Good day, ladies and gentlemen, and welcome to the USA Technologies Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference, Ms. Monica Gould, Investor Relations for USA Technologies. Ma'am, please go ahead.

Thank you and good morning, everyone. Welcome to the USA Technologies' Fourth Quarter and Full Year Fiscal 2017 Earnings Conference Call. With me on this 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 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 section of our website www.usatech.com. I would now like to turn the call over to Steve. Steve?

Thank you, Monica, and good morning, everyone. Thank you for joining us to discuss our fourth quarter and full fiscal year 2017 results. Set amidst the backdrop of an accelerating adoption of cashless payments in the unattended retail market, we at USA Technologies executed on our growth strategy and achieved a record-breaking fourth quarter and fiscal year. The fourth quarter's net new connection number of 64,000 is evidence of the inflection point we're seeing in the unattended retail market toward non-cash acceptance. To give you a sense of just how far we've come since we laid our strategic growth initiatives three years ago, this quarterly connection achievement compares to 67,000 net connections, added for the full year in fiscal 2015, just two years ago. It's obviously the largest connection ad in the company's history and drove total connections to 568,000 at June 30. We believe other large industry operators are witnessing this transition and at some point during the not-so-distant future, we believe that in order for an operator to be competitive in securing locations, cashless acceptance will be a must-have item in addressing any competitive situation or our uptake. Joining our roster this quarter were 300 new customers, bringing our total customer count to 12,700. We are seeing these connections convert to revenue. First in equipment sales, then to the recurring licensing transaction line, both of which hit new highs. Fourth quarter revenue was $34.3 million, of which $18.7 million was L&T and $15.6 million was equipment. The fourth quarter marked the 31st consecutive quarter of year-over-year revenue growth and the top line rose 56% from a year ago. For the year, total revenue grew to $104 million, a 35% increase from last year. Our service, ePort Connect is being utilized by consumers at an increasing rate. In the…

Thank you, Steve, and good morning, everyone. Fiscal 2017 was a terrific year for USA Technologies. It included a number of significant milestones. We exceeded our long term growth by achieving $104 million in revenue and 568,000 in connection, all while driving growth and profitability and expansion in other operating margins. Our revenue for fiscal 2017 increased 35% to $104 million. This included $69 million of license and transaction fees, up 22% and $35 million of equipment sales which were up 68% from last year. Adjusted EBITDA for fiscal 2017 grew 18% to a record $7 million and operating income improved to $135,000 compared to a loss of $1.5 million in the previous fiscal year. Our fourth quarter performance was exceptional and we ended our fiscal year in a very strong position. This strong performance was driven by accelerating growth across all key performance indicator. From a top line perspective, we achieved record revenue of $34 million, up 56% driven by the addition of 64,000 connections - the highest number of ads in a quarter in the company's history. At $2.8 million, our adjusted EBITDA grew threefold compared to last year, which we consider a very strong indication of the scalability of our business and our ability to drive improved returns in margin expansion through top line growth. We added 300 new customers, ending the quarter at 12,700 customers, a 15% increase from last year. Existing customers accounted for 93% of growth new connections, reflecting the trends that we continue to derive increases in connection from deeper penetration of existing customer accounts. Let me now briefly provide a breakdown of our revenue in the quarter. License and transaction fees increased 22% to $18.7 million and represented approximately 54% of our total revenue. Equipment sales were $15.6 million, up 134% from…

Thank you, Priyanka. To wrap up, we're very pleased with our performance in fiscal 2017 and are excited about the opportunities ahead of us in fiscal 2018. We plan to continue to build out our industry-leading platform with additional value-added services and partnerships to enable companies of all sizes to provide the key services they need to operate their unattended retail businesses. And with that, we'll now be happy to take your questions. Operator?

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

Thank you and good morning. Real happy with the connections guidance and I wondered if you could give us a sense of the composition of the connection growth you see this year, relative to existing customers increasing their penetration versus bringing that in from new customers?

Good morning, George. Thanks for the question. We believe that at least in the first half of this fiscal year, we're going to continue to see a very heavy mix of our connections coming from our existing customer base. We still have a lot of headroom, or white space, whatever you want to call it with those customers and I believe in the fourth quarter, those existing customers represented approximately 93% of our connections. So there's no reason to believe that that mix would change heavily, particularly in the first half of the fiscal year. Things may shift a little bit as we move through the year, but for the first half, I would think of it as the way that it has been unfolding for the last number of quarters.

Well, just a commentary there. I'm pleased that a lot of the growth is coming from existing customers. That's a lot more predictable, obviously, than bringing in new customers. One other question, kind of a tip of the iceberg question relative to the 100% cashless move. Can you just give us a sense of the number of your customers or a percentage of your customers that have moved to that 100% cashless?

George, we don't have our finger on an exact number at the moment. There are customers that are either at a 100% or they're moving to a 100%. There has to be dozens now that are either there or moving there and then if you started to include those that were in discussions with, the number would be larger. I think dozens.

Dozens. Okay. One other thing. Could you throw a couple of small partners that you have on the digital side chasing Apple? I wondered if you could just give us a little bit more detail on that opportunity?

Sure. It's a fairly simple arrangement in that regard and when we talked about digital marketing or advertising partners as a potential revenue stream and potential partners for leveraging the ePort Interactive platform - if you remember, we said the most likely partners to wait [ph] in first, would be those who want to promote their new payment methods or their brand. In the case of Chase, they want to promote two things. They have their own mobile payment initiative called Chase Pay, but of course they also have many, many Chase-branded cards. That's a twofold type thing and Apple is really consistent with what we've been doing with Apple all along, taken to another level with an agreement for digital marketing at point-of-sales. It's really simple in that regard. They see the positive. I believe I referred to some of the test results that we got with Apple and those that have been made public jointly by our shelves and Apple, people see that and they're obviously willing to move in with something of a deeper commitment. I hope that helps.

Oh, it's great. Thanks, guys. I appreciate it.

Sure.

Our next question comes from the line of Gary Prestopino with Barrington Research.

Hey, good morning. Priyanka, I couldn't write that. Did you give some guidance from gross margins on the equipment and licensing transaction for next year?

Not for next year, Gary. We give long term guidance of intending to be about 36% to 40% on the long term type for our L&T margins. Having said that, what is really exciting for us is the steady sequential increase that we've seen in our L&T margin for the last year and we expect this trend to continue as we inch to work our long term goals to 2018. On the equipment side, we expect to be somewhere in the range of what we experience in the second half of 2017 with the market expanding and inflecting ahead of us.

Okay. Sorry. What did you say the range was for the L&T?

For L&T, our long term guidance that we've given, Gary, is between 36% to 40% and we expect to see the sequential growth that we experience in 2017. We expect that to continue in 2018 as we move towards our long term goal. So we expect to see sequential growth throughout the quarters in 2018 as well.

Okay. That's great. Thank you.

Sure.

It looks like as I mentioned with your revenue for transaction seems to be stabilizing a little bit and just taking the total L&T revenues over the amount of transactions, but how much of the old JumpStart numbers the equipment rental that you guys would book is still in the revenue stream? How many more quarters are we going to have until that kind of totally flushes out?

We don't expect it to totally flush out. We do see JumpStart assets to be displayed, because it's an easy way for someone to get their foot into the door without having to sign a long-term contract. So we will always have JumpStart devices. If you look at the trending, it's kind of now stable between high single digits in the last couple of quarters and we expect that trend to continue. But to answer your question, that ratability in the revenue for connection or the revenue for transaction is really driven by the shift from JumpStart to QuickStart and we expect that to continue as that shift happens, but we will always have JumpStart in our mix. So depending on where it ends up in the quarter that this variability will continue.

I guess the question I'm asking is that years ago where you're all JumpStart, you're getting all that revenue in your L&T numbers. Right? You switched to QuickStart, eventually more your connections - the ones that you put in three years ago, you're still getting that JumpStart revenue, but eventually, if those connections would convert and I think you said they may...

Right.

It would start coming down.

Yes. Like we indicated, we are stabling now, so we have the trail down, it's stabling now and what is really exciting for us in 2018 and beyond is as we add more value-added services to our mix, we do expect this revenue for connection to start picking up and growing from there on along with the stability that we are seeing on the JumpStart. I hope that answers your question.

Yes, that's fine. And then Steve, just in general, could you maybe give us some idea of maybe some new verticals that are starting to explore cashless that you guys may be working on?

I think that one that, Gary, is the most interesting right now, is mainstream retail moving in a significant way the self-serve applications. And this is driven by a lot of things. It's driven by labor cost, we've all heard about $15 minimum wages and things like that, and of course there's the dynamic that's going on with retailer shifts. They're on the verge of being put out of business or put out of business by people like Bezos, no offense to Bezos, but the fact is that they're having defined newer and more effective ways to reach consumers. We just believe that's going to have a significant impact on the opportunities that we have to work with some major brands going forward. That's one that I personally have my eye on. I think it will fall primarily into the kiosk space. However, there will be retailers that leverage a more traditional type vending delivery system to do what they need to do, but I think you would agree, they're going to have to do something because what's happening right now for retailers is not sustainable.

Yes. And then lastly, you've been adding customers at a nice clip. I think years ago, you said that your existing customer base had about 2 million potential connections. Can you give us any idea of where you think that stands right now?

We stick, Gary, with our number of somewhere between 2 million and 2.5 million locations. Many of the customers that we add right now on a quarterly basis come from what we call SMB - Small Medium Business and they're not large companies, but they're low cost of acquisition. We sell to them over the phone, low cost of acquisition, high margin. So it doesn't necessarily move that 2 million-2.5 million number very much, but what it does do is pump high margin business into our pipeline.

Okay, thank you.

Sure.

[Operator Instructions] Our next question comes from the line of Mike Latimore with Northland Capital.

Hi. This is [indiscernible] for Mike Latimore. I have a couple of questions. What is the percentage of ePort Interactive devices in the mix in this quarter?

The percentage of ePort Interactive devices.

Yes.

The percentage of ePort Interactive devices in the quarter? Was that the question?

Yes.

Yes. Probably in the 15% range. On a quarterly basis, we were tracking more around, say, 20%, but I think in the last quarter, it was more like 15%.

Okay, great. Thank you. And how should we think about hardware versus L&T revenue mix for the next year FY '18?

That's a good question. While there might be some variability quarter-over-quarter depending on where our connections end up. On a full year of fiscal 2018 basis we expect the trend to be similar to what our 2017 exit was.

Okay, great. That's all for me. Thank you.

Sure. Thank you.

Thank you.

We have a follow-up question from the line of Gary Prestopino with Barrington Research.

Yes. Just one quick question I forgot to ask. Usually in the past your net ads have in terms of your connections have really grown, start out low in Q1, grew a little bit in Q2 and then really exploded in the back half of the year. Are we looking at that same kind of trend this year, Steve?

Sure, Gary. We do expect - there is some, because the markets are at an inflection point, I mean to talk out of both sides in my mouth here, forgive the expression. I think if you're modeling this thing, the best way to go is to look at probably some composite of fiscal '16 and fiscal '17. Look at the ramp rate and take the percentages from each quarter and sort of build out a model. We do expect to start off in the same way, but I would take a composite of the two years and look at the percentage that way, it would probably track in that manner. With that, I would give the caveat of anything can happen here because the market is clearly making a move. It might not play out the same way, but I don't think we have much of a choice because we don't exactly know what's the model in that manner.

Okay, thank you.

Sure.

I'm showing no further questions in queue at this time. I would like to turn the call back to Mr. Herbert for any closing remarks.

Thank you, Operator. USA Technology has accomplished some important long term goals in fiscal 2017, setting the stage for increasing top line and bottom line performance. I'd like to thank everyone for joining the call today and for your support as we continue to build and scale our company. We look forward to updating you on our progress next quarter. Hope everyone has a very good day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.