Cantaloupe, Inc. (NASDAQ:CTLP) Q3 2023 Earnings Call Transcript May 6, 2023

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 session. [Operator Instructions] 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: 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-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.

And with that, I would like to turn the call over to Ravi.

Ravi Venkatesan: 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 $60.4 million, up 20% year-on-year. 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 third quarter. 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 third quarter. Adjusted EBITDA for the quarter was $10.1 million, an increase of 176% year-on-year compared to the third quarter 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 third quarter 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 micro market 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 micro market 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 Kantine 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 first quarter.

They have now ordered 32M kiosks in the third quarter. 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 third quarter 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 competitor kiosks onto our platform.

A great example of cross-selling in the other direction, Seed Markets to existing 32M customers is a win with HGM Dryckservice, 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 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 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. We continue to deepen our thought leadership in the self-service industry. We recently released our 2023 Micropayment Trends Report, which studied micro payment 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 have 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: Thanks, Ravi. As mentioned, we delivered another strong quarter of revenue growth as well as record profitability and record cash flow generation. Our 3Q 2023 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 FY2022. 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 $16.2 million compared to $15.3 million in Q3 FY2022. Net income applicable to common shares for the third quarter 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 third quarter 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 third quarter with cash and cash equivalents of $46.7 million and 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. Now turning to FY2023 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% to 24%. With the hardware upgrade cycle behind us, we anticipate equipment revenue to be sequentially lower in the fourth quarter. 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?

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Mike Latimore with Northland Capital Markets. Your line is open.

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

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

Operator: Thank you. Last final question is coming from the line Chris Kennedy with William Blair. Your line is open.

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 Venkatesan for any closing remarks.

Ravi Venkatesan: 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. Operator?

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