Cantaloupe Q3 2023 Earnings Call Transcript

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Provided by Quartr
May 4, 2023

There are 6 speakers on the call.

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Cantaloupe's Third Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please note that today's conference may be recorded.

Operator

I will now hand the conference over to your speaker host, Dara Dirksop, Investor Relations. Please go ahead.

Speaker 1

Thank you and 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 Statements because of certain factors, including, but not limited to, business, financial markets and economic conditions.

Speaker 1

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 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. Tantalus 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 that substitute for GAAP financial measures, such as net income or loss.

Speaker 1

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 of our website at www.cantaloupe.com. And with that, I would like to turn the call over to Ravi.

Speaker 2

Thanks, Dara. Good afternoon, everyone, and 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 $60,400,000 up 20% year on year.

Speaker 2

This was driven by a record quarter for both transaction and subscription revenue. Transaction revenue grew 21% year on year and subscription revenue grew 22% year on 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 on year for the Q3. Adjusted EBITDA for the quarter was $10,100,000 an increase of 176% year on year compared to the Q3 of 2022. This is an all time record for the company.

Speaker 2

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 $22,000,000 which includes $14,000,000 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 3rd quarter business highlights include: at the end of the quarter, we had a total of 20 7,598 active customers, an increase of 21% year over year and 5% sequentially. Active devices grew by 2% year over year.

Speaker 2

We also rolled out 2 new products during the quarter, The SeedDriver mobile app and our next generation 46 inches micro market kiosk with enhanced accessibility features. With 1 full quarter of 3 Square Market or 3 2M in our results, We are pleased with the progress on integrating this business. The former 3 2 ms 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 micro market space, we already have a number of examples of selling 3 Square Market kiosks to cantaloupe customers and seed markets software to 3:2 ms customers. Some recent examples of this cross selling include Canteen of Northern California, a full line vending, micro market and office coffee service operator, who initially purchased and implemented our seed software back in the Q1.

Speaker 2

They have now ordered 3:2 ms 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 on to the full Cantaloupe platform. Another cross sell example is Take a Break Vending, a full line vending micro market and office coffee service operator located in California, Who was fully deployed with Cantaloupe's ePort hardware for telemetry and payment processing. They signed an agreement in the 3rd quarter to move their entire operation onto the seed platform as well as place their first order for 3:2 ms 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 competitor kiosks onto our platform.

Speaker 2

A great example of cross selling in the other direction, Seed markets to existing 3 to ms customers is a win with HGM Direct Service, a major micro market operator in Sweden. They are currently implementing seed markets across their large and growing micro market business. This also represents our first at scale implementation of seed markets in Europe and demonstrates our success to localize and rollout 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 3 2 ms and our SMB strategy, which is spearheaded by Cantelogue 1, our platform as a service offering that continues to see great market acceptance.

Speaker 2

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 micro market 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.

Speaker 2

We continue to deepen our thought leadership in the self We recently released our 2023 micropayments 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 cell 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.

Speaker 2

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

Speaker 3

the financial review. Scott? Thanks, Robbie. As mentioned, we delivered another strong quarter of revenue growth as well as record profitability and record cash flow generation. Our 3Q 'twenty three revenue was $60,400,000 up 20% year over year.

Speaker 3

Our combined transaction and subscription revenue grew 22% to $51,200,000 during the quarter. This includes $18,000,000 of subscription revenue, A year over year increase of 22 percent $33,000,000 of transaction revenue, an increase of 21% year over year. The overall increase in revenue was driven by processing volumes, including contributions from the 32 M acquisition, Accelerating subscription growth from CantelukOne 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 4 gs devices where 3 gs service has been discontinued. Our equipment revenue was $9,100,000 an increase of 12% compared to Q3 FY 'twenty two.

Speaker 3

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 FY2023 improved to positive 13.4% from a negative 8% in prior year. Total operating expenses in Q3 FY2023 were slightly up year over year at $16,200,000 compared to $15,300,000 in Q3 FY 'twenty 2. Net income applicable to common shares for the 3rd quarter was $6,700,000 or $0.09 per share compared to net income of $1,800,000 or $0.03 per share in the prior period.

Speaker 3

We had a record quarter for adjusted EBITDA, which was 100 which was $10,100,000 in the 3rd quarter compared to $3,700,000 in the prior year period. Adjusted EBITDA includes a $2,700,000 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 3rd quarter with cash and cash equivalents of $46,700,000 and generated $22,000,000 in cash from operations, driven largely by net income of $6,700,000 and a $14,000,000 decrease in accounts receivable.

Speaker 3

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. Now turning to FY We are reiterating our guidance for the fiscal year, which includes the impact of the 32 ms acquisition. Total revenue to be between $240,000,000 $250,000,000 We continue to expect the combination of transaction and subscription revenue to be between $200,000,000 $210,000,000 representing growth of 18% to 24%. With the Hardware upgrade cycle behind us, we anticipate equipment revenue to be sequentially lower in the 4th quarter. Total U.

Speaker 3

S. GAAP net income to net loss of $2,000,000 and net income of $3,000,000 Adjusted EBITDA is expected to be between $12,000,000 17,000,000 and total operating cash flow to be between $10,000,000 $15,000,000 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 and A. Operator?

Operator

And our first question coming from the line of Mike Latimore with Northland Capital Markets. Your line is open.

Speaker 4

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

Speaker 3

Yes. Hey, Micah, thank you for the question. Yes. So overall, there's a couple of components to it. As we said in the prepared remarks, the gross margin is up across all three revenue lines.

Speaker 3

So the transaction based fees, 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% to 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.

Speaker 3

So we were at about 5% this quarter up at about 5 0.1%. We do expect that to continue. And then on the subscription growth margin, We've increased that. We've had some expense reduction related to the network carriers. So we've negotiated a lower rate for 4 gs devices.

Speaker 3

So as the 3 gs devices have been rolling off and being replaced with 4 gs, we're starting to see some The second component to that is also with 3 Square Markets. Historically, they've had a higher Gross margin, so 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% to 85% range. This quarter we've been more in the 85% to 90% range.

Speaker 4

Got it. So is it fair to say this Level is for this kind of and is ball target sustainable?

Speaker 3

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

Speaker 4

Okay, great. And then you've mentioned Cantaloupe 1. Can you provide a little more color on the demand you're seeing there? Maybe how many seats were added or typical number of seats per customer, what's the pipeline look like?

Speaker 3

Sure. So 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.

Speaker 3

Ravi, I don't know if you have anything to add to that.

Speaker 2

No. The only thing I would say is, Mike, as in any paradigm And Cantelo 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? So you just have a monthly fee and you pay that. Everybody who has done it, whether it's 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.

Speaker 2

The small and medium businesses tend to adopt that faster because they care less about Depreciating assets on the balance sheet and then the large enterprises tend to lag behind, but eventually get with it When the benefits and simplicity of a subscription model outweigh the benefits of Picking up assets and depreciating on the balance sheet. So that's exactly what we are seeing here.

Speaker 4

Sure, sure. Makes sense. Great. All right. Thank you.

Speaker 4

Best of luck.

Speaker 3

Thanks Mike.

Operator

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

Speaker 4

Thank you. Very nice to see the international first win at scale. I'm curious, Ravi, if you could talk about the 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?

Speaker 2

Yes. George, thanks for the question. Look, we've I've always said that we are It's a 3 year journey. It's a lot of pieces that are to fall in place. And last quarter, I said we were right at about the midpoint of that 3 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.

Speaker 2

So 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 and in both of those markets, we now have our first wins, our first orders. So 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.

Speaker 4

Got you. 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 3 Square Markets 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 3 Square together making it real challenging. Is that Kind of what you're referring to when you're talking about the customer feedback?

Speaker 2

That is one part of it. The other part of it is When customers are looking for simplicity, they want one throat to choke, right? So they 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 micro markets, It makes it formidable and that's true. What's also true and frankly, we had underestimated the benefit of that is How much customers are craving to simplify their technology footprint and not have 5 different solutions and not have to train their people on 5 different screens and portals and things to go and do their workflow with and 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 micro markets or office coffee or vending And you just have to train people on one software and there's tremendous power in doing that.

Speaker 4

Got you. All right. Great to hear. Nice job.

Speaker 2

Thank you.

Operator

Thank you. And our next question coming from the line of Gary Prestopino with Barrington Research. Your line is open.

Speaker 4

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? And is that And I don't know if you mentioned this in your script, Ravi, but is that margin sustainable going forward?

Speaker 2

So Gary, first of all, there is no much less competition. I mean, we fight every day and we fight really hard every day to win every single

Speaker 4

deal, Right.

Speaker 2

So competition has not gone away. So I just wanted to clarify that. What I would say is we are seeing More responsible competition, right? So 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. So we are seeing the end of that.

Speaker 2

We're seeing more responsible competition from All industry players and that has contributed to a good extent to that margin. But I'll also say that Some of the innovations that we've launched. So if you just think about, we went from only having small thin 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? So that's one. The second is our devices now Have this remote price change capability when used in combination with our software and that's yet another incentive to be on our platform and differentiates it further from the competitors.

Speaker 2

So I would say it's a combination of, hey, we are past the upgrade cycle and hence there's more responsible competition. And 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.

Speaker 4

Okay. And I didn't mean to belittle a competitive thing. I should have just said something effective since the upgrade was over, maybe the pricing has become a little bit better. I think you mentioned that. And then given what you're doing in the micro market, I mean, the legacy business years ago, The transaction growth would really kind of mimic the volume growth dollars processed.

Speaker 4

It looks like here at least this quarter, that's not the case. And I'm just wondering, should we expect that really to continue because you're going into more higher Transaction counts?

Speaker 2

Yes. I think you're absolutely right. And honestly, the historical View of our business used to be very homogenous, 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 if you take one self-service location That is micro markets.

Speaker 2

It has very different characteristics from a self-service location in the amusement space versus EV charging versus Vending versus laundry versus airbags, so I can go on and on and on. So over time, you will see us deemphasize 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. And Gary,

Speaker 3

I'll just add to that a little bit. We've had Yes, 5 sequential quarters of average ticket size growth. Initially, we wrote it off to inflation, but Now we've done more analysis on it and see it's really the form factor that's changing as Robbie mentioned and a lot more focus on micro markets. People are buying $10 salads as opposed to a $1 candy bar. And oh, yes, by the way, that helps us sell seed because Yes, sounds are only good for a couple of days.

Speaker 3

So having an end of voice system that can manage that is very beneficial.

Speaker 4

Right. And then 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 going to give that stat anymore?

Speaker 3

We're not giving that stat.

Speaker 4

Okay. All right. Thank you.

Operator

Thank you. Last final questioner coming from the line of Chris Kennedy with William Blair. Your line is open.

Speaker 5

Yes. Good afternoon and 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?

Speaker 2

I think a good portion is related to the recent acquisition, but we've also done a lot of work in differentiating our offering. And Cantelo 1 has been a big contributor as well. 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. And I think with Scott's leadership and Jeff Dumbbell'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.

Speaker 3

Yes. And just to add to that a little bit, Chris, you see that our customer growth customer count continues to grow, a lot of that more on the SMB side To where we have a lot higher margins on.

Speaker 5

Got it. Understood. And then just Can you provide a broad mix of your current business, vending versus micro markets versus Other verticals? Thanks for taking the question.

Speaker 2

So we haven't broken it out in that manner. What I would say is that Food and beverage, which is more it combines vending, micro market, office coffee, etcetera, tends to be in the 75% to 80% range of our business. And then all the other verticals tend to be in the 20%, 25% range.

Speaker 3

And then Chris, I'll just add a little more to that too. So when you look at, 32 ms 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 $19,000,000 to $20,000,000 range. So that gives you an idea as to How much of the business they represent is around 10%.

Speaker 3

That number is starting to grow, Which is great. That's what we're heavily focused on, but that's about where we stand.

Speaker 5

Okay. Thanks for taking the questions.

Operator

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

Speaker 2

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. And the future is bright, and we are looking forward to building Success upon success. Thank you for your interest and engagement through this call. Okay.

Operator

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

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