Cantaloupe Inc. Q3 2023 Earnings Call
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Good day, ladies and gentlemen, thank you for standing by and welcome to the kernel of starts quarter fiscal year 2023 earnings conference call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to Westar one one on your telephone you will then hear an automatic message advising yohan. Its ways. Please note that today's conference maybe recorded.
I'll now hand, the conference I'll, let you speak of House Dara Jacks up Investor Relations. Please go ahead.
Thank you and good afternoon, everyone welcome to the canceled <unk> third quarter earnings Conference call with me on the call. Today is Rob you then can pace and Chief Executive Officer, and Scott Stewart, Chief Financial Officer before we begin today's call we'd 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 then 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 cancellous undertakes no obligation to update any forward looking statements, whether because of new information future events or otherwise.
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 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 Dot cantaloupe dot com and with that I would like to turn the call over to Robbie.
Thanks, Darryl and 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 $64 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 equipped.
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.
$22 million, which includes $14 million of our 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 27598 active customers an increase of 21% year over year and 5% sequentially.
<unk> 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 kiosks with enhanced accessibility features.
With one full quarter of three square market are three two M. In our results. We are pleased with the progress on integrating this business.
The former <unk> and catalog sales teams have been integrated and are leveraging subject matter expertise as well as their respective strength 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.
<unk> already have a number of examples of selling three square market kiosk, the catalog customers and seed markets software to three DRAM customers.
Some recent examples of this cross selling include canteen of Northern California.
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 <unk> kiosk in the third quarter.
This is also a great example of a customer with whom we had no relationship a year ago.
Our new mid market segment strategy, we have been able to bring them onto the full catalog platform.
Another cross sell example is take a break wending a full line vending micro market and office coffee service operator, located in California.
Was fully deployed with cantaloupes equaled hardware for telematics and payment processing. They signed an agreement in the third quarter to move their entire operation onto the <unk> platform as well as place their first order for <unk> kiosk.
Are these along with many other existing cantaloupe customers are examples of operators, who have gone all in with catalog and are converting from competitive kiosk onto our platform.
A great example of cross selling in the other direction.
Seed markets to existing <unk> customers is a win with a G M direct service a major micro market operator in Sweden.
They are currently implementing seed markets across the large and growing micro market business.
This also represents our first app.
Scale implementation of seed markets in Europe .
And demonstrates our success to localize and rollout of this platform internationally, which I'm, particularly excited about you can get more details about this rollout and market than in a press release that was issued earlier today.
Subscription growth during the quarter was 22% driven by <unk> and our SMB strategy, which is spearheaded by catalog 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 the strategy, we've optimized the C 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.
<unk> with catalogs E Board card readers.
Now theyre transitioning their entire operations onto the catalog C platform.
We continue to deepen our thought leadership in the self service industry. 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 700000 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 point was around the average cashless ticket size at amusement gaming machines for clay purchases.
Which was $5.32 compared to only 93 four.
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'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 the financial review Scott.
Thanks, Ravi as mentioned, we delivered another strong quarter of revenue growth as well as record profitability and record cash flow generation.
Our <unk> 'twenty three 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.
Our 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 <unk> acquisition accelerating subscription growth from Ken look 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 <unk> devices, where <unk> service has been discontinued.
Our equipment revenue was $9 1 million, an increase of 12% compared to Q3 FY 'twenty two.
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 equipped.
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, FY 'twenty two.
Net income applicable to common shares for the third quarter was $6 7 million or <unk> <unk> per share compared to net income of $1 8 million or <unk> <unk> per share in the prior period.
We had a record quarter for adjusted EBITDA, which was 100, 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.
Even largely by net income of $6 7 million.
$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 <unk> acquisition.
Total revenue is expected to be between 240 and $250 million.
We continue to expect the combination of transaction and subscription revenue to be between 202 hundred $10 million.
Representing a 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 was $3 million adjust.
Adjusted EBITDA is expected to be between $12 million and $17 million.
Total operating cash flow to be between $10 million $15 million.
I am pleased to see our transaction and subscription revenue grow as a percentage of total revenue as it relayed 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.
Thank you, ladies and gentlemen to ask a question on your lines of Westar, one one on your telephone and wait for your name to be announced.
Please standby, while we compile the Q&A roster.
And our first question coming from the line of.
Mike Latimore with Northland capital markets. Your line is open.
Okay.
Great. Thanks, Congrats on the really strong results here.
Okay.
On the subscription and license gross margin.
Throw the big sequential step up there and I guess is that sustainable new level.
Yeah, Hey, Mike and thank you for the question.
Yeah. So overall there is a couple of components to it as we said in the prepared remarks.
Gross margin is up across all three revenue lines. 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. So we were at about 5% this quarter up at about five 1%, we do expect that to continue and.
And then on the subscription gross margin.
We've increased that.
We've had some expense reduction related to the network carriers. So we've negotiated a lower rate for <unk> devices. So as the <unk> devices have been rolling off and being replaced with <unk>, We're starting to see some expense savings there. The second component to that is also with three square markets historically.
They have had a higher gross margin so as we start to layer them and it's increasing our margin some as well.
Historically, we've always said we'd been in the 80% to 85% range. This quarter, we've been more in the 85% to 90% range.
Got it.
So is it fair to say this level is kind of ballpark as sustainable.
Okay.
Yes, well be putting out our guidance for 2024 and fourth quarter, but as what we can see right now we believe that is sustainable.
Okay great.
And then you've mentioned cantaloupe one.
Can you provide a little more color on the.
The demand Youre seeing there maybe how many seats are added or.
Typical number of seats per customer.
The pipeline look like.
Sure. So overall, we've added about another 5000 seats. This quarter, we are seeing is picking up great traction.
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.
Ravi I don't know if you have anything to add to that the only thing.
I would say is.
Mike as in any paradigm shift and catalog one is a paradigm shift right, where we are shifting the market from a behavior, where they buy devices installed them.
And then pay for services to a paradigm there.
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 licensed based or subscription based or an infrastructure moved from being brand base to cloud based it's the same trend the small and medium businesses tend to adopt it faster because they cared less award depreciating assets on their balance sheet and then the large enterprises tend to lag.
Behind but eventually get with it when they are in their benefits and simplicity of.
Our subscription model outweigh the benefits of picking up assets and depreciating on their balance sheet. So thats exactly what we are seeing here.
Sure that makes sense great alright.
Alright, Thank you best of luck.
Thanks, Mike.
Yeah.
Thank you and our next question coming from the line of George Sutton with Craig Hallum. Your line is open.
Thank you very nice to see the international first.
When at scale I'm curious, Rob if you could talk about.
Timing and plans of go to market in Europe , a little bit more now that you are starting to perceive that a bit more aggressively.
Yes, George Thanks for the question look we have always said that we.
Sure.
Three 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 three year journey and I stated that we will see some revenue this fiscal year do not meaningful or material from international markets and then we will see that ramp through the fiscal year 'twenty four.
So we're 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 severe kind of beyond the AVR piloting it phase to now we've got real customers real installations and real revenues coming.
True.
I still.
I reiterate that we will start ramping it up more aggressively through fiscal year 'twenty four.
Gotcha.
Mentioned, you had been getting good customer feedback.
It kind of dovetails with.
And I think youre, referring to the feedback of.
Bringing in the three square markets opportunity, what we're hearing the same things, particularly from competitors, who are saying you are more challenging now to compete with because of you're bringing seaton and.
And three square together, making it real challenging.
Is that kind of what you are referring to when you were talking about the customer feedback.
That is one part of it the other part of it is.
When when customers are looking for simplicity.
They want one throat to choke right. So.
The part you're mentioning is hey, now we've got this highly differentiated product led the combination of the software and the devices and the micro markets. It makes it formidable and Thats true, what's also true and frankly.
We had underestimated the benefit of value base, how much customers are craving to simplify their technology footprint and not have five different solutions and not have to train their people on five different screens and portals and things to go and do their workflow right.
And how much of a value proposition, we now have by saying Hey, everything you manage your managed through seed doesn't matter, whether it's micro markets our office coffee, our vending and EHR train people on one software vendors there is tremendous power in doing that.
Gotcha Alright.
Alright, great to hear nice job.
Thank you.
Thank you and as a reminder, laser and gentlemen, if you'd like to ask a question. Please press star one.
Our next question coming from the line.
Gary <unk> with Barrington Research your line is open.
Good afternoon, everyone.
Could you maybe just talk about besides the fact that it.
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 that and I don't know if you've mentioned this in your script Ravi but is that margin sustainable going forward.
Yes, so Gary first of all there is no much less competitive.
We fight every day and we fight really hard everyday to win every single B right. So right competition has not gone away. So I just wanted to clarify.
Out of 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 which kind of incentive behaviors.
Of discounting in a way that was not sustainable. So we are seeing the end of that youre seeing more responsible competition from all industry players and that is contributory.
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 10 screen.
Devices that could do elementary and card readers to now having <unk>.
Wonderful beautiful fully interactive device with the engage device that can do a lot more right. So thats. One the second is our devices now have this is a more price change capability when used in combination with our software and that's yet another incentive to be on our platform and the <unk>.
<unk> further from the competitor so I would say I'd say, it's a combination of heavier past the upgrade cycle and hence theres more responsible competition and over the last 24 months, we have 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.
Okay, and I Didnt mean to belittle the competitive thing I should have just said something something affected since the upgrade was over maybe the pricing has become a little bit better and I think you mentioned that.
And then given what you are.
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 it looks like you are at least this quarter, that's not the case and I'm just wondering should we expect that really to.
To continue because youre going into more higher ticket item.
Markets that.
Youll definitely see much higher transaction dollar volume versus actual.
Transaction counts.
Yes, I think you're absolutely right and.
Honestly the historical view of our business used to be very homogenous you could tell everything about the prospects of the business and the growth and the progress of the business is making by looking at active device growth in transactions, that's not the case anymore, because if you take one cell service.
Asian that as micro markets. 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 they don't represent the business.
As it currently stands.
As well as they used to.
Gary I'll just add to that.
Had five.
The 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 as really the form factor, that's changing as Ravi mentioned and a lot more focus on micro markets people are buying $10 salads as opposed to a $1 candy bar and Oh, yeah by the way that helps us sell seed because sales are good for a couple of days so having inventory system that can manage that is very busy.
Essentials.
Alright, and then just lastly, Scott are you, giving out what the organic growth was for the quarter can you make that.
Public or Youre, just not going to give that stat anymore.
No, we're not giving that stat.
Okay.
Alright, thank you.
Thank you.
Our final question is coming from the line of Chris Kennedy with billing William Blair. Your line is open.
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.
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 cantaloupe one has been a big contributor as well sometimes people look at.
Product differentiation as features that you built into our product with a lot of times. It's also how it's bundled in how it sold and how it's customized to the needs of a particular market segment, and I think with Scott's leadership, and Jeff and umbrella leadership, our Seattle 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 segment of our target industry, yes.
Yes, just to add to that a little bit Chris do you see that our customer growth customer count continues to grow a lot it up more on the SMB side to where we have a lot higher margins on.
Got it understood and then just can you provide us a broad mix of your current business vending versus micro markets versus other other vertical thanks for taking my question.
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 et cetera tends to be in the 75% to 80% range of our business and then all the other verticals tend to be in the 2025%.
Range.
And then Chris I'll, just add a little more to that too is when you look at.
Three two am 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'll provide organic guidance. Overall, we said that they were in the $19 million to $20 million range. So that gives you an idea as to how much of their business. They represents around 10% that number is starting to grow.
Great. That's what we're heavily focused on but thats about where we stand.
Okay. Thanks for taking my questions.
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 <unk> catch Wilson for any closing remarks.
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.
The future is bright and we are looking forward to building.
Success upon success.
You for your interest and engagement through this call.
Operator.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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