Cantaloupe, Inc.

Hello, thank you for standing by. Welcome to the Cantaloupe Second Quarter, Fiscal Year 2017 Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question, you will need to press star one one on your telephone. To remove yourself from the queue, press star one one again. Also, please be reminded that this call is being recorded. I would now like to turn the conference over to your speaker for today, Magna Mera. You may now begin.

Thank you. Good afternoon, everyone. Welcome to the Cantaloupe Second 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 the actual results to differ materially from such forward-looking statements is included in our findings 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 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.canceluk.com. And with that, I would like to turn the call over to Ravi.

Thank you, Meghna. Good afternoon, everyone, and thank you for joining us today for our second quarter fiscal year 2025 call. I'll first start with a high-level view of our Q2 performance. I'll then talk about our fiscal year 2025 second-half priorities before turning it over to Scott to dive deeper into the numbers and our outlook. Q2 financial highlights. During the second quarter, our total revenue increased 13% year-over-year to $73.7 million, driven by 17% year-over-year transaction revenue growth and 14% year-over-year subscription revenue growth. Total adjusted gross margin for the quarter was 41.7% compared to 37.2% in the same quarter last year. Adjusted EBITDA for Q2 was $10.7 million, a 26% increase compared to prior year, reflecting continued success with our strategy of expanding operating leverage. Now on to our Q2 operating highlights. We continue to see strong growth in micro markets and penetration of seed software with existing as well as new customers. We gain momentum with customers going all in with us. An example is Premier Food Service, who signed an agreement to replace all competitive micro markets with cantaloupe solution and in parallel signed up to go all in with seed software. New customer wins include EVS Vending, who placed an order for several micro markets, including, interestingly, some kiosks to replace a full-service restaurant at a furniture store located in the Southwest region. This supports our hypothesis that kiosk-based markets and our newest innovations like smart stores continue to provide more modern self-service solutions to an ever expanding set of location types. Our premier and self-service payment acceptance and telematics devices are continuing to lead the market in North America. For example, Berkshire Foods recently replaced many competitive devices with our Engage and Engage Combo units. Berkshire Foods continues to grow with our solutions evidencing that one reliable trusted partner is key for a growing business to drive greater efficiencies. We're also seeing other verticals see cashless payment solutions such as automated retail and amusement. For example, entertainment solutions group secured a large number of pulse devices for their amusement machines. Another example is outdoor vending solutions who acquired a significant number of our G11 serial devices to be placed at Lowe's distribution centers on new Rhino propane self-service machines. On the indirect channel side, we worked with AVS to secure a large VIN in Q2 for our latest engaged pulse units that will be a game changer for the amusement sector, allowing customers to purchase multiple play credits in a single transaction through an interactive app that runs on the Engage device. To highlight some wins in sports and entertainment, in the enterprise space, we added the San Jose Earthquakes at PayPal Park to be the point of sale provider for all games and events at the stadium. This implementation not only includes our point of sale solutions, but also our newest suite management platform for their guest experience across the entire stadium. The implementation is already in progress and we will launch in the upcoming 2025 season. Our integration of SP software and cross-sell wins are performing in line with expectations. For example, we debited at the VendEx North event in November. Our integrated solution for customers and showcase for the first time smart stores along with unveiling of the next generation of VendManager a premier enterprise software solution that serves the UK and Ireland market. We secured Refresh Collective as a new Venn manager customer and successfully implemented them onto that platform. In addition, we secured multiple smart store and cashless devices across a variety of UK customers. In Mexico, we secured a Venn with one of our large vending customers deploying micro markets for Venn. Our focus in Q2 was to deploy and maximize transactions from connections sold previously, and we've executed very well on this objective, growing the transaction volumes across our cashless deployments in that region. Moving on to the product side, we launched and deployed new models for our innovative SmartStore series, the Cantaloupe SmartStore 600 and 700. These advanced self-service retail solutions are designed to revolutionize the way food and beverage vendors, as well as broader retailers, address key challenges, including labor shortages, theft and shrinkage, while maintaining a seamless and inclusive consumer experience. This solution takes us into self-service commerce opportunities well beyond our traditional market niche. A perfect example of how we are leveraging this solution to extend into retailers is with our partners at Gauls, which is a parent company of US Patriot. Josh Sandoz, Vice President of Military Operations at Gauls stated, the SmartStore 700 Duo has been a game changer for us, exceeding all expectations. We can stock a diverse range of retail products and reduce our labor costs while maintaining high standard of security. We're also able to create additional brand awareness with customized marketing wraps on each smart store. We've seen an incredibly positive response from our customers who appreciate the on-demand access to products like caps, tapes, headlamps, batteries, flashlights, notepads, socks, and more. Because of its success, we plan to expand smart stores across all our US Patriot locations. Within the first few months of launching this product, we sold several hundred smart stores with additional expanded store configurations where clients placed our trial or quad solutions in more public environments, such as auto dealerships, colleges and universities, senior living facilities, residential complexes, and more. As part of our strategy to develop and launch more add-on products, that serve in particular our SMB customers, we launched our micro-lending services under the brand of Catalog Capital in partnership with Fundbox. We're enabling customers to go through a quick online approval process to get access to funds that help them more easily expand their business and secure the devices and micro-markets they need to deploy their next location at all competitive rates. We launched our Cantaloupe Advantage program, which allows brands to engage with consumers through digital advertising at our point-of-sale touchscreen devices. The program's first collaboration was in partnership with MasterCard, aimed at supporting the Priceless Planet Coalition in its objective to plant 100 million trees around the world. The campaign ran across a variety of cantaloupe card readers and micro-market kiosks delivering over a million impressions within the first 10 weeks. Our fiscal year 25 second-half priorities will be to continue expanding operations support internationally, specifically in Europe and Latin America, to allow more rapid scaling. We'll also continue to refine our go-to-market strategy across both direct and indirect channels to expand our customer base organically and through strategic acquisitions. I am pleased with our second quarter of fiscal year results and remain excited about the future of Cantaloupe as we execute on our vision to be the global technology leader that powers self-service commerce. I want to thank the entire Cantaloupe team for their continued focus on execution, which led to a solid quarter. With that, Scott will now review our Q2 results in more detail. as well as our outlook for fiscal year 25.

Scott? Thanks, Robbie. As Robbie mentioned, we delivered another strong quarter. Our Q2 25 revenue was $73.7 million, up 13% compared to Q2 24. Our combined transaction subscription revenue grew 16% to $65.4 million during the quarter. This includes $20.7 million of subscription revenue, a year-over-year increase of 14%. and 44.4 million of transaction revenue, an increase of 17% compared to Q2 24. The overall increase in transaction revenue was driven by the continued move from cash to cashless payments and the trend of higher average ticket sizes due to product mix shift. Subscription revenue growth was largely driven by our strength in micro markets, which continues to be our fastest growing segment. As of December 31st, 2024, we had over 32,000 active customers and 1.3 million active devices, an increase of 10% and 4% respectively compared to the prior year. The average revenue per unit, or ARPU, for Q2-25 was $202, up 12% from the prior year period. As a reminder, this is defined as our total subscription and transaction fees for the trailing 12 months divided by the average total active devices for the same period. Our equipment revenue was $8.6 million, a decrease of 7% compared to Q2 FY24. Total gross margin for the quarter was 41.7% compared to 37.2% in the same quarter last year, driven by continued expansion of our transaction margin. Subscription adjusted gross margin was 89.7% versus 89% in the prior year, and transaction gross margin was 25.6% versus 21.1% in the prior year. This increase was driven by better cost management and improved transaction routing. Gross margin on equipment revenue for Q2 FY25 increased to 9.1% from 1.8% in the prior year. Total operating expenses in Q2 FY25 increased to $24.5 million compared to $20.7 million in Q2 FY24. This increase is largely due to expenses incurred by the companies we acquired in the past 12 months. Check and FB solved. Net income applicable to common shares for the quarter was $5 million for 7 cents diluted earnings per share compared to net income of $3.1 million for 4 cents diluted earnings per share in the prior period. Adjusted EBITDA was $10.7 million in the second quarter compared to $8.5 million in the prior year period, an increase of 26%. We ended the second quarter with cash and cash equivalents of $27.7 million. As we mentioned in our previous call, the decrease in our cash balance compared to our year-ending balance as of June 30, 2024, is due to the timing of payments made to our customers for transaction processing. This normalized in Q2 25, and we had a slight growth in our operating cash balance for the quarter. We anticipate cash from operating activities to grow throughout the rest of the year in line with the guidance we provided. Continuing with the balance sheet, we have recently refinanced and upsized our credit facility. The new facility provides for a $40 million term loan, a $30 million revolving credit facility, and a $30 million delayed draw term loan for a total of $100 million. The growth and profitability we have experienced over the past several years has allowed us to secure this facility with very competitive rates. This strengthens our balance sheet and provides flexibility for future uses of capital. The proceeds from the $40 million term loan were used to repay borrowings under our previous term loan and revolving credit facility. To date, the company has not borrowed against the new revolving credit facility or the delayed draw term loan. Now turning to our fiscal year 2025 guidance. As we said on our last earnings call and based on what we see today, we are reaffirming the following. Total revenue to be between $308 and $322 million, representing growth of 15 to 20%. We expect transaction subscription revenue to also be in the range of 15 to 20 percent. We expect total U.S. gap net income to be between $22 million and $32 million, adjusted EBITDA to be between $44 million and $52 million, and total operating cash flow is expected to be between $24 million and $32 million. With that, we would now like to turn the call back over to the operator for the Q&A session. Operator?

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. We also ask that you please wait for your name and company to be announced before you proceed with your question. One moment while we compile the Q&A roster. The first question that we have today will be coming from the line of Chris Kennedy of William Blair.

Good afternoon. Thanks for taking the question and appreciate all the new detail and the supplement. Can you just talk about the average revenue per unit and how that's evolved? And it's got to be driven kind of by your business mix going from traditional vending to micro markets, smart stores, what have you, and how your average ticket price has gone up. Can you just talk about the evolution of your business, please?

Yeah, sure, Chris. Happy to do so. And thanks for the question. So overall, we have seen a lot more growth related to the transaction processing. It is due to the fact that we are processing that our average ticket size has gone up significantly over the past couple of years. When we laid out an investor day back in December of 2022, we listed out if a customer was to buy every product that we offer at our list price, it would get up to $400 per unit. That still holds true. it's shifted a little bit more and probably could go up a little bit higher based off of the transaction processing. And then with some of the new software that we've released, like our Pick Easy product and our Seed Analytics.

And Chris, just to add to that, we've also had, you know, sales strategies be very intentional about what are the locations we are deploying our solutions into and are those locations where we can maximize revenue, not just for our customers, but consequently for us. So part of it has been to make sure we are not going after marginal customers and lower potential revenue locations.

Understood. Thank you. And then any update on your international strategy? And can you just remind us what your business mix is, U.S. versus international? Thanks for taking the questions.

Yeah, we continue to track well on the international side, but in the case of Latin America in particular, we did a little bit of, you know, take a couple of steps back to be able to leap forward. We had sold some fairly nice deals, and we wanted to make sure that those deployments were very robust and working as well as they possibly could, and that we were maximizing the number of transactions that came through from all those locations. So that's been a tweak. Now we have kind of passed that stage. We are again in the mode of expanding the footprint. And in both Latin America and EMEA, we've also had some nice wins in the last quarter in micro markets as well, which, as you know, has been kind of an appealing new segment of our business. Other than that, in terms of mix, it's really largely stayed the same. We think it will accelerate further at as we execute on our second half priorities. But as of now, we are tracking to kind of the same mix, which is it's under 5%. Got it.

Thank you.

Thank you. One moment for the next question. And our next question will be coming from the line of Gary Prestino of Barrington. Your line is open.

Hi. Good afternoon, Robbie and Scott. A couple of questions here. First of all, on this new lending, micro-lending that you're doing through Cantaloupe Capital, you're originating whatever loan you are. I would assume it's for equipment or whatever. Are you holding that paper or do you sell that to your partner that I couldn't write the name down there? Could you explain how this works?

Yeah, we don't hold any of the paper and we don't even underwrite the loans. The way this is done is through, as you rightly pointed out, through a partner. The nuance there is we are able to offer customers who are really used to coming to Seed Software in particular as kind of their ERP and their go-to system. a very convenient way to go through a few questions, point and click and then get approved for a loan and from a partner that they trust which is us. So it's sort of us being the gateway to this process adds a lot of comfort to our customers and also makes it easier because of our knowledge of their business and their knowledge of our brand and reputation.

Okay. Were you finding that at times some of your smaller clients, particularly maybe as you're going more upstream on the equipment side, they were capital constrained and this would help them to grow their business?

You hit the nail on the head. Yeah, you hit the nail on the head. That is exactly why we did this. In fact, this initiative has been on our roadmap for almost a couple of years We've just been working really hard to find the right partner, the right solution, the right user experience, which matters a heck of a lot, especially when you get to that small and medium business segment. And yeah, the aim was to free up capital constraints so that our customers can buy more micromarkets, more cashless payment devices, and subscribe to more seed software. That's ultimately our goal.

Okay, you're not on the hook for anything then. I just want to make sure I'm clear on that. That is correct. Okay. And then just from some of your narrative, Robbie, it strikes me as that really the growth here is being driven by micro markets in a big way. You know, if you could just segment it out, is it micro markets, smart stores, and then seed software? I mean, just could you maybe lay out what are some of the key growth drivers where you're having a lot of success with your product lines?

So we've got, as you've seen, healthy growth in both components of our recurring revenue, the transaction payment processing as well as the subscription revenue. On the subscription revenue, the growth is largely driven by an expanded footprint of micro markets, the new smart store product, but also newer locations and in what I would call a mixed shift in the locations where our products are placed. As I mentioned earlier, when we go from potato chips to Cobb salads, then the location becomes more valuable and what we earn from that location becomes more valuable. The similar factors apply to the transaction payment processing because again, as we deploy smart stores and more marketplaces, the revenue that's generated on transactions per location is significantly higher and that keeps improving the ARPU keeps improving. So that's a growth driver in itself. We are also seeing now, particularly with smart store, that the location types that we addressed historically, which were corporate break rooms, in some cases, certain other locations have drastically expanded. Now we are in universities, we are in hospitals, we are in car dealerships, we are in assisted living centers. We are in all kinds of new locations, which is exciting to me. and boards really well for the future of Camelot.

Okay, great. Thank you so much for answering those questions.

Thank you. One moment for the next question. And the next question will be coming from the line of Mike Lattimore of North Capital. I'm sorry, Northland Capital. Please go ahead.

All right, yeah. Thanks a lot. Great job on the margins and EBITDA growth again here.

on the subscription and transaction gross margin you know continues to improve is this kind of a sustainable level hey mike yep thanks for the question so uh we feel absolutely is a sustainable level um we continue to see increases especially as it relates to the transaction gross margin when you look at what makes that up we've seen over the past 18 months an increase in our take rate uh it's When you look at it sequentially, it's pretty even with where it was last quarter. I think we've kind of tapped out on increasing the take rate. But we continue to get benefits from the cost reduction measures that we've taken. And a lot of the routing and cost savings that we've done there, we continue to see benefit from. And then, as the average ticket price gets a little bit higher because there is a fixed fee component to our pricing, that'll also help increase the margins.

Great, again. Okay, excellent. And then on subscription growth, the subscription growth rate improved a little bit this quarter. Sounds like micro markets is a good driver of that. You know, I would imagine micro markets and then further enhanced by smart stores will continue to benefit subscription. I mean, should we think about, you know, subscription growth rate kind of improving from here?

Yeah, so we did see good acceleration at this quarter. Last quarter, we were at 11.5% year-over-year growth. This quarter, we're at 14.1%. The guide that we gave for this year was 15% plus, and we're still in line with that guide that we provided. Great.

And I guess just maybe similar, but transaction dollar volume growth, I think, was 15.5%. That also improved from the first quarter. Is that tied to micro-markets as well?

Micro-markets and smart stores, that's correct, mostly. Our operators are really pushing to sell more fresh foods and with that, that has a higher ticket price.

And I should, Mike, just to make sure we don't over-index on the micro-markets and the smart stores, There is a new category which we call internally smart retail or smart vending, if you will. And there is a phenomenon of, you know, selling more headphones and electronics and cosmetics and pharmaceuticals, et cetera, out of smarter, newer generation vending machines. And that also contributes to higher ticket sizes and higher transaction values as well as volumes.

Okay. Makes sense. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 11 on your telephone. One moment, please. And our next question will be coming from the line of George Sutton of Craig Callum. Your line is open.

Thank you. Just a clarification on the microlending program. Given that you have Cantaloupe One, I'm just curious, is there a certain customer scenario where you would look to do one versus the other. Does this suggest any changes in cantaloupe one?

Thanks, George. That's a really good question and clarification. These are aimed at very different use cases. So cantaloupe one is primarily aimed at somebody using 100% of our solution and finding a way to scale that without sort of stretching their balance sheet, is the best way I can put it. the micro-lending product that we have launched goes well beyond that. So our customers can use that to fund working capital. They can use that to fund new equipment purchases. And so they can use it for several things that go beyond just our cashless payment devices, our micro-markets, etc. And so in that sense, it's a broader canvas, if you will. I understand.

Okay, that's very helpful.

And you had mentioned Vendex, I believe Vendex North. So can you just give us a sense of the feedback you got from both partners and customers with the new product that you showed them?

Well, exceedingly positive. You know, it's a rare scenario of a product where, you know, the demand is far ahead of where we anticipated. And so, you know, we're almost working to ensure that the pace of scaling is the right pace of scaling. But the feedback in North America has been great. And now with Vendex in Europe has been phenomenal as well. And the real driver is it solves for, sorry, the real driver is it solves for theft. The challenge historically with vending machines has been that they've been perceived as old, especially the coil-based vending machine, and even though now the modern form factors are better received, the historical challenge with micro-markets has been theft. So they do very well in high-trust locations like corporate break rooms, but they do poorly in low-trust locations like a transit station, etc., where there's more tendency to have theft. And now with retail theft clicking up more and more, the smart store has been very well received as a kind of solution that solves for all these constraints. Gotcha.

Just one other thing relative to your cantaloupe advertising, the program that you launched, and you mentioned the million impressions. Can you give us a sense of what is the economic benefit to you from that? How do you charge for that?

Yeah, so we charge on a, there are two or three different models. So there are marketplaces where we can list quote unquote our screens and there it's, you know, the formulas are based on per impression, it's highly automated and a fairly standard business model. And we share, you know, revenue streams with our customers as well who operate those locations. There is another model where it's bespoke campaigns and bespoke advertising that's either from an interested party who wants to reach those audiences or a manufacturer of products that are sold out of those locations or machines. And there it's more custom pricing and more custom deals because the impressions are relatively more valuable to them. And it tends to be based on the number of people walking through a location that will actually cast their eyes on it. So it ultimately boils down to impressions. But those are the broad, you know, two models. There's a marketplace-based model and there's a custom, you know, we go sell the publisher of the advertising on it model. In both cases, we use this as a way to increase the revenue our customers derive from their existing platform. Gotcha. Perfect. Okay. Thanks, guys.

Thank you.

Thank you. One moment for the next question. And our next question will be coming from the line of Josh Nichols of B. Riley. Your line is open.

Yeah, thanks for taking my question and good to see the acceleration in subscription and transaction fee growth quarter over quarter. I'm just kind of curious if you could provide a little bit more color. I know you reaffirmed the guidance, but there's a relatively wide range, at least on the top line, between like the low and the high end. Is that driven mostly by like What's going to happen in terms of equipment sales for the back half of the year? What's kind of the delta between those two? If you could elaborate a little bit, please.

Yeah, sure. So that is right. It is mostly driven by the larger equipment sales in the back half of the year. With the smart stores that we launched, we're selling the entire store itself. So it's not a $250 point of sale device. It's a $12,000 to $15,000 smart store device. And as those ramp up, we're expecting the equipment revenue to ramp up in the back half of the year, especially as we get to the fourth quarter. But with that in mind, still keeping the transaction and subscription revenue growing somewhere between 15 to 20%.

I got it. That makes sense. So then you've continually come up above expectations in terms of the profitability when you look at like the EBITDA trend. Over the last few quarters, it's been up significantly. I know you reaffirmed 44 to 52, but given the margin profile that you guys are seeing, it seems like it'd be hard pressed for those margins to come in like near the lower end of the range. I'm just trying to think about how to think about the EBITDA guidance for the remainder of the year, given the profitability profile, which has improved pretty significantly over the last few quarters.

Yeah, and as we've gone through the year, we're tracking right to the midpoint of our guidance, and that's what we're expecting towards the end of the year as well. So we have seen the increase in the margins that could be a benefit to us as we get to the end of the year, but everything that we see right now, we're still going towards the midpoint of the guidance.

Appreciate it. Thank you.

Thank you. This does conclude the Q&A session. I would like to go ahead and turn the call over to Ravi for closing remarks. Please go ahead.

Thank you, Operator. Again, I continue to be very excited about the future of Camelot, both in terms of new products that we've launched and the adoption rates that we are seeing, as well as continuing to penetrate the market with our best-in-class seed software, as well as cashless payment devices and telematic solutions. We appreciate the engagement and interest of our investors. And with that, we'll conclude this call. Thank you.

Thank you so much for joining today's conference call. You may all disconnect.