Replies to post #2347 on USA Technologies Inc (USAT)

[FUNMAN]

Bring on Hudson.

Agree, something is terribly wrong with this picture, how can they be so unprofitable year after year? How about a picture of where all the money is going including payments to Board and upper management down to the janitor. When you sell something for a dollar but it cost a dollar and twenty cents to sell it how many customers do you want? There way of thinking is if we have a ten million customers maybe we can cut our cost down to a dollar and five cents and only loose a nickle on each sell (and because we are bringing in so many new customers we can give management a raise).

[FUNMAN]

Earnings Call Transcript - USAT Inc. (USAT) CEO Donald Layden on Q2 Fiscal Year 2020 Results - Earnings Call Transcript

Feb. 19, 2020 2:10 PM ET | About: USA Technologies, Inc. (USAT), USATP
FQ2: 02-18-20 Earnings Summary

https://seekingalpha.com/article/4325325-usa-technologies-inc-usat-ceo-donald-layden-on-q2-fiscal-year-2020-results-earnings-call?part=single

Comments about Hudson:

Let me comment quickly on the ongoing proxy contest with Hudson Executive Capital. The Board has remained steadfast in their position, but if there is going to be a change in the majority of the Board, then USAT shareholders deserve a premium for their shares to allow for change of control. Individual shareholders has their own motivation on actions they take and our Board is going to factor these motivations as we make decisions that benefits all of our shareholders.

For example, we have been advised by legal counsel at Hudson Executive Capital has triggered a provision of Pennsylvania laws in their decision to attempt and take control of the USAT Board.

As a result, Hudson is required to disgorge or surrender to USAT any profits on a sale of their shares in this company for a period of 18 months after triggering the obligation under the statute, including as a result of an M&A transaction. We believe any of those profits belong to USAT and so advised Hudson last November.

Surprisingly, Hudson never addressed this matter in any of the multiple proxy materials they have been circulating for the past three months. Obviously, an assessment of the likelihood of recovery in these profits is among many factors our Board has used in assessing Hudson’s decision. Regardless of this ongoing issue, and as demonstrated by today’s results, we are focused on improving the performance of our business and capturing the significant opportunities in our space.

Donald Layden

From the Q & A:

George Sutton

Got you. You mentioned in your prepared comments in a change of control that you felt shareholders deserved a premium for their shares, which I am not sure I fully understand if it’s simply a Board for Board changeover.

When you say premium for their shares, there has been speculation of a potential sale of the business which would not necessarily be good from these current levels. So just want to make sure I understood the thoughts behind the comment.

Donald Layden

I am not sure I understand the question. I think we’ve been pretty consistent in saying that, if there is going to be a wholesale change in the composition of the Board or a majority of the Board is replaced or removed that in a transaction like that, the – normally, you would see a control premium paid that that would happen as a result of an acquisition.

That’s not that Hudson is proposing. Hudson is simply proposing replacing the Board without paying to acquire the company.

EPS of $-0.06274 misses by $-0.04 Revenue of $44.05M (28.03% Y/Y) beats by $2.78M

USA Technologies, Inc. (OTC:USAT) Q2 2020 Earnings Conference Call February 19, 2020 8:30 AM ET

Company Participants

Monica Gould - Investor Relations

Donald Layden - Executive Chairman and Interim Chief Executive Officer

Glen Goold - Interim Chief Financial Officer

Conference Call Participants

Jaeson Schmidt - Lake Street Capital Markets

Bob Napoli - William Blair

George Sutton - Craig-Hallum Capital Group

Mike Latimore - Northland Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the USA Technologies Second Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand your conference over to your speaker today, Monica Gould, Investor Relations for USA Technologies. Please go ahead.

Monica Gould

Thank you, and good morning, everyone. Welcome to the USA Technologies’ second quarter fiscal 2020 earnings conference call. With me on the call this morning are, Don Layden, Chairman and Interim Chief Executive Officer and Glen Goold, Interim 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 last night.

Listeners are cautioned not to place undue reliance on any such forward-looking statements, which reflects 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 the reconciliation between these non-GAAP financial measures, as well as the most comparable GAAP financial measures can be found in our press release issued last night, 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 Don Layden. Don?

Donald Layden

Thank you, Monica. I would like to begin with a review of our progress on the strategic objectives that I outlined on our fiscal Q1 call. I will then review our updated guidance for fiscal 2020, provide an overview of our growth strategy, and then discuss our progress in regaining our NASDAQ listing.

I’ll then turn the call over to Glen for a more detailed review of our financials before turning the call back to the operator for the question-and-answer session.

We are making consistent and good progress against the strategic objectives we set out last quarter. On our fiscal Q1 earnings call, you may remember that I noted that we launched a series of initiatives to reduce our SG&A expense by an annualized $8 million.

I am pleased to report that we have achieved this goal through the following actions: First, we are in the final stages of negotiating a new transaction processing agreement, which will result in savings of approximately $3.5 million in the first year and total cost savings of approximately $22 million projected over the next five years. This new agreement reduces our annualized transaction processing cost from $6.8 million to $3 million.

Second, we continue to reduce our dependence on one of our third-party distributors, rationalizing our distribution channels and eliminating a gateway solutions provider by rerouting transactions through our own gateway resulting in annualized savings of $1.7 million.

Third, our efforts to better manage our equipment supply chain are beginning to take hold with our equipment margins showing early signs of improvement.

Fourth, we have reduced our sales and use tax accrual by over $1 million during the second quarter of the current fiscal year and expect we will see a further significant reduction in the $18 million reserve we established in the fourth quarter of 2019. Most of this recovery comes from determining that our customers either self report or they are exempts from the sales and use tax obligation.

Next, we have negotiated new agreements with professional service providers resulting in annualized savings in excess of $1.5 million. And finally, in addition to these larger-scale efforts, we also continue to rationalize our operating cost in smaller ways by closing offices, and eliminating consultants and other non-essential expenses.

To wrap that up, in combination, these initiatives are designed to allow us achieve a 30% EBITDA margin on a net revenue basis after excluding interchange costs. Our annualized interchange costs are about $80 million. Given our consistent progress we believe that we are in a position to achieve that target in the next 18 months.

Our continued strong performance gives us confidence to confirm our guidance on connections and to increase our guidance on revenue from $165 million to $175 million to $175 million to $185 million. As we noted in our earnings press release, which was issued yesterday, we do not believe that we will be able to meet our previous guidance of $10 million to $11 million in adjusted EBITDA.

This guidance was set assuming we would take out all non-recurring expenses as part of adjusted EBITDA calculation. We have calculated what our normalized runrate would look like after eliminating all non-recurring expenses from the company. Those adjustments resulted in an expense runrate of approximately $12.5 million per quarter.

Glen will provide more details regarding this runrate in his remarks. Glen will also walk you through the specific adjustments that impacted our prior period financials resulting in favorable adjustments to revenue and expense for those periods.

We discover the errors in the ordinary course of closing the financial statements for this quarter and the adjustments all relate to weaknesses in our processes that we have earlier identified. We were able to complete all the revisions within the expansion period prescribed by the SEC for filing our Form 10-Q.

I now like to take this opportunity to provide you with a more comprehensive view of our growth strategy. As you know, our mission is to be the leading integrated software solutions and payments provider for unattended retail markets that have a distributed network of machines and require regular monitoring and servicing.

Our go-to-market strategy is to advance our sales efforts as an integrated software and payment solution provider that monetizes software by enabling digital and card payments by consumers. We believe this strategy will allow us to continue to report year-over-year revenue growth in excess of 25% with a target of becoming a $500 million revenue business in five years.

Four building blocks of that strategy as follows: First, continue to deploy the full suite of services of Seed services with our existing vending customers. We are currently about 50% deployed with one or more Seed services being utilized across our customer connections.

About half of our customer base is currently addressable for the Seed solution and we are working on expanding the applicability of the products for further penetration into the long tail of our customer base such as through self-service onboarding.

Second, we intend to expand the categories where our solution is relevant, especially in markets where the average ticket size is higher, our existing customers on the business in these markets and the underlying growth rate of those markets where we positively impacted by a cashless and software solutions.

Importantly, we are extending our focus on adjacent markets where the product development investment is small relative to the market opportunities. In other words, we are focused on selling the integrated software solution we have already built. These markets include, laundry and amusement, where we now have sales people and marketing support focused on those opportunities.

Third, we want to expand our international efforts beyond our current business in Australia, Mexico, and Canada to other markets where there is a significant deployment of vending machines that lack an integrated software solution with robust capabilities. Japan, a market with more than 4 million vending machines is high on our list for international expansion.

And fourth, we continue to be focused on selling to our existing 19,000 customers, as they deploy additional machines or to replace competitors and to sell additional components of our solutions to those companies – those customers.

We are confident in our ability to execute on this growth strategy which as I just mentioned, we believe will allow us to continue 25% plus top-line growth with a target of being a $500 million revenue business in five years.

Let me now turn to some other updates. We remain focused on regaining our NASDAQ listing, while many of you may have seen NASDAQ’s recent announcement regarding our delisting, this announcement was in fact related to our earlier failure to timely file our SEC reports and was independent of our recent NASDAQ listing application.

We filed a new application with NASDAQ on December 19, 2019, received comments on January 13, 2020 and responded to those comments on January 23rd. The staffs – the application is still pending and the company continues to cooperate with the NASDAQ staffs’ review. While this is pending, we continue to review options with our advisors including the potential for listing on an alternative exchange.

Like many companies, we are monitoring the coronavirus and its potential impact on our growth targets. Specifically, our focus is on whether our third-party equipment manufacturers will be forced to delay shipments of some cashless readers. In addition, several of us had previously planned to attend the major Asian Vending Machine Operators Trade Show scheduled for the first week of March in Guangzhou, China. The tradeshow was postponed due to the virus and we are making alternative arrangements to meet with potential partners and distributors.

As I said, we continue to monitor, but at this stage, we expect as a postponement of the trade show is likely to delay the international expansion efforts that I mentioned a few moments ago. During this quarter, we again maintained our enviable track record of zero customer losses.

However, during the period when were unable to deliver current financial statements to the market, we replaced on a procurement hold by several large customers. Those customers slowed or stopped new sales but does not replace existing products.

I am pleased to report that the large regarded customers have returned to purchasing, now that our financial performance and balance sheet warranted listing this hold. But the uncertainty caused by the proxy contest remains a challenge for some of our customers, our ability to manage through these customer concerns reaffirms our Board’s view that the entire financing was a necessary step to enable the company to continue to grow.

I think it’s important to understand the events that led to the decision to execute the entire financing. In late September and October, 2019, as part of its review of our financial position and before the filing of our 10-K, our auditor BDO discussed with us the possibility of including a going concern qualification to their audit opinion.

The prospect of this going concern qualification through BDO which could have resulted among other things in significant sales of customer losses was laid against the timeliness to cost for the financing and the Board determined that the financing was the better alternative. The financing improved our balance sheet and we continue to look for ways to improve liquidity as we contemplated sale of lease receivables in this quarter of approximately $12 million.

When I took over as Interim CEO, I said I would push the company forward, set a clear strategic path for success and rationalize our cost structure to improve our operating results. We have made significant progress against those performance indicators over the past four months and we plan to continue to execute against that plan.

Our customers and our employees are responding favorably to the changes. Our shareholders told me very explicitly that they wanted to see improved results. We have delivered improved operating results balancing growth and expense rationalization while maintaining strong customer retention.

I believe that those improvements will continue. The Board and management team remains committed to continuing the fresh start we began after getting back on file in October. Progress is good and the company is improving every day.

Let me comment quickly on the ongoing proxy contest with Hudson Executive Capital. The Board has remained steadfast in their position, but if there is going to be a change in the majority of the Board, then USAT shareholders deserve a premium for their shares to allow for change of control. Individual shareholders has their own motivation on actions they take and our Board is going to factor these motivations as we make decisions that benefits all of our shareholders.

For example, we have been advised by legal counsel at Hudson Executive Capital has triggered a provision of Pennsylvania laws in their decision to attempt and take control of the USAT Board.

As a result, Hudson is required to disgorge or surrender to USAT any profits on a sale of their shares in this company for a period of 18 months after triggering the obligation under the statute, including as a result of an M&A transaction. We believe any of those profits belong to USAT and so advised Hudson last November.

Surprisingly, Hudson never addressed this matter in any of the multiple proxy materials they have been circulating for the past three months. Obviously, an assessment of the likelihood of recovery in these profits is among many factors our Board has used in assessing Hudson’s decision. Regardless of this ongoing issue, and as demonstrated by today’s results, we are focused on improving the performance of our business and capturing the significant opportunities in our space.

To that end and before I turn the call over to Glen, I want to commend the word of USA Technologies’ employees who remain as always focused and committed to our mission and to our customers. Today’s strong performance is a testament to them.

The Board and I are pleased with the overall progress we are making and are confident that we will continue to successfully execute on our initiatives and create long-term value for our shareholders.

And with that, I would now like to turn the call over to Glen to review our financials in more detail.

Glen Goold

Thank you, Don and good morning, everyone. I’ll review our financial and operating performance for the second quarter of our fiscal year and then conclude with our update of our full year that Don has summarized. We are pleased to deliver another quarter of record revenue.

As Don mentioned, total revenue grew 27.7% year-over-year and 1.6% sequentially to $44.1 million. License and transaction fee revenue increased 20.3% year-over-year to $35.8 million and accounted for 81.2% of our total revenue in the second fiscal quarter. Equipment revenue increased 74.6% year-over-year to $8.3 million.

We continue to make strides in growing our connection base and customer count, as well as sell a diversified suite of services to an expanding customer base. We added 40,000 net new connections in the second quarter bringing our total to over 1.25 million connections, up 16% to the – compared to the same quarter last year.

We also added 900 new customers ending the quarter with a total of 21,200 customers, an increase of 20% compared to 17,650 customers in the same quarter last year.

Our total gross margin increased to 29% from 27.4% in the second quarter of last fiscal year. The increase was driven by improvements in both our lease and transaction services margin, as well as our equipment margin.

Our license and transaction margin increased from – to 36.8% from 34.5% in the same period last year driven primarily by product mix. Looking forward, we look to expect our L&T margins to remain in the same 35% to 38% range.

Our equipment margin improved to a negative 5% from a negative 17.6% in the same period last year reflecting our improvements in our supply chain. As we have mentioned, we expect our equipment margin to be in the breakeven to low negative single-digits range going forward.

Adjusted EBITDA declined to a negative $2.3 million mark from breakeven in the same period in the prior year due primarily to increased cost of our restatement and audit activities.

SG&A for the second quarter was 18.7% - I am sorry, $18.7 million or 42.5% of revenue compared to $10.9 million or 31.7% of revenue over the prior period. Our SG&A expenses increased year-over-year primarily due to the increase in professional services, service costs related to the company’s restatement and audit activities and an increase in one-time employment related costs.

As Don mentioned, we have a number of initiatives in progress to reduce our operating expenses. As we come through our restatement and with the full year audit, we expect our professional services cost to decline in the coming months.

For reference, we incurred $4.7 million in these professional services cost in Q2. By the end of fiscal 2020, we expect these costs to decline to under $1 million per quarter. In Q2, we incurred $3.2 million in employment-related costs related to compensation and severance. We expect these costs to decline to under $1 million per quarter going forward.

Finally, we have other budgetary savings we anticipate through management of travel and other expenses that are not pertinent to the company’s growth strategy. We expect an additional $700,000 in quarterly savings from those reductions.

So difficult to predict with certainty. We anticipate that we will reduce our SG&A expense to a runrate of approximately $12.5 million per quarter as Don has mentioned. If we are able to eliminate these non-recurring expenses by our fourth quarter of fiscal year 2020, we expect our normalized adjusted EBITDA to be approximately $3.5 million.

Non-GAAP net loss was $4 million or negative $0.06 per share, compared to non-GAAP net loss of $1.6 million or negative $0.03 per share at the same period last year. Our cash balance at the end of the second quarter were $37.5 million, compared to $25.5 million at the end of the prior quarter. The increase in cash was primarily driven by the proceeds from our transactions that Don walked through.

Net working capital totaled $17.6 million at the end of the second quarter, compared to $15.7 million at the end of the second quarter of last year.

During our Q2 close, as Don mentioned, we identified a number of adjustments that impacted prior period financial statements. We have reported those adjustments to you in our filings posted yesterday. The adjustments made to both fiscal year 2019 and quarter one of fiscal year 2020 are favorable, in other words, they increased operating income.

We don’t believe that the adjustments are material to our fiscal year 2019 financial statements, but the adjustments were large enough that we did feel it was appropriate to restate our quarter one fiscal year 2020 filing which has now been done.

These adjustments primarily consists of the following: One, an incorrect allocation of transaction price between equipment revenues and license and transaction fees in connection with a customer contract which resulted in an inappropriate deferral of equipment revenues on hardware devices shipped during the three months ended June 30, 2019 and the three months ended September 30, 2019.

And secondly, inaccurate accounting treatment of the leasing and rental contract of our wholly-owned subsidiary, Cantaloupe Systems Inc., relating primarily to the fiscal year ended June 30, 2019 and the three months ended September 30, 2019. The cumulative impact of these adjustments resulted in a $2 million increase in operating income in fiscal year 2019 and a $1.6 million increase in operating income in Q1 of the full year 2020.

We continue to enhance our control environment and work to remediate our material weakness as we reported to you in our latest Form 10-K filing.

As Don mentioned, we are updating our guidance for fiscal year 2020, based on our strong license and transaction fee growth in our first half of fiscal year 2020. We now expect our fiscal year 2020 revenue to be in the range of $175 million to $185 million and we continue to expect to add 190,000 net new connections to our service.

Our reported Q2 adjusted EBITDA was negative $2.3 million and negative $8 million for the first half of fiscal 2020. We will not be able to meet our previous guidance of $10 million of annualized adjusted EBITDA.

However, as Don mentioned, if we were able to reduce our non-recurring expenses as anticipated, we expect we would be at a normalized adjusted EBITDA of approximately $3.5 million by the fourth quarter of fiscal year 2020.

If we were to take out all of the non-recurring expenses I’ve described, our Q2 adjusted EBITDA would have been positive $1.2 million and our first half of fiscal year 2020 adjusted EBITDA would have been positive $1.1 million.

To wrap up, we believe that our scalable financial model, driven by our recurring revenue streams, improved financial position and enhanced compliance controls position, position us very well to capitalize on the growth opportunities ahead of us as we execute on the strategic plan that Don discussed in his remarks.

We are working very hard and focused on driving our business strategic initiatives, improving our control environment and driving top-line and bottom-line improvements in our business.

This concludes our financial updates. We would now be happy to take your questions and I’ll turn it over to the operator, please provide instructions for the Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jaeson Schmidt from Lake Street. Your line is open.

Jaeson Schmidt

Hey guys. Thanks for taking my questions. I just want to follow-up on the commentary on operating expenses. What sort of timeline do you expect to be able to achieve that $12.5 million in SG&A?

Glen Goold

We will be tapering off over the next six months. Some of that will happen immediately through the third quarter. It will not all happen in the third quarter, but we hope that all of the improvements will be able to be implemented by the fourth quarter.

Jaeson Schmidt

Okay. And then, I know you outlined a number of cost savings initiatives. But, do you anticipate needing to the sales team in order to address sort of these new growth opportunities?

Donald Layden

I would expect that we would continue to evaluate the size of the team based on the opportunities that we – that are presented to us. Right now, we believe that the sales team is probably sufficient to address the market opportunities we have.

But we are in the process frankly, of making that determination right now as to whether we should add additional sales resources and I suspect it during the course over the next twelve months, we probably will add additional sales resources to address the opportunities we see in the markets.

Jaeson Schmidt

Okay. And then, just a last one for me and I’ll jump back in the queue. Wondering if you could comment if you think the Ingenico acquisition will have any impact on the business.

Donald Layden

We don’t – in the short run, we don’t believe that it will have any impact at all. Our relationship with Ingenico has been very modest, almost not existed over the course of the last year to year-and-a-half. To the extent the acquisition causes the change in their direction, there may be an opportunity for us to continue to do work with them. But at the moment, it really has almost no impacts to us at all.

Jaeson Schmidt

Okay. Thanks a lot guys.

Operator

Your next question comes from the line of Bob Napoli from William Blair. Your line is open.

Bob Napoli

Good morning. Thank you for the opportunity to ask a question. First question is, just Don, I appreciate the guidance or the targets, the five year revenue target and the EBITDA margin target. But just, adding $500 million revenue runrate in five years, how much of that would be interchange?

Because your target – EBITDA target is – that 30% is net of interchange at net revenue corrects. So would that be – what would that revenue be approximately in your target, net of interchange?

Donald Layden

Bob, I hope is that, the networks would reduce their interchange burden on - further reduce the interchange burden on a microcap space. But so far, that seems to not be happening.

So, right now, it would be really be a linear increase in the interchange costs, which would mean that, if interchange today is about $80 million of our total, I would expect that it would be $220 million roughly at $500 million, maybe a little bit more than that.

Bob Napoli

Okay. And then, is that 30% EBITDA margin target on that net number, what is the trajectory to get there? I mean, what would you hope to achieve in fiscal 2021 and then, what is the timing to get to that 30% number?

Donald Layden

I believe that by the fourth quarter of the next fiscal year, our runrate will be at the $30 million EBITDA target.

Bob Napoli

I am sorry, then the fourth quarter of next year, you will be at a runrate of $30 million or EBITDA or at 30% margin?

Donald Layden

Oh, I am sorry. Yes, so, in 18 months, I expect the margin to be 30%.

Bob Napoli

Okay.

Donald Layden

So, the margin in the fourth quarter of our next fiscal year should be at that number.

Bob Napoli

Okay. And – okay. Thank you that’s very helpful. And then, I guess, just on the growth confidence in that 25% plus revenue growth, what kind of visibility do you have into that as we sit here today? And would that growth be – the growth of – with L&T still be around 8% of that revenue?

Donald Layden

Yes, I think their visibility to that growth rate is probably in the 75% to 80% range and I would expect that that the mix to L&T would continue at about that 80% number.

Bob Napoli

Okay. And just last question. In that – as you are looking at the growth in 2021 and 2022, how much of that is going to come from some of the initiatives that you laid out to the adjacent markets, laundry, amusement, international? What is – are you seeing contribution in the near-term from some of those initiatives?

Donald Layden

Yes, the good news about our growth strategy is that, not all the things that I outlined has to happen in short order for us to be able to continue to hit that 25% number. And so, I suspect that our international markets would be a very small contribution to that number. The adjacent markets, our hope is that that continues to be a driver of growth.

As you know, we have previously reported, we had good opportunity in the amusement space that we announced in the last quarter and then we continue to deliver on. And – but honestly, the underlying vending markets, we believe will continue to grow strongly and will make up the vast majority of the growth that we are forecasting over the next year.

Bob Napoli

Thank you. And last question for me is, the great growth in volume and transactions, good revenue, appreciate the increase in the revenue guide. The revenue per transaction or the revenue yield went down, is that a mix? Did you have a very large customer? Who drove the lower revenue per transaction or revenue yield?

Glen Goold

We did deliver on a large customer transaction over both Q1 and Q2 that had a slight impact on revenue per transaction. But if you look over the last year, this was the first quarter where it dipped a little. We are showing larger ticket prices per transaction.

So, the trend over the last year has been slightly up. But you are right, it did dipped very slightly this quarter compared to the same quarter of previous year. A large portion of that is our average ticket price that we look at, but over the last year, that number has been increasing, I think quarter of it - a little bit of an anomaly.

Bob Napoli

Thank you.

Operator

Your next question comes from the line of George Sutton from Craig-Hallum. Your line is now open.

George Sutton

Thank you. I have always looked at the U.S. market as a fairly open-ended growth opportunity with an explosion of unattended used cases and you are going to your existing customers to penetrate them.

Thus I am surprised to hear about Japan being a potential strategy. Actually having lived in Japan, it’s a very developed, very competitive market. So I am curious how you would be going after that market? What you would be giving up in the U.S. market to do so?

Donald Layden

We don’t think we have to give anything up in the U.S. market. We think on a focused effort on delivering our software solution in the Japanese market would be very attractive. You are right, Japan is a very well developed vending market with a lot of vending machines. It has a very distributed group of payments providers.

And so our strategy to go to Japan is A, to find the right partner to help us move into that market, and B, to deliver the software solution that we already have into the market, because we believe that the Japanese operators would find the kind of benefits that the Seed software provides in the U.S. to be applicable to the Japanese markets.

And that’s based on the work that we have done today and based on the discussions that we’ve had with potential partners.

George Sutton

Got you. You mentioned in your prepared comments in a change of control that you felt shareholders deserved a premium for their shares, which I am not sure I fully understand if it’s simply a Board for Board changeover.

When you say premium for their shares, there has been speculation of a potential sale of the business which would not necessarily be good from these current levels. So just want to make sure I understood the thoughts behind the comment.

Donald Layden

I am not sure I understand the question. I think we’ve been pretty consistent in saying that, if there is going to be a wholesale change in the composition of the Board or a majority of the Board is replaced or removed that in a transaction like that, the – normally, you would see a control premium paid that that would happen as a result of an acquisition.

That’s not that Hudson is proposing. Hudson is simply proposing replacing the Board without paying to acquire the company.

Operator

Your next question comes from the line of Mike Latimore from Northland Capital. Your line is open.

Mike Latimore

All right. Great. Thanks. So just on the OpEx guidance, I guess, you had $18.7 million of SG&A in the quarter. Given your comments, it sounds like that $18.7 million should be $12.5 million in the first quarter of fiscal 2021, is that’s the right way to think about it?

Glen Goold

That is correct.

Mike Latimore

Okay. Got it. And then, the $3.5 million of EBITDA comment, was that would be for the full year fiscal 2020 excluding these non-recurring?

Glen Goold

No, that was for Q4 alone. So…

Mike Latimore

4Q alone? Okay. Got it. Okay.

Glen Goold

That was intended to reflect what we think the kind of runrate EBITDA by quarter would be if we are able to achieve the $12.5 million OpEx mark.

Mike Latimore

Okay. I am sorry, if OpEx was $12.5 million in the fourth quarter, EBITDA would be $3.5 million, is the idea?

Glen Goold

That’s correct.

Mike Latimore

Okay. And then, it looks like your transaction volume growth really accelerated in the quarter to mid 30% range from low 20% range last couple quarters. What caused that volume growth?

Glen Goold

It’s hard for me to speculate on what the – what’s causing the number of transactions to go up. As part of the growth of the company, we continue to add connections which certainly drives volume of transactions. That’s certainly one component of it. Other than that, the customer use of our platform assets in place.

Mike Latimore

Okay. It was a big acceleration, sorry, just kind of curious. So, but that transaction volume, I mean, there is no reason why it would decline sequentially right?

Glen Goold

I wouldn’t expect so, no.

Mike Latimore

Okay. And you talked about product mix… yes, go ahead.

Glen Goold

Similar to our revenue line, as we add connections our revenue used to go up, it’s kind of linear that way.

Mike Latimore

Okay. And you talked about a product mix effect in gross margin. Can you just elaborate on that a little bit?

Glen Goold

Yes, yes. As I look at it, it’s just a comparison and it fluctuates. That’s why it’s a little bit of a moving target as we give guidance to 35% to 40% of margins for our transaction services. It’s somewhat dependent on the combination of our service fees and the transaction processing fees driven by volume and that product mix impacts the margin that we see. So, that’s the product.

Mike Latimore

And just last, on the vending management solution or Seed, how is that performing relative to cashless?

Glen Goold

We think it’s performing very well. As we look at our strategy to integrate the Cantaloupe feed software into our installed network or think for about 50% there, we have work to do to address that additional white space. That’s in process. But the integration is going very, very well and it’s very, very well received by our customers.

Mike Latimore

Is it growing at the same rate as license and transaction revenue or above or below that?

Glen Goold

I would say that is probably not quite as – quite the curve that the transaction revenue is growing. But it absolutely is growing. It’s a significant part of our strategy to continue to add the software component to our network. So, it absolutely is growing in a big part of our strategic growth that we envision for the future.

Mike Latimore

And just last kind of housekeeping, what should that comp be on a quarterly basis going forward?

Glen Goold

We think, on a quarterly basis, it should be in the $300,000 to $400,000 range.

Mike Latimore

Okay, great. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Bob Napoli from William Blair. Your line is open.

Bob Napoli

Thank you. Couple more I guess. Don, the 30% margin target in 18 months, I appreciate that. But what should be – I mean, I would think that you have some good operating leverage in this business. What are your thoughts on kind of the trajectory of margins once you get to that level over the next several years?

Is this something where margin should improve 100 basis points a year? Or if you are growing it 20%? Or is that conservative? So, just some thoughts on the operating margin leverage over the medium to long-term.

Donald Layden

Bob, thanks for the question. For payments companies, what has happened historically and I think as we try to benchmark ourselves against other payments companies, and software companies that monetize their software through a payments network, there has been a range of EBITDA margins, once you hit 30%, which I think is largely a target benchmark for most payments companies.

You see the range move up to about 33%, 34%, 35% to fairly narrow range. And at that level, you begin to see some market-based pressure to share some of the profitability through reduced pricing from customers.

And so, I think that there is a natural hedge against the growth of that margin based on the competitive market realities and the expectation the customers have, but some of that will be shared with them.

Bob Napoli

Okay. Yes, we are still seeing margins go up at some of the big – so there maybe some sharing. But they are still getting – you are still seeing operating leverage even at the very massive payments companies…

Donald Layden

And the advantage they have there and one of the things that we are focused on in our growth strategy is that they have a higher ticket price per transaction. We are in the micropayment space.

Bob Napoli

Yes.

Donald Layden

So, it is harder to drive that operating leverage because of the small dollar value of the transactions. If we are successful, as we believe we will be over time, moving into markets with higher ticket prices and therefore moving our average tickets up from less than $2 per transaction that we currently sit.

Then you might see some of that improvements that you are talking about. In a micropayment space it is much more challenging to do that.

Bob Napoli

Understood. And within – what is your expectation for equipment margins and L&T margins? So, gross margins over the next few years?

Donald Layden

Yes, I think that the way that we are required to account for that and you are going to see the equipment margin come to a natural point of breakeven or a slight loss, because the accounting rules require us to reallocate our transaction agreements. So that our equipment is valued at fair market value. The – so one way or another, I think you are going to see the equipment margins get back to some level of breakeven.

I think that our supply chain initiatives will further drive some value into that and should further improve that margin. But I think you are looking at marginal improvements in that margin. Our real focus is to drive recurring revenue through our software platform, monetized by payments.

And the equipment at its current pricing doesn’t really drive, we think the long-term value of the business. But it is an important enabler for us to drive connections and to drive that recurring revenue stream which is what we intend to continue to focus on.

Bob Napoli

And the L&T margins?

Glen Goold

Bob, you might find this interesting. If you apply the $3.5 million a year of savings that we anticipate through our processing improvement that we are negotiating, the L&T margin for the first half of 2020 we reported it 36.5%. If you roll that 3.5% savings into that, it becomes 38.6%, $3.5 million, yes, if you roll out those savings into the results, our margin will be 38.6%.

I think approaching the 40% level we have previously been discussing with our shareholder base is certainly a good mark to think about of where we are heading as we improve the costing of our structure and implement the processing change that we will be, I think that 40% mark is a good way to think about it.

Bob Napoli

Okay. And just on Cantaloupe, the cross-sell of Cantaloupe was a big focus when that company was acquired a few years ago. How is the cross-sell progressing?

Glen Goold

As I mentioned, it’s about 50%.

Bob Napoli

Okay.

Glen Goold

We have strategic marks in place to look at the right space on that side of our business and attack it. It is a certainly a growth strategy that we look at our way to improve and increase our software deployment. So, it is something that we are working on right now. It’s about 50%, more to come.

Bob Napoli

And maybe just one last one, I guess, just Don, you have been there as CEO now a few months, what if you - what are your thoughts? I mean, what has surprised you? Do you need to add to your team? You’ve been around the payments industry a long time. There are senior executives that you want to add to the team to drive growth. And are there – I know it’s – you’ve gone through a big process here still driving good growth. But are there add-on M&A thoughts over the long to medium-term? That’s a number of questions.

Donald Layden

Yes, I am used to that. I have no plans to add anybody else to the management team. I think that, we have a strong team. We have diversified the talent pool by adding some talent from Denver in addition to the strong talent we already have in Malvern and in New Orleans. That has improved I think the mix of talent that we have in an appropriate way.

The – we don’t have an M&A speculation. But this is a market that has a lot of competitors and I think, like any other payment market, there is going to probably be some consolidation in that market and there is going to be I think a fair amount of competition in the market as well. We are really focused on our go-to-market strategy on delivering a software solution that’s monetized through the payment networks.

There are other folks who have a very different go-to-market strategy and where our software solution embedded in their hardware or in their payment capabilities could be very attractive. And from a commercial perspective, we are absolutely looking at every one of those potential transactions to build out our base of vending and other unattended retail outlets with our software solutions, because we believe it’s the strongest, most robust software solution that exists in the marketplace for unattended retail.

Bob Napoli

All right. Thank you. Appreciate it.

Operator

There are no further questions at this time. I’ll turn the call back over to Don Layden for closing remarks.

Donald Layden

Yes. Thanks very much for participating today in our earnings call. Again, I want to really highlight the hard work and dedication of our employees. They really are the ones who delivered these results this quarter and will continue to deliver the results as we go forward. Thanks very much.

Operator

This concludes today’s conference call. You may now disconnect.