Q2 2023 Cantaloupe Inc Earnings Call
Good day, and thank you for standing by and welcome to the Cantaloupe second quarter 2023 earnings Conference call. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today Dara Dirks Investor Relations. Please go ahead.
Thank you and good afternoon, everyone welcome to the Cantaloupe second quarter earnings Conference call with me on the call. This afternoon is rather using intestine, 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.
Our forward looking in nature actual results could differ materially from those contemplated by the forward looking statements because of a certain factors, including but not limited to business financial markets and economic conditions.
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.
Their meat 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 cantaloupes 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 the 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 our Investor Relations section of our website at www dot cancel of dotcom and with that I would like to turn the call over to Robbie.
Thank you Dara good afternoon, and thank you for joining us today.
I'm pleased to report solid financial and business results from the second quarter of our fiscal year 2023.
This is my first quarter as CEO and we made a lot of progress on strategic initiatives, which are led by our vision to become the global market leader, providing technology that power cell service commerce.
We successfully closed on the acquisition of three square market in December positioning us to accelerate cantaloupes presents in the high growth micro market industry. While also immediately expanding cantaloupes international footprint for a full suite of self service technology products.
We held our first Investor day at NASDAQ, which was well attended.
During this session investors and analysts were able to meet that executive team listened to key customers and hear our vision and strategy.
Also shared our long term financial outlook for the company and one time Kpis that demonstrates the opportunity we see ahead of us.
Our focus continues to be on accelerating the high margin subscription revenue growth. We were successful in doing this by scaling the catalog program and selling subscription including feed software device management, Andrew more price change.
As a reminder, our catalog one platform is the only bundled subscription offering in the market that enabled self service operators to eliminate upfront capital expenditures, we continue to see strong interest from our growing small and medium business customers given the light capital.
The chair of this offering.
We also reported strong financial results for Q2.
We reported a record total revenue of $61 3 million up 20% over last year's second quarter.
We reported a record in transaction revenue, which grew by 21% year over year and a record in subscription revenue, which grew by 15% year over year.
While we anticipated an acceleration of subscription revenue in the second half of the fiscal year. We've been pleased with the strong subscription revenue growth trends in the first half as well.
We continue to expect subscription growth to ramp throughout the year, resulting in growth in the high teens for the full year.
Equipment revenue growth was strong as well up 25% year over year.
While the <unk> upgrade cycle is largely behind US there are some delayed installations due to labor shortages.
We are pleased to have helped many of our clients through that upgrade cycle.
Active customers totaled $26 335 at the end of the second quarter up 24% year over year compared with the second quarter of last year.
We added 1300, new customers in the quarter, primarily among small and medium businesses driven by the appeal of our catalog one offering.
Active devices grew 3% year over year.
And importantly, our adjusted EBITDA for the quarter was three 9 million, a 61% increase year on year compared to the second quarter of the prior year.
Now to move to a few additional business highlights from this quarter.
While we are still early in the integration of three square market. We are pleased with the progress thus far integrating business functions, such as sales marketing HR and finance are.
Our priority is to achieve the revenue synergy opportunity, we saw with the acquisition and we've already posted a number of early wins, including <unk>.
<unk> sales automatic vending sales who was located in Michigan.
We've reached an agreement to replace a portion of their competitor units with three square market and they are committed to growing their future market locations with cantaloupe.
Adam Moore President of automatic vending sales stated rich.
Cantaloupe in the future.
The reception among existing cantaloupe customers has also been exceedingly positive about the combined company offerings.
For example, cantaloupe customer Madison coffee in vending is transitioning their micro market business from a competitor to three squares.
Lastly, FGM direct service Ah, Sweden based three square market customers successfully installed multiple new market and are continuing to scale their footprint with us.
We also continue to see strong organic growth in other areas of our business.
Cc vending one of the largest independent refreshment services companies in the Metro New York area and longtime seed customer entered into a strategic long term agreement with capital to upgrade all of their non ENB devices and also signed up for the remote price change for the vending fleet.
Additionally, the added 24 more yolk kiosk to expand their micro market services at one of the largest financial institutions in the city.
Crigler venting, a canteen franchisee in the New York State area, and former Cantaloupe cashless customer who had switched to a competitor in 2017 signed an agreement to migrate half of their machines back to cantaloupe cashless devices and move fully onto the seat platform. This include.
<unk> all of our core C products like sea floor office markets and delivery.
We continue to see strong demand for Upsells.
As you might have seen from a recent release, we completed a significant project to onboard Buffalo rock, a Pepsi bottler, who will know you seed to manage 9000 vending machines.
We also expanded our agreement to support <unk> in reach convenience business with both our hardware and software solutions. This.
This includes the rollout of seed across 18 branches.
Pepsi Florence also known as Phoebe foods.
A large Pepsi bottler and canteen franchisee in the southeast who was a fully deployed cantaloupe customer expanded that seed services by adding remote price change and lastly, coke autumn a large coca Cola bottler upgraded their non ENB devices to equaled engage our latest interactive.
Ice.
In November we held Cantaloupe University very hosted 150 of our customers and partners in a two day summit and discuss some of the latest innovations in upcoming products that we will release in calendar year 2023.
We also conducted in depth seed E Board and micro market training.
The event was very well received and validated that our pipeline of innovation continues to resonate with our customers and we highly relevant to their businesses.
As we move into the second half of our fiscal year.
We remain focused on the four initiatives that we outlined at our Investor day, one increased market share in core vertical that we operate in within North America.
Two international expansion, leading with enterprise software, we're already positioned well for this with our acquisition of three squared market.
Three extend revenue per connection through or add on services such as they are more price change AI borrowed merchandising and more.
Four continue expansion into adjacent vertical such as <unk> charging entertainment gaming and smart retail.
We are focused on continuously strengthening the executive team and to that end I would like to officially welcome Anna logo Solecki as our new Chief legal and compliance officer, who will also serve as general counsel and corporate Secretary.
Anna has already been an excellent addition to our leadership team, bringing even more focused towards international expansion and valuable legal experience of reviewing regulatory needs as we continue to expand and scale.
With that I'll turn it over to Scott for him to review our queue to financial results in detail Scott.
Thanks, Robby is Ravi stated are TQ twenty-three revenue was $61.3 million of 20% year over year.
As a reminder, we had 30 days or three square market <unk> numbers.
Revenue growth, excluding three square markets would have been 17% for the quarter.
Combined transaction subscription revenue grew 19% to $48.9 million, which was driven by accelerating subscription growth from cantaloupe one.
And higher average transaction ticket sizes.
Our equipment revenue was $12.4 million, an increase of 25% compared to Q2 FY 2002.
Total gross margin for the quarter was 31% down.
Down from 31.3% in the same quarter last year, driven by slightly lower gross margin on transaction fees due to shifting card mix and the associated processing fees.
Gross margin on equipment and proof slightly to negative 2.3% from negative 2.8% in prior year.
We look forward to driving to positive margins in Q3, and Q4 for equipment as we move fast <unk> and AMB upgrade cycles.
Total operating expenses in the second quarter of 2023 $19.4 million.
Appeared to $16.3 million in queue to FY 2000 to the.
The increase was mainly driven by integration acquisition expenses of $2.8 million encouraged as part of our Three-square markets acquisition.
Net loss applicable to common shares for the second quarter was 573000 or loss of one cent per share compared to a net loss.
68000, or one per share in the prior period.
Adjusted EBITDA was $3.9 million in the second quarter compared to $2.4 million and the prior year period.
A few notes on our balance sheet and liquidity since last quarter we.
We ended the second quarter with cash and cash equivalents of $28 $1 million <unk>.
This was down $22.7 million from our cash balance of $58 million at the end of the first quarter.
Roughly half of the decrease $11.9 million was directly attributable to the acquisition of three square markets.
The remaining decrease of $10 $8 million was split between $6 million of net cash used to fund operating activities and $4 $5 million for capital expenditures.
Going forward, we're focused on lowering our inventory NAR balances as we collect on large equipment purchases made during the upgrade cycle.
This decrease in inventory is expected to generate positive cash flow from operating activities and the third and fourth quarter of 2023.
Now turn into 2023 guidance, we are reiterating our guidance for the fiscal year that we provide on December 12th 2022, as our Investor day.
This guidance includes the impact of the three square markets acquisition.
As a reminder, or guidance calls for total revenue to be between $240 million and $250 million <unk>.
Total us GAAP net income to be between a net loss of $2 million and net income of $3 million and adjusted EBITDA to be between $12 million and $17 million we.
We expect the combination of transactions subscription revenue to be between $200 million and $210 million representing growth of 18% to 24% to.
To expand further we expect transaction revenue growth to be in the low to mid twenties and subscription revenue growth to be in the high teens to low twenties.
We expect equipment revenue growth can be between 10% and 15%.
With that I'll turn the call over to the operator for Q&A operator.
As a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one one again please.
Please stand by while we compile the Q&A roster.
And our first question comes from Chris Kennedy with William Blair. Your line is open.
Good afternoon. Thanks for taking my question can you talk about your expectations between.
Your customer base, whether it's enterprise mid market for small businesses as we look into calendar 2023 with the uncertain macro environment.
Chris.
It's a really good question this is robbie.
We see the food and beverage side of our business in particular be very resilient to macroeconomic headwinds.
And in fact, one of the unique trends in our businesses.
As more and more small businesses start businesses and micro markets and Wending, that's driving interest in in demand for our products and services. So so far we are actually seeing it would be a positive.
Not a negative in terms of the macroeconomic environment.
Right very helpful. Just a quick follow up on the prospects for Cantaloupe, one and this this year can you <unk>.
Talk about kind of your expectations. Thanks, a lot.
Yes.
I'll give you a little bit color and then also ask Scott to add to it.
Canada, one product has been very well received particularly by small and medium businesses enterprises that are large continuing to prefer a martyr variable purchase equipment and depreciated.
But small businesses absolutely love the idea of.
Not having to put upfront capital and then be risking themselves from any kind of product obsolescence with Scott when you add some color financially as well yeah. So overall, we're seeing great growth with the Cantaloupe one program.
We are seeing it not just in the small businesses, but also in the mid market as well. So we're starting to put a lot of effort and focus on that mid market for your overall, that's one of the largest drivers that we have for our subscription revenue growth.
Over this past quarter, and we see that continuing into third and fourth quarter.
Thank you.
Thanks, Chris.
Thank you one moment for our next question.
And our next question comes from Gary Presto, Pinel with Barrington Research. Your line is open.
Hey.
<unk> afternoon, Robbie and Scott a.
Couple of questions first of all Scott do you have the transaction number the number of transactions on the growth and absolute transactions handy.
Yeah, sure so year over year <unk>.
Number of transactions increased by 3%.
When you look at the total dollar volume of transactions that increased by 17%.
So the the dollar value of transaction is growing faster than the overall transactions himself Gimme a little detail behind that so.
Last year, our average ticket size was $2.12 this quarter were at $2 40.
And so we're starting to see a lot of growth within the average ticket price.
Those driven partially by.
Overall inflation, a large part of it but also of what we're seeing two is that when you look at more and more move into the self service commerce, you're seeing higher ticket prices are higher higher ticket items for instance, we have kiosk machines within the airports to their their venue headphones and charging forward. So we're.
Starting to see the shift of self several commerce at higher ticket value items.
And even within food and beverage it's more.
Expensive odwalla strengths versus a can of soda.
The shift and the products as well.
Okay, Great and then.
Was there any impact I know you mentioned that the margins on subscription and transaction fees were down.
Looks like over 100 basis points, you did mention some card mix there, but was there also an impact on.
The acquisition that impacted the margins, even though it was only a montana.
Revenue contribution.
No it really was.
When you look at overall.
With the transaction revenue being our largest revenue line item the impact of the acquisition for 30 days at the very very little impact on it.
Okay. So the transactions I'm sorry go ahead.
I was just going to say it truly is just a mix of the cards.
The pricing overall is fairly complex when you look at it but it is just a mix of the car brands. So.
So it's more it's more debit or credit versus debit on the mix.
So it gets a little more complex than that so it can be credit reverse that it can be American express verse discover okay, there's different pricing depending on the issuing bank. So a lot of factors go into it.
Okay.
Leading up to $20.
And then could you maybe go into what you're doing to integrate.
Sales forces.
<unk> for the acquisition with your legacy Salesforce in the micro market.
Yeah. So the the sales area is the one that we integrated first and the approach that we've had an umbrella chief revenue officer has done an outstanding.
Job with this using his playbook from the very form base.
It's a model there.
The salespeople have major and minor specializations. So if you had a salesperson that's an expert in telling micro markets and came from the three squared world. We have now cross trained them on the seed markets and the other products.
And they can lead with the micro market sale, but then they bring in the other products and then they also bring in an additional salesperson when needed with deeper specialization in Florida.
Luke Wholesaling, if you will and it works the other way around also so.
Cantaloupe salesperson that might have deep expertise in.
The software side, but is now gaining expertise on the micro market site will bring in.
A former Three-square salesperson with deeper expertise to core sale and delivered the right solution for the customer so in.
In a certain sense. This is.
This is pushed us into a more sophisticated solutions selling model versus selling widgets, which was.
Card readers and.
Telemeter in an elementary software. So this this has been a more sophisticated.
Sale and Jeff has led the transformation of the Salesforce very well.
And then the last question I have is it just it looks like the active devices sequentially were flat is that correct and what would account for that.
Our flat.
Yeah, so overall quarter over quarter were up 3%, but you look sequentially at his flat sequentially.
That is as well as we're rounding out the.
And the <unk> upgrade cycle, we're putting in a lot of our effort over the past six months has been finishing that out and making sure that you don't have any churn as we do that as we look to third quarter on fourth quarter.
<unk> will focus now has gone on to new sales.
Okay. Thank you very much.
[noise]. Thank you one moment for our next question.
And our next question is from George certain with Craig hold on your line is open.
Hey, guys. This is James Ross Shawn for George.
Congrats on the corner and on the <unk>.
Success, you're seeing with three square market. So early on.
And so it's sort of on the topic of micro markets.
Get some industry data out there it's sort of implied that are micro market can do 10, 20, <unk> annual sales of a vending machine.
Could you sort of talk about how that translates into your unit economics.
Spaces between venting and micro markets like what kind of yes could you see per device for micro market versus funding.
I think those numbers are absolutely right on the money James.
There are cases, where we actually see operators to replace.
A vending machine or two in a location and then go to a micro market type of model and and you're right. It does go tenex and it's driven by a lot of different factors for us. The benefits are we see a direct benefit in the transaction revenue where.
Those increase sales attract better economics for us and processing the transactions.
And we also see a big lift.
When it comes to the seed software product, which for the micro market is priced approximately four times to five times per location than the.
The vending side of the equivalent product of Europe .
So V C a benefit on both of those.
The transaction and the subscription line item than a micro market is deployed.
Got anything to add there.
I think you've pretty much covered it I mean overall again going back to the higher ticket prices and micro market you see a lot more because people are buying 12 dollar salad as opposed to the $2 Gatorade, that's a really good point tickets either as a better as well.
Yeah that makes sense.
And then I guess, how would you describe the appetite of operators you've spoken to for adding new devices now that we've gotten through the upgrade cycle like our operators sitting there with funded budget is just ready to pull the trigger in the next few quarters and order a bunch of new devices or would you expect.
Operators to sort of methodically deploy capital I'll add new devices that are pretty even tastes or the rest of the year.
I think we're going to see it more even paced.
The demand actually is higher than that.
I would almost say there has been some starvation because all of their budgets have been consumed with.
<unk> and the <unk> upgrade cycle. However, we are seeing operators be cautious based on the macroeconomic environment in terms of how fast they go into rolling out new location and there is also the lag factor of.
Yes, 70, 80% people have come back to offices, but they've come back three days, a week and sort of five days a week.
And in some locations have still not come back in and they're still lateral moldwarp factor, which is making operators.
Eight and rolling out new locations very aggressively so I think we're going to see.
Gentle out in a more even pace of new Rollouts.
Gotcha and I just wanted to follow up to that I guess, if I could sort of on the return to the office trend I guess.
Are there still some locations today that are below pre pandemic of levels and if so could you sort of speak to like what percentage that may be.
Activate the active devices.
Yeah. So as I said income. So there are two dimensions to that question one is.
How many locations simply haven't come back from a pre pandemic to a post pandemic comparison I'd say, that's about 15% in that bucket and then the second part of that question is four locations that have come back what are we seeing in terms of depressed or less volume than before we had actually not seeing that for.
More spot.
Crossed the pre pandemic levels, but it may not be because people have come back five days to work in the office, but it's more because the ticket sizes of prices have gone up and.
They're just maybe buying more premium products and the product mix has shifted so so that our other factors that have compensated and hence the sales per location.
Exceeded pre pandemic levels already.
Makes sense thanks, guys.
Thank you. Thank you and as a reminder to ask a question. Please press star one one on your phone.
And our next question comes from Mike Lattimore with Northland Capital markets. Your line is open.
Super Thanks very much.
Congrats on the strong results Armstrong EBITDA.
You mentioned.
A couple of remote price change, we and I believe when you went through the cusp.
Customer winning the quarter I guess, just how prevalent is the interest in remote price change you know is it a <unk>.
<unk> part of kind of Upsells of new logos, you're seeing out there at this point.
It's.
It's very exciting and.
If anything I think the only thing that's.
Holding his back from accelerating it is that in some cases that are upgrades to the software that are running that an operator has running on their machines and things like that sometimes it's plug and play and sometimes they have to upgrade.
Software components within their infrastructure before they roll it out, but but we continue to see very strong.
Take from this product and a strong ramp up profit.
Alright, and then on Kellogg one it sounds like.
That was.
Important contributor to the new customer adds again, I guess could you give us some ballpark of how many customers are.
Using catalog one this client or number of active devices or something like that.
Sure. So right now we're seeing approximately 15000 seats on camera and we've been adding them at a rate of about 5000 per quarter.
Okay.
And then just last one on operating expense and when you think about operating expense for the.
March quarter should we just kind of <unk> in two more months of.
Three square market or are there some other areas and then you can kind of trim expenses.
Yeah. So overall when you look at the operating expense.
First quarter we.
We had a lot of one time events.
So it's not a good indicator of a run rate for the.
The second quarter is a little bit better of an indicator, but we have also made some some cost savings as well to help decrease it.
And then we always on the third quarter, we chew up our sales tax reserve, which last year was around $2 million in savings.
What will we expect it to be around the same this year.
Okay Alright.
That's helpful.
Thanks, a lot.
Thanks Bye.
And I would now like to turn the conference back to <unk> for closing remarks.
Thank you operator, so in.
In summary, this was a solid quarter for us with strong revenue growth and a clear pathway to improve profitability I'm excited about getting past the <unk> and Ian via upgrade cycles, completing the acquisition of three square market and also early traction in Latin America, and EMEA and look forward to executing on the strategy that we.
Articulated as part of our Investor day in December and unlocking significant value. Thank you for your interest in attending this earnings call.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise and lower yohan. During Q&A you can dial 911.
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