Ladies and gentlemen, thank you for standing by, and welcome to the USA Technologies Q2 F iscal Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press *1 on your telephone. If you require any further assistance, please press *0 . I would now like to hand your conference over to your speaker today, Monica Gould, Investor Relations for USA Technologies. Please go ahead.
Thank you, and good morning, everyone. Welcome to the USA Technologies Q2 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 discussions 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 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 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. With that, I'd now like to turn the call over to Don Layden. Don?
Thank you, Monica. I'd 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're 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'm 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 Q2 of the current fiscal year and expect that we will see a further significant reduction in the $18 million reserve we established in the Q4 of 2019. Most of this recovery comes from determining that our customers either self-report or they are exempt 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. Finally, in addition to these larger-scale efforts, we also continue to rationalize our operating costs 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 to 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-$175 million, to $175 million-$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-$11 million in adjusted EBITDA. This guidance was set assuming we would take out all non-recurring expenses as part of our adjusted EBITDA calculation.
We have calculated what our normalized run rate would look like after eliminating all non-recurring expenses from the company. Those adjustments resulted in an expense run rate of approximately $12.5 million per quarter. Glen will provide more details regarding this run rate 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 discovered 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 of the revisions within the extension period prescribed by the SEC for filing our Form 10-Q. I'd 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 payment 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 record year-over-year revenue growth in excess of 25%, with a target of becoming a $500 million revenue business in five years.
The four building blocks of that strategy follow. First, continue to deploy the full suite 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 product 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 have a business in these markets, and the underlying growth rate of those markets will be positively impacted by a cashless and software solution.
Importantly, we are extending our focus on adjacent markets where the product development investment is small relative to the market opportunity. 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 salespeople 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 four million vending machines, is high on our list for international expansion. Fourth, we continue to be focused on selling to our existing 19,000 customers as they deploy additional machines or to replace competitors and sell additional components of our solutions to 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 19th, 2019, received comments on January 13, 2020, and responded to those comments on January 23rd.
The application is still pending, and the company continues to cooperate with the Nasdaq staff's 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 manufacturer will be forced to delay shipments of some cashless readers. In addition, several of us had previously planned to attend a major Asian vending machine operators trade show scheduled for the first week of March in Guangzhou, China. The trade show 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 that the 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 we were unable to deliver current financial statements to the market, we were placed on a procurement hold by several large customers. Those customers slowed or stopped new sales but did not replace existing products. I am pleased to report that the large majority of customers have returned to purchasing now that our financial performance and balance sheet warranted lifting this hold. 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 Antara 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 Antara financing. In late September and October 2019, as part of its review of our financial position, and before the filing of our Form 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 for BDO, which could have resulted, among other things, in significant sales and customer losses, was weighed against the timeliness and cost of 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 contemplate a 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 that 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 a change of control. Individual shareholders have their own motivation actions they take, and our board has tried to factor these motivations as we make decisions that benefit all of our shareholders.
For example, we have been advised by legal counsel that Hudson Executive Capital has triggered a provision of Pennsylvania law in their decision to attempt to take control of the USAT board. As a result, Hudson is required to disgorge or surrender to USAT any profits on the sale of their shares in the 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 recovering these profits is among many factors our board has used in assessing Hudson's position.
Regardless of this ongoing issue, 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, before I turn the call over to Glen, I want to commend the work of our 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 shareholders. With that, I would now like to turn the call over to Glen to review our financials in more detail.
Thank you, Don, and good morning, everyone. I'll review our financial and operating performance for the Q2 of our fiscal year, and then conclude with our update of our full year that Don has summarized. We're 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 Q2 , bringing our total to over 1.25 million connections, up 16% 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 Q2 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 to 36.8% from 34.5% in the same period last year, driven primarily by product mix. Looking forward, we expect our LNP margins to remain in the same 35%-40% range.
Our equipment margin improved to -5% from -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 break-even to low negative single-digits range going forward. adjusted EBITDA declined to a - $2.3 million mark from break-even in the same period in the prior year, due primarily to increased cost of our restatement and audit activities. SG&A for the Q2 was $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 service costs related to the company's restatements 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 multiple-year audit, we expect our professional services costs to decline in the coming months. For reference, we incurred $4.7 million in these professional services costs 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. 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. Though difficult to predict with certainty, we anticipate that we will reduce our SG&A expense to a run rate of approximately $12.5 million per quarter, as Don has mentioned. If we're able to eliminate these non-recurring expenses by our Q4 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 - $0.03 per share of the same period last year. Our cash balance at the end of the Q2 was $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 the Antara transactions that Don walked through.
Net working capital totaled $17.6 million at the end of the Q2 , compared to $15.7 million at the end of the Q2 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 Q 1 of fiscal year 2020 are favorable. In other words, they increase operating income. We do not 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 Q1 fiscal year 2020 filing, which has now been done.
These adjustments primarily consist of the following. One, a n incorrect allocation of transaction price between equipment revenues and license and transaction fees in connection with a customer contract, which resulted in the 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. Secondly, inaccurate accounting treatment of the leasing 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 fiscal year 2020.
We continue to enhance our control environment and work to remediate our material weaknesses 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-$185 million, and we continue to expect to add 190,000 net new connections to our service.
Our reported Q2 adjusted EBITDA was - $2.3 million and - $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 theQ4 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've been positive $1.1 million.
To wrap up, we believe that our scalable financial model, driven by our recurring revenue stream, improved financial position, and enhanced compliance controls 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 update. We would now be happy to take your questions, I'll turn it over to the operator. Please provide instructions for the Q&A session.
At this time, I'd like to remind everyone, in order to ask a question, please press * 1 on your telephone keypad. Your first question comes from the line of Jaeson Schmidt from Lake Street. Your line is open.
Hey, guys. Thanks for taking my questions. 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?
We will be tapering off over the next six months. Some of that will happen immediately through the Q3 . It will not all happen in the Q3 , but we hope that all of the improvements will be able to be implemented by the Q4 .
Okay. I know you outlined a number of cost savings initiatives, but do you anticipate needing to add to the sales team in order to address these new growth opportunities?
I would expect that we would continue to evaluate the size of the team based on the opportunities 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're in the process, frankly, of making that determination right now as to whether we should add additional sales resources. And I suspect that during the course of the next 12 months, we probably will add additional sales resources to address the opportunities we see in the market.
Okay. Just the last one from me, and I'll jump back in the queue. I'm wondering if you could comment if you think the Ingenico acquisition will have any impact on the business?
In the short run, we don't believe that it will have any impact at all. Our relationship with Ingenico has been very modest to almost nonexistent over the course of the last year and a half. To the extent the acquisition causes a 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 impact to us at all.
Okay. Thanks a lot, guys.
Your next question comes from the line of Bob Napoli from William Blair. Your line is open.
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. Just at a $500 million revenue run rate in five years, how much of that would be interchange? Because your EBITDA target, the 30% is net of interchange and net revenue, correct? What would that revenue be approximately in your target net of interchange?
Bob, my hope is that the networks would further reduce the interchange burden on the micro-payment space. So far, that seems to not be happening. Right now, it would 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.
Okay. Is that 30% EBITDA margin target on that net number, what is the trajectory to get there? What would you hope to achieve in fiscal 2021, and then, what is the timing to get to that 30% number?
I believe that by the Q4 of the next fiscal year, our run rate will be at the $30 million EBITDA target.
I'm sorry. The Q4 of next year, you'll be at a run rate of $30 million of EBITDA or a 30% margin?
Oh, I'm sorry. Yeah. In 18 months-
Both. Okay.
In 18 months, I expect the margin to be 30%.
Okay.
The margin in the Q4 of our next fiscal year should be at that number.
Okay, thank you. That's very helpful. I guess just on the growth, the confidence in that 25% plus revenue growth, what kind of visibility do you have into that as we sit here today? Would that growth, would L&T still be around 80% of that revenue?
Yeah, I think our visibility to that growth rate is probably in the 75%-80% range. I would expect that the mix to L&T would continue at about that 80% number.
Okay. Just last question, as you're 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, the adjacent markets, laundry, amusement, international? Are you seeing contribution in the near term from some of those initiatives?
The good news about our growth strategy is that not all the things that I outlined have to happen in short order for us to be able to continue to hit that 25% number. 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, as we had previously reported, we had a good opportunity in the amusement space, that we announced in the last quarter, and that we continue to deliver on. Honestly, the underlying vending market, we believe will continue to grow strongly and will make up the vast majority of the growth that we're forecasting over the next year.
Thank you. Last question for me is, you have 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? What drove the lower revenue per transaction or revenue yield?
We did deliver on a large customer transaction over both Q1 and Q2 that had a slight impact on revenue per transaction. If you look over the last year, this was the Q1 where it dipped a little bit. We are showing larger ticket prices per transaction. The trend over the last year has been slightly up. You're right, it did dip very slightly this quarter compared to the same quarter previous year. A large portion of that is our average ticket price that we look at. Over the last year, that number has been increasing. This, I think, quarter was a little bit of an anomaly.
Right. Thank you.
Your next question comes from the line of George Sutton from Craig-Hallum. Your line is open.
Thank you. I've always looked at the U.S. market as a fairly open-ended growth opportunity with an explosion of unattended use cases, and you're going to your existing customers to penetrate them. Thus, I'm surprised to hear about Japan being a potential strategy. Actually, having lived in Japan, it's a very developed, very competitive market, so I'm curious how you would be going after that market, what you would be giving up in the U.S. market to do so.
We don't think we have to give anything up in the U.S. market. We think that a focused effort on delivering our software solution in the Japanese market would be very attractive. You're right, Japan is a very well-developed vending market, with a lot of vending machines. It has a very distributed group of payments providers. 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 market. That's based on the work that we have done to date, and based on the discussions that we've had with potential partners.
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'm not sure I fully understand if it's simply a board for board changeover. When you say premium for their shares, there's been speculation of a potential sale of the business, which would not necessarily be good from these current levels. Just want to make sure I understood the thoughts behind the comment.
I'm 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, where a majority of the board is replaced or removed, that in a transaction like that, normally you would see a control premium paid that would happen as a result of an acquisition. That's not what Hudson is proposing. Hudson's simply proposing replacing the board without paying to acquire the company.
Your next question comes from the line of Mike Latimore from Northland Capital. Your line is open.
All right. Great. Thanks. 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 Q1 of fiscal 2021. Is that the right way to think about it?
That is correct.
Okay, got it. Then the $3.5 million of EBITDA comment, was that what it would be for the full year fiscal 2020, excluding these non-recurring?
No, that was for Q4 alone.
For Q4 alone, okay. Got it. Okay.
That was intended to reflect what we think the kind of run rate EBITDA by quarter would be if we're able to achieve the $12.5 million OpEx mark.
Okay. If OpEx was $12.5 million in the Q4 , EBITDA would be $3.5 million, is the idea?
That's correct.
Okay. It looks like your transaction volume growth really accelerated in the quarter, the mid-30% range from low 20% range last couple of quarters. What caused that volume growth?
It's hard for me to speculate at what's causing the number of transactions to go up. It's part of the growth of the company. We continue to add connections, which certainly drive volume of transactions. That's certainly one component of it. Other than that, the customer use of our platform as it's in place.
Okay. It was a big acceleration. I'm just kind of curious. That transaction volume, there's no reason why it would decline sequentially, right?
I wouldn't expect so, no.
You talked about product mix.
Similar to our revenue line, as we add connections, our revenue continues to go up. It's kind of linear that way, yeah.
Okay. You talked about a product mix affecting gross margin. Can you just elaborate on that a little bit?
Yeah. As I look at 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%-40% of margin for 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. That's the product mix I'm referring to.
Just last, on the vending management solution or Seed, how is that performing relative to cashless?
We think it's performing very well. As we look at our strategy to integrate the Cantaloupe Seed software into our installed network, we think we're about 50% there. We have work to do to address that additional white space. That's in process, but the integration is going very well, and they're very well-received by our customers.
Is it growing at the same rate as license and transaction revenue or above or below that?
I would say that it's probably not 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. It absolutely is growing and a big part of our strategic growth that we envision for the future.
All right. Just last, kind of housekeeping. What should stock comp be on a quarterly basis going forward?
We think on a quarterly basis, it should be in the $300,000-$400,000 range.
Okay, great. Thank you.
Again, if you'd like to ask a question, please press *1 on your telephone keypad. Your next question comes from the line of Bob Napoli from William Blair. Your line is open.
Thank you. Couple more, I guess. Don, the 30% margin target in 18 months, appreciate that, but 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 margins should improve 100 basis points a year if you're growing at 20%, or is that conservative? Just some thoughts on the operating margin leverage over the medium to long term.
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's been a range of EBITDA margin. Once you hit 30%, which I think is largely a target benchmark for most payment companies, you see the range move up to about 33%, 34%, 35%. It's a fairly narrow range. At that level, you begin to see some market-based pressure to share some of the profitability through reduced pricing from customers. I think that there is a natural hedge against the growth of that margin based on the competitive market realities and the expectation that customers have, that some of that will be shared with them.
Okay. Yeah, we're still seeing margins go up at some of the big, there may be some sharing, but you're still seeing operating leverage even at the very massive payments companies.
The advantage they have there, and one of the things that we're focused on in our growth strategy, is that they have a higher ticket price per transaction. We're in the micropayment space.
Yep.
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 ticket up from less than $2 per transaction where we currently sit, then you might see some of that improvement that you're talking about. In a micropayment space, it is much more challenging to do that.
Understood. What is your expectation for equipment margins and LNP margins, so gross margins over the next few years?
Yeah, I think the way that we're required to account for that, you're 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. One way or another, I think you're 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. I think you're looking at marginal improvements in that margin. Our real focus is to drive recurring revenue through our software platform monetized by payments.
The equipment at its current pricing doesn't really drive, we think, the long-term value of the business, but 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.
The LNP margins?
Bob, you might find this interesting. If you apply the $3.5 million a year savings that we anticipate through our processing improvement that we are negotiating, the LNP margin for the first half of 2020, we reported as 36.5%. If you roll that 3.5% savings into that, it becomes 38.6%. $3.5 million. Yeah, if you roll out those savings into the results, our margin would be 38.6%. I think approaching the 40% level, as we have previously been discussing with our shareholder base, is certainly a good mark to think about of where we're 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.
Okay. Just on Cantaloupe, the cross-sell of Cantaloupe was a big focus when that company was acquired a few years ago. How was the cross-sell progressing?
As I mentioned, it's about 50%. We have strategic marks in place to look at the white space on that side of our business and to attack it. It is certainly a growth strategy that we look at, a way to improve and increase our software deployment. It is something that we're working on right now. It's about 50%. More to come.
Maybe just one last one, I guess. Just, Don, you've been there as CEO now a few months. What are your thoughts? What has surprised you? Do you need to add to your team? You've been around the payments industry a long time. Are there senior executives that you want to add to the team to drive growth? I know you're going through a big process here, still driving good growth, but are there add-on M&A thoughts over the medium term?
Yeah.
The right number.
I have no plans to add anybody else to the management team. I think that we have a strong team. We've 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. As you know, we don't comment on M&A speculation. This is a market that has a lot of competitors, and I think, like any other payments market, there is going to probably be some consolidation in that market. There's going to be, I think, a fair amount of co-opetition 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 network.
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. 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 solution, because we believe it's the strongest, most robust software solution that exists in the marketplace for unattended retail.
Great. Thank you. Appreciate it.
There are no further questions at this time. I'll turn the call back over to Don Layden for closing remarks.
Yeah. 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.
This concludes today's conference call. You may now disconnect.