the 30th consecutive…

Thank you, Steve. Good morning everyone. Before I review the financial results for the quarter, I would like to take this opportunity to share my enthusiasm to be part of the USA Technologies team and say that I'm excited to help continue the growth of the company. Now to review the financials. Net connections for the quarter totaled 25,000 compared to 22,000 in the third quarter of last year. We added 40,000 gross connections compared to 34,000 gross connections in Q3 of last year. There were approximately 5,000 deactivations which we would consider a typical level. We added 500 new customers ending the quarter at 12,400 customers, a 15% increase from last year. We continue to derive increases in connections, primarily from deeper penetration of existing customer accounts and we continue to drove both the numbers and dollar value of transactions. This quarter we had 105 million total transactions representing 203 million in transaction volume increases of 28% and 34% respectively from last year. Year-over-year growth was driven by an increase in total connections to our ePort Connect Service, which were 504,000 at the end of third quarter representing a 26% increase from the 401,000 at the end of the same quarter last year. Approximately 88% of gross new connections came from existing customers which is a strong indication to us of the increasing move by our customers towards 100% adoption of cashless technology. Revenue was up 30% in this quarter including a 19% growth in license and transaction fee revenue and 60% growth in hardware. Total revenue this quarter was a record $26.5 million compared to $20.4 million last year. License and transaction fees were $17.5 million compared to $14.7 million last year representing a 19% increase. These fees which are comprised of the recurring monthly service, plus transaction…

Thank you very much, Priyanka, and thank you everyone for joining us this morning. USA Technologies continues to move the market for unattended retail payments for their flexible platform as we expand our offerings in revenue, connections, and net income. We continue to expect to add between 115,000 and 125,000 net new connections for fiscal 2017 bringing total connections to our service to a range of 544,000 to 554,000. We continue to anticipate revenue to be in the range of $95 million to $100 million. With that, we would like to open the call for questions. Operator?

Thank you. [Operator Instructions]. And our first question comes from George Sutton with Craig-Hallum. Your line is open.

Hey good morning, it's Jason on for George.

Hi, Jason.

And welcome to the call, Priyanka.

Hi, Jason. Thank you.

You're welcome. Steve wondering if you can just step back and give us your thoughts on the growth opportunity in the industry. I know that we've talked about the low penetration rates here but what are the limitations to that growth? Are there any changes in the competitive environment; is it more marketing dollars need to flow into the industry, just any thoughts on any changes in the opportunity? Thank you.

Sure. Thank you for the question, I love that question. I'll answer that question and of course this is a matter -- it's largely a matter of opinion I guess I would call it informed opinion as much as I think informed but nevertheless here it goes. I would answer that question first of all by saying that we believe right now the industry is entering what we would call the next inflection point. And we come to this conclusion by number of factors, the behavior of customers, of course we're just coming off of NAMA, where there was you have an unprecedented amount of customer interaction in a concentrated period of time and then there's simply activity in the marketplace. So right now and in this moment, we feel like that's something that's occurring. Of course you only know for sure that an inflection point happened and to -- you only know after it happened but that's kind of where we feel that we are now. From a growth perspective, as we think about this industry and let's just use the domestic number, the unattended retail space we're still -- we are sticking to our number, we believe the number of Visa, Mastercard, and Chase, and other people that we deal with and I think Ingenico believes it too, we need to talk about that. But the long-term prospects for a market that is largely unpenetrated and it added another inflection point with our company still in a pretty strong leadership position; I believe our long-term growth prospects are very good. And I think the growth prospects for the industry are very good because we believe and others believe that all of those locations will be connected at some point. So short-term inflection, we believe long-term we believe that whole industry will get connected, we're in a leadership position, we're doing everything to take full advantage of that, and to checked it. I think one fact that we absolutely cannot overlook as a group here is the fact that lots of good things going on but Ingenico is a big company, everyone can many people already know who they are but if you don't I would encourage you to take a look. I think they are the number one or two point-of-sale manufacturer in the world, they are multi-billion dollars they're virtually in every country they would not enter a market if they didn't see millions of potential device setup, they just wouldn't do it. And they -- so I don't want to share too much about Ingenico but they thought long and hard about this and we've worked with them for quite some time. So I think that is we're going to look back and their entry will look back and see that that was something of a bellwether moment.

Can you provide some more detail --?

Something of a longwinded answer but it's an important question about short-term and long-term growth.

Yes. I wanted to dig into Ingenico a little bit more as you start to go in that direction but can you give us more details on the nature of that relationship and really what additional capabilities does USA Technologies gain working with Ingenico when you go to market?

Well first of all the most obvious is we have a hardware choice and by the way that hardware sale, it doesn't matter if we sell our device or somebody else's device, we still get hardware revenue. So that's just squares that up very well. Secondly, we obviously have more choice for our customers. So you've got major league manufacturer who has support all over the world for their hardware, so wherever we want to go, if we want to put devices out in the marketplace and support our customers they have a service infrastructure that can help make that happen, be -- going a little bit further obviously once again, they have a global footprint and I would envision our companies working together to push into the unattended market both in the United States and outside. So on the micro level, new choices for our customers, big time manufacturer, tons of capacity not that we're constrained right now but it's nice to have more capacity and more choice and then as you look forward lots of arms and legs and kind of feet on the street to help with growth in the future, there's a lot of ground to cover.

Okay. Just a last one for me, any updates on the pricing environment that you're seeing right now are you changing anything with promotions or are you seeing anything in the market that's different from a pricing perspective?

We got since our last discussion in our last quarter there are no macro level pricing deviations in the market. The competitive environment is largely the same as it was from our last call. There are new entrants like Ingenico but we see that as a good thing. We don't see it as a competitor for us.

Thank you. Our next question comes from Mike Latimore with Northland Capital. Your line is open.

Hi guys this is Nick Altmann on for Mike. Thanks for taking my question. First one your connections guidance suggests that 4Q will be a record connections quarter by a pretty substantial margin? Can you guys just talk about how much visibility you have into that number and whether or not it depends on a large order or two large orders is the pipeline pretty diverse there?

Well great, good morning by the way and thanks for joining us. The first of all the visibility -- the visibility is really an easy answer, if you look at where our business comes from 80% of our business in any given quarter, I don't have the number in front of me for this quarter but somewhere in the neighborhood every quarter for the past, I don't know how many quarters has come from our existing customer base. So our visibility goes to a very long list of customers and where we think our connections are going to come from. And I'm sorry, your second question was oh I remember now forgive me. Are you reliant on a couple of big deals? Every quarter has a mix of what we call -- what I call base hit and then some bigger guess, it might be a home run, it might be a triple, but it really is typically a mix every quarter up and down the street business and day shifts and then some larger wins.

Okay. Just going off that did your largest customer add any connections in the quarter?

Yes, absolutely.

Okay, okay good. Okay and then what you guys see license and transactions gross margin being in 4Q and I guess what are the levers to get there?

I can go ahead. So license and transaction margins for this quarter was up versus the prior quarter and that's a great sign and it's indicative of what we've said in the prior quarters in the short run, we are working on upselling this with the existing customer base, we are working on pricing and the third level of that is our cost. So we are working on our transaction cost as well as our wireless cost, we will see margins continuing to be in the low-to-mid-30s as we've indicated in the past and we expect to be in the same range for the next quarter as well.

Thank you and our next question comes from Peter [indiscernible] with ArchCo Capital. Your line is open.

Hey guys, I just wanted to ask if you guys had any comments on the aging, I guess penetration of your customer base. So we had talked about this in the past but I guess customers that you had for more than a year or two what the penetration rate there versus the new customers if you can comment on that that will be great.

Good morning, Peter. It's Steve Herbert. So I want to make sure -- I want to make sure that we understand your question was the first part of your question related to the overall penetration rate of our existing customer base and what that looks like.

Yes. And then if you could parse it out to where I guess like in many detailed version, one-year-old customers, two-year-old customers et cetera that will be great.

Right, okay. Well the first of all if you look at our existing customer base, we have 12,400 customers now there are probably somewhere we believe the number of total connections is somewhere and let me get a little more specific, two in a quarter to 2.5 million range and at 500,000 or so we are somewhere in the neighborhood of 25% penetration. That’s an average penetration rate. Then we have customers Peter that they range from 5% penetration, they might be getting started and they're at 5% or 10% and we have some number at 50 and then we have increasing numbers of customers that are moving to 100%. That is a huge trust within our selling and marketing organizations pushing customers to the 100% mark. So to answer your question, again just to repeat the penetration levels really run the gamut but there customers are moving to let's call it 50% and 100% and that's really where we're pushing up and that's where the industry, this is one of the data points when we say we think we had another inflection point and we believe the industry is going to be 100% connected, it's because the industry and the customer base are all saying that's where they're going to go.

And that's great. May be let me ask it another way, how long do you think it takes a customer to go from the average 20% to 100% how many years from the time --?

There is no single answer and that's going to change that the rate at which that happens is going to change, it started -- the 100% movement that the customer is going that way started at a very slow pace and that pace is picking up. And if this -- if the adoption of this payment method meaning cashless in vending in particular follows the same pattern that and I'm updating myself, the implementation of the dollar bill acceptor, if it follows that same pattern there at least five million more connections to get done in vending. And right now let's say the industry is connecting at somewhere in the neighborhood of let’s call it 50,000 a quarter may be well that would take 20 odd years to get done that's not what's going to happen and that's not what happened with dollar bill acceptors. You get a point in time where customers went through 100% in a very rapid fashion, so the industry was delivering dollar bill acceptors to the tune of 150, 200, 250,000 per quarter in order to get it done over say a four to five or six year period. That has to happen, if it's to be done in a reasonable amount of time. So if history repeats itself, we're in for some interesting times. Now you can ask me when that's going to happen because that's the billion dollar question, nobody knows the answer to that.

Fair enough. What do you think the bottleneck is right now for you and maybe for the industry?

I don't think -- I don't think there is a bottleneck. I really don't think there is a bottleneck, I think the industries, I think the industry is moving and the numbers continue to increase both the actions and the retract are all pointing in the right direction, in the very same direction as last time. So I really don't think there's a -- I don't think there's a bottleneck. I think it's just -- I think it's just a matter of time before we kickoff almost exponentially from numbers that we're seeing right now and of course I want to make sure I qualify this by saying this is a matter of opinion you're asking me what I think the market might do, this affects you, this would affect USA and anybody else within the space.

Great, fair enough. And you think you have the capacity to meet that kind of 200, 250,000 a quarter demand does that takes off like a hockey stick like bulk with your sales force and I guess your equipment contracts et cetera?

I'm really excited you asked that question. There are couple of us working in the company that we're working with Pepsi when the dollar go about thing happened and unfortunately we were on the receiving end of essentially not having, what was necessary to meet the needs of the market as it took off. It was actually Mike Lawlor, he is our Chief Services Officer and we started the dialogue in the company I mean it has to be 18 months ago, when we were thinking about this market we said what we’re not going to let that happen to USA Technologies. So we started preparing a long time ago for the possibility of this happening. And I can't go through all of the examples but we've gone you know who our partners are Chase, Verizon, our manufacturers we have gone to the supply chain, we have looked at our business across the board and we've thought about if volume goes from X to 5X to 10X in terms of activations of devices and transactions and support, are we ready for that, we started preparing quite some time ago.

Okay, great. I don't want to monopolize anymore at the time of the call. I really appreciate it. Keep up the good job.

Thanks Peter.

Thank you. The next question comes from Josh Elving with Lake Street Capital. Your line is open.

So I had a couple of questions and I apologize if these have been addressed but I just wanted to touch base, the higher equipment sales in the quarter obviously very strong was that due to higher price point terminal sales or can you may be give us a little color as to why that was so strong?

The -- well in 35,000 there were higher sales of terminals, 35,000 terminals and in addition to that, I think further boosting that number with the kind of larger percentage of interactive devices as well.

And that's [indiscernible] correct?

Yes we said that, I think it's over and over that we think 20% would be our mix of interactive, I think that mix was a little bit higher in the quarter, so.

Okay. And then just trying to get a better sense by the way congratulations on the trends we've seen in the L&T gross margin that does appear to be a stabilizing or improving over the last several quarters that's fantastic to see. Maybe could you offer up a little bit of additional color, it's 32% still that target range for the L&T gross margin?

I think Priyanka mentioned she talked about margins a few minutes ago and our target range right now remains the same it's low to mid 30s and we're just going to continue to chip away at that working on both -- working on it from a number of different dimensions that we talked about in the past pushing on the cost side of the equation, trying to drive additional revenue whether it's through pricing or additional service upsells, so that we're just going to continue to push that strategy and hopefully that number will improve.

Okay. And then last question for me and again I apologize if Priyanka mentioned this on the SG&A I have been having trouble getting my head around exactly or how to model this line and I know there's been some fair box expenses in there that have kind of moved the numbers around a little bit, can you maybe kind of talk a little bit about expectations for here maybe the June quarter and into next year. Maybe from an annual perspective or maybe talk a little bit about the cadence of what the quarterly numbers might look like given some of the year-end additional accounting expenses.

Absolutely so SG&A has been a little bit light for the past two quarters and as you indicated the trend is more backend within the year. So we do expect as we focus on our annual stock program and year-end vesting we do expect Q4 2017 SG&A to be in the mid to high 6s range which is consistent with our prior guidance.

And then I don't know if the right term is seasonal but looking into 2018 may be higher in the September and June quarter's lower in the December and March quarters that's the right way to think about it?

Q1 of 2018 would have a similar trend we do see a highest expenses in Q4 and Q1 of the following year so we do expect that trend to continue this year as well.

Thank you. That is all the time we have for questions. I would now like to turn the call back over to Mr. Herbert for closing remarks.

Thank you, Operator. And thanks to everyone for taking the time to join our call today. We sincerely appreciate your support and your interest in our company and look forward to reporting back to you on our next quarter. Operator.

Ladies and gentlemen thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.