Cantaloupe, Inc.

Good day. Thank you for standing by. Welcome to the Cantaloupe second quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would like to hand the conference over to your speaker today,

Thank you and good afternoon, everyone. Welcome to the Cantaloupe Second Quarter Earnings Conference Call. With me on the call today is Sean Feeney, Chief Executive Officer, Ravi Venkatesan, Chief Operating Officer, and Wayne Jackson, 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 because of certain factors, including but not limited to business, financial markets, 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 earlier today. Listeners are cautioned to not take place to not place undue reliance on any such forward-looking statements which reflect management's view only as of the date they are made. Cantaloupe undertakes no obligation to update any forward-looking statements, whether because 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 Cantaloupe's operating results. These Non-GAAP financial measures are supplemental to and not substitute for GAAP financial measures such as net income or loss. Details of these non-GAAP financial measures and a presentation of the most directly comparable GAAP financial measures and a reconciliation between these non-GAAP financial measures as well as the most comparable GAAP financial measures can be found in our press release issued this afternoon, which has been posted on the investor relations section of our website at www.cantaloupe.com. And with that, I would like to turn the call over to Chief Executive Officer Sean Feeney. Sean?

Good afternoon, and thank you for joining us today. We are pleased to report record revenue results for the quarter and confirm we are on track to deliver a strong year. Second quarter top-line revenue grew 33% year-over-year, driven by double-digit growth in all revenue categories. Equipment revenue led the way, with growth almost doubling compared to last year's Q2. Transaction revenue continued to rebound with 31% growth year-over-year, and subscription fees grew 13% year-over-year. This was the third quarter in a row that we posted double-digit top-line revenue growth compared to the equivalent quarters in in prior periods. A few other highlights from the quarter include a 31% in total dollar volumes, another record, and 16% year-over-year increase in active customers. In the second quarter, subscription and transaction fees grew 24%, a record for the third consecutive quarter. As evidenced by our results, our customers understand the value proposition of our products and services. We continue to be focused on enhancing our customer service as well as providing operators ways to engage their customers and optimize their businesses. We believe our existing customer base represents the largest opportunity to scale recurring revenue and connections. I'd like to share just a few of the examples of customer expansion from this quarter. Refreshing USA, A national independent vending operator purchased thousands of Newcastle's G10S devices from us during the quarter. Admiral Beverage, a Pepsi bottler, continued a theme we are seeing of converting acquired businesses to cantaloupe services and extending their agreements. And Continental Cafe purchased several thousand devices and will continue to expand seed software to their latest acquired company. A notable new customer win in the quarter was the addition of Larson Vendings, which purchased its first ePorts during Q2. To continue to build on our sales momentum, we recently brought in payment services veteran Jeff Dumbrow as chief revenue officer. Jeff comes to us with over 20 years of experience building and scaling high-performance sales organizations in payments and technology globally. During his time at Verifone, he served as executive vice president of Europe, Middle East, Africa, and Asia Pacific, where revenue more than doubled during his tenure. I believe Cantaloupe will benefit from his vast industry and international expertise and am confident he will continue our positive momentum, particularly outside of the United States. We've continued to make progress on building self-service capabilities and improving the customer experience across service delivery and support. Over the past 12 months, we've doubled the customer services team minimizing hold times and improving problem resolution times. We've automated certain customer service tasks, including device deactivation, transfers, and callbacks. As I am out visiting customers, I am hearing feedback that they are seeing results from our focus on improving customer service, which strengthens these relationships and leads to increased sales. We also continue to develop exciting new initiatives to enable our customers to increase revenue through new modes of payment and additional consumer engagement functionality, as well as new business tools for running a more efficient operation. I would like to turn the call over to Ravi Venkatasin, whose promotion to Chief Operating Officer was announced in today's earnings release. Ravi?

Thanks, Sean. Consumers are exhibiting a high demand for fast, simple, and seamless digital purchase experiences in all areas of commerce, including the unattended retail space that we are focused on. To address these needs, we shipped over 14,000 ePort Engage devices during this quarter. This is our next generation touchscreen interactive device, which has been very well received by our customers. We also launched our Campus Card product that gives students the capability to use a virtual ID card from their Apple Wallet to make purchases at our ePort-enabled vending machine. This is helping drive usage and engagement with the student community and benefits our customers at universities and campuses by driving up same-store sales for them. Our recent release of the Yolk Micro Market Version 2 includes significant upgrades to both the operator as well as the consumer experiences on the Yolk point of sale, the Yolk Pay app, and the Yolk portal. Customers now have greater flexibility to drive consumer engagement and loyalty with enhancements to our deals, promotions, and reward programs. This, along with kiosk and consumer management tools, ensure that the Yolk market's product is better at serving consumers and simplifying the self-checkout process. Micro-markets continue to be the fastest-growing segment of the unattended retail industry, a trend we expect will continue as more and more businesses shift to touchless commerce. We recently completed a survey which found that more than a third of consumers between the ages of 18 and 54 own cryptocurrency. Further, 67% of those who own crypto are willing to use it for purchases if it were linked to a mobile wallet. With the popularity and ownership of cryptocurrency growing, we work on solutions to enable their use through our partnership with BAPT. We are also partnering with the card networks and our customers to transition to EMV compliant devices which enables more secure touchless payments. As a reminder, we have the most EMV-enabled devices in the markets we serve today. We've also continued to invest in developing additional services and solutions that enable our customers to operate more cost-effectively. This is critical for our customers in light of today's tight labor market and lack of labor availability. A handful of highlights from initiatives this quarter. We launched a new warehouse app, enabling warehouse staff to easily manage product purchases, transfers, and take inventory all via mobile or tablet device. We added additional customers to the final pilot for our remote price change product and expect to execute a full rollout in the first half of this calendar year. Customer demand and interest levels in this product are particularly high, especially due to tight labor and inflationary market conditions. A few weeks ago, we announced a partnership with Hivory, which will provide customers with artificial intelligence-powered merchandising capabilities. Powerful new product recommendations, targeted space to sales optimization are all enabled using Hivory's proprietary algorithms to boost the top line of Cantaloupe's customers and improve operational efficiencies. This will empower our customers to react in real time to the way consumers shop and drive increased same-store sales. We are seeing a lot of interest and already have multiple customers piloting this program. I would now like to turn the call back over to Sean.

Thanks, Ravi. On the international front, we recently unveiled our international partners program aimed to drive market penetration and unattended retailers with unattended retailers outside of the United States. We look forward to providing an update on this program in the coming quarters. We also continue to work on improving operations within the company. We've gone live on two large projects. First, we have implemented NetSuite, consolidating our two ERP systems onto one platform. Also, our configure price quote project has gone live and contributed to our strong Q2 sales performance. We continue to invest in internal systems to provide future operating leverage. As you may have seen in our earnings release, we announced some changes to our executive team in addition to Ravi's promotion. Wayne Jackson has decided to retire from Cantaloupe, making way for the promotion of Scott Stewart to Chief Financial Officer effective tomorrow. February 4th. Wayne and Scott have partnered to transform our finance operations and updated our financial reporting systems. Over the next several months, Wayne will work with Scott and me on the successful transition and other strategic initiatives. Also, I would like to welcome Ian Harris to our Board of Directors. Ian is a senior analyst at Hudson Executive Capital, our largest shareholder, and has been a valuable resource to both myself and and the Board of Directors since I joined in May 2020. I would like to thank Doug Braunstein for his many contributions to this company and board over the last three years and look forward to our continued engagement in his role as founder and co-managing partner of Hudson Executive Capital, which will continue to have two representatives on the board through Ian and Doug Bergeron, our chairman. With that, I would like to turn the call over to Wayne to go over the financials in greater detail. Wayne?

Thanks, Sean. Good afternoon, everyone. During the second quarter, we continued our trend of strong year-over-year revenue growth attributable to increases in transaction volumes as well as demand for our devices as the industry fully migrates to 4G technology. As a reminder, last quarter we began disclosing a breakout of subscription and transaction revenues. We also revised the presentation of operating expenses in our income statement by disaggregating selling, general, and administrative expenses. The new presentation is intended to provide additional transparency and reflects in more detail how we manage our business. Q2 FY22 revenue was $51.1 million, a 33% increase year-over-year, driven by subscription and transaction fees of $41.2 million and equipment sales of 9.9 million. Transaction fees grew 31 percent in the second quarter, which was a company record. Subscription fees increased 13 percent year-over-year. The 24 percent increase in subscription and transaction fees year-over-year is primarily driven by approximately 31 percent increase in total dollar volumes for Q2 2022 compared to last year. And we're currently exceeding pre-pandemic levels of processing volumes. Equipment revenue for the second quarter increased 95% year-over-year, as many customers held off on delivery of 4G devices with 4G upgrade devices until closer to the discontinuation of the 3G network support starting in 2022. Due to this, we expect equipment revenue to continue to increase to the end of the 2022 calendar year. As a reminder, Q2 and Q4 are historically our strongest hardware sales quarters. Active customers increased 16% year over year to 21,315 customers. Active devices totaled 1.1 million as of December 31, 2021, an increase of 4% year over year. Total gross margin for the quarter was 31%, down from 32% in the prior year fiscal second quarter. The decrease in gross margin was primarily due to a change in revenue mix of higher transaction fees during the second quarter, offset by an increase in the gross margin on equipment sales. Subscription and transaction revenue margin was 39 percent versus the prior year quarter's margin of 38 percent. Equipment revenue margins for Q2 FY22 improved to negative 3 percent from negative 6 percent in the prior year. Total operating expenses in the second quarter totaled $16.3 million, compared to $14.9 million in Q2 FY21. The change in total operating expenses reflects the company's objective to reduce general and administrative expenses and utilize these savings to invest in innovative technologies to acquire new customers and expand our footprint with existing customers. Net loss applicable to common shareholders for the second quarter was $.5 million, or one cent per share, compared to a loss of $2.9 million, or 4 cents per share, in the prior year period. Adjusted EBITDA was $2.4 million in the second quarter, compared to $1 million in the prior year period. Relating to our balance sheet and liquidity, we ended the second quarter with cash and cash equivalents of $76.3 million. Turning to our fiscal year 2022 guidance, We remain confident in our previously issued guidance and continue to expect revenues to be between $200 and $210 million, representing year-over-year growth of 20 to 26 percent. We expect transaction and subscription revenues to continue to grow based on increased dollar and transaction volumes, as well as incremental subscription revenue from new and existing customers. While we expect equipment revenue to grow in the second half of 2022, It will be more weighted to the fourth quarter. Net loss applicable to common shares is expected to be between $5 and $7 million, and we expect adjusted EBITDA to range between $8.5 million and $10.5 million. Given the continued supply chain challenges and the need to build our inventory levels whenever possible, we now expect cash flow from operations to be between break-even and negative $2 million for the year. Finally, I have greatly enjoyed working with Sean and the leadership team. As much has been accomplished since the current leadership team has been in place. As I transition out over the next several months, I know Scott is well prepared and is the right person to help drive continued success for Cantaloupe in the future. I will now turn the call over to the operator for Q&A. Operator?

Thank you. In order to ask a question at this time, please press star 1. on your touch-tone phone. And to withdraw your question from the queue, just press the pound key. Once again, that's star one for questions, one moment for questions. Our first question will come from the line of Mike Lattimore from Northland Capital. You may begin.

Great, thanks. Yeah, congratulations on the nice results here. And Wayne, very nice working with you. Best of luck in your next venture there.

Thank you, Mike.

So I guess on the subscription and transaction gross margin, you know, seem very solid as of sequentially. Is that kind of a good number to think about for the rest of the year?

Hi, Mike. This is Wayne. It is. Yes. The answer is yes. And the reason for that is we're going to continue to see the transaction volumes at about the level we are, and we fully expect to see subscription revenue continue to grow.

Got it. And the gross margin should be similar going forward, is that what you said?

Yes, you're asking about the rest of this fiscal year, yes.

Okay, great. And I think you touched on it a little bit, but your new CRO, it sounds like international is a big area of emphasis. Maybe what would be his other kind of top two areas of focus here?

Well, As I said, Mike, we're very excited to have Jeff on board. Jeff had a long and distinguished career at Verifone and several other places, most recently Boost Payments. International is absolutely an area that we are looking to expand into, and Jeff has a network and strong relationships there to do that. Secondly is driving subscription growth driven by expanding SEED, Now with our Yolk 2.0 micromarket, we think there's a huge opportunity there, and we're launching remote price change here in the second half, and we'll begin charging for that and selling it on a big basis. And then the last area is adjacent markets and hiring more business development people in those areas.

Okay. Great. And then just any – if you could provide just a little more view into the opportunity to cross LSL feed into your current base. How does the pipeline look for that?

I'm never happy with the pipeline, but the pipeline looks good to do that. And I think what we're seeing is operators turning from focus on upgrading their devices from 3G to 4G. Of course, now the card issuers are beginning to push EMV compliance, which will be another upgrade cycle. but I do believe we're beginning to see people coming out of that, out of the COVID kind of holdback. Secondly, we've begun to see operators doing more and more M&A activity, and what we're happy to see there is we have many of those larger customers that are doing the M&A, and they are converting the customers that they acquire to SEED software, which is adding to our install base, as well as, in many cases, upgrading them in the 3G to 4G and EMV from their competitor devices to ePorts.

Great. Thanks very much. Thanks, Mike.

And our next question comes from Chris Kennedy from William Blair. You may begin.

Hey, guys. Thanks for taking the question. On the subscription fees, can you just talk about the growth of that? Should we look at it on a sequential basis, growing 2% sequentially or year over year? How should we think about that line item? Thank you.

Hi, Chris. This is Wayne. It certainly has been growing sequentially so far. Our goal, as Sean touched on the last question, is to grow it faster. But I think for the remainder of this fiscal year, that's a good estimate. But longer term, more.

Okay. And then can you just dive into that longer term, you know, I guess your longer term goals for growing that line item?

Sure, Chris. This is Sean. You know, we are absolutely focused on that. And as I've talked about, we believe, to Mike's question, that we can continue to expand the penetration of seed. We believe that we're 25% to 30% of the industry penetrated. So we've got plenty of room to go there. We believe that our PC is going to be a very good seller and a very good product, and we'll add monthly subscription per device per month. And what we've seen is with the inflationary and prices rising, we've seen more and more customers calling us about that. Third, we are adding Highbury as an additional module, which will be an additional per month per device fee in which we've gotten a lot of interest and we're piloting with several customers now and we'll launch widespread in this half of the year. And then, as I've said kind of in every call, the mission that Robbie has is to give us a product every 12 to 18 months that we can basically add to subscriptions. So if you think of a classic software subscription model, we want to add additional modules that add additional revenue on a per month per basis. So as Wayne said, for the next couple of quarters, that sequential growth is probably about right, but I expect that as we move into FY23 starting in July, that will continue to grow. And, you know, I would expect that our subscription will continue to kind of grow. And what I would look, what my goal is to move it towards 20%. That's an aspirational goal. And I think we can get there over the next 12 to 24 months.

Very helpful. Thank you. And then can you just go into a little bit more of your efforts to diversify beyond the core vending market, whether it's micro market, micro markets, or. EV charging, whatever it is. Thank you.

Sure. It's a great question and one that is a big part of Jeff's focus, as I said. The biggest opportunity for us in the near term is, of course, micromarkets. And what we're seeing with many operators is they are adding micromarkets and then redeploying vending machines in other locations. So we believe that micromarkets is not necessarily a replacement but a lift to that subscription fee. And I was at one of our very large customers this week showing them our micro market product. On the adjacent spaces, we are very focused in the electronic vehicle charging market. As you know, there are a lot of players in that market. It's pretty fragmented interest today. We're also focused on amusement and seeing that come back post-pandemic and a lot of interest there. We are also looking at adjacent markets with taking the yoke payment platform, and it works very well in unattended grocery, unattended convenience stores, and we think that there's an opportunity there. And we continue with our partners like Sedomatics in laundry, car washes, and other areas. And then, you know, international, when we get that going, significantly increases our TAM, and we believe there's both software and payment devices, primarily working through partnerships in other areas of the world.

Very helpful. And then just one last one. Can you just remind us what the current mix is of connections, vending versus non-vending? Thanks a lot.

You know, I don't know whether we've given a number like that, but I would say that vending is probably, you know, north of 80% of our total connections. Thank you.

Thank you. Once again, that's star one for questions. Star one. Our next question will come from the line of George Sutton from Craig Hammond. You may begin.

Hey, guys. This is James on for George. Thanks for taking my question. Could you provide a little more detail on the International Partnership Program, sort of what types of partners you're looking for there? I mean, is it processing, distribution? And then you called out LATAM as a target geo, but can you give any specifics on sort of which countries you think make most sense to start off in or which you find most attractive?

Sure. So let me take the last part of that first is in Latin America, we definitely see Mexico as kind of the lead opportunity there. And our partnership program is modeled after the very successful Verifone program international partners program. Both Fernando, who is our business development executive in Latin America, and Jeff were very successfully executed that. And what it gives is structure for us to add potential operators who need software or want to resell our software. And think of it as, in many cases, we'll be leveraging our current U.S. partners, whether that's Fiserv or Catalyst, and then local providers who can provide payment capability that we can partner with. There may be some situations where we white-label things, basically to find a way to enter into the market, because we think once we're in a market, we can expand it. And we think that in some areas that we can add resellers of our current products in a partnership program. So it has many flavors, but it provides a structure for people to – easily become part of the cantaloupe team and to take on our competitors in other areas of the world than just the U.S.

Perfect. Thanks, guys.

And once again, that's star one for questions, star one. One moment for questions. And I'm not showing any further questions in the queue. I'll turn it over to Sean Feeney for any closing remarks.

Great. Thanks, operator. I'd like to just add one more thank you to Wayne. He's been a great partner. And as you can see, we've made significant progress in the time that we've been together. And we're excited about the future here at Cantaloupe with Scott moving into the CFO role, Ravi becoming COO, and Jeff Dunbro coming on board as Chief Revenue Officer. So we had a very strong quarter. And as I said, we're on our way to what we believe is a strong year. So thank you for your interest, and we look forward to talking to you soon.

And this will conclude today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.