Q3 2022 Cantaloupe Inc Earnings Call

Welcome to the Council third quarter fiscal year 2022 earnings conference call. At this time, all participants are in listen only mode.

After the speaker's 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 <unk> Chief Executive Officer Ravi event, that's Hudson Chief operate the operate the officer and Scott, So what Chief Financial Officer.

Before we begin today's call I would like to remind you that all statements included in this call I'll tell you that 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.

Clothing, 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 filings with the SEC and in the press release issued earlier today listeners are cautioned to not place undue reliance of any such forward looking statements.

Which reflect managements view only as of the date they are made.

<unk> 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 Easter at the non-GAAP financial measures that we believe are useful for almost other things evaluating tackle its 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.

It was 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 Dot <unk> dot com and with that I would like to turn the call over to exact Chief Executive Officer, Sean Sweeney you may begin.

Thank you operator, good afternoon, and thank you for joining US today, we're 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.

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 <unk> to <unk> and <unk> 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 <unk> show in Chicago, where we hosted a number of customers and prospects at our booth.

We showcased many of our new products, including Yolked to point out our AI enabled merchandising offering with Highbury and our seed warehouse app to name a few.

After speaking with a number of operators I came away with the following exciting takeaways.

Yes.

First more than ever the industry is poised for expansion and growth through innovation and technology is top of mind for operators.

The M&A market is very active led by many large operator, who are also seed customers and are leveraging <unk> to standardize their technology stacks across all branches for complete operational visibility post acquisitions.

Also an explosion of small operators, leveraging technology and 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 is a lot of innovation on the next generation of convenience services and micro Mark.

That's <unk>.

And the next generation of vending solutions, including concepts like smart coolers, which provide a hybrid experience in both traditional vending and a micro market.

Specific to cantaloupe, operator feedback is that they have seen a dramatic improvement in our customer service since the August 2021, NAMIC 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 listened to our issues and address them.

Peak Cordero owner of CRH catering company headquartered in Pennsylvania, a well respected vending industry operators. So the cantaloupe as world class technical support and that seed is revolutionize the industry and greatly increase 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 would 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 13000, vending machines 350, plus micro markets and 1400 office coffee service delivery points is a great example of a significant customer expansion during the quarter.

<unk>.

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 Beloit to deploy E. Sports. This represents increased traction in deployments for seed markets AMC delivery.

We will be working to complete this implementation over the next several months.

During the quarter vintage was a client that left our platform two years ago for a competitor returned to cantaloupe for our full suite of cloud software C pro cede off as seed markets and see 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 Sega 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, we're running a more efficient operation on that note I would like to turn the call over to Ravi <unk>, our chief operating officer to discuss some.

Adding an important product updates Ravi 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 a loss now mature in August 2021, and this year. It was energizing to showcase and actively sell these products to an enthusiastic customer response.

Wanted to highlight a few recent launches.

First our seed warehouses, App, which we released on March 16.

This streamlines the workflow within the warehouse, enabling functions like stock picking and mentally reconciliation et cetera to happen rapidly through an easy to use mobile app.

Customer feedback has been extremely positive for example, Tommy Elliott from Tom drove ending and coffee services said, we used to.

Doing inventory, but now we can do it twice as fast with the new warehouse App saving time, and making our business more efficient.

<unk> daily from the Jackson, whether the South recently said, we were having a hard time getting accurate warehouse and driver inventory information compared to other solution. We're now saving money and are able to keep all of our business information in one system. It was a no brainer.

We also launched our catalog one platform on March 22. This is a first of its kind bundled subscription model.

The need for consumers or our customers to future proof their business.

It brings the cloud computing like paradigm to unattended retail eliminating upfront capital expenditures and the risk of hardware end of life due to transitions such as <unk> <unk> to <unk> <unk> et cetera.

Thanks to zero upfront fees and a simplified monthly subscription model. This platform is starting to gain significant market traction.

On March 29, we launched our E sport engage combo. In addition to all of the benefits of our <unk> engage which we had previously launched this device offers simplified installation directly over an existing bill et cetera.

Ideal for customers with machines that have limited space to install a card reader.

We've already shipped over 25000, <unk> combo and engage devices during the third quarter.

A highlight for us at the Nama one.

Our next generation <unk> platform.

As well as the newly announced Youll point of sale plus product. This.

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.

POS plus 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 Kathy owner from group C stated for every one micro market with other solutions. We can have 10 yield market because it is just not cost effective.

As part of our quick to market strategy.

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 price change product extending the compatibility to 99% plus 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.

Another success story has been our launch of an AI powered merchandising product in partnership with hybrid.

This company has a long track record of success in traditional retail and we brought this functionality now to unattended retail and are making it available as an add on subscription within our seed software product.

Hi, Woody was a very hard item at Alabama, both this year and we've already signed our first few customers.

Lastly, we have partnered with <unk> to enable a true touchless mobile app enabled vending expedia.

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.

Thanks, Ravi and 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 in equipment sales of $8 2 million.

<unk> fees grew 31% in the third quarter. Another company record subscription fees increased 7% year over year to 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.

Equivalent revenue for the third quarter was relatively flat year over year as many customers held off on delivering <unk> device upgrades and so closer to the discontinuation of <unk> 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 22800 customers exit devices totaled $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.

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%.

Also increase along the credits of $15 million. We are proud of this agreement as as as a direct result of our banks confidence in the company due to our strong financial performance over the past year.

Turning to our fiscal year 2022 guidance remained confident or previously issued guidance for revenue and continued to expect to be between 202 hundred $10 million representing year over year growth of 20% to 26% we.

We expect transactions 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 range between $8 5 million and $10.5 million.

We now expecting that lots applicable to common shares to be between $1 million and $3 million. This improvement is based on lower than anticipated stock based compensation expense.

<unk> of our interest expense related the setbacks.

We also continue to expect cash flow from operations to be between breakeven and negative $2 million given the continued supply chain challenges and the need to build our inventory levels whenever possible.

With that I will now turn the call over to the operator for Q&A operator.

<unk> on your phone's keypad thief.

These 10 vials of compile like too many last year.

Yeah first question comes from the line of Mike Lanning, Mario from Northland Capital markets. Your line is now open.

Yeah. Thanks for the great results their outlook.

Outlook.

I guess on the.

Subscription and transaction gross margin Greek sequentially, despite transaction growing as a percent I guess you touched on a dare I guess.

One.

You said I think you said the transaction gross margin was in my mid teens per cent.

First question. The second should this level of gross margin be sustainable or improve a little bit going forward and then what drove the transaction River gross margin.

I got you on anti island, Yeah sure. Thank you very much for the question. So 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 cost.

So we have entered into some new agreements to get some additional incentives and rebates.

Which is really helpful, reducing our costs, which is growing the margin. The other thing that we're seeing as an increase in the average transaction price. So when we began the year where around I guess last year's average was around $2.05 per transaction now we're up to $2 17 per transaction and so.

That's helping increase the margins as well.

Yeah that makes sense.

And then.

Talked about a number of things and it seemed like they can drive subscription I guess.

And is there any way to rank order them or or or discuss like what would be the biggest driver subscription.

Does it hurt PC new connection.

How should we think about the the.

The biggest thing subscription drivers here.

Yeah, It's great question, Mike and you know that's something that we are very focused on so first of all signing large customers like Buffalo rock.

Our key to kind of growing the subscription revenue in that has the biggest kind of near term and back secondly.

Secondly, we're very excited about the initial market reaction to the cantaloupe, one platform as a service and we sold.

Into the hundreds of customers on that it fits very well in the SMB part of the market now.

Not quite as attractive to the high end of the market because they like to buy devices and depreciate them.

The market was asking to kind of future proof of platform and we answered it with that so 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 all 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 yield probably equal there.

And driving additional subscriptions and then then hydrated would be probably the third.

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

Alright, great and this last one for me.

The.

Implied fourth quarter revenue range is about $10 million I guess, what sort of moves you to the upper lower end of that range.

The upper or lower end of that range is really key around two things subscriptions pretty steady we'll see some growth. There. If we see can 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 in business hold.

<unk> was kind of.

Come back around that and then.

We've got a number of kind of remaining three G and four G upgrades.

On that.

And it really determines on what the hardware sales are for for.

For Q4.

Okay. Thank you.

Thanks, Mike.

The next question comes from the line of charges clean.

Clean Caledonia line is now open.

Thank you.

Curious on the cantaloupe, one offering in the following context.

Investors understand that Apple has been extremely successful with the hardware is a service offering in.

The market seemed to yawn at.

Your release and I'm curious with that up against the initial reaction <unk> scenes 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.

Yeah, I think George you hit the nail on the head with kind of if you look at.

Kind of the traditional cable model.

Apple has done it.

Couple of days after we announced peloton came out and announced they were bundling their hardware into a platform is a service.

I just think that.

They want to 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.

But the market reaction has been very positive to bundling.

Our software products with hardware and removing the worry about is there an upgrade that I'm going to have to go forward with and.

Our initial reaction has.

Been a great launch.

So far so 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.

Of results from that but I'm very positive literally.

Impressed with our sales organization has done so far and the reaction and what I'm hearing primarily as I said in the the small and medium sized business. The larger guys like that by the hardware and get the depreciation right off.

Have the balance sheet, but for capital challenge smaller customers if it works very well.

So more broadly on the hardware side, you had a competitor make us strategic decision to maintain very low gross margins on the hardware side at least temporarily.

I assume your position is still you will gladly take a service deal instead of a hardware deal. If that's how it comes out and you are willing to work with other hardware vendors is thinking about that the right way.

If I understand your Kirk your question George.

Yes, we are software works with everybody else's hardware.

And while we prefer and I'm working on some things that would make it better for our software to work with our devices.

Many large operators use our competitor products.

And have kind of strategies around two or three competitors, but and.

And then if the second part is I will gladly trade as much cantaloupe revenue one revenue as I can for hardware it because the hardware margin is better.

And the likelihood of going beyond the initial term is very good as everyone knows from other kind of platform is a service Apple you mentioned I mentioned kind of the cable company.

What we've seen with a rental program before we've just turned it into.

Rental program that bundles in the software.

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

I prefer subscription revenue, yes, yes, that's what I mean.

And 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.

Yes, we are.

Still working in Latin America and Mexico.

Got a couple of good things working and they're very close to having our devices certified there. So.

So I'm optimistic that we will see revenue in.

In our next fiscal year, which of course starts in July 1st we have hired our first employee in in Europe .

And we did a bunch of meetings during Nemo with international operators and we are more confident than ever that there is a seed opportunity in Europe .

And we're moving aggressively towards that I'm very happy one of the reasons that we hired Jeff umbrella is our chief revenue Officer was he had a lot of international experience. He's begun the guy we hired in Europe as one of his former teammates.

And we were.

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

Well I'm, hoping years from now the cantaloupe employ Ken.

Very eloquently talk about how is the number one cantaloupe and play in Europe .

I'm.

Very excited about that as well and optimistic.

Thanks again.

Again to ask a question. Please press star one on your phone's keypad.

Your next question comes from the line of specific Ken Kennedy.

Your line is now open.

Hi, guys. This is mark on for Chris.

For taking my questions.

I just wanted to touch on the expansion beyond one thing I know you mentioned.

Get at Ma'am I just wanted to see if you had any more updates I know.

Talking about other stuff such as vehicle charging stations, so any update or color that would be appreciated.

We continue to focus on growing our total device account and moving into Adjacencies is is key we've got a lot of good activity around.

Unintended spaces beyond vending with our yoga platform.

And we're working on a couple of exciting.

Partnerships.

We continued kind of work in the electronic vehicle charging station, we think that 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.

We are expanding their.

As well as in the traditional ones, we have always worked in with our partners in laundry.

And with with CSC, and the others and the and the airbag space. So.

Continue to make progress there as you can see by the customer count in some cases those are are small but will grow we believe rapidly in the coming years. So.

Got some good stuff coming so standby Mark I think you'll you'll see some things here either in this quarter or the next.

Got it and then just one follow up with Cantaloupe, one so on the upgrade cycle are you seeing any of your SNB customers convert to the capital one offering when they are approached with upgrading for for today.

Yes, yes, that's that's driving a lot of that either ENB or three G to four G upgrades.

Got it I appreciate that thank you guys.

No.

Good to have you on the call Mark.

Thank you and again, if you have any questions <unk>.

Is that right.

At this time Ckc may continue.

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.

Thank you. This concludes today's conference call. Thank you all for participating.

Panicked.

Okay.

[music].

Okay.

[music].

[music].

[music].

[music].