Description

By nearly every metric, USAT is wildly expensive.  The company has an EV of $800MM and trades at 5.6x annualized revenues, 7.4x annualized recurring revenues, and more than 50x annualized EBITDA for mrq of $14.6MM. To boot, the stock is up ~170pct over the past year.  Below is a summary of the business and an attempt to value using a customer lifetime value approach. Admittedly, new customers and new connections are a major part of the equation but USAT and the industry are both positioned for continued growth in cashless payment systems on vending machines and other self-pay portals such as parking meters & garages, laundry mats, and self-serve kiosks such as in airports and some of the newer QSR formats.  Using this approach, USAT common equity is worth $25/share.

USAT is a business beginning to realize significant scale economies and market share gains, with low risk of another business to disintermediating.  It currently has operations in USA, Mexico, Canada, and Australia. The company currently facilitates more than $1B in unattended transaction volume annually.  The business exists because vending machine owners prefer cashless transactions and because consumers want payment options at a vending machine. In other words, Chase or Apple Pay will never displace a business like USAT.

USA Technologies was first and last written up on VIC in October 2015 when the stock traded around $3 and the company had a ~$100MM market cap, $12MM of net debt and $17MM of preferred stock and unpaid accrued dividends.  At the time, the company had 333,000 connections to its ePort service, and processed 217 million cashless transaction totaling $389MM. Revenues were $58MM, and EPS was a loss of 5 cents per share, operating cash flow was burn of $1.7MM.  New connections were 67,000 for that fiscal year and new customers 2,300; bringing total customers to 9,600.

Fast forward to 2018, as of March 31 the company has 15,600 customers, 969,000 connections, (1,400 customers and 270,000 connections from the recent Cantaloupe transaction).  Market cap today is $850MM with $20MM of net debt and $19MM of preferred equity & unpaid cumulative dividends for an EV of $890MM. In November of 2017, the company closed the acquisition of Cantaloupe Systems – a highly complementary software suite – for $85MM.  Mgmt reiterates that the transaction will be accretive in fiscal 2018 (ending June 30, 2018). Funding was $65MM in cash and $20MM in USAT stock.

On the hardware side or legacy USAT, the cashless reader is manufactured by 3rd parties and installed on vending machines.  The installation is a beauty and a curse it’s manual rather than OEM.  A competitor replacing the installed based cannot do so overnight, but USAT cannot double units overnight either.  The company sells the units directly to vending operators or to 3rd party leasing companies who lease them to vending operators.  The units have various price points but average about $240 net to USAT and USAT earns a very small gross margin on the transaction of less than 10%.  A small percentage (<2% over past 3 quarters) of equipment sales flow through the Jumpstart channel where USAT rents the unit to vending operators – the company is de-emphasizing this channel as its ties up capital and as 3rd party leasing channel has opened up.  Apple has indicated to USAT mgmt that its locations represent the largest single deployment of Apple Pay, accounting for nearly 10% of the approximately 6 million Apple Pay acceptance points in the US.

The economics of the hardware from a vending machine owner’s perspective are compelling.  A study that ran over six months, where USAT compared its interactive call to action screens versus its traditional eport readers (that simply say “tap or swipe now” above Apple Pay and other payment logos), sales increased by 36.5% in the test group (35 machines) versus a 5.5% drop (largely attributed to seasonality) in the control group of 130 machines.  Mobile or NFC payments, by the same comparison, were up 135% - everyone carries their phone, but not necessarily their wallet, around while walking the halls of their university or work campus. Below is the test group’s interactive reader with targeted advertising capabilities.

Cantaloupe November 2017 Acquisition

In November 2017, USAT acquired Cantaloupe for $85MM, $65MM in cash and the rest in stock, issuing 3.4MM shares.  According the May 2018 USAT S-1, Cantaloupe had $20MM in TTM revenues at June 2017, of which $17MM was license and transaction fees.  On Fiscal Q2 call (Feb 2018) mgmt. said the addition of Cantaloupe NFC locations as well as new organic connections for the company for Q2 significantly increased what they believed to already be the largest NFC mobile payments footprint in the USA and the world.

Cantaloupe provides a back-end solution for vending machine owners to set threshold limits (inventory on hand, cash in machine, service issues if any) to indicate when a machine requires a technician visit on a given day or week.  The software also provides dynamic routing to generate the mapped route for those visits and inventory packing instructions. A quick overview is provided here: https://www.youtube.com/watch?v=ALiiIeefOeE

Cantaloupe eliminates route and inventory inefficiencies as real-time machine status is provided to the home office.  Any vending machine owner knows the cost of lost sales opportunity from lack of inventory but more importantly, knows the risk as property owners at high traffic locations are quick to swap providers if patrons complain about vending reliability and inventory issues.  Cantaloupe provides a tremendous cross sell opportunity and will be a necessity in the future of self-service vending transactions.

Avenues for growth

License and Fee growth on existing connections:

• Increase in cashless and mobile payments at existing locations.  Mobile payments drive more fees to USAT. USAT last reported at fiscal year end 2017, June 30, that 475,000 of its connections were NFC enabled and 622,000 as of March 31, 2018.
• Cross selling.  USAT mgmt. says it sees a 30-40% uplift on fees when they add in cantaloupe software analytics.

New connection opportunities

• Increased penetration of existing customer base – USAT estimates its customer base that comprise its ~1MM connections have 3MM unattended sales locations.  92% of new connections in 3Q of fiscal ’18 came from existing customers.
• Growth in new customers – steal market share from competition with USAT/Cantaloupe’s end to end vending machine payment solutions.  Of the 969,000 connections, ~75% are vending or approx. 725,000, compared with 7 million vending machines in the United States.
• White space – “connected” vending machines expected to double by 2022, growth in unattended kiosks such as airport convenience stores and QSRs, other customers such as car washes, laundry mats, arcades.  2.6MM @ 2017 connected vending machines to 5.4MM by 2022. By USAT’s own estimates, the market for unattended connections is in the 13MM to 15MM range.

Industry

• Big market penetration opportunity.  In 2015, cashless payments were 75% of total transaction dollars of $5.67 trillion.  Vending, by comparison, was at ~1/3rd of cashless relative to total payments in 2015.  Figures have obviously changed over past few years.
• Vending Market Watch estimated the vending market at $22B in revenues for 2016.
• Estimated number of vending machines in USA is 7 million, 16 million globally (https://www.linkedin.com/pulse/vending-machine-operators-quiet-corner-food-service-industry-schein/)
• 30% have a cashless reader (http://www.vendingmarketwatch.com/article/12350375/2017-state-of-the-industry-operators-close-2016-with-7-year-high-of-216-billion .  A Michigan State University professor cites 25-30% sales increase with plastic and a 15-20% rise in per transaction value (https://discountvending.com/is-a-completely-cashless-vending-machine-the-future/).   But not everyone carries their wallet, enter mobile payments…
• 2.6MM machines online, expected to double by 2022.
• At ~1MM connections (granted some are cantaloupe software only), USAT has 35%-40% market share of existing online vending machines with the market size doubling as more online machines replaced legacy boxes.

Competition

Crane makes the vending machines as well, so its payment systems are largely a captive solution.  Crane and PayRange signed a partnership in March 2018. PayRange, a company founded in 2013, provides an alternative to cellular connectivity of the vending machine, as it requires the customer to have the PayRange app, initiate an in-app purchase, and the vending transaction relies on the customer’s cell phone connection rather than at the machine level. A novel approach indeed but consumers are reluctant to download a new app versus the ease of NCF based mobile payments.

The company estimates its 969,000 connections represents ~7% penetration of the 13-15MM connections addressable in the market place.  USAT also estimates an add’l 2MM connections are available to penetrate of its existing customer base, suggesting only 1/3rd penetration of existing customer machines.  622,000 of its connections are NFC enabled. 475k as of 6/30/17.

Cap Structure

In May 2018, USAT via a secondary offering of common stock, raised $75.7MM with 6.33MM shares sold by USAT at $11/share, lifting shares outstanding from 53.7MM to 60MM.  The approx. $70MM in proceeds are marked for general corporate purposes and the company has expressed an acquisition strategy both before and after the Cantaloupe transaction.

USAT also has 445,063 of preferred shares outstanding, convertible into 88,473 shares of common.  These shares pay an annual dividend $1.50, on a semi-annual basis, which amounts to $668,000 per year that accrues for the entire issue. Unpaid amounts are $33.69 per share or $14.99MM total.  Convertible into 0.1988 shares, votes assigned as well. Company has right to redeem all preferred stock for $11/share plus any & all unpaid dividends, and a liquidation preference of $10/share plus any and all unpaid dividends, or company assets, before common stockholders received anything.  Preferred traded at ~$25. Preferred stock 445,063 outstanding at 3/31, 19.4MM liquidation preference. These are highly illiquid but trade at an approx. 40% discount to intrinsic value and are effectively a way to speculate on a takeout as 60% of Preferred Shares votes are needed to effectuate a transaction or merger for the company in which >50% of voting rights transferred or disposed of, or if the company attempts to issue new convertible securities of any kind.

Valuation

Following the cantaloupe acquisition, management has increased their expectations for long-term margins for USAT.

The simple CLV formula is used, shown below:

There’s no doubt a healthy combo of leap of faith and playing the long, long game here:

Other considerations:

Management long-term incentives driven more by connection and Adj. EBITDA metrics rather than per share metrics.

Catalyst

• Increased connections rollout
• Increased monetization of existing connections
• More accretive acquisitions to enhance, entrench USAT products & services