Cantaloupe - Q3 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cantaloupe Q3 fiscal year 2023 earnings conference call. At this time, all participants are on 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 11 on your telephone. You will then hear an automatic message advising your hand is raised. Please note that today's conference may be recorded. I will now hand the conference over to your speaker host, Dara Dierks of Investor Relations. Please go ahead.

Dara Dierks (Investor Relations)

Thank you and good afternoon, everyone. Welcome to the Cantaloupe Q3 earnings conference call. With me on the call today is Ravi Venkatesan, Chief Executive Officer, and Scott Stewart, Chief Financial Officer. Before we begin today's call, we would like to remind you that all statements included in this call, other than statements of historical facts, are forward-looking in nature. Actual results could differ materially from those contemplated by the forward-looking statements because of certain factors, including, but not limited to, business, financial, markets, and economic conditions. A detailed discussion of the risks and uncertainties that could cause actual results to differ materially from such forward-looking statements is included in our filings with the SEC and in the press release issued earlier today. Listeners are cautioned to not place undue reliance on any such forward-looking statements which reflect management's views only as of the date they are made.

Cantaloupe undertakes no obligation to update any forward-looking statements, whether because of new information, future events, or otherwise. This call will also include a discussion of certain non-GAAP financial measures that we believe are useful for, among other things, evaluating Cantaloupe's operating results. These non-GAAP financial measures are supplemental to and not substitute for GAAP financial measures such as net income or loss. Details of these non-GAAP financial measures, a presentation of the most directly comparable GAAP financial measures, and a reconciliation between those non-GAAP financial measures, as well as the most comparable GAAP financial measures, can be found in our press release issued this afternoon, which has been posted on the investor relations section of our website at www.cantaloupe.com. With that, I would like to turn the call over to Ravi.

Ravi Venkatesan (CEO)

Thanks, Dara. Good afternoon, everyone, thanks for joining us today. I wanted to start the call highlighting our financial results. We are proud to deliver the highest quarterly earnings in the history of the company. Our total revenue for the quarter was $60.4 million, up 20% year-over-year. This was driven by a record quarter for both transaction and subscription revenue. Transaction revenue grew 21% year-over-year, subscription revenue grew 22% year-over-year for the Q3. We continue to expect subscription revenue to ramp throughout the year, resulting in growth in the high teens for the full year. Equipment revenue grew 12% year-over-year for the Q3.

Adjusted EBITDA for the quarter was $10.1 million, an increase of 176% year-on-year compared to the Q3 of 2022. This is an all-time record for the company. This is evidence of our unlocking operating leverage from the business as outlined at our Analyst Day in December 2022. Operating cash for the quarter was also strong at $22 million, which includes $14 million of AR collection and demonstrates the cash flow generation ability of our business. We expect the positive operating leverage and cash flow generation to continue into future quarters as outlined at our Analyst Day. A few additional Q3 business highlights include at the end of the quarter, we had a total of 27,598 active customers, an increase of 21% year-over-year and 5% sequentially.

Active devices grew by 2% year-over-year. We also rolled out two new products during the quarter, the Seed Driver mobile app and our next generation 46-inch micromarket kiosk with enhanced accessibility features. With one full quarter of Three Square Market or 32M in our results, we are pleased with the progress on integrating this business. The former 32M and Cantaloupe sales teams have been integrated and are leveraging subject matter expertise as well as their respective strengths with specific channels to drive revenue synergies and a very healthy pipeline for future growth. In addition, the customer reception to the combination has so far exceeded our initial expectations, and I'm very pleased with the sales momentum and opportunities for revenue synergies in the micromarket space.

We already have a number of examples of selling Three Square Market kiosks to Cantaloupe customers and Seed Markets software to 32M customers. Some recent examples of this cross-selling include Canteen of Northern California, a full line vending micromarket and office coffee service operator, who initially purchased and implemented our Seed software back in the Q1. They have now ordered 32M kiosks in the Q3. This is also a great example of a customer with whom we had no relationship a year ago, but with our new mid-market segment strategy, we've been able to bring them onto the full Cantaloupe platform. Another cross-sell example is Take A Break Vending, a full line vending micromarket and office coffee service operator located in California, who is fully deployed with Cantaloupe's ePort hardware for telemetry and payment processing.

They signed an agreement in the Q3 to move their entire operation onto the Seed platform, as well as place their first order for 32M kiosks. Both of these, along with many other existing Cantaloupe customers, are examples of operators who've gone all in with Cantaloupe and are converting from competitive kiosks onto our platform. A great example of cross-selling in the other direction, Seed Markets to existing 32M customers, is a win with Edge M Direct Service, a major micromarket operator in Sweden. They are currently implementing Seed Markets across their large and growing micromarket business. This also represents our first at-scale implementation of Seed Markets in Europe and demonstrates our success to localize and roll out this platform internationally, which I'm particularly excited about. You can get more details about this rollout and market win in a press release that was issued earlier today.

Subscription growth during the quarter was 22%, driven by 32M and our SMB strategy, which is spearheaded by Cantaloupe ONE, our Platform as a Service offering that continues to see great market acceptance. At our Analyst Day, we laid out a strategy to target the mid-market segment in addition to the enterprise and small business segments. As part of this strategy, we've optimized the Seed suite of software products to make it easier to implement for this segment. One recent example of this is a vending and micromarket company called Essentially Organic. Essentially Organic originally made the switch to cashless payment acceptance with Cantaloupe's ePort card readers. Now they are transitioning their entire operation onto the Cantaloupe Seed platform. We continue to deepen our thought leadership in the self-service industry.

We recently released our 2023 Micropayment Trends Report, which studied micropayment trends for transactions less than $10 at food and beverage vending, as well as amusement machines throughout the United States and Canada. The results, which covered a sample of more than 700,000 active Cantaloupe self-service locations, showed that consumers are increasingly using cashless payment methods even for smaller ticket transactions. One of the more impressive data points was around the average cashless ticket size at amusement gaming machines for play purchases, which was $5.32, compared to only $0.93 for cash purchases. This report supports the trends we are seeing in terms of continued growth in cashless payments, and specifically contactless payments by consumers. We are excited about the upcoming NAMA Show, the largest convenience services industry event of the year in Atlanta in a few days.

This gives us the opportunity to meet face-to-face with leaders in the self-service industry. We would encourage you to stop by our booth, as we'll be unveiling some of our latest payment acceptance technology, as well as showcasing our latest innovations. In conclusion, I'm excited about the progress we've made this quarter in doing what we said we would do at our Analyst Day last December. With that, I'll turn the call over to Scott for the financial review. Scott?

Scott Stewart (CFO)

Thanks, Ravi. As mentioned, we delivered another strong quarter of revenue growth as well as record profitability and record cash flow generation. Our 3Q23 revenue was $60.4 million, up 20% year-over-year. Our combined transaction and subscription revenue grew 22% to $51.2 million during the quarter. This includes $18 million of subscription revenue, a year-over-year increase of 22%, and $33 million of transaction revenue, an increase of 21% year-over-year. The overall increase in revenue was driven by processing volumes, including contributions from the 32M acquisition, accelerating subscription growth from Cantaloupe ONE, and higher average transaction ticket sizes. While transaction volumes remain robust, we experienced lower sequential volumes as a result of certain customers who have been slower to install 4G devices where 3G service has been discontinued.

Our equipment revenue was $9.1 million, an increase of 12% compared to Q3 FY22. Total gross margin for the quarter was 37.9% compared to 32.2% in the same quarter last year, driven by higher margins across all three revenue lines. Subscription and transaction revenue margin was 42.3% versus 40% in prior year. Equipment revenue margin for Q3 FY23 improved to positive 13.4% from a negative 8% in prior year. Total operating expenses in Q3 FY23 were slightly up year-over-year at $16.2 million compared to $15.3 million in Q3 FY22.

Net income applicable to common shares for the Q3 was $6.7 million or $0.09 per share compared to net income of $1.8 million or $0.03 per share in the prior period. We had a record quarter for Adjusted EBITDA, which was $10.1 million in the Q3, compared to $3.7 million in the prior year period. Adjusted EBITDA includes a $2.7 million benefit from the release of a portion of our state sales tax accrual. Even without this adjustment, Adjusted EBITDA would still be a record. A few notes on our balance sheet and liquidity since last quarter.

We ended the Q3 with cash and cash equivalents of $46.7 million, generated $22 million in cash from operations, driven largely by net income of $6.7 million and a $14 million decrease in accounts receivable. Our capital allocation priorities continue to target profitable growth and are specifically focused on driving operational improvements to control OpEx, expanding our micro market offerings, and investing in our international go-to-market strategy and product development. Turning to FY23 guidance. We are reiterating our guidance for the fiscal year, which includes the impact of the 32M acquisition. Total revenue is expected to be between $240 million and $250 million. We continue to expect the combination of transaction and subscription revenue to be between $200 million and $210 million, representing growth of 18%-24%.

With the hardware upgrade cycle behind us, we anticipate equipment revenue to be sequentially lower in the Q4. Total U.S. GAAP net income to be between a net loss of $2 million and net income of $3 million. Adjusted EBITDA is expected to be between $12 million and $17 million, and total operating cash flow to be between $10 million and $15 million. I am pleased to see our transaction and subscription revenue grow as a percentage of total revenue as we laid out in our Investor Day. This directly contributes to operating leverage and sustainable cash flow generation. With that, I'll now turn the call over to the operator for Q&A. Operator?

Operator (participant)

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

Mike Latimore (Managing Director and Senior Research Analyst)

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

Scott Stewart (CFO)

Yeah. Hey, Mike, thank you for the question. Overall, there's a couple components to it. As we said in the prepared remarks, the gross margin is up across all three revenue lines. On the transaction-based fees, you know, we've been saying over the past couple of calls that we've been working very hard to grow that. Historically, it's been in the 8%-10%. We've had it in the mid-teens over the past several quarters. We've been able to push that up to the higher end of that range. Part of that is we've increased our overall take rate. We were at about 5% this quarter, up at about 5.1%. We do expect that to continue. On the subscription growth margin, we've increased that.

We've had some expense reduction related to the network carriers. We've negotiated a lower rate for 4G devices. As the 3G devices have been rolling off and being replaced with 4G, we're starting to see some expense savings there. The second component to that is also with Three Square Markets. Historically, they've had a higher gross margin, as we start to layer them in, it's increasing our margin some as well. Historically, we've always said we've been in the 80%-85% range. This quarter, we've been more in the 85%-90% range.

Mike Latimore (Managing Director and Senior Research Analyst)

Got it. Is it fair to say this level is, or this in this ballpark is sustainable?

Scott Stewart (CFO)

Yes. We'll be putting out our guidance for 2024 in Q4, but as what we can see right now, we believe that's sustainable.

Mike Latimore (Managing Director and Senior Research Analyst)

Okay, great. Then you've mentioned Cantaloupe ONE. Can you provide a little more color on the demand you're seeing there? You know, maybe how many seats were added or, you know, typical number of seats per customer? What's the pipeline look like?

Scott Stewart (CFO)

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

Ravi Venkatesan (CEO)

No, the only thing I would say is, you know, Mike, as in any paradigm shift, and Cantaloupe ONE is a paradigm shift, right? We are shifting the market from a behavior where they buy devices, install them, and then pay for services to a paradigm where it's cloud computing brought into this space, right? You just have a monthly fee and you pay that. Everybody who's done it, whether it's, you know, when software moved from being license-based to subscription-based or when infrastructure moved from being prem-based to cloud-based, it's the same trend. The small and medium businesses tend to adopt that faster because they care less about depreciating assets on their balance sheet.

The large enterprises tend to lag behind, but eventually get with it when they are, you know, when the benefits and simplicity of a subscription model outweigh the benefits of picking up assets and depreciating on their balance sheet. That's exactly what we are seeing here.

Mike Latimore (Managing Director and Senior Research Analyst)

Sure. Sure. Makes sense. Great. All right. Thank you. Best of luck.

Scott Stewart (CFO)

Thanks, Mike.

Operator (participant)

Thank you. Our next question coming from the line of George Sutton with Craig-Hallum. Your line is open.

George Sutton (Senior Research Analyst)

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

Ravi Venkatesan (CEO)

Yeah, George Sutton, thanks for the question. Look, I've always said that it's a three-year journey. It's a lot of pieces that are to fall in place. Last quarter, I said we were right at about the midpoint of that three-year journey, and I had stated that we'll see some revenues this fiscal year, though not meaningful or material, from international markets, and then we'll see that ramp through the fiscal year 2024. We are right on track with that trajectory that we had laid out, and continue to make great progress in both Latin America and Europe. In both of those markets, we now have our first wins, our first orders. We are kind of beyond the, "Hey, we are piloting it," phase to now we've got real customers, real installations, and real revenues coming through.

I still reiterate that we will start ramping it up more aggressively through fiscal year 2024.

George Sutton (Senior Research Analyst)

Gotcha. You mentioned you had been getting good customer feedback, and that kind of dovetails with, and I think you're referring to the feedback of bringing in the Three Square Market opportunity. We're hearing the same things, particularly from competitors who are saying you're more challenging now to compete with because of you're bringing Seed and Three Square together, making it real challenging. Is that kind of what you're referring to when you're talking about the customer feedback?

Ravi Venkatesan (CEO)

That is one part of it. The other part of it is when, you know, when customers are looking for simplicity, you know, they want one throat to choke, right? They, you know, the part you're mentioning is, hey, now we've got this highly differentiated product where the combination of the software and the devices and the micromarkets, it makes it formidable, and that's true. What's also true, and frankly, you know, we had underestimated the benefit of that, is how much customers are craving to simplify their technology footprint and not have five different solutions and not have to train their people on five different screens and portals and things to go and do their workflow with. How much of a value proposition we now have by saying, "Hey, everything you manage, you manage through Seed.

Doesn't matter whether it's micromarkets or office coffee or vending, and you just have trained people on one software," and there's tremendous power in doing that.

George Sutton (Senior Research Analyst)

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

Ravi Venkatesan (CEO)

Thank you.

Operator (participant)

Thank you. As a reminder, ladies and gentlemen, if you'd like to ask a question, please press star one one. Our next question coming from the line of Gary Prestopino with Barrington Research. Your line is open.

Gary Prestopino (Vice President and Senior Research Analyst)

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

Ravi Venkatesan (CEO)

Gary, first of all, there is no much less competitive market. I mean, we fight every day, and we fight really hard every day to win every single deal, right?

Gary Prestopino (Vice President and Senior Research Analyst)

Right.

Ravi Venkatesan (CEO)

The competition has not gone away, I just wanted to clarify that. What I would say is we are seeing more responsible competition, right? We are seeing the industry mature a little bit, particularly as we get out of the upgrade cycle, which kind of incented behaviors of discounting in a way that was not sustainable. We are seeing the end of that. We're seeing more responsible competition from all industry players, and that has contributed, you know, to a good extent to that margin. I'll also say that some of the innovations that we've launched. If you just think about, we went from only having small 10-screen devices that could do telemetry and card readers, to now having a wonderful, beautiful, fully interactive device with the Engage device that can do a lot more, right?

That's one. The second is our devices now have this remote price change capability in, you know, when used in combination with our software, and that's yet another incentive to be on our platform and differentiates it further from the competitor. I'd say it's a combination of heavier past the upgrade cycle, and hence there's more responsible competition. Over the last 24 months, we've differentiated our products further from competitors, which allow us to command that premium and to maintain those margins while our competitors are under severe pressure on that front.

Gary Prestopino (Vice President and Senior Research Analyst)

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

Ravi Venkatesan (CEO)

Yep, I think you're absolutely right. You know, honestly, the historical view of our business used to be very homogeneous, right? You could tell everything about the prospects of the business and the growth and the progress that the business is making by looking at active device growth and transactions. That's not the case anymore because, you know, if you take one self-service location that is micromarket, it has very different characteristics from a self-service location in the amusement space versus EV charging, versus vending, versus laundry, versus AirWatch. I can go on and on and on. Over time, you'll see us de-emphasize and maybe even get away from active devices and transactions as kind of key metrics for the business.

They'll go from key metrics to being secondary metrics and perhaps even not as relevant anymore because they don't represent the business as it currently stands, as well as they used to.

Scott Stewart (CFO)

Gary, I'll just add to that a little bit. We've had, you know, five sequential quarters of average ticket size growth. Initially we wrote it off to inflation, but, you know, now we're doing more analysis on it and see it's really the form factor that's changing, as Ravi mentioned, and a lot more focus on micro markets. You know, people are buying $10 salads as opposed to a $1 candy bar. Oh, yeah, by the way, that helps us sell C because, you know, salads are only good for a couple of days, so having an inventory system that can manage that is very beneficial.

Gary Prestopino (Vice President and Senior Research Analyst)

Right. Just lastly, Scott, are you giving out what the organic growth was for the quarter? Can you make that public or you're just not gonna give that stat anymore?

Scott Stewart (CFO)

No, we're not giving that stat.

Gary Prestopino (Vice President and Senior Research Analyst)

Okay. All right. Thank you.

Operator (participant)

Thank you. Final question coming from the line of Cristopher Kennedy with William Blair. Your line is open.

Cristopher Kennedy (Equity Research Analyst)

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

Ravi Venkatesan (CEO)

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

Scott Stewart (CFO)

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

Cristopher Kennedy (Equity Research Analyst)

Got it. Understood. Then just, can you provide a broad mix of your current business, you know, vending versus micro markets versus, you know, other verticals? Thanks for taking the questions.

Ravi Venkatesan (CEO)

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

Scott Stewart (CFO)

Chris, I'll just add a little more to that too. When you look at 32M with the acquisition, we laid out what their revenues were, and I think this will help answer Gary's question a little bit earlier too about whether we're providing organic guidance. Overall, we said that they were in the $19 million-$20 million range. That gives you an idea as to how much of their business they represent. It's around 10%. That number is starting to grow, which is great. That's what we're heavily focused on, but that's about where we stand.

Cristopher Kennedy (Equity Research Analyst)

Okay. Thanks for taking the questions.

Operator (participant)

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

Ravi Venkatesan (CEO)

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

Operator (participant)

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