USA Technologies (NASDAQ:USAT) is a provider of credit card readers to the unattended retail space, primarily vending machines and other applications such as laundry and parking. In my initial thesis (“USA Technologies: Undervalued, Under-Followed And At An Inflection Point”), I argued that USAT was at a profitability inflection point and would produce significant amounts of free cash flow on a go-forward basis. The key tenants of the thesis were:
- 75% of USAT’s revenue is recurring and therefore high-quality. As recurring revenue increased with a larger installed base, so too would profitability and free cash flow
- USAT operated in an under-penetrated market, providing a long runway for growth
- Profitability was being masked by prior sale accounting, an aspect that would reverse as USAT transitioned to a new sale process
- Quick Start, the company’s new sales program, would accelerate adoption and lead to faster revenue growth
With two years in the rear-view mirror, I am reassessing the thesis and have concluded there is significant downside to the current share price. While my revenue and unit adoption theories have come to fruition, the company had to sacrifice margins to meet and exceed those expectations. Moreover, based on comments made by USAT’s CEO on a recent conference call, I do not believe the recurring revenue portion of the business is high quality and likely produces little cash flow. With margins compressing on the equipment sale side of the business and little cash flow from the license and transaction segment, I assess the likelihood of a significant cash flow inflection to be low. The stock is currently trading at 25x 2018E EBITDA, a 150% premium to larger, more established payment peers. I believe there is roughly 40% downside to the stock as forward EBITDA and free cash flow estimates are revised down and/or revenue growth slows.
The capital structure of USAT has evolved over the past two years. In 2015, there were 36M shares…