USA Technologies, Inc. (OTCPK:USAT) Q1 2021 Earnings Conference Call November 5, 2020 4:30 AM ET

Company Participants

Alicia Nieva-Woodgate – VP of Corporate Communications & IR

Sean Feeney – CEO

Wayne Jackson – CFO

Anant Agrawal – Chief Revenue Officer

Conference Call Participants

Mike Latimore – Northland Capital Markets

George Sutton – Craig-Hallum

Chris Kennedy – William Blair

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the USA Technologies First quarter 2021 earnings conference call. [Operator Instructions]

I would now like to hand your conference over to your speaker today. Alicia Nieva-Woodgate, Vice President of Corporate Communications and Investor Relations for USA Technologies. Please go ahead.

Alicia Nieva-Woodgate

Thank you. And good afternoon, everyone. Welcome to the USA technologies first quarter fiscal 2021 earnings conference call. With me on the call this afternoon are Sean Feeney, Chief Executive Officer; Wayne Jackson, Chief Financial Officer; and Anant Agrawal, Chief Revenue 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 today. 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 non-GAAP financial measures, a presentation of the most directly comparable GAAP financial measures and a reconciliation between these non-GAAP financial measures as well as the most comparable GAAP financial measures could be found in our press release issued this afternoon, which has been posted on the Investor Relations section of our website at www.usatech.com.

And with that, I’d now like to turn the call over to our Chief Executive Officer Sean Feeney. Sean?

Sean Feeney

Thank you, Alicia. And thank you, everyone for joining us today. I hope everyone is safe. And well. Next week, we’ll mark my six months with the company. And I am pleased to say that we are making good progress against the initiatives I outlined on the Q4 call on today’s call, and I will look forward to updating you on these items and our plans to drive our company growth strategy forward. Wayne will then review the fiscal year 2021 first quarter results, and we will also discuss our financial guidance for this fiscal year.

As we carry on in the current COVID environment, frictionless Commerce has become an increasingly important part of consumers everyday lives. This dynamic extends to cashless and in particular contactless payments. We are well positioned to capitalize on these trends, which makes us extremely relevant for the markets we serve, and a key component to our customers success.

Nevertheless, the pandemic is still affecting businesses. And while we experienced positive results compared to Q4 fiscal year 2020. It continued to impact the company during the first quarter. revenue of $36.9 million increased sequentially by 13%.

But this decreased 15% year over year, gross margin was 38.6% compared to 26.3% in the prior year period due to a mix of revenue during the quarter, which Wang will discuss in more detail in a few minutes. operating loss of $3.6 million in Q1 fiscal year 21 compared to a loss of $11.3 million in Q1 last year. adjusted EBITDA was a negative 500,000 compared to negative $4.9 million in the prior year period. We continue to take actions that are geared toward preparing the economy to turn especially in our go to market initiatives, network operations, while effectively managing costs that are within our control. We are focused on these near term initiatives without losing sight of our longer term growth vision for the company.

As a reminder, the strategic initiatives that the management and board laid out for this fiscal year are to drive sustainable organic growth, right size the company’s cost structure and invest in people and culture in order to achieve excellence Keeping these in mind, let me give you some highlights from the last time we gave you an update.

Last week, we announced the upgraded expansion of our airport product portfolio to now accept EMP contact and contactless payments. Earlier today, we also announced the cashless device upgrade plan to address this cellular sunsetting of the two and 3G networks, and the upgrade to that hardware. We continue to execute upon our aforementioned marketing initiatives, showcasing our platform as a service, with an emphasis on the benefits of the seed family of products.

As part of our efforts to become a more customer centric organization, we have continued to build out our customer service teams, and have added additional account managers. In addition, we have also invested in our sales team, including adding two new regional sales directors during the quarter. Lastly, our migration advisor remains on track.

Well, we made a lot of progress, as in September, we experienced the network in our transaction platform, resulting in the inability to process payment transactions. We remediated the cause of the incident and replace some old devices that were slow to reconnect. In order to speed up the recovery of customers. We continue to look at further enhancements to the platform for our customers, transactions on our seed platform were not infected.

I will now turn the call over to Anant Agrawal, our Chief Revenue Officer to give you more color on the quarters business performance. Anant?

Anant Agrawal

Thanks, Sean. This quarter we kept that executing a ton of growth strategies from providing a customer experience that is best in class, to enhancing our platform as a service and delivering the best cashless and software solution on the market. Here are some key highlights. As Sean mentioned, last week, we announced the upgrade to our E port product portfolio, giving operators the choice to accept contact and contact lists in V.

So they have full optionality to choose their end investments wisely, in many cases only needing to upgrade the card reader or their to amateur rather than the whole kit. In addition, and to the delight of our customers, we implemented a free over the air upgrade to a large number of our existing devices in the field, completely eliminating the need for any equipment upgrades. Along with the EMB enhancement, we rolled out the upgrade plan for customers who still have 2G and or 3G devices.

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As you know, the carriers are starting to sunset, their 2G and 3G network and any customers with devices that are reliant on either of these networks will need to upgrade. Many of our 3G devices in the field only need a telemetry upgrade versus a full cashless kit. key benefit to the port hardware design, saving them significant investment dollars in most cases.

Similar to the advantages of incorporating EMB with airport devices that I mentioned before. These are just a few examples of how the company’s Platform as a Service leverages forward thinking technology to help customers get the most life out of their hardware investments with the E book platform.

In addition to these initiatives, we continue to make strides toward getting our customers fully deployed with seed and cashless. As we’ve maintained on previous calls, feed penetration within our existing customer base is a key focus for our business. And we made great progress in Q1. What has helped us is the fact that the onset of COVID has provided further evidence to the benefits of C to our existing customers who have been able to nimbly manage operating costs in real time maximizing profitability during this challenging environment.

In a recently published blog post, we have added how three operators Duncan Smith, president and chief operating officer of all search services, broadly within operations manager at K in our vending services, and Jared Detweiler, VP of operations at one source office refreshment services, have leveraged our platform during COVID to better serve their customers via frictionless service our seed operators are getting created, and how they can quickly adjust to address the changes this volatile business environment introduces.

By leveraging all the capabilities of seed they have actionable real time data at their fingertips, which gives them the flexibility to adapt food orders. Combine the routes to minimize operating costs, streamline operations across bending micromarkets and OCS by leveraging hybrid routes and ultimately maximize the profitability Compared to their competition with our efforts to reinforce the benefits of seed, coupled with the secular cashless tailwinds, we usually we are well positioned to convert the vast majority of our customers on to the full platform.

As we mentioned in the press, we, we have three new customer wins that serve as a barometer, to the success of our new go to market strategy of going all at first is a large operator in the Midwest, which was a partially deployed legacy port customer, but fully ingrained with the competitors, BMS and other cash flow solution, they will now be completely moving to the feed platform, plus deploy our full 4G EMB cash flow solution as they upgrade their existing 3G caches devices.

We have also signed one of Los Angeles is largest independent vendors, continental bending, the company has gone all in on us at switching all of its devices to import from a competitive cashless solution in signing up with C by converting off of a competitive BMS in the process. And last but not least, we have fresh group, a legacy USAT customer, and the largest independent operator in Houston.

The company will be upgrading all of its 3G devices to 4G and EMP. And what as well as migrating from a competitor’s BMS system to be fully deployed on seeds so they can be on a single platform. These are significant players in the industry, going all in and choosing our best in class platform. And we look forward to accelerating the pace of upgrading all of our operator businesses to our full platform.

With that, I would like to turn it back over to Sean. Sean?

Sean Feeney

Thanks Anant. Now to move on to cover a few other highlights before turning it over to Wayne. Earlier this month. Dennis connects up left the company a few months ago for a large financial services firm, rejoined our organization and was named chief architect. We’re very excited to have his expertise and 15 years of institutional usat knowledge back on the team.

We also continue to build out our finance organization with the hiring of Scott Stewart, our new chief accounting officer, he has made some key hires first team which speaks to our commitment to eliminate our reliance on outside consultants and reduce professional services fields. I also want to address our NASDAQ relisting efforts. As I know it’s top of mind for everyone. The only update I can provide on the process is that our application remains pending. And we have been in regular communication with the NASDAQ organization.

They have welcomed the changes made to the board and the management team. I want to reiterate that we remained focused and dedicated to getting us relisted on that set. Just to wrap up. While we may have experienced a few bumps in this quarter due to legacy factors as well as external variables, particularly COVID. We continue to believe that we have an incredible foundation from which to grow this business and will emerge stronger.

With that, let me hand it over to Wayne to walk you through the fiscal year 2021 first quarter financial results.

Wayne Jackson

Thanks, Sean. Good afternoon, everyone. And thank you for joining our call today. revenue for the first quarter of FY 21 total $36.9 million, a decrease of 15% over the prior year first quarter, and an increase of 13% from Q4 of last year. license and transaction revenue total $33.1 million for the first quarter, a decrease of 4.3% from the prior year first quarter, primarily as a result of lower transaction volume in the current quarter. license and transaction revenues increased 18.9% versus Q4 FY 20. primarily driven by an improvement in tracking transaction volumes.

Equipment sales for the current quarter of $3.8 million decrease 56.9% compared to the prior year quarter of a point $8 million. The decrease was primarily due to lower hardware shipments during the first quarter of FY 21 compared to the same period last year. As you may recall in the prior year first quarter shipments of equipment increased significantly due to a large contract with a new customer.

Total gross profit margin for the quarter was 38.6%, compared with total margin of 26.3% for the prior year, first quarter, and 34% in the fourth quarter of FY 20. license and transaction margin improved to 41.6% in the first quarter of this fiscal year, up from 36.2% in Q1 of last year, as licensed revenue with higher margins was a larger percentage of L&T revenue in the current quarter compared to the prior year quarter.

The current period margin is more in line with Q4 FY 20 a 42.3%. Due to a similar mix of revenue between transactions and licenses. As we noted in our fourth quarter earnings call, transaction volumes and revenue are expected to sell accelerate during the second half of FY 21.

So we anticipate L&T margins to be more long with historical rates by the end of FY 21. Equipment margin was a positive 12.4% for the quarter compared to negative 12.6% in the prior year. As more fully disclosed in our form 10 q to be filed tomorrow.

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We recorded an adjustment of $800,000 as a result of a mouse due to the company for USAT provided parts that were incorporated into the assembly of hardware that was ultimately sold to customers. operating expenses in the first quarter totaled $17.8 million, a 21.4% decrease over the prior year. SG&A expenses in the first quarter of FY 21 totaled $16.8 million, which decreased 2.4% from $17.2 million dollars in Q1 of the prior year.

This decrease was driven by to $2.8 million in lower professional services fees, and $500,000 in total travel expenses, offset by $2.9 million of charges, primarily related to $1.1 million dollars of costs associated with a network instant and $1.8 million in compensation expense, which consisted primarily of an increase in stock based compensation.

The operating loss of the first quarter was $3.6 million, compared to a loss of $11.3 million dollars in the first quarter of the prior year. In addition to the higher gross margins for the current year, first quarter, the other primary driver of the $7.7 million improvement from the first quarter of FY 20 was a $4.5 million reduction in investigation proxy solicitation and restatement expenses.

Net loss applicable to common shareholders for the first quarter was $6.9 million, or 11 cents per basic share, compared to $11.8 million or 20 cents per basic share in the prior year period. adjusted EBITDA for the first quarter was a negative $500,000 compared to negative $4.9 million in the prior year period. Regarding liquidity, the company had $34.7 million of cash and cash equivalents on hand as of September 30 2020.

Moving to our guidance for the full year 2021, we continue to expect revenue to be between $170 and $180 million and adjusted EBITDA to be between two and $5 million. In addition, we expect net loss applicable the common shares to be between $11.1 million and $14.1 million. This range assumes no further unforeseen COVID related impacts, that creates substantial economic duress for the remainder of this year and into calendar 2021.

The first half of the fiscal year will be more negatively impacted both. By COVID-19. In our continued turnaround in the business, we will begin to see the benefits of our investments and refocus sales efforts in the second half of our fiscal year. And the second half of our fiscal year will be a more robust year in terms of office, school and hotel traffic.

With that, we will turn it back over to the operator for questions. operator?

Question-and-Answer Session

Operator

[Operator Instructions] Thank you. Our first question comes from the line of Mike Latimore from Northland Capital Markets.

Mike Latimore

Great, thanks. I guess, Sean. You’ve talked in the past about transaction volumes kind of year over year. I think it starts with last time it got knocked down 10 to 15%. I guess. What are you seeing currently, and you seen any kind of you know, sequential improvement?

Sean Feeney

I would say that, you know, looking at our revenue, you’ve seen a little bit of, you know, sequential quarter improvement, but when you look year over year, we’re still down in that, you know, 10 to 12 13% off. And while that sounds like it’s been consistent, remember transactions were growing and, you know, our, our transactions, you know, do continue to grow just we’re about 10 to 12% off of year over year, on a weekly basis. That’s kind of how I look at it.

Mike Latimore

Okay, and then in turn Have the visibility into sort of new connections? should we think about connections kind of, you know, building every quarter sequentially to where fourth quarters is? And I know you’re not as focused on connections versus overall fat. But is that generally the way to think about it?

Sean Feeney

Yeah, I think, you know, we would expect that you would see continued connections growth, we continue to focus on that. Well, I think it’s not the best measure, it’s one we’ve traditionally given and continue to continue to look at. So yeah, I would I would look at it that way.

Mike Latimore

Okay, thanks.

Operator

Next question George Sutton from Craig-Hallum.

George Sutton

Thank you, Sean, one of the things you mentioned as a primary goal is substantial organic growth. And I wondered if you could just give us a better sense of what you view as substantial organic growth? And at what point, would you expect that a normalized situation to enable that kind of a race?

Sean Feeney

Thanks, George, not sure I remember using the word substantial, but, you know, we are looking for consistent organic growth. And I think when you look at it, I kind of look at it, there’s two ways you look at it, look at it pre COVID, and post COVID. And really, the environment I’m in right now is with COVID. So I think you saw good growth off of the last quarter, in this quarter.

And if you look at that, to get to our guidance that we’ve given you and that we continue to look at, you know, I think you’ll continue to see sequential growth, you know, when you look at it kind of pre COVID, you know, that’s really dependent on really, when we see people 100%, back in offices, 100%, back in schools, you know, kind of sporting events, all the things that will return to normal.

And I’ve seen and when I talk to operators, they look at, you know, that beginning to come back, hopefully after, you know, somewhat in this quarter, and some look at and go, they may or may not come back until the end of next calendar year. So, you know, we’re focused on kind of the environment we have. And I think that we can grow well within that environment. And we really need kind of a return to, to normal, or pre COVID. To really get to the kind of growth numbers, we think we can do.

George Sutton

That and if I overuse the word, substantial, I apologize. I think I’m on my 15th earnings call today. Somebody used the word substantial today. So moving on to my second question. This is for Anant. The, you mentioned a couple of wholesale takeaways. And, you know, having covered this space for a long time, we rarely, frankly, see wholesale takeaways, particularly on the payments side. I’m curious what you see changing, is this really driven by seed? Or is there something else that’s driving these takeaways?

Anant Agrawal

Yeah, sure. So I think it’s a couple pieces. One is, I think a lot of companies, as we’ve been talking about, are seeing the value of being on a single platform for both cashless and logistic software, which is really what our platform is, a lot of the other solutions out there fairly kouji. So I think that is helping, especially with our existing customers, showing that they’re doing well for COVID. that’s helping drive that notion of, you know, I just want one supplier for it all, because it really is one solution.

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The other piece is that we announced the upgrades for MBM, through 2G and 3G on our own network. Reality is a lot of our competitors, devices out there are also going to need to be upgraded. And so when you couple that with us having the best in class solution in the market, we are seeing deals where customers are moving off other competitors caching solutions to go to the us.

Sean Feeney

And George, this is Sean, the one thing that I would add that excited me was, you know, similar to your question, I had heard that it was very difficult for people to switch vmss and I think the success that we’ve had, while we’re in the middle of implementing those is showing that that we can do that and I was just recently at another customer that just at sinal a little while ago but had was switching over to seed and I was happy that the day I was there they were migrating and it went very well and they were very happy I actually went out road with the with some of the route salesmen and some of their sales guys and got a good look at their operation which was which was a great education for me, but I was I was excited to see that, that people could switch in it could go off pretty well.

George Sutton

All right, I appreciate the substantial answers. Thanks, guys.

Operator

[Operator Instructions] Next question Chris Kennedy with William Blair. Chris, your line is open.

Chris Kennedy

Hi guys, thanks for taking the question. We look, think about the business. What do you think the long term margin opportunity is? For the company?

Sean Feeney

Chris, what I would say is, that’s a work in progress for us. You know, Wayne, in the end, Scott, and we’re really kind of, you know, adding some additional people, the team is new. And while we think that there’s positive margin there, I’m not ready to give you kind of what I think that that number will ultimately, ultimately look like. But as we’ve said, we believe that there’s a good growth opportunity here. And we want to do that, while being, you know, kind of a positive earner.

So we’re working toward that. And as we as we get more clarity, and, you know, begin to look into next year, we’ll probably give it some thought on that. But, you know, I think you can tell from the guidance that we’ve continued with that. We’re optimistic that we’re making progress.

Chris Kennedy

Okay, and then another one, you know, expanding beyond the core vending market is a key opportunity for you guys, can you give an update on the progress you’ve made?

Sean Feeney

We continue to look for those opportunities and continue to kind of sell in those, we did close a deal in the in the airbag space in the quarter. And, you know, between that, and then looking, you know, kind of a geographic expansion, but we also think we’ve got, you know, in the near term, a lot of good growth, just in the in the vending space as well.

Operator

As a follow up question. We have for Mike Latimore from Northland Capital.

Mike Latimore

Great, I’m just trying to think through the SG&A line here, that 16 point 8 million in the quarter, I think you’ve mentioned some onetime charges and so forth, but like what is kind of a good baseline SG&A number to be working with here.

Sean Feeney

So this is weighing the, the reduction of the 2.8. And the is real, me think about we started delivered in cash, real savings, the two and a half million dollars professional services. While we still have some work to do, and that was at a high watermark last year, first quarter, we still have some work to do to convert the work streams to in house people. But that’s real savings. And then that is offset a little bit by a sustained charge on the on the stock based comp side. But then the one offs is the is the network instead of about a million and a half. So you can do the math there to give a sort of staying G&A, SG&A.

Mike Latimore

Great, and, you know, you’ve died to 170 to 180 reiterated that guidance, any color on how much hardware might be in the mixer?

Sean Feeney

I don’t think we want to break out but I think if you look at with the 2G, 3G upgrade, the hardware it’s for is, is it’s a decent size. So the success of our upgrades there and, driving that will drive the help us drive that hardware number. Yeah. And I guess just getting back to this replacement notion, I guess, Shauna, that’s something that there’s the opportunity to replace competitors and cashless.

Is that something that you’ve sort of seen as a new opportunity now, in the last, you know, month or so, because of the 2G, 3G upgrade plus the SAS? Or is that something that’s kind of, you know, I’ve always been part of the plan here. Well, I think, you know, our preference would be is that the that we didn’t have to, you know, that there was no 3G, 2G upgrade, it’s, it is an opportunity for us.

And, we’re doing reviews with, you know, every customer of size and our SMB team is working on that. And that’s, that’s something that’s driven by the cellular companies not by us. So we do see as an opportunity to potential They replace people and of course, our competitors do it as an opportunity to replace us. So I’ve got a lot of confidence in our offering and in our sales team, and we’re out there doing battle every day.

Mike Latimore

Great, thanks.

Operator

There are no more questions Presenters, you may continue with any closing remarks.

Sean Feeney

Great. Thank you, everyone, for your interest in the business. And, you know, we look forward to talking to many of you over this evening and over the next couple of weeks. And, you know, we’re focused on getting to some of the questions that you asked and you’re, you’re focused on the right areas of the business and we continue to be excited about what we’re doing and the opportunities in front of us here at USA technology. So thank you very much and operator, thanks for your help with the call.

Operator

You’re always welcome. Ladies and gentlemen, thank you all for participating. This concludes today’s conference call. You may now disconnect. Have a good day.



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