Cantaloupe, Inc.

Good day, and thank you for standing by, and welcome to the Candelope First Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. With us on the call this afternoon is Ravi Venkatesan, Chief Executive Officer, and Scott Stewart, Chief Financial Officer. Before we begin today's call, I would like to remind you that all statements included in this call, other than the 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 in our filings with the SEC and in the press release issued earlier today. Listeners are cautioned to not place undue reliance on any such forward-looking statements, which reflect management's views 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 are 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.cantelope.com. And with that, I would like to turn the call over to Ravi.

Thank you, operator. Good afternoon and thank you for joining us today. We are pleased with the start of our fiscal year and are reporting a first quarter record in revenue of $57.8 million up 26% over last year's first quarter. Transaction revenue grew by 18% year over year, and subscription revenue growth came in at 11% year over year, in line with our expectations. Subscription revenue benefited from a strong uptake of our bundled platform as a service offering, Cantaloupe One, as well as continued demand for additional software modules like remote price change. As you may have seen in the outlook section of our earnings release, we expect subscription revenue growth to continue to ramp up throughout the year, resulting in growth in the low teens for the full year and exiting fiscal year 23 in the high teens. Equipment revenue growth was strong, up 108% year over year, As we near the end of the 4G EMV upgrade cycle, we continue to work closely with our customers to complete the necessary upgrades before the industry-wide December 31 deadline. Active customers totaled over 25,000 at the end of the first quarter, up 21% increase year over year, and 4% sequentially. driven primarily by the success of our small and medium business strategy. Active devices grew 3% year over year and 1% sequentially as we navigate the final months of the hardware upgrade cycle. We expect an acceleration in the number of active devices as we move into the next calendar year when capital budgets are redirected to expansion and innovation. Our adjusted EBITDA for the quarter was negative $5.4 million compared to positive $1.9 million in the same quarter of the prior year. Gross margin and adjusted EBITDA were negatively impacted primarily due to one-time migration costs related to our transition to the AWS cloud environment and procurement of higher-priced components to fulfill customer demand. However, this positions us well for growth and profitability through the remainder of the fiscal year. We remain laser focused on accelerating Cantaloupe's growth over the next three to five years. We continue to invest in expanding our service offerings and software add-ons, which position us to extend our presence in core verticals like food and beverage, traditional and smart vending, and micro markets. I consistently hear concerns from customers around supply chain constraints and the impact of inflation and labor shortages on their day-to-day operations. They are actively looking for areas to aggressively integrate software and technology to help offset these macro pressures and view Cantaloupe as a key partner who can help. For example, our Cantaloupe One platform is a first-of-its-kind bundled subscription model enabling autonomous retailers to eliminate upfront capital expenditures on new hardware and reduce the risk of hardware end-of-life. Cantaloupe One, which we brought to market beginning in April, continued its strong performance this quarter. We are seeing particular interest from our growing SMB customer base given the light capital nature of the offering. RPC, a remote price change software offering, also had a successful quarter. Historically, CPG companies would implement two annual price increases on average, and it required substantial effort from our customers to pass those price increases along to customers. Updating prices across a fleet of thousand machines or more could take up to four months Today, our customers are experiencing 10 plus price changes in a year. Using our proprietary RPC offering saves time, money, and ensures system-wide consistency. Brian Potts, data analyst and system administrator at Continental Services, found that, quote, before a bank of four machines used to take 30 minutes, now we can do 100 machines in 30 minutes, without putting any trucks in the field, unquote. Another great example comes from Buffalo Rock, a full-line vending and Pepsi bottler from the southeast who completed their seed sink implementation across 14 different branches. General Manager Kyle Murphy stated, I quote, since switching 3,500 of our cashless readers over to Cantaloupe's ePort device, our customers are noticing and commenting how much more reliable the devices are at the machine, no more downtime, and no more missed revenue at our locations. They just work exactly how they should, unquote. Buffalo Rock has also found tremendous value in C-Pro's dynamic scheduling functionality, and in Kyle's words, this has been a no-brainer and a massive win for our entire business. We can efficiently manage our routes, drivers, and know that we are keeping our service levels exactly where they need to be with Seed. We also saw a significant growth in Seed delivery, our software solution that enables paperless invoicing, integrated web ordering, and dynamic mobile delivery targeting the office and coffee pantry segment. One of the advantages of Seed is the ability to manage your entire operation from vending to micromarkets to delivery services like office coffee, all on one platform. In Q1, an existing customer, Compass Canada, committed to moving their office coffee and pantry locations onto seed delivery. They started with 2,500 migrations and have already doubled total locations to 5,000. One operational highlight I wanted to touch on is the completion of our migration to the AWS cloud platform. This is a major milestone in becoming an enterprise-wide cloud-based network. We now have the infrastructure and foundation upon which to add the next million devices. This upgrade will also allow us to replicate our offerings seamlessly across international markets as well. Before turning the call over to Scott to review our Q1 results in more detail, I wanted to spend a few minutes on some of the things that excite me the most about Cantaloupe's market position and the opportunities ahead of us. First, the secular tailwinds driving digital payments adoption in our industry. We conducted a study in partnership with Michigan State University called The Payments in Unattended Retail, analyzing payment trends among a sample of 160,000 vending locations. We saw cashless payments had increased from 51% of transactions in January 2020 to 62% by October 2021. We continue to see the adoption of cashless payments steadily increase month over month. What's more impressive is the growth in contactless payments, Consumers have become more and more comfortable at using the mobile phone or physical card to just tap and go. Second, demographics are driving consumer preference for self-service, whether it's non-traditional categories beginning to be sold in vending machines or the proliferation of kiosk-based self-checkout experiences. We see both the TAM for our core current offerings as well as opportunities for innovative solutions in adjacent verticals continue to flourish. Third, our technology. Our scalable seed platform and flexible software add-ons like RPC are becoming essential for any customer who wants to manage costs and scale their business. Today's macroeconomic trends like labor shortages and rising cost of goods will help fuel digital transformation and consequently growth in our software offerings. And last but not least, our people. We have worked hard over the last two and a half years to rebuild to a culture of excellence and recruited top tier talent, some of who you will have a chance to meet at our upcoming analyst day on December 12th in New York City, where we will be reviewing some of the opportunities and moats around our business that excite us the most. With that, I'll turn it over to Scott for him to review our Q1 results in detail. Scott?

Thanks, Ravi. Q1 23 revenue was $57.8 million, an increase of 26% year-over-year. Our combined transaction subscription revenue grew 16% to $47.1 million, which is driven by a volume higher average transaction ticket sizes as well as additional subscription revenue from Cantaloupe One and newer software modules like RPC. Our equipment revenue was $10.7 million, an increase of 108% compared to Q1 2022. Total gross margin for the quarter was 24.5%, down from 32.5% last year, predominantly driven by negative 23.8% gross margins on equipment revenue compared to 5.3% in prior year. Our team continues to work hard to navigate supply chain constraints, and we are maintaining higher than normal inventory levels to ensure we fulfill customer demand, which has been an issue for some of our competitors. However, in Q1, we saw higher than anticipated demand for certain ePort products that are being impacted by an industry-wide chip shortage. Given the very attractive lifetime value of an active device, We decided to purchase the necessary componentry at higher prices on the spot market to satisfy demand, resulting in a negative impact of approximately two million to our equipment gross profit. As of September 30th, we have de-risked the vast majority of our device portfolio and will continue to work closely with customers through Q2. The industry mandated deadline for 4G ENV compliance is December 31st. We would expect equipment margins to normalize thereafter. Subscription and transaction gross margin was 35.5%, relatively flat year over year. Sequentially, this is down due to a one-time expense in Q1 related to our AWS migration. For the remainder of the fiscal year, we expect gross margin on transaction revenue to be in the mid-teens and combined subscription and transaction gross margins to be approximately 38 to 40%. Total operating expenses in the first quarter of 2023 were $22.7 million compared to 16 million in Q1 FY22. The increase was primarily driven by higher dev spend on technology projects, bad debt expense, and professional services related to our efforts to expand our market position, the AWS migration, and the delayed 10K filing. Additionally, prior year also benefited from a one-time insurance recovery of 700,000. Net loss applicable to common shares for the first quarter was 8.9 million, or a loss of 13 cents per share, compared to a net loss of 1.6 million, or two cents per share, in the prior period. Adjusted EBITDA was negative 5.4 million in the first quarter, compared to positive 1.9 in the prior year period. We had a number of higher than anticipated expenses during the first quarter, including the one-time AWS related expense, approximately two million of component related equipment expenses, and the higher operating expenses I just mentioned. Related to our balance sheet and liquidity, we ended the first quarter with cash and cash equivalents of $50.8 million. Now turning to 2023 guidance, we are reiterating our guidance for the fiscal year. As a reminder, our guidance calls for total revenue to be between $225 million and $235 million, representing growth of 10% to 15%. Based on the strong business demand we're experiencing, we now expect to be at the high end of our guidance for total revenue. As we mentioned on our last earnings call, we expect the combination of the transaction subscription revenue to be between 191 million and 198 million, representing growth of 13 to 17%. To expand further, we expect transaction revenue growth to be in the high teens and subscription revenue growth to be in the low teens. As a reminder, we expect equipment revenue to be relatively flat year over year, but heavily skewed in the first half of the fiscal year as we conclude the 4G and EMV upgrade cycle. Conversely, we expect transactions and subscription revenue to ramp sequentially throughout the year. Based on investor feedback, you'll note that we added further detail on revenue growth by major category in our earnings release issued earlier today. Our guidance for total U.S. GAAP net income is expected to be between $1 million and $5 million. Total adjusted EBITDA to be between $12 million and $17 million. Total operating cash flow to be between $10 million and $15 million. Based on our higher than anticipated costs for the first quarter, which I just touched on, we expect to be at the low end of our adjusted EBITDA range for the full year. With that, I'll now turn the call over to the operator for Q&A. Operator?