Cantaloupe, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Canada Loves Third Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are on a listen-only mode. After this speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Thank you.

Good afternoon, everyone. Welcome to the Cantaloupe Third Quarter Earnings Conference Call. With me on the call today is Ravi Venkatesan, Chief Executive Officer, and Scott Stewart, Chief Financial Officer. Before we begin today's call, we 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 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, a presentation of the most directly comparable GAAP financial measures, and a reconciliation between those 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 Robbie.

Thanks, Daryl. Good afternoon, everyone, and thanks for joining us today. I wanted to start the call highlighting our financial results. We are proud to deliver the highest quarterly earnings in the history of the company. Our total revenue for the quarter was $60.4 million, up 20% year on year. This was driven by a record quarter for both transaction and subscription revenue. Transaction revenue grew 21% year on year, and subscription revenue grew 22% year on year for the third quarter. We continue to expect subscription revenue to ramp throughout the year, resulting in growth in the high teens for the full year. Equipment revenue grew 12% year on year for the third quarter. Adjusted EBITDA for the quarter was $10.1 million, an increase of 176% year on year compared to the third quarter of 2022. This is an all time record for the company. This is evidence of our unlocking operating leverage from the business as outlined at our analyst day in December, 2022. Operating cash for the quarter was also strong at $22 million, which includes $14 million of AR collection and demonstrates the cashflow generation ability of our business. We expect the positive operating leverage and cash flow generation to continue into future quarters as outlined at our analyst day. A few additional third quarter business highlights include, at the end of the quarter, we had a total of 27,598 active customers, an increase of 21% year-over-year and 5% sequentially. Active devices grew by 2% year over year. We also rolled out two new products during the quarter, the Seed Driver mobile app and our next generation 46 inch micro market kiosk with enhanced accessibility features. With one full quarter of three square market or three to M in our results, we are pleased with the progress on integrating this business. The former 3-2M and Cantaloupe sales teams have been integrated and are leveraging subject matter expertise, as well as their respective strengths with specific channels to drive revenue synergies and a very healthy pipeline for future growth. In addition, the customer reception to the combination has so far exceeded our initial expectations, and I'm very pleased with the sales momentum and opportunities for revenue synergies in the micro-market space. We already have a number of examples of selling three-square market kiosks to cantaloupe customers and seed markets software to 3-2-M customers. Some recent examples of this cross-selling include Canteen of Northern California, a full-line vending micro-market and office coffee service operator who initially purchased and implemented our seed software back in the first quarter. They have now ordered three 2M kiosks in the third quarter. This is also a great example of a customer with whom we had no relationship a year ago, but with our new mid-market segment strategy, we've been able to bring them onto the full Cantaloupe platform. Another cross-sell example is Take a Break Vending, a full-line vending, micro-market, and office coffee service operator located in California. who was fully deployed with Cantaloupe's ePort hardware for telemetry and payment processing. They signed an agreement in the third quarter to move their entire operation onto the seed platform, as well as place their first order for 32M kiosks. Both of these, along with many other existing Cantaloupe customers, are examples of operators who've gone all in with Cantaloupe and are converting from competitor kiosks onto our platform. A great example of cross-selling in the other direction, seed markets to existing 3-2M customers, is a win with HGM Direct Service, a major micro-market operator in Sweden. They are currently implementing seed markets across their large and growing micro-market business. This also represents our first at-scale implementation of seed markets in Europe, and demonstrates our success to localize and roll out this platform internationally, which I'm particularly excited about. You can get more details about this rollout and market win in a press release that was issued earlier today. Subscription growth during the quarter was 22%, driven by 3-2-M and our SMB strategy, which is spearheaded by Cantaloupe One, our platform as a service offering that continues to see great market acceptance. At our analyst day, we laid out a strategy to target the mid-market segment in addition to the enterprise and small business segments. As part of this strategy, we've optimized the seed suite of software products to make it easier to implement for this segment. One recent example of this is a vending and micro-market company called Essentially Organic. Essentially Organic originally made the switch to cashless payment acceptance with Cantaloupe's ePort card readers. Now they are transitioning their entire operation onto the Cantaloupe SEED platform. We continue to deepen our thought leadership in the self-service industry. We recently released our 2023 Micropayments Trends Report, which studied micropayment trends for transactions less than $10 at food and beverage vending, as well as amusement machines throughout the United States and Canada. The results, which covered a sample of more than 700,000 active cantaloupe cell service locations, showed that consumers are increasingly using cashless payment methods, even for smaller ticket transactions. One of the more impressive data points was around the average cashless ticket size at amusement gaming machines for play purchases, which was $5.32 compared to only $0.93 for cash purchases. This report supports the trends we are seeing in terms of continued growth in cashless payments and specifically contactless payments by consumers. We are excited about the upcoming NAMA show, the largest convenience services industry event of the year in Atlanta in a few days. This gives us the opportunity to meet face-to-face with leaders in the self-service industry. We would encourage you to stop by our booth as we'll be unveiling some of our latest payment acceptance technology as well as showcasing our latest innovations. In conclusion, I'm excited about the progress we've made this quarter in doing what we said we would do at our analyst day last December. With that, I'll turn the call over to Scott for the financial review. Scott?

Thanks, Ravi. As mentioned, we delivered another strong quarter of revenue growth as well as record profitability and record cash flow generation. Our 3Q23 revenue was $60.4 million, up 20% year over year. Our combined transaction and subscription revenue grew 22%, to $51.2 million during the quarter. This includes $18 million of subscription revenue, a year-over-year increase of 22%, and $33 million of transaction revenue, an increase of 21% year-over-year. The overall increase in revenue was driven by processing volumes, including contributions from the 3-2M acquisition, accelerating subscription growth from Catalog 1, and higher average transaction ticket sizes. While transaction volumes remain robust, we experience lower sequential volumes as a result of certain customers who have been slower to install 4G devices where 3G service has been discontinued. Our equipment revenue was $9.1 million, an increase of 12% compared to Q3 FY22. Total gross margin for the quarter was 37.9% compared to 32.2% in the same quarter last year. driven by higher margins across all three revenue lines. Subscription and transaction revenue margin was 42.3% versus 40% in prior year. Equipment revenue margin for Q3 FY23 improved a positive 13.4% from a negative 8% in prior year. Total operating expenses in Q3 FY23 were slightly up year over year at $16.2 million compared to $15.3 million in Q3 FY22. Net income applicable to common shares for the third quarter was $6.7 million, or $0.09 per share, compared to net income of $1.8 million, or $0.03 per share, in the prior period. We had a record quarter for adjusted EBITDA, which was $10.1 million in the third quarter compared to $3.7 million in the prior year period. Adjusted EBITDA includes a 2.7 million benefit from the release of a portion of our state sales tax accrual. Even without this adjustment, adjusted EBITDA would still be a record. A few notes on our balance sheet and liquidity since last quarter. We ended the third quarter with cash and cash equivalents of 46.7 million and generated 22 million in cash from operations, driven largely by net income of 6.7 million and a $14 million decrease in accounts receivable. Our capital allocation priorities continue to target profitable growth and are specifically focused on driving operational improvements to control OpEx, expanding our micro-market offerings, and investing in our international go-to-market strategy and product development. Now turning to FY23 guidance, we are reiterating our guidance for the fiscal year, which includes the impact of the 3-2M acquisition. Total revenue is expected to be between $240 and $250 million. We continue to expect the combination of transaction and subscription revenue to be between $200 and $210 million, representing growth of 18 to 24%. With the hardware upgrade cycle behind us, we anticipate equipment revenue to be sequentially lower in the fourth quarter. Total U.S. GAAP net income to be between a net loss of $2 million and net income of $3 million, Adjusted EBITDA is expected to be between $12 million and $17 million, and total operating cash flow to be between $10 million and $15 million. I am pleased to see our transaction and subscription revenue grow as a percentage of total revenue as we laid out in our investor day. This directly contributes to operating leverage and sustainable cash flow generation. With that, I'll now turn the call over to the operator for Q&A. Operator?

Thank you. Ladies and gentlemen, as a question, you will need to press star 11 on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A roster. And our first question coming from the lineup, Mike Lattimore with Northland Capital Markets. Your line is open.

Great. Thanks. Yeah. Congrats on the really strong results here. On the subscription and license gross margin, you know, what, what, drove the big sequential step up there, and I guess is that sustainable, this new level?

Yeah, hey, Mike, and thank you for the question. Yeah, so overall, there's a couple components to it. As we said in the prepared remarks, the growth margin is up across all three revenue lines. So on the transaction-based fees, we've been saying over the past couple calls that we've been working very hard to grow that. Historically, it's been in the 8% to 10%. We've had it in the mid-teens over the past several quarters. We've been able to push that up to the higher end of that range. Part of that is we've increased our overall take rate. So we were at about 5% this quarter, up at about 5.1%. We do expect that to continue. And then on the subscription growth margin, we've increased that. We've had some expense reduction related to the network carriers. So we've negotiated a lower rate for 4G devices. So as the 3G devices have been rolling off and being replaced with 4G, we're starting to see some expense savings there. But the second component to that is also with three square markets. Historically, they've had a higher gross margin. So as we start to layer them in, it's increasing our margin sum as well. Historically, we've always said we've been in the 80% to 85% range. This quarter, we've been more in the 85% to 90% range.

So is it fair to say this ballpark is sustainable?

Yes. We'll be putting out our guidance for 2024 and fourth quarter. But as what we can see right now, we believe that's sustainable.

Okay, great. And then you mentioned cantaloupe one. Can you provide a little more color on the demand you're seeing there? Maybe how many seats were added or you know, typical number of seats per customer. What's the pipeline look like?

Sure. So overall, we've added about another 5,000 seats this quarter. We are seeing it's picking up great traction. The customers are generally on the SMB side of the house. We do have some mid-market customers who are also taking advantage of this program. Robbie, I don't know if you have anything to add to that.

No, the only thing I would say is... you know, Mike, as in any paradigm shift, and catalog one is a paradigm shift, right? We are shifting the market from a behavior where they buy devices, install them, and then pay for services to a paradigm where it's cloud computing brought into this space, right? So you just have a monthly fee and you pay that. Everybody who's done it, whether it's, you know, when software moved from being license-based to subscription-based or when infrastructure moved from being prem-based to cloud-based, it's the same trend. The small and medium businesses tend to adopt that faster because they care less about depreciating assets on their balance sheet. And then the large enterprises tend to lag behind but eventually get with it when the benefits and simplicity of a subscription model outweigh the benefits of picking up assets and depreciating on their balance sheet. So that's exactly what we are seeing here.

Sure, sure. Makes sense. Great. All right. Thank you. Best of luck. Thanks, Mike.

Thank you. And our next question coming from the lineup, George Sun with Craig Hallam, Yolanda Selfman.

Thank you. Very nice to see the international first win at scale. I'm curious, Robbie, if you could talk about sort of timing and plans of go-to-market in Europe a little bit more now that you're starting to pursue that a bit more aggressively?

Yeah, George, thanks for the question. Look, I've always said that it's a three-year journey. It's a lot of pieces that are to fall in place. And last quarter, I said we were right at about the midpoint of that three-year journey. And I stated that we'll see some revenues this fiscal year, though not meaningful or material. from international markets. And then we'll see that ramp through the fiscal year 24. So we are right on track with the, with that trajectory that we had laid out, um, and continue to make great progress in both Latin America and Europe. And in both of those markets, we now have our first wins, our first order. So we are kind of beyond the, Hey, we are piloting it phase to now we've got real customers, real. installations and real revenues coming through. I still reiterate that we will start ramping it up more aggressively through fiscal year 24.

Gotcha. You mentioned you had been getting good customer feedback and that kind of dovetails with, and I think you're referring to the feedback of bringing in the three square markets opportunity what we're hearing the same things typically from competitors who are saying you're more challenging now to compete with because of your bringing seed and and and three square together making it real challenging king is that kind of what you're referring to when you're talking about the customer feedback that is one part of it the other part of it is when you know when customers are looking for simplicity

you know, they want one throat to choke, right? So they, you know, the part you're mentioning is, hey, now we've got this highly differentiated product where the combination of the software and the devices and the micro markets, it makes it formidable. And that's true. What's also true, and frankly, you know, we had underestimated the benefit of that is how much customers are craving to simplify their technology footprint and not have five different solutions and not have to train their people on five different screens and portals and things to go and do their workflow with, and how much of a value proposition we now have by saying, hey, everything you manage, you manage through seed. It doesn't matter whether it's micromarkets or office coffee or vending, and you just have to train people on one software, and there's tremendous power in doing that.

Gotcha. All right, great to hear. Nice job. Thank you.

Thank you. And as a reminder, ladies and gentlemen, if you'd like to ask a question, please press star 1-1. And our next question coming from the lineup, Gary Prestapino with Barrington Research. Your line is open.

Good afternoon, everyone. Could you maybe just talk about, besides the fact that it was a much less competitive market on equipment sales, was there anything else that you did there to get that margin up to where it is? And I don't know if you mentioned this in your script, Ravi, but is that margin sustainable going forward?

So Gary, first of all, there is no much less competitive market. We fight every day and we fight really hard every day to win every single deal, right? So The competition has not gone away, so I just wanted to clarify that. What I would say is we are seeing more responsible competition. So we are seeing the industry mature a little bit, particularly as we get out of the upgrade cycle, which kind of incented behaviors of discounting in a way that was not sustainable. So we are seeing the end of that. You're seeing more responsible competition from all industry players, and that has contributed to a good extent to that margin. But I'll also say that some of the innovations that we've launched, so if you just think about we went from only having small, thin-screen devices that could do telemetry and card readers to now having a wonderful, beautiful, fully interactive device with the engaged device can do a lot more right so that's one the second is our devices now have this remote price change capability in you know when used in combination with our software and that's yet another incentive to be on our platform and differentiates it further from the competitor so i would say i'd say it's a combination of behavior past the upgrade cycle and hence there's more responsible competition and over the last 24 months we've differentiated our products further from competitors, which allow us to command that premium and to maintain those margins while our competitors are under severe pressure on that front.

Okay. And I didn't mean to belittle the competitive thing. I should have just said something, something effective since the upgrade was over. Maybe the pricing has become a little bit better. I think you mentioned that. And then given what you're doing in the micro market, I mean, you know, the legacy business years ago, the transaction growth would really kind of mimic the volume growth dollars process. It looks like here, at least this quarter, that's not the case. And I'm just wondering, should we expect that really to continue because you're going into more higher ticket item markets that you'll definitely see much higher transaction dollar volumes versus actual transaction counts?

Yeah, I think you're absolutely right. And honestly, the historical view of our business used to be very homogenous. You could tell everything about the prospects of the business and the growth and the progress that the business is making by looking at active device growth and transactions. That's not the case anymore because if you take one self-service location, that is micro-markets, It has very different characteristics from a self-service location in the amusement space versus EV charging versus vending versus laundry versus airbags. So I can go on and on and on. So over time, you will see us de-emphasize and maybe even get away from active devices and transactions as kind of key metrics for the business. They'll go from key metrics to being secondary metrics and perhaps even not as relevant anymore because they don't represent the business as it currently stands, as well as they used to.

And Gary, I'll just add to that a little bit. We've had five sequential quarters of average ticket size growth. Initially, we wrote it off to inflation, but now we're doing more analysis on it and see it's really the form factor that's changing, as Robbie mentioned, and a lot more focus on micro markets. You know, people are buying $10 salads as opposed to a dollar candy bar. And oh yeah, by the way, that helps us sell seed because, you know, salads are only good for a couple days. So having an inventory system that can manage that is very beneficial.

Right. And then just lastly, Scott, are you giving out what the organic growth was for the quarter? Can you make that public or are you just not going to give that stat anymore?

No, we're not giving that stat.

Okay. All right. Thank you.

Thank you. Now, a final question coming from the line of Chris Kennedy with William Blair. You'll let us open.

Yeah. Good afternoon, and thanks for taking the question. It's great to see the continued acceleration of subscription revenues. Can you talk about the key drivers of that over the last several quarters and how much of that is related to the recent acquisition?

I think a good portion is related to the recent acquisition, but we've also done a lot of work in differentiating our offering. And Cantaloupe One has been a big contributor as well. Sometimes people look at product differentiation as features that you build into a product, but a lot of times it's also how it's bundled and how it's sold and how it's customized to the needs of a particular market segment. And I think with Scott's leadership and Jeff Dombrow's leadership, our CRO, our team has done a really nice job of addressing the needs of the small and medium businesses as well as now the mid-market segments of our target industry.

Yeah, and just to add to that a little bit, Chris, you see that our customer growth, our customer count continues to grow. A lot of that's more on the SMB side to where we have a lot higher margins on.

Understood. And then just can you provide a broad mix of your current business, you know, vending versus micro markets versus, you know, other verticals? Thanks for taking the question.

So we haven't broken it out in that manner. What I would say is that food and beverage, which is more it combines vending, micro market, office coffee, et cetera, tends to be in the 75% to 80% range. of our business, and then all the other verticals tend to be in the 20%, 25% range.

And then, Chris, I'll just add a little more to that, too. So when you look at 3.2M with the acquisition, we laid out what their revenues were, and I think this will help answer Gary's question a little bit earlier, too, about whether we're providing organic guidance. Overall, we said that they were in the 19 to 20 million range, so that gives you an idea as to how much of their business they represent. It's around 10%. That number is starting to grow, which is great. That's what we're heavily focused on. But that's about where we stand.

Okay. Thanks for taking the questions.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Ravi Venkatesan for any closing remarks.

In conclusion, we are very bullish about the trajectory that the business is on. I'm really proud that our team has pulled together in a very tough environment to deliver the best earnings results that the company has ever had. And the future is bright, and we are looking forward to building success upon success. Thank you for your interest and engagement through this call. Operator?

Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.