Cantaloupe - Q3 2022

Transcript

Operator (participant)

Welcome to the Cantaloupe third quarter fiscal year 2022 earnings conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. With me on the call today is Sean Feeney, Chief Executive Officer, Ravi Venkatesan, Chief Operating Officer, and Scott Stewart, Chief Financial Officer. Before we begin today's call, I would like to remind you that all statements included in this call, other than statements of historical facts, are forward-looking in nature. Actual results could differ materially from those contemplated by the forward-looking statements because of certain factors, including, but not limited to business, financial markets, and economic conditions.

A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included with our filing 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 reflects management's view 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 a 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 a substitute for, GAAP financial measures, such as net income or loss.

Details of these non-GAAP financial measures and a presentation of the most directly comparable GAAP financial measures and a reconciliation between these 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 return the call over to Chief Executive Officer, Sean Feeney. You may begin.

Sean Feeney (CEO)

Thank you, operator. Good afternoon, and thank you for joining us today. We are pleased to report our results for the third quarter. We reported a solid start to the calendar year 2022, increasing total revenue by 18% year-over-year, marking our fourth consecutive quarter of double-digit annual revenue growth. While we were negatively impacted by the resurgence of the Omicron variant in January and February, business recovered strongly in March. Transaction revenue for the quarter grew 31% year-over-year. Encouragingly, the strength in the transaction volumes has continued into April as offices begin to reopen. Subscription fees grew 7% in the quarter, and we continue to drive subscription growth with initiatives like our recent launch of the Cantaloupe ONE platform, which Ravi will discuss in more detail shortly. Equipment revenue grew 1% this quarter.

We expect a lift in equipment revenue in Q4, typically our strongest quarter, as more operators prepare for the 3G to 4G and EMV upgrades. We saw a 22% increase in active customers, and in total, we achieved a 36% increase in total dollar volume of transactions, a record for the fourth consecutive quarter. Just last month, we attended the NAMA show in Chicago, where we hosted a number of customers and prospects at our booth. We showcased many of our new products, including Yoke 2.0, our AI-enabled merchandising offering with HIVERY, and our Seed Warehouse app, to name a few. After speaking with a number of operators, I came away with the following exciting takeaways. First, more than ever, the industry is poised for expansion and growth through innovation, and technology is top of mind for operators.

Second, the M&A market is very active, led by many large operators who are also Seed customers and are leveraging Seed to standardize their technology stacks across all branches for complete operational visibility post-acquisitions. There's also an explosion of small operators leveraging technology in niche markets to grow and diversify their offerings. Thirdly, operators are increasingly focused on engaging customers to drive additional revenue through advertising, interactive devices, and loyalty programs, and I'm happy to report that we have products that meet all of those needs. Lastly, there's a lot of innovation on the next generation of convenience services in micromarkets and the next generation of vending solutions, including concepts like smart coolers, which provide a hybrid experience in both traditional vending and a micromarket. Specific to Cantaloupe, operator feedback is that they have seen a dramatic improvement in our customer service since the August 2021 NAMA conference.

Our efforts to improve customer support and the customer experience across our platform are paying off, and I'm incredibly proud of the recognition for our company and team. A common refrain was, "You listen to our issues and address them." Peter Cordero, owner of CRH Catering Company, headquartered in Pennsylvania, a well-respected vending industry operator, said that Cantaloupe has world-class technical support and that Seed has revolutionized the industry and greatly increased the value of our business. With our technical expertise and continuous focus on customer success, we believe we are well-positioned to provide operators with ways to engage consumers and increase same-store sales as well as to optimize their businesses now and in the future. We continue to believe our existing customer base represents a significant opportunity to scale our recurring revenue.

I'd like to share some examples of customer expansions and new wins, including a competitive win-back from this quarter. The Buffalo Rock Company, a large Pepsi bottler serving Alabama, Georgia, and Florida with 14 franchise operations, 13,000 vending machines, 350+ micromarkets, and 1,400 office coffee service delivery points, is a great example of a significant customer expansion during the quarter. Buffalo Rock was using our hardware, but after successfully piloting Seed, made the decision to go all in with a full conversion to Seed, along with continuing to deploy ePorts. This represents increased traction in deployments for Seed Markets and Seed Delivery. We will be working to complete this implementation over the next several months.

During the quarter, VendEdge, who was a client that left our platform two years ago for a competitor, returned to Cantaloupe for our full suite of cloud software, Seed Pro, Seed Office, Seed Markets and Seed Delivery. Other new Seed customer wins in the quarter include Refreshment Works, Breaktime Vending, and Jordan Distributing. Additional hardware expansion wins in the quarter include Cash Depot, Pepsi Florence, and Seaga, among others. Finally, we continue to develop exciting new initiatives to enable our customers to increase revenue through new modes of payment, additional consumer engagement functionality, as well as new business tools for running a more efficient operation. On that note, I would like to turn the call over to Ravi Venkatesan, our Chief Operating Officer, to discuss some exciting and important product updates. Ravi?

Ravi Venkatesan (COO)

Thanks, Sean. As Sean mentioned, we recently returned from NAMA, which was a great success for us. We had announced many of the new products that we launched this time at our last NAMA show in August 2021, and this year it was energizing to showcase and actively sell these products to an enthusiastic customer response. I wanted to highlight a few recent launches. First, our Seed Warehouse app, which we released on March sixteenth. This app streamlines the workflow within the warehouse, enabling functions like stock taking, inventory reconciliation, et cetera, to happen rapidly through an easy-to-use mobile app. Customer feedback has been extremely positive.

For example, Tommy Elliott from Elliott's Vending and Coffee Services said, "We used to dread doing inventory, but now we can do it twice as fast with the new Warehouse app, saving time and making our business more efficient." Tyler Daley from the Jackson Brothers of the South recently said, "We were having a hard time getting accurate warehouse and driver inventory information. Compared to other solutions, we are now saving money and are able to keep all our business information in one system. It was a no-brainer." We also launched our Cantaloupe ONE platform on March twenty-third. This is a first-of-its-kind bundled subscription model that solves the need for consumers or our customers to future-proof their business. It brings a cloud computing-like paradigm to unattended retail, eliminating upfront capital expenditures and the risk of hardware end of life due to transitions such as 3G to 4G, EMV, et cetera.

Thanks to zero upfront fees and a simplified monthly subscription model, this platform is starting to gain significant market traction. On March twenty-ninth, we launched our ePort Engage Combo. In addition to all the benefits of our ePort Engage, which we had previously launched, this device offers simplified installation directly over an existing bill acceptor. It's ideal for customers with machines that have limited space to install a card reader. We've already shipped over 25,000 ePort Combo and Engage devices during the third quarter. A highlight for us at NAMA was our next-generation Yoke platform, as well as the newly announced Yoke POS+ product. This upgraded platform provides an enhanced consumer interface, customized promotion, and loyalty program capabilities, as well as a unique mobile app that supports new engagement features.

The Yoke POS+ version enables both cashless as well as cash acceptance, and is expected to be available to our customers later this calendar year. One of our customers, Chris Cascione from Group C, stated, "For every one micro market with other solutions, we can have 10 Yoke markets, because it is just that cost-effective." As part of our quick-to-market strategy, we also continue to leverage new and existing partnerships to rapidly bring exciting products to our industry. For example, we recently announced a partnership with Vendors Exchange to extend the reach of our Seed remote price change product, extending the compatibility to 99%+ of vending machines in the U.S. We've launched this product and already sold it into our first few customers and are seeing a very strong pipeline for it. Another success story has been our launch of an AI-powered merchandising product in partnership with HIVERY.

This company has a long track record of success in traditional retail, and we've brought this functionality now to unattended retail. We are making it available as an add-on subscription within our Seed software product. Hybrid was a very hot item at our NAMA booth this year, and we've already signed our first few customers. We've partnered with Vendekin to enable a true touchless mobile app-enabled vending experience. With this technology, consumers can now simply scan a QR code using their smartphone, select products, make payments, all of it without ever touching the vending machine. This product will be sold as an add-on subscription within our cashless platform. It was an exciting quarter with the release of many new products as we continue to help our customers reduce their operating costs and capital expenditures, as well as streamline their processes and scale their businesses.

With that, I'd like to turn the call over to Scott to go over our financials in greater detail. Scott?

Scott Stewart (CFO)

Thanks, Ravi. Good afternoon, everyone. During the third quarter, we continued our strong trend of year-over-year growth. Q3 2022 revenue was $50.3 million, an 18% increase year-over-year, driven by subscription and transaction fees of $42.1 million and equipment sales of $8.2 million. Transaction fees grew 31% in the third quarter, another company record. Subscription fees increased 7% year-over-year, with 21% increase in combined subscription and transaction fees year-over-year is primarily driven by the 36% increase in total dollar volumes for Q3 2022 compared to last year. Equipment revenue for the third quarter was relatively flat year-over-year, as many customers held off on delivery of 4G device upgrades until closer to the discontinuation of 3G network support starting in 2022.

Due to this, we expect equipment revenue to accelerate through the end of 2022 calendar year. Active customers increased 22% year over year to 22,800 customers. Active devices total 1.1 million as of March 31, 2022, an increase of 4% year over year. Total gross margins for the quarter was 32.2%, up from 29.7% in prior year fiscal third quarter. We've meaningfully expanded gross margins on our transaction fees to the mid-teens during the quarter, which we believe will continue going forward. Subscription and transaction revenue margin was 40% versus the prior year quarter's margin of 41%. Equipment revenue margin for Q3 FY 2022 improved 11 basis points to -8% from -19% in prior year.

Operating expenses in the third quarter totaled $15.3 million, compared to $14.7 million in Q3 2021. We've continued to increase our investment in R&D for product innovation and in our sales force to acquire new customers while we continually reduce G&A. Net income applicable to common shares improved for the third quarter to $1.8 million or 3 cents per share, compared to a net loss of $2.2 million or a loss of 3 cents per share in the prior year period. Adjusted EBITDA was $3.7 million in the third quarter, compared to $2.2 million in the prior year period. The improvement was largely due to our ability to grow revenue while simultaneously improving gross margin. Relative to our balance sheet and liquidity, we ended the third quarter with cash and cash equivalents of $75.1 million.

In March, we amended our debt facility, which has improved pricing and makes available an additional $10 million increase to our term loan that can be borrowed for up to one year from closing. The new facility also increased our line of credit to $15 million. We are proud of this agreement as it is a direct result of our bank's confidence in the company due to our strong financial performance over the past year. Turning to our fiscal year 2022 guidance, we remain confident in our previously issued guidance for revenue and continue to expect to be between $200 million and $210 million, representing year-over-year growth of 20%-26%. We expect transaction subscription revenue to continue to grow based on increased dollar and transaction volumes, as well as incremental subscription revenue from new and existing customers.

We continue to expect adjusted EBITDA to range between $8.5 million-$10.5 million. We now expect net loss applicable to common shares to be between $1 million-$3 million. This improvement is based on lower than anticipated stock-based compensation expense and a true-up of our interest expense related to sales tax. We also continue to expect cash flow from operations to be between break even and -$2 million, given the continued supply chain challenges and the need to build our inventory levels whenever possible. With that, I'll now turn the call over to the operator for Q&A. Operator?

Operator (participant)

To ask a question, please press star one on your phone's keypad. Please stand by while we compile a Q&A roster. Your first question comes from the line of Mike Latimore from Northland Capital Markets. Your line is now open.

Mike Latimore (Managing Director, Equity Research)

Yeah, thanks. Great results there. Outlook. I guess on the subscription and transaction gross margin, you know, grew sequentially despite transaction growing as a %. I guess you touched on it there. I guess the one, you said, I think you said the transaction gross margin was in the mid-teens percent. I guess that's the first question. The second, should this level of gross margin be sustainable or improve a little bit going forward? What drove the transaction improvement, gross margin?

Sean Feeney (CEO)

Scott, you wanna answer that one?

Scott Stewart (CFO)

Yeah, sure. Thank you very much for the question. Overall, what we're seeing is our margin on transactions are increasing, and a lot of that is

Due to two different things. The first is that we've worked over the past year to manage our costs, and so we've entered into some new agreements to get some additional incentives and rebates, which has really helped in reducing our costs, which is growing the margin. The other thing that we're seeing is an increase in the average transaction price. When we began the year, I guess last year's average was around $2.05 per transaction. Now we're up to $2.17 per transaction. That's helping increase the margin as well.

Mike Latimore (Managing Director, Equity Research)

Yeah. Makes sense. Then you talked about a number of things that seem like they can drive subscription. I guess, you know, is there any way to rank order them or discuss like what would be the biggest driver subscription? You know, is it Seed? Is it RPC, new connections? You know, how should we think about the biggest subscription drivers here?

Sean Feeney (CEO)

Yeah. It's a great question, Mike. You know that's something that we are very focused on. First of all, you know, signing large customers like Buffalo Rock are key to kind of growing the subscription revenue, and that has the biggest kind of near-term impact. Secondly, we're very excited about the initial market reaction to the Cantaloupe One platform as a service. We've sold, you know, into the hundreds of customers on that. It fits very well in the SMB part of the market, not quite as attractive to the high-end of the market 'cause they like to buy devices and depreciate them. The market was asking to kind of future-proof a platform, and we answered it with that. I think that will. You'll see some improvement in that.

Now, it will have a negative impact on equipment revenue, but I think we're all very happy to trade equipment revenue for subscription, especially when it's bundled into the subscription, we get higher margins on that. The next would be RPC and Yoke probably equal there in driving additional subscriptions. Then, HIVERY would be probably the third-

Mike Latimore (Managing Director, Equity Research)

Mm.

Sean Feeney (CEO)

In that kind of priority of where we will see contribution to subscription growth.

Mike Latimore (Managing Director, Equity Research)

Great. Just last one for me. The implied fourth quarter revenue range is about $10 million. I guess, what sort of moves you to the upper or lower end of that range?

Sean Feeney (CEO)

The upper or lower end of that range is really key around two things. You know, subscription's pretty steady. We'll see some growth there. If we see kind of continued transaction growth that we saw in March and into April as people begin to come back to the offices and travel, business travel and business hotels kind of come back around that. You know, we've got a number of kind of remaining 3G and 4G upgrades on that, and it really determines kind of on what the hardware sales are for Q4.

Mike Latimore (Managing Director, Equity Research)

Mm-hmm. Yep. Okay. Thank you.

Sean Feeney (CEO)

Thanks, Mike.

Operator (participant)

Our next question comes from the line of George Sutton from Craig-Hallum. Your line is now open.

George Sutton (Partner and Co-Director of Research)

Thank you. I'm curious on the Cantaloupe ONE offering in the following context. Investors understand that Apple has been extremely successful with hardware as a service offering, and the market seemed to yawn at your release. I'm curious with that up against the initial reaction you've seen, do you just think the market doesn't appreciate the significance of this? Or, I'm just trying to get a little bit more perspective there.

Sean Feeney (CEO)

Yeah. I think, George, you've hit the nail on the head with kind of if you look at you know kind of the traditional cable model. Apple has done it. You know, a couple days after we announced, Peloton came out and announced they were bundling their hardware into a platform as a service. I just think that they wanna see those results coming out probably in general. I feel like the company just keeps performing better and better, and as we all know, the stock price isn't reflecting that performance yet. The market reaction has been very positive to bundling our software products with hardware and removing kind of the worry about you know is there an upgrade that I'm gonna have to go forward with.

Our initial reaction is you know been a great launch so far. We'll give you some more details kind of probably at the end of the next quarter where we have a full quarter's worth of results from that. I'm very positively impressed with what our sales organization has done so far and the reaction. What I'm hearing primarily, as I said, in the small and medium-sized business. The larger guys like to buy the hardware and get the depreciation right off and they have the balance sheet. For capital-challenged smaller customers, it works very well.

George Sutton (Partner and Co-Director of Research)

More broadly on the hardware side, you had a competitor make a strategic decision to maintain very low gross margins on the hardware side at least temporarily. I assume your position is still you'll gladly take a service deal instead of a hardware deal if that's how it comes out and you're willing to work with other hardware vendors. Am I thinking about that the right way?

Sean Feeney (CEO)

If I understand your question, George, yes. Our software works with everybody else's hardware. While we prefer, and I'm working on some things that would make it better for our software to work with our devices, you know, many large operators use our competitor products, and have you know, kind of strategies around two or three competitors. If the second part is, I will gladly trade as much Cantaloupe revenue, ONE revenue as I can for hardware, 'cause the hardware margin is better, and the likelihood of it going beyond the initial term is very good, as everyone knows from other kind of platforms as a service. You know, Apple, you mentioned, I mentioned kind of the cable company.

That's what we've seen with our rental program before. We've just turned it into a rental program that bundles in the software.

George Sutton (Partner and Co-Director of Research)

Just so anybody reading this isn't confused, you said you'd trade hardware revenue, you mean software revenue. You prefer the software revenue.

Sean Feeney (CEO)

I prefer subscription revenue. Yes. Yes.

George Sutton (Partner and Co-Director of Research)

That's what I meant, yeah. Last question on international, I didn't hear any new updates on this call. I know it's a strategy. Can you just give us a quick update there?

Sean Feeney (CEO)

Yes. We're still working in Latin America and Mexico. We've got a couple good things working, and they're very close to having our devices certified there. I'm optimistic that we will see revenue in our next fiscal year, which of course starts in July 1st. We have hired our first employee in Europe. We did a bunch of meetings during NAMA with international operators, and we are more confident than ever that there's a Seed opportunity in Europe, and we're moving aggressively towards that. I'm very happy. One of the reasons that we hired Jeff Dumbrell as our Chief Revenue Officer was he had a lot of international experience. He's begun. The guy we hired in Europe is one of his former teammates.

We're aggressively kind of moving in those markets as well as in Latin America. I'm disappointed I don't have something more firm to announce, it's coming.

George Sutton (Partner and Co-Director of Research)

Well, I'm hoping years from now, the Cantaloupe employee can very eloquently talk about how he's the number one Cantaloupe employee in Europe.

Sean Feeney (CEO)

I'm very excited about that as well, and optimistic.

George Sutton (Partner and Co-Director of Research)

Thanks, guys.

Operator (participant)

Again, to ask a question, please press star one on your phone's keypad. Your next question comes from the line of Christopher Kennedy from William Blair. Your line is now open.

Speaker 6

Hi, guys. This is Mark on for Chris, and thank you for taking my questions. I just wanted to touch on, like, the expansion beyond vending. I know you mentioned Yoke at NAMA. I just wanted to see if you had any more updates. I know talking about other stuff such as vehicle charging stations. Any update or color there would be appreciated.

Sean Feeney (CEO)

We continue to focus on growing our total device count and moving into adjacencies is key. We've got a lot of good activity around unattended spaces beyond vending with our Yoke platform, and we're working on a couple of exciting partnerships. We continue to kind of work in the electric vehicle charging station. We think that, of course, is going to be an explosive growth. We of course have a couple of partners we work with there, so we're expanding there, as well as in the traditional ones we've always worked in with our partners in laundry, and with CSC and others in the air vac space. You know, continue to make progress there, as you can see by the customer count.

In some cases, those are small, but will grow, we believe, rapidly in the coming years. Got some good stuff coming. Stand by, Mark. I think you'll see some things here either in this quarter or the next.

Speaker 6

Got it. Just one follow-up with Cantaloupe ONE. On the upgrade cycle, are you seeing any of your SMB customers convert to the Cantaloupe ONE offering when they are approached with upgrading for 4G?

Sean Feeney (CEO)

Yes. Yes. That's driving a lot of that, either EMV or 3G to 4G upgrades.

Speaker 6

Got it. I appreciate that. Thank you, guys.

Sean Feeney (CEO)

Nope. Good to have you on the call, Mark.

Operator (participant)

Thank you. Again, if you have any questions, please press star one on your phone's keypad. There are no further questions at this time. Speakers, you may continue.

Sean Feeney (CEO)

Great. Thank you for your interest. I know today's a busy day with earnings, and we look forward to following up with everyone over the next few weeks. Thanks, operator.

Operator (participant)

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