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?

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. Our first question comes from Chris Kennedy with William Blair. Chris, your line is open.

Good afternoon, and thank you for taking the question, and we appreciate the additional details and guidance. Can you talk a little bit about the acceleration of subscription revenue? And you mentioned exiting the year at a high team's clip. Is that kind of what we should expect going forward?

Thanks for the question, Chris. We are very excited about really stepping on the gas on the subscription revenue, which we've heard repeatedly is the single most important metric for our investors. especially given the much more attractive margin profile of that revenue. So there has been a focus on it. This is primarily driven by our strategy of platform as a service with the Cantaloupe One offering and also additional add-on products like RPC and artificial intelligence powered merchandising, et cetera. In terms of expectations, yes. What we see is that the subscription revenue will accelerate throughout the year and as We mentioned earlier, you know, we've started at 11% with the first quarter. We expect to have the full year revenue be in the low teens but actually exit in the high teens, consequently entering the next fiscal year at that level and continuing to accelerate from there.

Great. Appreciate that, Kolar. And then just a small modeling one. What was the cost associated with the migration to AWS?

Yeah, so Chris, the overall cost was $1.4 million, and you'll see that in two different areas. You'll see a little bit less than a million in the cost of goods sold, and then you'll see about $400,000 to $500,000 in the operating expenses. Great.

Thanks a lot, guys.

Please stand by for our next question. Our next question comes from Gary Prestopino from Barrington Research. Gary, your line is open.

Hi, good afternoon, everyone. A couple of questions here. First of all, could you talk about anything you saw on the Yolk payments space? Are you getting any traction there at all?

Thanks for the question, Gary. Yes, so we have some exciting traction on the Yolk payment space, not traction which is reflected in the first quarter financial results but that will beneficially impact the trajectory of our subscription revenue in the coming months. And part of our positive guidance on the revenue front, particularly the subscription revenue, is based on the traction that we are seeing, not just for our software products, but also for our micro-market offerings. And as a reminder, the Seed Market Edition, not just the Yolk kiosk, combined together address the micro market opportunity and feed markets is already the market leader for the software that powers micro markets, whether they are your kiosk or kiosks from another competitor.

Okay. And then in your guidance that you're contemplating, once we get past this upgrade, you said that the margins for equipment will normalize as far as you can see. So we shouldn't expect any kind of negative disintermediation like we had here in the quarter, you know, where we get a pretty bad surprise on the downside. Is that a correct assumption?

Yes, that is a correct assumption, Gary. So overall, when you look at where we landed for the first quarter and then looking into second quarter, we expect some of those costs to trickle into the second quarter. We mitigated that sum by renegotiating some of our prices with our suppliers. We're getting them to absorb some of the costs as well. There will be a little spillover from that in the second quarter, and we are expecting a pretty significant second quarter for equipment revenue as we round out the 4G upgrade process. But then after that, as we roll into the third quarter and fourth quarter, we will be selling it at a profit. Okay. I'm sorry. Go ahead, Robbie. Sorry.

Now, I was just going to add a little bit more color on the margin profile on the equipment. And as you described it, the fairly significant downside surprise. Look, the way this has worked is the supply chain situation has been challenging with chip shortages. And it depends on the specific products and the specific mix, et cetera. But we had a strategic decision to make especially with our customers spending a lot of their capital in upgrades to either push and try to pass on all those costs to our customers or work with them with a longer view and help them through these upgrades, keeping our eye on kind of the lifetime value for those connections, which is very attractive. And we decided to do the latter, which we believe is in the best long-term interests of our business as well as the relationships we have with our customers.

Okay, and then just lastly, and I'll jump off, would you say that your business is generating revenues on a same store basis basically at or above pre-pandemic levels? I guess I'm just trying to get an idea of what the economy looks like now in terms of offices opening, things like that.

It is. Yeah, the simple answer is it is. I'll let Scott add some more color there.

Yeah, so especially as it relates to the transaction processing, we are operating well above what the pre-pandemic levels were. The exciting part for us is we feel like there's still more to come as it relates to businesses coming back. So we're thinking another 10% or 15% increase if we ever get back to full offices being occupied. Thank you.

Thank you. Please stand by. Our next question comes from George Sutton from Craig Hallam. George, your line is open.

Thank you. Looking at your move to AWS, you talked about the scale that that will give you the ability to have. Can you talk about any governors to your growth you had prior to this, just so we're clear where those were and what's enhanced by the AWS move?

Yeah, George, thank you for that question. So the The two things that the AWS move makes easier is when we take our cloud platform and the software that runs there, it's much easier now to replicate it into geographies that require that software to run within their macro region. Europe, for example, where for compliance reasons you have to replicate the software and run it within data centers that are in Europe, The AWS platform makes it much easier to replicate it that way, similar for other regions like Latin America, et cetera. So that's a big one, which we felt was a governor earlier in our prior cloud infrastructure.

So just to be clear, it's primarily an international benefit, and obviously we've wanted you, encouraged you to grow quicker internationally. This will enhance that effort. Is that the main benefit, just to be clear?

That's the main benefit. The second benefit is it's a more scalable environment. Amazon has built essentially the best cloud infrastructure on the planet, and that lets us scale in a very seamless manner as transactions grow, as connections grow, and as we put more volumes on the platform.

I understand. So when we do third-party work, we continually hear, how attractive remote price change is. It's something competitors don't have. And I'm curious how aggressively you're using that for both new customer opportunities and for retention of existing customers.

It's a great question, and it's music to my ears that your third-party research validates what we are seeing in the marketplace. We are being aggressive in using it on both, as you said, retention as well as in new customer acquisition. In fact, there have been several new customers for whom the main driver, not just to migrate to our seed software, but also to our ePort devices, has been the ability to do remote price change. Where we are not being too aggressive is we are trying to hold, and we are going to hold the price pretty steady there, and not, you know, because we see a tremendous amount of value in it, this is a value-based sale for us versus a price-based sale for us, if that makes sense.

I understand. Last question, if I could, just trying to put a couple things together. You suggested you had competitors that have had some supply constraints. You were very aggressive in going after some opportunities relative to bringing hardware as part of a broader relationship. And then you also announced a fairly significant growth in customers. I'm just trying to put all this together and understand the significance of the hardware

component of this versus the cantaloupe one effort relative to this customer growth yeah so two things you know the the cantaloupe whether it's the cantaloupe one effort or the combination of our navigation of supply chain in essence what it's let us do is navigate this upgrade cycle with very minimum churn right and continue to grow our active devices which was a very important key metric for us because all the services we layer are layered on top of that footprint although our seed software does work with competitive devices also so we can continue to grow that on an independent vector does that answer your question so i think what you're saying is the you've you've been able to keep customers so retention by being aggressive on the hardware side

Cantaloupe One is different in the sense that it's bringing in new customers via that channel. Is that what I'm hearing?

Correct. Correct. And it's also worth amplifying that Cantaloupe One has had wonderful receptivity with the small and medium business segment where we were traditionally less penetrated. Traditionally, we were always very well penetrated on the large enterprise segment. and we looked at it and have specifically focused on the SMB segment a lot more, particularly in the last 12 to 15 months. Part of that was the Candle of One strategy, and it's starting to pay off significantly, which is reflected in our customers being up 21%. Perfect.

Okay. Thanks, guys.

Thank you. I would now like to turn it back to Ravi for closing remarks.

Thank you, operator. First of all, I wanted to thank you all for joining this call and your engagement. I also wanted to extend an invitation to you to join us at our Investor Day on December 12th at the NASDAQ to meet our broader leadership team and also learn about the longer-term outlook and growth strategy of the company. With that, we can close out. Thank you.

Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.