Cantaloupe, Inc.

Good day and thank you for standing by and welcome to the Cantaloupe Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dara Dirks, Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the Cantaloupe Second Quarter Earnings Conference Call. With me 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 cantaloupes operating results. These non-GAAP financial measures are supplemental to and that 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 those non-GAAP financial measures as well as the most comparable GAAP financial measures can be found in our press release issue this afternoon, which has been posted on our investor relations section of our website at www.cancelope.com. And with that, I would like to turn the call over to Ravi.

Thank you, Dara. Good afternoon, and thank you for joining us today. I'm pleased to report solid financial and business results from the second quarter of our fiscal year 2023. This was my first quarter as CEO, and we made a lot of progress on strategic initiatives which are led by our vision to become the global market leader, providing technology that powers self-service commerce. We successfully closed on the acquisition of Three Square Market in December, positioning us to accelerate Cantaloupe's presence in the high-growth micro-market industry, while also immediately expanding Cantaloupe's international footprint for a full suite of self-service technology products. We held our first investor day at NASDAQ, which was well attended. During this session, investors and analysts were able to meet our executive team, listen to key customers, and hear our vision and strategy. We also shared a long-term financial outlook for the company and one-time KPIs that demonstrate the opportunity we see ahead of us. Our focus continues to be on accelerating the high-margin subscription revenue growth. We were successful in doing this by scaling the Cantaloupe program and selling subscriptions, including seed software, device management, and remote price change. As a reminder, our Cantaloupe One platform is the only bundled subscription offering in the market that enables self-service operators to eliminate upfront capital expenditures. We continue to see strong interest from our growing small and medium business customers, given the light capital nature of this offering. We also reported strong financial results for Q2. We reported a record in total revenue of $61.3 million, up 20% over last year's second quarter. We reported a record in transaction revenue, which grew by 21% year over year, and a record in subscription revenue, which grew by 15% year over year. While we anticipated an acceleration of subscription revenue in the second half of the fiscal year, we've been pleased with the strong subscription revenue growth trends in the first half as well. We continue to expect subscription growth to ramp throughout the year, resulting in growth in the high teens for the full year. Equipment revenue growth was strong as well, up 25% year over year, While the 4G and EMV upgrade cycle is largely behind us, there are some delayed installations due to labor shortages. We are pleased to have helped many of our clients through their upgrade cycle. Active customers totaled 26,335 at the end of the second quarter, up 24% year-over-year compared with the second quarter of last year. 1,300 new customers in the quarter, primarily among small and medium businesses, driven by the appeal of our Cantaloupe One offering. Active devices grew 3% year-over-year. And importantly, our adjusted EBITDA for the quarter was $3.9 million, a 61% increase year-on-year compared to the second quarter of the prior year. Now to move to a few additional business highlights from this quarter. While we are still early in the integration of Three Square Market, we are pleased with the progress thus far integrating business functions such as sales, marketing, HR, and finance. Our priority is to achieve the revenue synergy opportunity we saw with the acquisition, and we've already posted a number of early wins including automatic sales automatic vending sales who's located in Michigan we've reached an agreement to replace a portion of their competitor units with three square market and they've committed to growing their future market locations with cantaloupe Adam more president of automatic vending sales stated we chose three square market because of their feature rich platform which was comparable to our previous provider and and the attractive fee structure that allows us to see a higher profitability on our markets. Our transition installing the Three Square Market kiosk has been seamless for both my team and my customers, and we look forward to continuing to grow with Cantaloupe in the future. The reception among existing Cantaloupe customers has also been exceedingly positive about the combined company offerings. For example, Cantaloupe customer Madison Coffee and Vending is transitioning their micromarket business from a competitor to 3Square. Lastly, HGM Drick Service, a Sweden-based 3Square market customer, successfully installed multiple new markets and are continuing to scale their footprint with us. We also continue to see strong organic growth in other areas of our business. CC Vending is one of the largest independent refreshment services companies in the metro New York area and longtime seed customer, entered into a strategic long-term agreement with Cantaloupe to upgrade all of their non-EMV devices and also signed up for a remote price change for their vending fleet. Additionally, they added 24 more yoke kiosks to expand their micromarket services at one of the largest financial institutions in the city. Crickler Vending, a canteen franchisee in the New York State area and former Cantaloupe Cashless customer who had switched to a competitor in 2017, had signed an agreement to migrate half of their machines back to Cantaloupe Cashless devices and move fully onto the Seed platform. This includes all of our core Seed products like Seed Pro, Office, Markets, and Delivery. We continue to see strong demand for upsells As you might have seen from a recent release, we completed a significant project to onboard Buffalo Rock, a Pepsi bottler, who will now use Seed to manage 9,000 vending machines. We also expanded our agreement to support Sodexo's in-reach convenience business with both our hardware and software solutions. This includes the rollout of Seed across 18 branches. Pepsi Florence, also known as PD Foods, A large Pepsi bottler and canteen franchisee in the southeast, who is a fully deployed Cantaloupe customer, expanded their seed services by adding remote price change. And lastly, Coke Odom, a large Coca-Cola bottler, upgraded their non-EMV devices to ePort Engage, our latest interactive device. In November, we held Cantaloupe University, where we hosted 150 of our customers and partners in a two-day summit and discuss some of the latest innovations and upcoming products that we will release in calendar year 2023. We also conducted in-depth seed, e-port, and micro-market training. The event was very well received and validated that our pipeline of innovations continues to resonate with our customers and be highly relevant to their businesses. As we move into the second half of our fiscal year, we remain focused on the four initiatives that we outlined at our investor day. One, increase market share in core verticals that we operate in within North America. Two, international expansion leading with enterprise software. We are already positioned well for this with our acquisition of Three Square Market. Three, extend revenue per connection through our add-on services such as remote price change, AI-powered merchandising, and more. Four, continue expansion into adjacent verticals, such as EV charging, entertainment, gaming, and smart retail. We are focused on continuously strengthening the executive team, and to that end, I would like to officially welcome Anna Novoseletsky as our new Chief Legal and Compliance Officer, who will also serve as General Counsel and Corporate Secretary. Anna has already been an excellent addition to our leadership team, bringing even more focus towards international expansion and valuable legal experience of reviewing regulatory needs as we continue to expand and scale. With that, I'll turn it over to Scott for him to review our Q2 financial results in detail. Scott? Thanks, Ravi.

As Ravi stated, our TQ23 revenue was $61.3 million. up 20% year-over-year. As a reminder, we had 30 days of three-square market in our 2Q numbers. Revenue growth excluding three-square markets would have been 17% for the quarter. Our combined transaction and subscription revenue grew 19% to $48.9 million, which was driven by accelerating subscription growth from Cantaloupe One and higher average transaction ticket sizes. Our equipment revenue was $12.4 million, an increase of 25% compared to Q2 FY22. Total gross margin for the quarter was 30.1%, down from 31.3% in the same quarter last year, driven by slightly lower gross margin on transaction fees due to a shift in card mix and the associated processing fees. Gross margin on equipment improved slightly to negative 2.3% from negative 2.8% in prior year. We look forward to driving to positive margins in Q3 and Q4 for equipment as we move past the 4G and EMV upgrade cycles. Total operating expenses in the second quarter of 2023 were $19.4 million compared to $16.3 million in Q2 FY22. The increase was mainly driven by integration and acquisition expenses of $2.8 million incurred as part of our three square markets acquisition. Net loss applicable to common shares for the second quarter was $573,000, or a loss of one cent per share, compared to a net loss of $468,000, or one cent per share, in the prior period. Adjusted EBITDA was $3.9 million in the second quarter, compared to $2.4 million in the prior year period. A few notes on our balance sheet and liquidity since last quarter. We ended the second quarter with cash and cash equivalents of $28.1 million. This is down $22.7 million from our cash balance of $50.8 million at the end of the first quarter. Roughly half of the decrease, $11.9 million, was directly attributable to the acquisition of three square markets. The remaining decrease of $10.8 million was split between $6 million of net cash used to fund operating activities and $4.5 million for capital expenditures. Going forward, we are focused on lowering our inventory and AR balances as we collect on large equipment purchases made during the upgrade cycle. This decrease in inventory and AR is expected to generate positive cash flow from operating activities in the third and fourth quarter of 2023. Now turning to 2023 guidance. We are reiterating our guidance for the fiscal year that we provided on December 12, 2022 at our Investor Day. This guidance includes the impact of the three square markets acquisition. As a reminder, our guidance calls for total revenue to be between $240 million and $250 million, total U.S. GAAP net income to be between a net loss of $2 million and net income of $3 million, and adjusted EBITDA to be between $12 million and $17 million. We expect the combination of transaction and subscription revenue to be between $200 million and $210 million, representing growth of 18% to 24%. To expand farther, we expect transaction revenue growth to be in the low to mid-20s, and subscription revenue growth to be in the high teens to low 20s. We expect equipment revenue growth to be between 10% and 15%. With that, I'll turn our call over to the operator for Q&A. Operator?

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. And our first question comes from Chris Kennedy with William Blair. Your line is open.

Good afternoon. Thanks for taking the question. Can you talk about your expectations between your customer base, whether it's enterprise, mid-market, or small businesses, as we look into calendar 2023 with the uncertain macro environment?

Chris, that's a really good question. This is Ravi. We see the food and beverage side of our business in particular be very resilient to macroeconomic headwinds. And in fact, one of the unique trends in our business is as more and more small businesses start businesses in micro markets and vending, that's driving interest in and demand for our products and services. So, so far we are actually seeing it be a positive not a negative in terms of the macroeconomic environment.

Great. Very helpful. And just a quick follow-up on the prospects for Cantaloupe One this year. Can you talk about kind of your expectations? Thanks a lot.

Yeah, I'll give you a little bit of color and then also ask Scott to add to it. The Cantaloupe One product has been very well received, particularly by small and medium businesses. Enterprises that are large continue to prefer a model where they purchase equipment and depreciate it, but small businesses absolutely love the idea of not having to put upfront capital and then de-risking themselves from any kind of product obsolescence. But Scott, why don't you add some color financially as well?

Yeah, so overall we're seeing great growth with the Cantaloupe One program. We're seeing it not just in the small businesses, but also in the mid-market as well. So we're starting to put a lot of effort and focus in that mid-market. But overall, that's one of the largest drivers that we have for our subscription revenue growth over this past quarter, and we see that continuing into third and fourth quarter. Great. Thank you. Thanks, Chris.

Thank you. One moment for our next question. And our next question comes from Gary Prestopino with Barrington Research. Your line is open.

Hey, good afternoon, Ravi and Scott. A couple of questions. First of all, Scott, do you have the transaction number, the number of transactions and the growth in absolute transactions handy?

Yeah, sure do. So year over year, the number of transactions increased by 3%. When you look at the total dollar volume of transactions, that increased by 17%. So the dollar value of transactions is growing faster than the overall transactions themselves. I'll give you a little detail behind that. So last year, our average ticket size was $2.12. This quarter, we're at $2.40. And so we're starting to see a lot of growth within that average ticket price. That's driven partially by overall inflation, a large part of it. But also what we're seeing, too, is that when you look at more and more move into the self-service commerce, you're seeing higher ticket prices or higher ticket items. For instance, we have kiosks and machines within the airports to their vending headphones and charging cords. So we're starting to see the shift to self-service commerce at higher ticket value items.

Yeah. And even within food and beverage, it's more, you know, expensive Odwalla drinks versus a can of soda, right? So there's a shift in the products as well. Okay, great.

And then was there any impact? I know you mentioned that the margins on subscription and transaction fees were down. It looks like over 100 basis points. You did mention some card mix there. But was there also an impact from, um, the acquisition that impacted the margins, even though it was only a month in, uh, in terms of revenue contribution?

No, it really wasn't. Uh, when you look at overall, um, the transaction revenue being our largest revenue line item, the impact of the acquisition for 30 days had a very, very little impact on it. Okay. So the transaction, I'm sorry, go ahead. I was just going to say, it truly is just a mix of the cards. I mean, the pricing overall is fairly complex when you look at it, but it is just a mix of the card brands.

So it's more credit versus debit on the mix?

So it gets a little more complex than that. So it could be credit versus debit. It can be American Express versus Discover. There's different pricing depending on the issuing bank. So a lot of factors go into it. Okay, that's easy enough to explain.

And then could you maybe go into what you're doing to integrate the sales forces for the acquisition with your legacy sales force in the micro market?

Yeah, so the sales area is the one that we integrated first. And the approach that we've had, and Jeff Dombrella, our chief revenue officer, has done a an outstanding job with this, using his playbook from the very first days. It's a model where the salespeople have major and minor specializations. So if you're a salesperson that's an expert in selling micro-markets and came from the three-square world, we've now cross-trained them on the seed markets and the other products, and they can lead with the micro-market sale, but then they bring in the other products, and then they also bring in an additional salesperson when needed with deeper specialization and sort of do co-selling, if you will. And it works the other way around also. So a cantaloupe salesperson that might have deep expertise in the software side but is now gaining expertise on the micro-market side would bring in a former three-square salesperson with deeper expertise to co-sell and deliver the right solution for the customer. In a certain sense, this has pushed us into a more sophisticated solution selling model versus selling widgets, which was, hey, you know, card readers and telemeters and the more elementary software. So this has been a more sophisticated sale, and Jeff has led that transformation with the sales force very well.

And then the last question I have is it just, it looks like the active devices sequentially were flat. Is that correct? And what would account for that if it, if they are flat?

Yeah. So overall quarter over quarter, we're up 3%, but you look sequentially, it is flat sequentially. A lot of that is as we're, as we're rounding out the EMV 4g upgrade cycle, We're putting, you know, a lot of our effort over the past six months has been finishing that out and making sure they don't have any churn as we do that. As we look to third quarter and fourth quarter, a lot of the focus now is going on to new sales. Okay. Thank you very much.

Thank you. One moment for our next question. And our next question is from George Sutton with Craig Holland. Your line is open.

Hey, guys. This is James Rush on for George. Congrats on the quarter and on the success you're seeing with three-square markets so early on. And so sort of on the topic of micro-markets, if you look at some industry data out there, it sort of implied that a micro-market can do 10 to 20x the annual sales of a vending machine. Could you sort of talk about how that translates into your unit economics on a per-device basis between vending and micro-markets? Like what kind of conflict could you see per device for a micro market versus vending?

I think those numbers are absolutely right on the money, James, in the sense there are cases where we actually see operators replace a vending machine or two in a location and then go to a micro market type of model. And you're right, it does go 10x and it's driven by a lot of different factors. For us, the benefits are We see a direct benefit in the transaction revenue where those increased sales attract better economics for us in processing the transactions. And we also see a big lift when it comes to the seed software product, which for the micro market is priced approximately four times to five times per location than the vending side of the equivalent product, if you will. So we see a benefit on both of those, the transaction and the subscription line item when a micromarket is deployed.

Scott, anything to add there? Well, I think you pretty much covered it. I mean, overall, again, going back to the higher ticket prices in the micromarkets, you see a lot more because people are buying $12 solids as opposed to a $2 Gatorade. Yeah, that's a really good point.

Ticket sizes are better as well.

Yep, that makes sense. And then I guess, how would you sort of describe the appetite of operators you've spoken to for adding new devices now that we've gone through the upgrade cycle? Like, are operators sitting there with funded budgets just ready to pull the trigger in the next two quarters and order a bunch of new devices? Or would you expect operators to sort of methodically deploy capital and add new devices at a pretty even pace for the rest of the year?

I think we're going to see it more even paced. The demand actually is higher and there is a, I would almost say there has been some starvation because all of their budgets have been consumed with the EMV and the 4G upgrade cycle. However, we are seeing operators be cautious based on the macroeconomic environment in terms of how fast they go into rolling out new locations. And there is also the lag factor of, you know, Yes, 70, 80% people have come back to offices, but they've come back three days a week and sort of five days a week, and some locations have still not come back. There's still that remote work factor, which is making operators hesitate in rolling out new locations very aggressively. So I think we're going to see a gentler and a more even pace of new rollouts.

Gotcha. And I just want to follow up to that, I guess, if I could. sort of on the return to the office trend, I guess, are there still some locations today that are below pre-pandemic levels? And if so, could you sort of speak to like what percentage that may be of your active devices?

Yeah, so as I said, so there are two dimensions to that question. One is how many locations simply haven't come back, right, from a pre-pandemic to a post-pandemic comparison. I'd say there's about 15% in that bucket. And then the second part of that question is, for locations that have come back, what are we seeing in terms of depressed or less volume than before? We're actually not seeing that. For the most part, they have crossed the pre-pandemic levels. But it may not be because people have come back five days to work in the office, but it's more because the ticket prices have gone up and they're just maybe buying more premium products and the product mix has shifted. So there are other factors that have compensated, and hence the sales per location have exceeded pre-pandemic levels already.

Makes sense. Thanks, guys.

Thank you.

Thank you.

And as a reminder, to ask a question, please press star 11 on your phone. And our next question comes from Mike Lattimore with Northland Capital Markets. Your line is open.

Super. Thanks very much. Yeah, congrats on the strong results there, strong EBITDA. You mentioned a couple remote price change wins, I believe, when you went through the customer wins in the quarter. I guess just how prevalent is the interest in remote price change? You know, is it a – sizable part of kind of upsells and new logos you're seeing out there at this point?

It's very exciting. And if anything, I think the only thing that's holding us back from accelerating it is that in some cases, there are upgrades to the software that an operator has running on their machines and things like that. So sometimes it's plug and play, and sometimes They have to upgrade software components within their infrastructure before they roll it out. But we continue to see very strong uptake from this product and a strong ramp-up of it.

Great. And then on Channel 1, it sounds like that was an important contributor to new customer ads again. I guess, can you give us some ballpark of how many customers are using Cantaloupe One at this point or number of active devices or something like that?

Sure. So right now we're seeing approximately 15,000 seats on Cantaloupe One, and we've been adding them at a rate of about 5,000 per quarter.

Okay. And then just last one on operating expense. I mean, when you think about operating expense for the March quarter, should we just kind of layer in two more months of three-square market, or are there some other areas that you can kind of trim expenses?

Yeah, so overall, when you look at the operating expense, I would say first quarter, we had a lot of one-time events, so it's got a good indicator of a run rate for it. The second quarter is a little bit better of an indicator, but we have also made some cost savings as well to help decrease it. And then we always, on the third quarter, we true up our sales tax reserve, which last year was around $2 million in savings. We expect it to be around the same this year. Okay.

All right. That's helpful. Great. Thanks a lot. Thanks, Mike.

And I would now like to turn the conference back to Ravi Venkatesan for closing remarks.

Thank you, operator. So in summary, this is a solid quarter for us with strong revenue growth and a clear pathway to improve profitability. I'm excited about getting past the 4G and EMV upgrade cycles, completing the acquisition of Three Square Market, and also early traction in Latin America and EMEA, and look forward to executing on the strategy that we articulated as part of our investor day in December and unlocking significant value. Thank you for your interest in attending this earnings call.

This concludes today's conference call. Thank you for participating. You may now disconnect.

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