Cantaloupe - Q1 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Welcome to Cantaloupe first quarter fiscal year 2024 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 will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Dara Dierks, Investor Relations. Please go ahead.

Dara Dierks (VP of Investor Relations)

Thank you, Michelle. Good afternoon, everyone. Welcome to the Cantaloupe first quarter earnings conference call. With me on today's call are 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, including 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.cantaloupe.com. With that, I would like to turn the call over to Ravi.

Ravi Venkatesan (CEO)

Thanks, Dara. Good afternoon, everyone, and thank you for joining us today for our first quarter fiscal year 2024 call. During this quarter, our revenue increased 8% year-over-year to $62.7 million. Importantly, transaction revenue grew 18%, and subscription revenue grew 15% year-over-year. Adjusted EBITDA for Q1 was $7.8 million, a 246% increase over last year's first quarter. As covered in our last call, in fiscal year 2024, we are focused on expanding operating leverage using a three-pronged strategy: driving subscription revenue, optimizing cost of goods sold, and controlling operational expenses. We are driving subscription revenue through the following initiatives. First, by accelerating growth in micro markets. We continue to see strong demand in the micro market segment for Cantaloupe's offerings.

Two notable wins include P&B Foods, a full-line vending micro market and office coffee provider based in Florence, South Carolina, and Pyramid Foods, a full-line vending and micro market operator based in Rogersville, Missouri. Our traction in the small business segment continues to accelerate with the adoption of micro markets. In Q1, we saw several small business operators purchase full micro market setups from us, including kiosks, coolers, cabinetry, and fixtures. ABC Vending, an operator out of Illinois, purchased new markets with Cantaloupe and also took advantage of our upgrade program. We're excited about the momentum and continued interest from our growing base of small business customers. We're also seeing opportunities with new location types for our micro market portfolios.

For example, Anytime Fitness in Long Beach, California, is adding micro markets as a new amenity for its gym members. Secondly, we are driving subscription revenue through the penetration of Seed software.

We've seen continued adoption of our Seed software, in particular, the Markets edition. Seed Markets is becoming the industry standard for combined management of vending, micro markets, and office coffee within one platform for ease of routing, warehouse management, and driver efficiencies. New Seed deployments include VVS Canteen, Treasure Valley Vending, and Palace Vending, who went all in with Cantaloupe software in Q1. Thirdly, adding new products is also helping us drive subscription revenue. We are seeing traction with our newest product, Smart Coolers, which we recently showcased at this year's NACS show in Atlanta, as well as the Abastur show in Mexico City. Our innovative smart store solutions, such as Cooler Café and Smart Café, allow consumers to make a payment, unlock the cooler, grab their items, and walk away.... Our advanced technology provides greater security for the store owner and a faster, frictionless buying experience for the consumer.

We are also experiencing progress with new original equipment manufacturers and partners integrating Cooler Café kits and our smart lock technology. Finally, we continue to innovate with Cantaloupe One. Our Cantaloupe One platform continues to grow penetration in the mid-market and is serving as a great benefit for operators who want to bundle the purchase of new card readers from Cantaloupe with Seed software. Two recent wins were Larsen Vending and CAM. I also want to share some exciting updates on progress with our international expansion. We hosted a successful launch event in the UK on the 28th of September with over 100 prospects, partners, and industry professionals, and are pleased to report a high degree of interest and excitement for our products and services. We showcased next-generation technology, including full digital screen retrofit doors for vending or coolers, age verification-enabled smart coolers, and smart lockers.

This event allowed us to showcase our innovative solutions to the European market and also highlighted our commitment to bringing the best, most reliable solutions to customers and partners alike in this market. We've also been adding new international customers, including Decorum Vending out of the U.K., who ordered 700 devices. In Portugal, we implemented Cantaloupe's cashless payment technology on Club Master's golf ball dispensers, which is another great example of product market fit in Europe and in an adjacent vertical. Our second priority for fiscal 2024 is to optimize cost of goods sold. In Q1, we improved margins on every revenue line compared to the prior year. Transaction margins continued to benefit from the cost optimization and price standardization we put in place. We reduced network fees, which improved subscription margins, and equipment continued to benefit from a more stable pricing environment.

Our third fiscal year 2024 priority is maintaining discipline on operational expenses. In Q1, OpEx declined by 5% compared to the same period in the prior year, and we saw a notable improvement in G&A, which declined 10% year-over-year, driven by decreased infrastructure and professional services costs. We also completed the integration of the Three Square Market business in Q1 into our enterprise financial systems. Fiscal year 2024 will benefit from our fiscal year 2023 initiatives, including migrating to the AWS platform for cloud infrastructure, integrating Salesforce, NetSuite, and other IT infrastructure improvements across the organization. I'm pleased with this strong start to the fiscal year, and I'm 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 Q1 results in more detail, as well as review our outlook for fiscal year 2024. Scott?

Scott Stewart (CFO)

Thanks, Ravi. As Ravi mentioned, we delivered another strong quarter of revenue growth and profitability. Our Q1 2024 revenue was $62.7 million, up 8% year-over-year. Our combined transaction subscription revenue grew 17% to $55.1 million during the quarter. This includes $18.1 million of subscription revenue, a year-over-year increase of 15%, and $37 million of transaction revenue, an increase of 18% year-over-year. The overall increase in revenue was again driven by increased processing volumes, higher average transaction ticket sizes, and subscription revenue growth from micro markets and Cantaloupe One. Our equipment revenue was $7.5 million, a decrease of 30% compared to Q1 FY 2023. This was primarily due to prior year benefiting from the 3G upgrade cycle that is now behind us.

While overall equipment revenue was down, we did see an increase in active device growth of 4% year-over-year. Total gross margin for the quarter was 38.8%, compared to 24.5% in the same quarter last year, driven by higher margins across all three revenue lines. Subscription and transaction revenue margin was 42.5% versus 35.5% in prior year. As subscription revenue becomes an increasingly larger share of our overall revenue, we expect to realize margin expansion in both the terms of gross profit and operating margin. Equipment revenue margin for Q1 FY 2024 improved to positive 12.2% from negative 23.8% in prior year. Total operating expense in Q1 FY 2024 were $21.6 million, compared to $22.7 million in Q1 FY 2023.

Net income applicable to common shares for the first quarter was $1.7 million, or $0.02 per share, compared to a net loss of $8.9 million, or $0.13 per share in the prior period. Adjusted EBITDA was $7.8 million in the first quarter, compared to -$5.4 million in the prior year period, an increase of 246%. We ended the first quarter with cash and cash equivalents of $54.6 million and generated $6.7 million in cash from operations. 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 domestic and international go-to-market strategy and product development. Now, turning to our FY 2024 guidance. We are reiterating our guidance for the fiscal year.

Total revenue between $275 million and $285 million, representing growth of 13%-17%. The combination of transaction and subscription revenue to be between $234 million and $242 million, representing growth of 17%-21%. Total US GAAP net income to be between $9 million and $15 million. Adjusted EBITDA is expected to be between $28 million and $34 million, and total operating cash flow to be between $28 million and $38 million. Adjusted EBITDA will be weighted towards the second half of the year as we continue to invest in sales and marketing, installation services, and international expansion. This will lead to higher SG&A in Q2. However, we anticipate these investments will drive subscription revenue throughout 2024.

With that, we would now like to turn the call back over to the operator for the Q&A session. Operator?

Operator (participant)

Thank you. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from Josh Nichols with B. Riley. Your line is open.

Josh Nichols (Senior Research Analyst)

Yeah, thanks for taking my question. Great to see the margin improvement across all the segments and good control of the operating expenses with healthy EBITDA. Just looking here, sales were up 8.5% or so in the first quarter, but I know the company is targeting a pretty meaningful acceleration, closer to 15% for the full year. How much of that is really attributable to international growth and the micro markets? And how good is the visibility you guys have into the back half, based on some of these early-stage wins you've been announcing?

Ravi Venkatesan (CEO)

Josh, thanks for the question. Yes, you know, we're very pleased with the margin expansion and continued expansion and operating leverage, which is the journey we've been on. In terms of the growth side of the equation, we actually have pretty good visibility to that ramp because there is a significant backlog of both micro markets as well as cashless payment acceptance services, where we've sold, but there is an installation backlog. So that gives us pretty good visibility. And that, you know, the problem that we had alluded to in the last quarter around device activation timelines being longer because of labor shortages, continued into our first quarter, but we've now seen that window shrink and get much closer to what is normal.

So that, you know, that just means that as our sales velocity, which has already been up, starts being matched by installation velocity, we'll start seeing that revenue ramp up.

Josh Nichols (Senior Research Analyst)

Thanks. That's great to hear, and it sounded like you had some good traction with Cantaloupe One. I know you've been adding, like, 4-5 thousand or so kind of new subs. Is that the type of trajectory you guys are continuing to see? And any commentary on what you're seeing in terms of upsells for things like inventory management and remote price change would be helpful.

Scott Stewart (CFO)

Sure. Thanks for the question, Josh. So overall, we continue to see great traction with the Cantaloupe One program. You know, the cost of capital is continuing to increase, so it's especially attractive in the small and mid-market, and it continues to be. We're not providing the actual number of licenses that we have out there, but it has continued to grow at the same rates or the same percentage of what our overall equipment sales have grown at.

Josh Nichols (Senior Research Analyst)

Great to hear. Thanks.

Operator (participant)

Please stand by for the next question. The next question comes from Gary Prestopino with Barrington Research. Your line is open.

Gary Prestopino (Managing Director)

Good afternoon, Scott and Ravi. I wanted to just dwell a little bit into, and I don't know if you mentioned it in the narrative, but you had this launch event in the U.K. And what really was the focus of what you were trying to sell there? Was it basically micro markets, or are you starting with more of, you know, individual vending machine products?

Ravi Venkatesan (CEO)

Gary, thanks for the question. It's our full portfolio of products, including-

Gary Prestopino (Managing Director)

Mm-hmm.

Ravi Venkatesan (CEO)

cashless payment acceptance, telematics, that lets dispensation of a product or service happen from whether it's a vending machine or a golf ball dispenser, as I mentioned, a variety of different equipment that's dispensing products or services unattended, as well as our Seed software. So it's, it's our full complement of services.... In particular, we've seen a lot of interest in Europe with Smart Coolers, smart store concepts, et cetera, which is, which is attractive in terms of margins and very exciting in terms of being more innovative and on the bleeding edge of using technology.

Scott Stewart (CFO)

Is there anyone over there right now that is offering, you know, these same kind of products, like, especially the Smart Coolers and-

Ravi Venkatesan (CEO)

There are other competitors that offer these types of products, but not one single competitor that offers the full breadth of these products.

Gary Prestopino (Managing Director)

Okay. All right. Thank you very much. That's all I have.

Ravi Venkatesan (CEO)

Thank you.

Operator (participant)

Please stand by for the next question. The next question comes from Marc Feldman with William Blair. Your line is open. Marc, if your phone is on mute, can you please unmute? Please stand by for our next question. The next question comes from Mike Latimore with Maximus Securities. Your line is open.

Mike Latimore (Managing Director)

Hi, this is Logan on for Mike. Kind of building on that question about Cantaloupe One from earlier. Can you guys talk a little about your view for the pipeline of that service and kind of if you're considering adding any new capabilities or refining pricing? Thanks.

Ravi Venkatesan (CEO)

Hey, Mike, thanks for the question. Yeah, what we've done is over time, we've broadened the suite of products that are offered as part of those Cantaloupe One bundles. The information is actually available on our website along with the pricing. It's very transparent pricing. But what's happened is, over time, we are seeing more and more demand from particularly the small business segment of our customer base. As Scott mentioned, you know, the cost of capital going up is driving them to look at Cantaloupe One instead of more traditional lease or purchase options to expand their business. So we are seeing it go from just being payment acceptance devices to bundling software to now micro markets as well.

Mike Latimore (Managing Director)

Perfect. Thank you. And could you guys provide some color kind of around growth in micro markets and how much of that is coming from new logos versus upsells?

Ravi Venkatesan (CEO)

Yeah. So we have, and I'm very pleased to share that we've actually doubled the sales velocity after we had done the acquisition of Three Square Market. Now, we took a little bit of time to get the installation velocity also going, and that has now started matching the sales velocity, I would say, just in the last couple of months. Till then, it was significantly lagging behind. And then in terms of a mix of new logos versus current logos, I would say there's been a lot more new logos for that product, but not necessarily new logos for us as a company. So we've done a lot of cross-sell and upsell, if that makes sense.

Mike Latimore (Managing Director)

Yeah. Thank you. That's all for me. Congrats on the quarter.

Ravi Venkatesan (CEO)

Thank you.

Operator (participant)

Please stand by for the next question. Our next question comes from George Sutton with Craig-Hallum. Your line is open.

George Sutton (Partner and Co-Director of Research)

Hey, good afternoon, guys. This is Adam on for George. Ravi, you mentioned in your remarks that you're experiencing some, you know, good progress with equipment manufacturers. I was wondering if you could talk a little more on that.

Ravi Venkatesan (CEO)

Yeah, it's, you know, particularly in the international markets, you know, in Latin America and in Europe, we've found that when we work with equipment manufacturers and sort of embed our solutions, there is a much faster and more efficient distribution model. And we are finding more traction in going to market that way, in addition to kind of our traditional channels.

George Sutton (Partner and Co-Director of Research)

That's great. And you did mention Latin America there, and I know we had a few notable wins in Europe, but would be curious to know about the progress in Lat Am as well.

Ravi Venkatesan (CEO)

The progress in Latin America continues to be positive, and we have gone through a few implementations. There are competitive reasons why we sometimes mention or don't mention a particular name, you know, or not. So I'm, you know, the trajectory is actually very good, but the nature of the implementations is such that we are, we are not sharing the names of specific customers yet for Latin America.

George Sutton (Partner and Co-Director of Research)

Understood. Thanks, guys.

Operator (participant)

Please stand by for the next question. The next question comes from Gary Prestopino with Barrington Research. Your line is open.

Gary Prestopino (Managing Director)

Scott, do you have... You gave the total transactions for this quarter, but do you have the absolute increase, the percentage increase year-over-year on transactions offhand?

Scott Stewart (CFO)

Overall, the number of transactions, not the dollar value of transactions?

Gary Prestopino (Managing Director)

Yeah, I'm just looking for the total, the number of transactions. You had 283 million, right?

Scott Stewart (CFO)

Yes, we're up 3% year-over-year. We're up 2% sequentially.

Gary Prestopino (Managing Director)

Okay. In terms of what you did in the UK, I would assume that I know you've already sold some product on the continent, but are there plans to do a one of these showcases on continental Europe in the major countries like France and Germany this year?

Ravi Venkatesan (CEO)

Not this year. Our next major event of a similar nature is in Latin America, and that is on the fifth of December. So, we've got a, you know, kind of a well-sequenced game plan of these types of events, and the next, you know, focus is really on the Latin America event.

Gary Prestopino (Managing Director)

So and on, in terms of, I mean, Three Square Market was doing business in Europe, correct? And they had some Seed software there, or they had, they had their product there, and you were gonna try and cross-sell Seed software. Is that correct?

Ravi Venkatesan (CEO)

That's correct, and we actually have implemented Seed Software and cross-sold already. That happened a couple of quarters ago, and it is in place.

Gary Prestopino (Managing Director)

Okay. Thank you.

Operator (participant)

Please stand by for the next question. And as a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. Our next question comes from Marc Feldman with William Blair. Your line is open. Marc, if your phone is on mute, can you unmute, please? Marc, you may want to try to log out and log back in. Please stand by. I am showing no further questions at this time. I would now like to turn the call back to Ravi for closing remarks.

Ravi Venkatesan (CEO)

Well, thank you all for joining this call. To summarize, we continue to be very excited about the trajectory we are on in terms of expanding operating leverage and growing our earnings in an aggressive manner. We are also pleased with the traction on both growth drivers for the business, international expansion, as well as growing the micro market business, including adding newer products like Smart Coolers and targeting newer subverticals like gyms and fitness centers, et cetera. So a lot of positive momentum from the first quarter as we've kicked off the year, and look forward to continuing to drive the business forward through the next few quarters and getting to our long-term goals. Thank you.

Operator (participant)

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