Q1 2023 Cantaloupe Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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Good day, and thank you for standing by and welcome to the Cantaloupe first quarter 2023 earnings Conference call. Please be advised that today's conference is being recorded.
With us on the call. This afternoon is Ravi Thank God person, Chief Executive 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 the 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 market and economic condition.
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 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's financial measures that we believe are useful for among other things evaluating cantaloupes operating results.
These non-GAAP's financial measures are supplemental to and not substitute for <unk> financial measures such as net income or loss.
Details of these non-GAAP's financial measures a presentation of the most directly comparable GAAP's financial measures and a reconciliation between these non-GAAP's financial measures as well as the most comparable <unk> financial measure 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 Cantaloupe Dot com.
And with that I would like to turn the call over to Ravi.
Thank you operator, good afternoon, and thank you for joining us today.
We are pleased with the start of our fiscal year and are reporting a first quarter record in revenue of $57 8 million.
Up 26% over last year's first quarter.
Transaction revenue grew by 18% year over year and subscription revenue growth came in at 11% year over year in line with our expectations.
Subscription revenue benefited from a strong uptake of our bundled platform as a service offering cantaloupe, one as well as continued demand for additional software modules like remote price change as.
As you may have seen in the outlook section of our earnings release.
Expect subscription revenue growth to continue to ramp up throughout the year, resulting in growth in the low teens for the full year.
<unk> fiscal year 'twenty three in the high teens.
Equipment revenue growth was strong up 108% year over year.
As we near the end of the <unk> upgrade cycle, we continue to work closely with our customers to complete the necessary upgrades before the industry wide December 31 deadline.
Active customers totaled over 25000 at the end of the first quarter up 21% increase year over year and 4% sequentially.
Driven primarily by the success of our small and medium business strategy.
Active devices grew 3% year over year, and 1% sequentially as we navigate the final months of the hardware upgrade cycle.
We expect an acceleration in the number of active devices as we move into the next calendar year when capital budgets are redirected to expansion and innovation.
Our adjusted EBITDA for the quarter was a negative $5 4 million compared to positive $1 9 million in the same quarter of the prior year.
Gross margin and adjusted EBITDA were negatively impacted primarily due to one time migration cost related to our transition to the AWS cloud environment and procurement of higher priced components to fulfill customer demand. However, this positions us well for growth and.
<unk> through the remainder of the fiscal year.
We remain laser focused on accelerating cantaloupes growth over the next three to five years.
We continue to invest in expanding our service offerings and software add ons, which position us to extend our presence in core verticals like food and beverage traditional and smart vending and micro markets.
Consistently hear concerns from customers around supply chain constraints and the impact of inflation and labor shortages on their day to day operations.
They are actively looking for areas to aggressively integrate software and technology to help offset these macro pressures.
View cantaloupe as a key partner who can help.
For example, our catalog <unk> platform is a first of its kind bundled subscription model, enabling autonomous retailers to eliminate upfront capital expenditures on new hardware and reduce the risk of hardware end of life.
Catalog, one, which we brought to market beginning in April continued its strong performance this quarter.
We are seeing particular interest from our growing SMB customer base, given the light capital nature of the offering.
RPC more price change software offering also had a successful quarter.
Historically CPG companies will implement to annual price increases on average and it required substantial effort from our customers to pass those price increases along to customers.
Updating prices across our fleet of <unk> thousand machines or more could take up to four months.
Today, our customers are experiencing 10, plus price changes in a year.
Using our proprietary RPC offering saves time and money and ensure system wide consistency.
Brian parts data analyst and system administrator at Continental services.
<unk> Dot Corp, before to Banco four machines used to take 30 minutes now we can do 100 machines and 30 minutes without putting any trucks in the field on court.
Another Great example comes from Buffalo Rock.
Our full line vending and Pepsi bottler from the southeast who completed their seed zinc implementation across 14 different branches.
General manager Kyle Murphy stated I court since switching 3500 of our cashless readers over to catalogs E Board devise our customers are noticing and commenting how much more reliable that devices are at the machine.
No more downtime than normal missed revenue at our locations. They just work exactly how they should.
Court.
Buffalo Rock has also found tremendous value in seat growth dynamic scheduling functionality and then cards words. This has been a no brainer and a massive win for our entire business. We can efficiently manage our route drivers and know that we are keeping our service levels exactly where they need to be with.
Feet.
We also saw a significant growth in seed delivery, our software solution that enables paperless invoicing integrated web ordering and dynamic mobile delivery targeting the office in coffee foundry segment.
One of the advantages of seed is the ability to manage your entire operation from vending to micro markets to delivery services like office coffee.
All on one platform.
In Q1, and existing customer Compass, Canada committed to moving their office coffee and battery locations on to seed delivery. They started with 2500 migrations and have already doubled total locations to 5000.
One operational highlight I wanted to touch on is the completion of our migration to the AWS cloud platform.
As a major milestone in becoming an enterprise wide.
Cloud based network.
We now have the infrastructure and foundation upon which to add the next million devices.
This upgrade will also allow us to replicate our offerings seamlessly across international markets as well.
Before turning the call over to Scott to review, our Q1 results in more detail I wanted to spend a few minutes on some of the things that excites me the most about cantaloupes market position and the opportunities ahead of us.
First the secular tailwind driving digital payments adoption in our industry.
We conducted a study in partnership with Michigan State University called the payments in art ended retail analyzing payment trends among the sample of 160000 vending locations.
We saw a cashless payments had increased from 51% of transactions in January 2020% to 62% by October 2021.
We continue to see the adoption of cashless payments steadily increase month over month.
What's more impressive is the growth in contactless payments consumers have become more and more comfortable using the mobile phone or physical card, but just tap and go.
Second demographics are driving consumer preference for self service.
Whether it's non traditional categories beginning to be sold and vending machines.
The proliferation of kiosk based self checkout experiences.
We see both the Tam for our core current offerings as well as opportunities for innovative solutions and adjacent verticals continue to flourish.
Third our technology.
Our scalable <unk> platform and flexible software add ons like RPC are becoming essential for any customer who wants to manage cost and scale their business.
Today's macroeconomic trends like labor shortages and rising cost of goods.
Will help fuel digital transformation and consequently growth in our software offerings.
And last but not least our people.
We have worked hard over the last two and a half years to rebuild to a culture of excellence and recruited top tier talent.
Some of you will have a chance to meet at our upcoming analyst day on December 12 in New York City.
Where we will be reviewing some of the opportunities and moats around our business that excite us the most.
With that I'll turn it over to Scott for him to review our Q1 results in detail Scott.
Thanks Ravi Q.
Q1, 'twenty three revenue was $57 8 million, an increase of 26% year over year, our combined transaction and subscription revenue grew 16% to $47 1 million, which was driven.
Higher average transaction ticket sizes as well as additional subscription revenue from cantaloupe, one and newer software modules like RPC.
Equipment revenue was $10 7 million, an increase of one 8% compared to Q1 2022.
Total gross margin for the quarter was 24, 5% down from 32, 5% last year.
Dominantly driven by negative 23, 8% gross margins on equipment revenue compared to five 3% in prior year.
Our team continues to work hard to navigate supply chain constraints, and we are maintaining higher than normal inventory levels to ensure we fulfill customer demand.
Which has been an issue for some of our competitors. However in Q1, we saw higher than anticipated demand for certain <unk> products that are being impacted by an industry wide chip shortage given.
Given the very attractive lifetime value of an active device, we decided to purchase a necessary component of higher prices on the spot market to satisfy demand, resulting in a negative impact of approximately $2 million to our equipment gross profit.
As of September 30, we have de risked the vast majority of our device portfolio and we'll continue to work closely with customers through Q2 the.
The industry mandated deadline for <unk> compliance as December 31.
We would expect equipment margins to normalize thereafter.
Subscription and transaction gross margin was 35, 5% relatively flat year over year sequentially. This was down due to a onetime expense in Q1 related to our AWS migration.
For the remainder of the fiscal year, we expect gross margin on transaction revenue to be in the mid teens and combined subscription and transaction gross margins to be approximately 38% to 40%.
Total operating expenses in the first quarter of 2023, or $22 7 million compared to $16 million in Q1, FY 'twenty two.
The increase was primarily driven by higher does spend on technology projects bad debt expense and professional services related to our efforts to expand our market position the AWS migration and the delayed 10-K filing.
Additionally, prior year also benefited from a one time insurance recovery of 700000.
Net loss applicable to common shares for the first quarter was $8 9 million or a loss of <unk> 13 per share compared to a net loss of $1 6 million or <unk> <unk> per share in the prior period adjusted.
Adjusted EBITDA was negative $5 4 million in the first quarter compared to positive $1 nine in the prior year period.
We had a number of higher than anticipated expenses during the first quarter, including the onetime Asia Ws related expense approximately $2 million of component related equipment expenses.
And the higher operating expenses I just mentioned.
Related to our balance sheet and liquidity, we ended the first quarter with cash and cash equivalents of $50 8 million.
Now turning to 2023 guidance, we are reiterating our guidance for the fiscal year. As a reminder, our guidance calls for total revenue to be between $225 million and $235 million representing growth of 10% to 15%.
Based on the strong business demand, we're experiencing we now expect to be at the high end of our guidance for total revenue.
As we mentioned on our last earnings call. We expect the combination of the transaction and subscription revenue to be between $191 million and $198 million representing growth of 13% to 17% to expand further we expect transaction revenue growth to be in the high teens and subscription revenue growth to be in the low teens.
As a reminder, we expect equipment revenue to be relatively flat year over year.
But heavily skewed in the first half of the fiscal year as we conclude the <unk> upgrade cycle.
Firstly, we expect transactions and subscription revenue to ramp sequentially throughout the year.
Based on Investor feedback, you'll note that we added further detail on revenue growth by major category in our earnings release issued earlier today.
Our guidance for total U S. GAAP net income is expected to be between 1 million $5 million total adjusted EBITDA to be between $12 million and $17 million.
Total operating cash flow to be between $10 million $15 million.
Based on a higher than anticipated costs for the first quarter, which I just touched on we expect to be at the low end of our adjusted EBITDA range for the full year.
With that I'll now turn the call over to the operator for Q&A operator.
Thank you.
At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please standby, while we compile the Q&A roster.
Okay.
Our first question comes from Chris Kennedy with William Blair, Chris Your line is open.
Good afternoon, and thank you for taking my question and we appreciate the additional details on guidance can you talk a little bit about the acceleration of subscription revenue and you mentioned exiting the year at a high teens clip is.
That kind of what we should expect going forward.
Thanks for the question Chris.
We're very excited about really stepping on the gas on the subscription revenue, which we've heard repeatedly is.
The single most important metric for our investors, especially given the much more attractive margin profile of Dr. Revenue. So there has been a focus on it.
This is primarily driven by our strategy of platform as a service with the catalog one offering and also additional add on products like RPC in artificial intelligence powered merchandising et cetera in terms of expectations, yet what we see is that the subscription revenue will accelerate throughout the year.
And as we mentioned earlier.
Started at 11% with the first quarter, we expect to have the full year revenue will be in the low teens, but actually exists in the high teens. Consequently, entering the next fiscal year at that level and continuing to accelerate from there.
Great I appreciate that color and then just a small modeling one what was the the costs associated with the migration to AWS.
Yes, so Chris the overall cost was $1 4 million and Youll see that in two different areas, you'll see a little bit less than $1 million and the cost of goods sold and then youll see about 400 to 500000 in the.
Operating expenses.
Great. Thanks, a lot guys.
Please standby for our next question.
Our next question comes from Gary Presto P&L from Barrington Research Gary Your line is open.
Hi, good afternoon, everyone.
Couple of questions here first of all could you talk about anything you saw on the.
Youll payments space Youre.
Are you getting any traction there at all.
Thanks for the question Gary Yes, so we have some.
Exciting traction on the yolk payments space not traction, which is reflected in the first quarter financial results, but that will beneficially impact or the trajectory of our subscription revenue in the coming months and part of our positive guidance on.
On the revenue front, particularly the subscription revenue is based on the traction that we are seeing not just for our software products, but also for our micro market offerings and as a reminder, the seed market addition, not just the York kiosks.
Combined together address the micro market market opportunity and feed markets is already the market leader for the software that powers micro markets, whether they are youll kiosk or kiosks from another competitor.
Okay and then.
In your guidance, what you're contemplating.
Once we get past. This upgrade you said that the margins for equipment will normalize as far as you can see so we shouldnt expect any kind of negative disintermediation like we had here.
In the quarter, when we get a pretty pretty bad surprise on the downside.
Is that a correct assumption.
Yes that is attracting assumption Gary so overall when you look at where we landed for the first quarter and then looking into second quarter. We expect some of those costs would trickle into the second quarter, we mitigated that sum by renegotiating some of our prices with our suppliers, we're getting them to absorb some of the costs as well.
I'll be a little spillover from that in the second quarter, and we are expecting a pretty.
Significant second quarter for equipment revenue as we round out the <unk> upgrade process, but then after that is real in the third quarter to fourth quarter, we will be selling it at a profit.
Okay, and then getting less.
Sorry go ahead Robin sorry.
I was just going to add a little bit more color on the.
On the margin profile on the equipment.
And as you described it the fairly significant downside surprise.
The way this is worth this.
The supply chain situation has been challenging with chip shortages and it depends on the specific products and the specific mix et cetera, but we had a strategic decision to make especially with our customers spending a lot of their capital and upgrades.
Do.
Either push and try to pass on all of those costs to our customers our work with them with a longer view and help them through these upgrades.
Keeping our eye on kind of a lifetime value for those connections, which is very attractive and we decided to do the latter which we believe is in the best long term interest of our business as well as the relationships we have with our customers.
Okay, and then just lastly, and ill jump off would you say that.
Your your business is.
Generating revenues on a same store basis.
Basically.
At or above pre pandemic levels, I guess I'm, just trying to get an idea of what the what the economy looks like now in terms of offices opening.
Things like that.
Yes. The simple answer is it is I'll, let Scott add some more color there yes.
As it relates to the transaction processing, we are operating well above the pre pandemic levels, where the exciting part for US is we feel like there's still more to come as it relates to the business is coming back. So we're taking another 10 or 15% increase if we ever get back to.
Full offices being occupied.
Thank you.
Thank you please standby.
Our next question comes from George Sutton from Craig Hallum, George Your line is open.
Thank you looking at your move to AWS, you talked about the scale that that will give you the ability to have can you talk about any governors to your growth that you had prior to this just so we're clear where those were in.
And what's enhanced by the AWS smooth.
Yes, Josh Thank you for that question so the.
The two things that the AWS move makes easier is when we take our.
Cloud platform and the software that runs there it's much easier now to replicated into geographies that are acquired that software to run within their macro region. Europe . For example, therefore compliance reasons Europe replicate the software and run it within data centers.
In Europe , the AWS platform makes it much easier to replicate it that way.
<unk> for other regions like Latin America et cetera, So that's a big one which we felt was.
Was a governor earlier than our prior cloud infrastructure.
So just to be clear, it's primarily in international.
Benefit and obviously.
We've wanted you encourage you to grow quicker internationally. This will enhance that effort is that that's the main benefit just to be clear.
That's the main benefit the second benefit is.
It's a more scalable environment Amazon has built essentially the best cloud infrastructure on the planet and that lets us scale in a very seamless manner.
Transactions grow as connections grow and as we put more volumes on the platform.
I understand so well.
When we do third party work, we continually hear how attractive remote price changes, it's something competitors don't have and I am curious how aggressively you are using that for for both new customer opportunities and for retention of existing customers.
It's a great question and it's music to my ears that your third party research validates what we are seeing in the marketplace.
We're being aggressive in using it on board as you said retention as well as in new customer acquisition. In fact, there have been several new customers for whom the main driver not just to migrate to our seed software, but also to our <unk> port devices has been the ability to grow to more price change, where we are not being too aggressive.
So as we are trying to hold and we are going to hold the price pretty steady there.
And not.
Because we see a tremendous amount of value in it. This is a value based sale for us versus a price based sale for us if that makes sense.
I understand last question, if I could just trying to put a couple of things together you.
You suggested you had competitors that have had some supply constraints you were very aggressive in going after some opportunities.
<unk>, two bringing hardware as part of a broader relationship and then you also announced a fairly significant growth in customers.
Just trying to put all this together understand the significance of the hardware.
Ponant of this versus the cantaloupe one.
Effort relative to this customer growth.
Yes, so two things.
The catalog, whether it's the camera one effort or the combination of iron navigation of supply chain innocent. What it's led US do is navigate this upgrade cycle with very minimum churn right and continue to grow our active devices, which was a very important key metric for us because all of it.
The services layer and layer on top of that footprint, although our feed software does work with competitor devices. Also so we can continue to grow that on an independent vector does that answer your question.
So I think what you are saying is the <unk>.
You've been able to keep customers so retention.
By being aggressive on the hardware side Cantaloupe, one is different in the sense that it's bringing in new customers via that channel is that what I'm hearing correct correct and it's also worth amplifying that cancel one have had wonderful receptivity with the small and medium business segment, where we were.
Really less penetrated trade.
Traditionally we were always very well penetrated on the large enterprise segment and we looked at it and have specifically focused on the SMB segment, a lot more particularly in the last 12 to 15 months.
Part of that was the catalog one strategy and it's starting to pay off significantly which is reflected in our customers being up 21%.
Perfect. Okay. Thanks, guys.
Okay.
Thank you I would now like to turn it back to Ravi for closing remarks.
Thank you operator first of all I wanted to thank you all for joining this call and your engagement I also wanted to extend an invitation for you to join US at our Investor Day on December 12 at the NASDAQ to meet our broader leadership team and also learn about the <unk>.
Longer term outlook and growth strategy of the company.
With that we can close out thank you.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
The conference will begin shortly.
As Johan during Q&A, you can dial star one one.
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