Cantaloupe, Inc.

Good day and thank you for standing by. Welcome to the Cantaloupe Third Quarter Fiscal Year 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Meghna Mehra, Investor Relations. Please go ahead. 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 the actual results to defer 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 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.counselor.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 third quarter fiscal year 2025 call. I'll first start with a high-level view of our Q3 performance and outlook for fiscal year 2025, before turning it over to Scott to dive deeper into the numbers and our outlook. Q3 financial highlights. During the third quarter, our total revenue increased 11% year over year, to $75.4 million, driven by a 10 percent year-over-year transaction revenue growth and 10 percent year-over-year subscription revenue growth. Our equipment revenue was $10.2 million, an increase of 18 percent compared to Q3 fiscal year 24. Revenue came in lower than anticipated due to one-time weather events impacting transaction revenue and delays in equipment purchases due to economic uncertainty. While we had lower than anticipated equipment sales this quarter, we've seen a strong rebound in April, providing us confidence in our newly revised guidance for the year. Scott will cover this in more detail. Total adjusted gross margin continues to expand for the quarter at 41.6% compared to 39.6% in the same quarter last year. Adjusted EBITDA for Q3 was $13.9 million, a 37% increase compared to prior year, reflecting continued success with expanding margins and operating leverage. Q3 was one of our best quarters for cash generation, with total cash from operating activities achieving $22.4 million. Now on to Q3 operational highlights. We continue to see strong growth in micro markets and penetration of seed software with both existing and new customers. SMB customers continue to go all in with Cantaloupe, including cashless payments and seed software to manage vending micromarkets and smart stores. New wins include NDDN distributions, variety vendors, best vending, and ace vending. Many of these customers have selected Seed software in addition to cashless payment acceptance. A notable win in the enterprise space is DC Vending, who is completing a full replacement of over 1,200 competitive devices and moving from a legacy software platform to Cantaloupe Seed for their vending, micromarket, and office coffee business, and also deploying add-on modules such as analytics and remote price change. We see continued momentum in our micro-market business, including Peppy Foods moving from a competitor's platform to Cantaloupe and booking a large replacement order for 120 micro-markets, and also see wins in the small business segment, including a rollout of micro-markets with amazing raise. Our success in expansion with channel partners and resellers continues with additional orders through the quarter from AVS, and TPI for cashless payment devices to sell downstream into their customer base. The amusement vertical remains a strong focus for cashless expansion for us. We had the opportunity to showcase our Engage Pulse device at the AMOA show in Las Vegas in March. We've sold several Engage Pulse units across multiple customers, including Bar Partners, Hypermusement, and also developed a partnership with CandyMachines.com, where we will become one of their primary cashless payment providers for their customers. During Q3, we shipped over $2 million of smart stores, which drive incremental growth in new verticals and accelerate our foothold in the adjacent areas of residential, airport, and transportation sectors. We continue to gain traction in sports and entertainment venues, at the mid-tier level, including two independent baseball league venues who are adopting Cantaloupe's full point-of-sale platform, along with leveraging our SUIT management for creating a cohesive fan game day experience. Moving on to the product side, at the start of Q3, our Engage Pulse cashless device designed for the arcade and amusement industry became commercially available. It has been well received based on unique differentiated features such as ladder pricing interface for encouraging higher play spend, major price redemption reporting, and single tap multi-vend functionality. We've already received positive response from customers, including Tim Zahn, Vice President of Operations at Lieberman Companies, who stated, we installed crane machines with the EngagePulse units at one of our trampoline park locations, and saw in the first two months sales up 85% year-over-year. In mall locations, we are seeing up to 53% year-over-year sales increases. In late January, we held our largest cantaloupe customer conference to date, Cantaloupe University in Miami, Florida, where we hosted over 250 customers of all sizes, strategic partners, and technology providers. The agenda included a preview of our latest product innovations along with interactive training and education sessions to help customers leverage Cantaloupe's entire platform to run a profitable and growing business. We debuted the Smart Aisle as a preview to what customers can expect to see at the upcoming NAMA show in May. We also showcased new seed features that continue to enhance experience with add-on services such as seed analytics and remote price change. In February, in collaboration with Fundbox, we launched Cantaloupe Capital, a platform built to provide Cantaloupe customers flexible access to cash flow for equipment investments and business growth. Since launch, we've already signed 117 registered users through this platform, approving over 300,000 in capital funds. We continue to look at this as an enabler to help our customers of all sizes get quick access to cash and support their business growth with catalog. Our strategic priorities remain intact. We will continue to focus on scaling our business in Europe and Latin America and continue to refine our go-to-market strategy across both direct and indirect channels to expand our customer base organically and through strategic acquisitions. As always, I want to thank the entire Cantaloupe team for their continued focus on execution. With that, Scott will now review our Q3 results in more detail, as well as our outlook for fiscal year 25. Scott?

Thanks, Ravi. As Ravi mentioned, we delivered another strong quarter. Our Q3 25 revenue was $75.4 million, up 11% compared to Q3 24. Our combined transaction subscription revenue grew 10%, to $65.2 million during the quarter. This includes $21.2 million of subscription revenue, a year-over-year increase of 10%, and $44 million of transaction revenue, an increase of 10% compared to Q3 24. Transaction revenue in the quarter was materially impacted by several adverse weather events and storms in January and February, which led to abnormally low traffic for many of our customer locations including schools and offices that closed during these events. Since March and April, we have seen traffic trends and transaction volumes normalized. During the quarter, we also saw a pullback in large equipment purchases due to economic uncertainty as Robbie mentioned earlier. This appears to have rebounded in the fourth quarter as we have seen strong equipment sales in April. As of March 31st, 2025, we have over 34,000 active customers and 1.26 million active devices, an increase of 11% and 4%, respectively, compared to the prior year. The average revenue per unit for ARPU for 3Q25 was $206, up 11% 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 average total active devices for the same period. Our equipment revenue was $10.2 million, an increase of 18% compared to Q3 FY24, driven by continued success in our Smart Store offering. Total adjusted gross margin for the quarter was 41.6% compared to 39.6% in the same quarter last year, driven by continued expansion of our transaction and subscription margin. Subscription adjusted gross margin was 90.7% versus 89.6% in the prior year and transaction gross margin was 24.8 percent versus 22.8 percent in the prior year. These increases were driven by leveraging our scale to renegotiate vendor agreements and improving transaction routing strategies. Gross marginal equipment revenue for Q3 FY25 increased to 12.3 percent from 7.2 percent in the prior year. Total operating expenses in Q3 FY25 increased to $24.5 million compared to $22.6 million in Q3 FY24, driven by higher DNA and other expenses incurred by our newly acquired company, SB Software. Now turning to income taxes. During Q3 FY25, the company released $42.2 million of its valuation allowance associated with the federal and state deferred tax assets. These deferred tax assets were created as a result of net operating loss carry-forwards from historical business operations. The company's sustained profitability over the last three years, coupled with anticipated teacher earnings, provided enough evidence to support the fact that sufficient taxable income will be generated to use the net operating loss carry-forwards, making the dilution allowance on the deferred tax assets no longer necessary. The release of the $42.2 million dilution allowance shows as an income tax benefit on the income statement. Net income applicable to common shares for the third quarter was $48.9 million or $0.65 diluted earnings per share. Without the previously mentioned tax benefit, net income attributable to common shares would have been $6.7 million compared to net income of $4.4 million or $0.06 diluted earnings per share in the prior year period. Adjusted EBITDA was $13.9 million in the third quarter compared to $10.2 million in the prior year period, an increase of 37%. We ended the third quarter with cash and cash equivalents of $46.3 million. This represents $18.6 million of sequential growth for the quarter. The growth was largely driven by $22.4 million of cash from operating activities, offset by cash used in investing activities. Now turning to our fiscal year 2025 guidance. As Robbie mentioned earlier, we are revising our 2025 outlook as follows. Total revenues could be between $302 million and $308 million, representing growth of 13% to 15%. For transaction and subscription revenue growth, we now expect that to be at the low end of our previously given range of 15% to 20%. We now expect total U.S. GAAP net income to be between $64 million and $70 million, with the increase being driven by the release of the large valuation allowance on our deferred tax assets. We now expect adjusted EBITDA to be between $46 million and $50 million. Total operating cash flow is still 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?

As a reminder, if you'd like to ask a question at this time, please press star 11 on your telephone. and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Our first question comes from a line of Josh Nichols with B. Riley.

Yeah, thanks for taking my question. And glad you provided a little bit of color on the transaction revenue. To dig a little bit deeper into it, Were you able to quantify at all about what that weather impact had specifically on the transaction revenue per quarter?

Yes. Thanks for the question, Mr. Scott. And yes, this is approximately $2 million, mostly in January and then a little bit in February.

Got it. And then good to see the smart store sales. I think you said like $2 million during the quarter and looking at the guidance. there should be a healthy step up in hardware sales in 4Q. What are the early indications you're seeing from the smart store product demand, and do you expect those to ramp up pretty quickly, or what's the cadence look like on that front?

Yeah, Josh, you're absolutely right. We are already seeing quite a ramp up in the fourth quarter, and the smart store continues to be, I'd say, our hottest selling product. I'm actually at the NAMA show today, which is the largest conference for our industry. And the smart store is basically the most sought-after product that people want to learn about, order, and find out how they can get it and deploy it as soon as possible. And we are starting to see it translate into the numbers in fourth quarter equipment revenue already.

And then last question for me, then I'll hop back in the queue. You touched on it really briefly, some progress you're seeing in Europe. Any updates in Latin America specifically? I know you've been working with like one or two customers over there specifically, and any color on that?

We do have some really exciting updates. It's just a little bit premature to share them, but the scaling is continuing to happen both with the large customers we have as well as in the SMB space and look forward to some releases very soon from us on that.

Appreciate it. Thanks.

Our next question comes from Chris Kennedy with William Blair.

Good afternoon. Thanks for taking the question. Just wanted to follow up on your comments on the smart store. We saw your micropayment trends report. There's some really interesting data in that. Can you just talk broadly about kind of the revenue opportunity between traditional vending, smart stores, and the other verticals?

Yeah, Chris, thanks for the question, first of all. What we are seeing is an evolution in the form factors that support self-service commerce. It it used to be vending and the various forms in which vending machines came. And then came the micro-markets, which essentially were kiosk-based marketplaces with products kept out in the open. Vending, very secure, no chance of people stealing from it. However, an older experience, a less contemporary experience, and some limitations in terms of the types of products that can be sold from there. Micro-markets, were a great fit for corporate buildings and kind of non-public secure locations where the audience was fairly known. And hence, the potential for theft was very controlled. But they couldn't scale beyond that space. Where there is low-trust environments like transit locations, hospitals, hotels, etc., which are either semi-public or public, micro-markets have struggled because of the theft issue in spite of cameras and all kinds of theft detection measures. The smart store has been such a runaway hit because it solves both of those problems. And it's, in that sense, the next evolution of self-service commerce. It can operate in low-trust environments because it's theft-proof, and it can also provide a very contemporary, very modern feel and allow for food items like fresh salads and sandwiches, etc., to be sold. And then, by the way, there are other form factors coming, such as the just walkout experiences that you've seen with Amazon, digital cart experiences that are AI-powered, camera-based, scan-free, you know, no need to scan and check out products. So there are more evolutions coming. The way I see it pan out is I think vending will continue to grow kind of in the 5%, 6% range and micro markets will continue to grow kind of in the 30%, maybe even 40% range. Smart stores and all the other cousins they have like smart coolers and various other flavors, some are AI-powered cameras, some are load-bearing cells. I think they will grow 100%, 200% in the next two to three years and start start becoming a big portion of the market share. Long answer to your short question, but hopefully that helps.

Yeah, no, that's fantastic. Really appreciate that. And then just a follow-up, when you think about the productivity or the monthly sales, how does that vary between a vending, a micro-market, and a smart store?

I think as we execute on this new and exciting phase where people are realizing that, hey, if I deploy something, When I deploy a micro market, I get 10 times the sales of a vending machine. And oh, by the way, when I deploy a smart store, I get twice even that. And the margins are better. We think in the next, you know, at least the next 12 to 18 months, smart stores will be a considerable portion, maybe 25, 30% of the new sales that we do.

Great. Thanks for taking the questions.

Our next question comes from Gary Prestapino with Barrington.

Robbie, Scott, how are you?

Wonderful, Gary. How are you?

Oh, just great. Thanks. Hey, just a couple of questions in terms of the slippage in sales. Because I've had a number of calls today and a couple of companies have said that the storms in the southeast really impacted them. And I would assume that that's where you're talking about where you had some issues with, um, lower traffic to generate transactions. Or was there something else going on there?

No, no, no. And really it was, uh, storms that blew through on the 20th and 21st of January. Those are on a Monday and Tuesday, uh, cause a lot of school closures and a lot of business closures. So that was the biggest impacting storm. And there was also another storm that blew through in February that lasted longer. It was from the 13th to the 17th of February. That also had a fairly significant impact.

That's when places like New Orleans were getting snow, right?

Right. And the tornadoes that also came with it and the flooding that also came with it.

Okay. So that's good. And then I guess on the equipment side, I mean, you guys had said you were on allocation for smart stores, the smart store product. Was the slowdown that you saw in the quarter, I would assume it's towards the latter end of the quarter, did that encompass the smart store product or was it, you know, something else that was out there, say, micro markets, things like that, that really hit you?

Yeah. Yeah, no, smart stores actually it was the opposite. We were more supply constrained than demand constrained. But on the micro markets as well as the vending and other amusement, all of the other spaces, we did see a period of time where economic uncertainty was driving businesses to defer purchases. They were nervous about the tariff situation, they were nervous about trade, They were nervous about interest rates, potential recessionary conditions. We have seen that, you know, settle down as the, you know, broader markets have settled down and light at the end of the tunnel around bilateral kind of tariff deals. And, you know, maybe it's not going to be as bad as it once felt is starting to become the tone. We are seeing those purchases happen now in the fourth quarter. So, you know, We are optimistic that it was a temporary kind of deferral, but that is what caused the weakness on the equipment side.

Okay, so the equipment kind of snapped back here in May. Because, I mean, look, the whole thing with tariffs, the liberation day didn't come until the first couple of days of May. So post that time where people have had the ability to absorb some of what could possibly happen with tariffs, And, you know, the stock market has started to do a little bit better. You have seen an increase in equipment sales. We have.

We have. The other thing I'll mention is a lot of people think liberation days when the problems of uncertainty started, that's actually not true. There was way more uncertainty, at least from our vantage point before that, because There was rhetoric around something's going to happen, and people didn't know what's going to happen. At least with Liberation Day, people then knew, okay, this is what's happened, and this is what we think will now happen, and so let's get on with it. So it actually had the opposite effect. It kind of settled some of the decisions down because it provided a worst-case analysis for a lot of people.

Okay, thank you.

As a reminder, if you'd like to ask a question at this time, please press star 1-1 on your touch-tone phone.

Again, that is star 1-1 to ask a question. Our next question comes from a line of Mike Lattimore with Northland Capital.

Hi, this is Aditya on behalf of Mike Latimore. Could you give some color on what do you expect the international revenue to be as a percentage exiting this year?

Sure.

So as we exit our fourth quarter 2025 fiscal year, we're anticipating international revenue to be in the 3% to 4%, and then continue to climb from there through our FY26 year.

Got it. And some color on the free cash flow that we can expect.

Sure. So as Robbie mentioned in his prepared remarks, we had a great quarter for cash flow. Our free cash flow this quarter ended up being $18.6 million. As we look at the fourth quarter, we're anticipating it to be around that same range. So operating cash flow is somewhere in the upper let's say $16 to $22 million, and free cash flow being somewhere in the $15 to $18 million.

Got it. Thank you.

That concludes today's question and answer session. I'd like to turn the call back to Ravi for closing remarks.

Thank you, Operator. Again, thank you all for your engagement. I just want to leave you with kind of the highlights from my perspective from Q3 were that we breached the $200 ARPU mark for the first time, which was part of our strategic goals, and I'm very pleased that we've crossed that milestone. As you noted, earnings performance and cash flow generation, in spite of the slower revenue growth, have been really strong, and I'm particularly pleased that that comes from margin expansion, not cost reduction. and it evidences the strength of our business model and the fundamental tailwinds that the self-service commerce tech space enjoys. And also, thanks to an established ability to generate net income, we are now unlocking the benefit of accumulated losses from prior periods, which will benefit both income and free cash flow in the upcoming quarters. Thank you all for your attention, and with that, we conclude the call.

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