Special Bulletin September 13, 2016
USA Technologies (USAT) reported a mixed bag of quarterly results this morning. Revenue growth of 24.1% (to $21.9 million) beat by $700,000, while higher-than-expected costs led to an EPS loss of $0.04, a nickel shy of consensus estimates.
Most of the quarter was good. Connections to the ePort service were up 29% to 429,000 connections, total customer count was up 15% to 11,050, license and transaction fee revenue (70% of total revenue) was up 28% to $15.3 million, equipment sales (30% of total revenue) were up 17% to $6.68 million, and a sixth consecutive quarter of positive operating cash flow ($1.3 million in the quarter) means USA Technologies now has $19.3 million sitting in the bank.
Last quarter, I talked about the company’s lower margins on equipment, and stated that I hoped it wasn’t the beginning of a trend. This quarter, equipment margin was up 33% (to 17%) compared to last year, but license and transaction fee margin was a little lower (by 11% to 30.5%). The net result was that company-wide gross margin was down 3% to 26.4%. I think the bottom line here is that this will fluctuate quarter-to-quarter depending on the deals struck, and that the company is willing to give up a little profit in exchange for fresh business, but I don’t see a general trend of gross margin contraction. I’ll keep an eye on it moving forward, but for now I’m not concerned with gross margins. Over the last year, revenue is up by 33% (to $77.4 million) and total connections are up by 29%, while transaction volume is up by 50%. Those are the big picture numbers that really matter.
The company was challenged in the quarter on the bottom line. Net loss increased from $201,000 in fiscal Q4 last year to $872,000 this year. The culprit was higher Selling, General and Administrative (SG&A) expense, which was up 31% to $6.7 million. Specific costs were operating expenses related to the VendScreen acquisition (which should be largely done with) and higher accounting expenses to maintain SOX Section 404 compliance. The latter is necessary because USA Technologies has grown to a market cap size (over $75 million) that requires it to become an “accelerated filer,” meaning the company needs to work closer with its auditors to make sure its internal controls and procedures for financial reporting are up to snuff and that its quarterly and annual reports are filed more rapidly. The company is not quite there yet (not entirely uncommon as a company grows quickly), so more work has to be done.
Management guided for similar SG&A expense in the next quarter (around $6.7 million), so we should expect another modest adjusted EPS loss. However, management thinks this is the “high water mark” on SG&A, and that as it moves thorough fiscal 2017, spending will come down. At the same time, management continues to expect steady revenue and connections growth (the all-important top line). Provided that occurs, we can give them a little leniency on profitability (for now).
For the next fiscal year (which started in July), management (which is typically conservative) guided for 115,000 to 125,000 net new connections, bringing the total up by a range of 27% to 29% to 544,000 to 554,000. That should help drive revenues up 23% to 30% to a range of $95 million to $100 million. That should be good enough to keep interest in the stock high, even if expenses are a little elevated for the time being.
There are a few factors that could goose growth. First could be a quicker transition to ePort Connect as vendors deal with new EPA regulations going into effect in December that require nutritional information on vending machines.
Second could be a faster-than-expected transition to digital and cashless payment solutions industry-wide. One example of what can happen is illustrated by TouchTunes, a company that makes digital jukeboxes. Earlier this summer, it had to shut down credit card readers because they didn’t adhere to PCI data security standards. At that time TouchTunes, which has around 65,000 digital jukeboxes countrywide, partnered with USA Technologies to provide compliant credit card readers on TouchTune jukeboxes. The machines are run by regional operators (much like in the vending machine industry) so we don’t know exactly how big this opportunity could be in the near term. But USA Tech’s management team thinks it approaching 1,000 machines with around 72 operators currently engaged with its sales team. USA Tech isn’t the only provider, but the point here is that this is just one example of an unexpected opportunity outside of the core vending machine market. How many more like this are out there?
The stock’s reaction to today’s earnings release has been a little volatile. It was down in the morning but is now trading slightly higher. One of the reasons for weakness over the past few days could be a flood of new shares on the market as a number of warrants hit (which increases the supply of tradable stock). This will be absorbed in due course, but it’s worth noting that around 1.5 million warrants remain outstanding and unexercised. Just keep this in the back of your mind if the stock trades in a wider range than normal.
There might be an opportunity here to be an opportunistic buyer of the stock, not for a huge position but to add a little to what you have or to initiate a small new position if you don’t own the stock. The chart shows three bumps up against resistance in the 4.60 to 4.80 range, occurring in April, May and June, respectively. Notably, the May rally came just before the last quarterly report, upon which the stock fell, much like what occurred this month. Then shares broke out in August, trading up to its 52-week high of 5.30. The stock spiked down this morning but is now trading right in that summer range. Should it hold around this level, this could mark a level of strong support and a good place to add a few shares in anticipation of another trip to 5.30 (a 12% move).
I think buying here has a relatively high probability of working out within a 30-day window. It’s not a slam-dunk, but enough to warrant moving the stock back to buy, for the time being. BUY.