Q4 2023 Cantaloupe Inc Earnings Call

Okay.

Thank you for standing by and welcome to the Cantaloupe fourth 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 this session you will need to press star one one on your telephone to remove yourself from the queue.

Simply press Star one again.

Today's program is being recorded and now I'd like to introduce your host for today's program. Mr. Newman Investor Relations. Please go ahead.

Yeah.

Thank you good afternoon, everyone and welcome to the fourth quarter earnings Conference call with me on today's call are routed I could check and Chief Executive Officer, and Scott Stewart, Chief Financial Officer before we begin today's call. We would like to remind you that all statements in this call other than statements of historical fact 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 the actual results to differ materially from such forward looking statements.

Put it 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.

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 telematics operating results. These.

These non-GAAP financial measures are supplemental to and not substitute for GAAP financial measures such as net income or loss.

These non-GAAP financial measures a presentation of the most directly comparable GAAP financial measures and a reconciliation between the non-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 Candela dotcom.

And with that I'd like to turn the call over to Bobby.

Thanks, Marissa and good afternoon, everyone and thanks for joining us today for our fourth quarter and fiscal year 2023 earnings call.

It has been an incredible year for tableau capped off by a strong fourth quarter.

For the fourth quarter our.

Revenue increased 11% year over year to $64 $2 million.

Importantly transaction revenue grew 18% and subscription revenue grew 17% year over year for Q4.

Adjusted EBITDA for Q4 was $9 $2 million, a fourfold increase over last year's corresponding number.

For the full fiscal year, our revenue increased 19%.

So $243 6 million a new record for the company.

<unk> revenue grew 20% and subscription revenue grew 16% year over year.

We also improved gross margin to 33, 3% compared to 31, 3% in fiscal year 'twenty to 'twenty two.

Importantly, the improved gross margins sequentially through each quarter of the financial year.

After two years of negative equipment margins, we delivered a positive equipment margin of one 7% in fiscal year 'twenty three.

This improvement was a result of more responsible competition in the marketplace for telematics and payment devices.

Following the <unk> upgrade cycle.

Discounts were needed to incentivize and support our customers through it.

It is also driven by diversification of our equipment product portfolio, which now includes higher margin smart coolers and micro market Geos.

Also improved our margins for the combination of subscription and transaction revenue from 38, 8% in fiscal year, 'twenty, 2% to 42% in fiscal year 'twenty three.

Our initiatives to accelerate subscription revenue growth and control expenses accelerated operating leverage, which we highlighted as a priority at our Investor Day last December .

Consequently, adjusted EBITDA for the fiscal year was $17 $8 million and 80% increase from last year.

Finally, we ended the fiscal year with over 28000 active customers.

17% increase over fiscal year 'twenty two.

In addition to these financial accomplishments I'm also pleased with operational accomplishments from this fiscal year that create a great platform for long term growth and profitability.

First we successfully expanded our footprint in the fast growing micro market space with the acquisition of three square market.

Second we continued to scale catalog one our platform as a service offering which has enabled us to penetrate the SMB segment better.

Third we completed the move over to AWS cloud services, which has enabled scale business process optimization and global expansion of the catalog platform.

Lastly, but importantly, we hosted our inaugural Investor day, where we were able to showcase our leadership team as well as provide a longer term outlook with three year financial targets, we remain committed to increased transparency and visibility into key drivers of the business for our investors.

<unk>.

For 2024.

We will focus on expanding operating leverage as we shared at our Investor day last year we.

We will accomplish this through a three pronged strategy.

Driving subscription revenue optimizing cogs and controlling operational expenses.

To spend a few minutes elaborating this.

We'll drive subscription revenue by focusing on three areas.

First.

Accelerating growth in micro markets.

Total addressable market for this space is over $1 7 billion.

We are already the market leader on the software side and are now positioned to grow as a comprehensive solution, including kiosks payments and software.

Since our acquisition of three square market.

Been acquiring new customers because of the appeal of our comprehensive suite of solutions.

This includes take a break canteen of northern California, and vacation land vendors, who have gone all in on our seed software cashless solutions and micro market solutions. This showcases the appeal of a complete platform for our customers.

On the go to market front, we continue to expand into indirect channels more in Q4, we expanded our partnership with the Avs company as one of our master resellers inventing and amusement. They now offer catalog card readers micro market kiosks and cooler cafe payment terminals.

Along with smart locks added to their call Blue color line.

The second driver of subscription revenue as further penetration of our catalog one platform for Smbs.

As an example of this during Q4.

<unk> and existing customer used catalog wanted to deploy seed in addition to expanding that rollout of cashless epi devices. They.

They were also able to sign up for a remote price change add on.

Another customer like Sam's was peninsula bottling over under deployed on cashless. Our team was able to bundle the rest of their fleet onto cashless along with seed pro software.

The third driver of subscription revenue is extending our revenue per connection.

We will do this by continuing to launch meaningful revenue driving add on modules that our customers can purchase on top of their current service stack.

We will also leverage our customer success management teams to execute against this strategy.

Two examples of exciting new add ons that we debuted at the <unk> conference in May are the catalog both product line and the seed pick easy solution.

The catalog both self service product line was developed so that consumers can buy it and go it includes self checkout kiosk smart store concepts and the catalog called management platform.

The seed pick easy solution is a cloud based technology solution designed to deliver time and operational cost savings to operators by optimizing warehouse picking.

Unlike other competitive offerings. This plug and play solution integrates directly with an operator's vending management software, allowing their house workers to quickly generate digital paperless operators can deploy seed pick easy without disrupting current processes and scale the solution rapid.

Lee as their warehouse capacity growth.

In addition to extending revenue per connection with existing customers. These add on products and solutions enable us to further penetrate the enterprise segment.

To highlight a few other customer wins with add on products in Q4, we signed an agreement with CSC service works one of the largest providers in the country of add back machine rollout remote price change across their entire fleet.

We also signed a deal with Blue Rhino, leveraging outdoor vending solutions equipment to rollout catalog card readers with vertical specific add ons across all their outdoor propane tank lethal stations in the United States.

This is a great example of success with our strategy to penetrate adjacent verticals.

Finally in Q4, Pepsi mid America, one of the largest specialty bottlers committed to replacing their current Vms provider with catalog and have agreed to go all in on seed to support their vending micro market and office coffee business utilizing seed software.

Along with available add ons for the specific businesses.

Through fiscal year 2003, we've seen tremendous success in the Butler space and are excited about the opportunity with them in fiscal year 2024.

In addition to driving subscription revenue the.

The second area of focus for fiscal year 'twenty, four we'll be optimizing the cost of goods sold.

We will do this by negotiating better terms and optimizing transaction routing for payments.

We will also continue to manage the cost of our equipment, while navigating a complex supply chain environment.

The final area of focus to drive operating leverage as related to controlling operational expenses.

Fiscal year 'twenty, four will benefit from FY2023 initiatives, including our migrations to the AWS four cloud infrastructure maturing the rollout of our Salesforce CRM Netsuite ERP and other infrastructure improvements.

To wrap up I'm incredibly proud of what our team has accomplished in fiscal year 'twenty three.

I am even more excited about being well positioned to address the opportunities in front of us for fiscal year 'twenty four.

Scott will now review, our Q4 results in more detail as well as outline our outlook for fiscal year 'twenty for Scott.

Thanks Ravi.

As Ravi mentioned, we delivered another strong quarter of revenue growth and record profitability.

Our <unk> 'twenty three revenue was $64 2 million up 11% year over year.

Combined transaction and subscription revenue grew 18% to $53 million during the quarter.

This includes $17 5 million of subscription revenue our year over year increase of 17%.

And $35 5 million of transaction revenue, an increase of 18% year over year.

The overall increase in revenue was driven by processing volumes, including contributions from our <unk> acquisition and higher average transaction ticket sizes.

Along with the accelerating subscription growth from Cantaloupe one.

Alright Clinton revenue was $11 2 million, a decrease of 15% compared to Q4 FY 'twenty two.

This was primarily due to prior year being our largest quarter on record for equipment sales driven by the <unk> upgrade cycle.

Total gross margin for the quarter was 41% compared to 29, 5% in the same quarter last year, driven by higher margins across all three revenue lines subscription.

And transaction revenue margins were 44, 2% versus 39, 5% in the prior year the fourth quarter did benefit from a processing rebate of 775000 related to prior quarters without this benefit the subscription and transaction revenue margin was at 42, 6%.

Still a significant increase from prior year.

As subscription revenue becomes an increasingly larger share of our overall revenue we expect to realize margin expansion both in terms of gross profit.

And operating margin.

Equipment revenue margin for Q4, FY2023 improved to a positive 28% from negative four 6% in prior year.

We also had a one time benefit of $750000 related to our equipment costs for the fourth quarter.

Without this benefit equipment revenue margins would have been a positive 14, 1%.

Total operating expenses in Q4, FY2023 'twenty.

$22 3 million compared to $19 2 million in Q4, FY 'twenty two.

Net income applicable to common shares for the fourth quarter was $2 8 million or <unk> <unk> per share compared to a net loss of $2 1 million or negative <unk> <unk> per share in the prior period.

Adjusted EBITDA was $9 2 million in the fourth quarter compared to $2 million in the prior year period, an increase of 362%.

The transaction processing rebate and one time equipment Cogs benefit previously mentioned had a combined $1 5 million positive impact on adjusted EBITDA.

We ended fourth quarter with a cash and cash equivalents of $50 9 million and generated $8 4 million in cash from operations as.

As Ravi alluded to our capital allocation priorities continue to target profitable growth and are specifically focused on driving operational improvements to control opex, expanding our micro market offering and investing in our domestic and international go to market strategy and product development.

Now turning to FY 'twenty for guidance.

Based on what we see today, we expect the following.

Total revenues to be between $275 million and $285 million representing growth of 13% to 17%.

The combination of transaction and subscription revenue to be between $234 million and $242 million representing growth of 17% to 21%.

Total U S GAAP net income to be between $9 million and $15 million adjust.

Adjusted EBITDA is expected to be between 28 million $34 million.

So operating cash flow to be between $28 million and $38 million.

We expect adjusted EBITDA to be more heavily weighted towards the back half of FY 'twenty four as we make investments in sales marketing and implementation capacity early in the year and benefit from the ramp up of subscription and transaction revenue throughout 2024.

Operator: Thank you for standing by and welcome to the cantaloupe fourth quarter fiscal year 2023 earnings conference call. At this time, all participants are in a listen only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded.

With that I'll now turn the call back over to Ravi for a few concluding.

Concluding remarks Ravi Thanks, Scott as you can see from our results in fiscal year, 'twenty, three and guidance for fiscal year 'twenty. Four we continued to execute against the three year financial targets. We outlined last December with that wed like to turn the call back over to the operator for the Q&A.

Marissa Newman: And now I'd like to introduce you our host for today's program, Marissa Newman, investor relations. Please go ahead. Thank you.

Operator.

Certainly one moment for our first question.

And our first question comes from the line of Josh Nichols from B Riley Your question. Please.

Marissa Newman: Good afternoon, everyone. Welcome to the cantaloupe fourth quarter earnings conference call.

Marissa Newman: We're seeing on today's call our Ravi Venkatesan Chief Executive Officer and Scott Stewart Chief Financial Officer. Before we begin today's call, we would like to remind you that all statements included in this call, other than statements of historical facts, are forward looking in nature. Actual results could differ materially from those contemplated by the forward looking statements because of certain factors, including but not limited to business, financial markets, and economic conditions. A detailed discussion of the risks and uncertainties that could cause the actual result to differ materially from such forward looking statements is included in our findings with the SEC and in the press release issued earlier today.

Yes, Thanks for taking my question clearly a big milestone with the company achieving 40% gross margin even with a couple of onetime small benefits that you mentioned.

Marissa Newman: Listeners are cautioned to not put undue reliance on any such forward looking statements which reflect management views only as is the date they are made. Cantaloupe undertakes no application to update any forward looking statements whether because of new information future events or otherwise. This call will also include a discussion of their non-gap financial measures that we believe are useful for among other things evaluating cantaloupe operating results. These non-gap financial measures are supplemental to and not substitute for gap financial measures such as net income or loss.

Should we think about the opportunity for expansion in fiscal 'twenty forward, how to incorporate that into the guidance for this coming year.

Hey, Josh Thanks for the question.

It's a great question and we have worked very hard over the past 18 months, improving our gross margin, especially on the transaction processing side and the subscription fees and then just more recently on the equipment side. So as we look at those individually.

Transaction margin. This quarter was just north of 20%. We did have that one time benefit that we mentioned on the pre call.

Without that we'd be just south of 20, so we'd be in the high teens and that's what we're expecting going forward as we roll into 2024.

As you look at the subscription fees, we've seen an increase over the past few quarters historically, we've been at 80% 85%.

Third quarter were closer to 90% in this quarter, we were above that as we roll into 2024, we expect it to be more in the 85% to 90% I think it will be higher in the first half of the year and then maybe scaled back just a little bit in the second half of the year as we continue our international expansion and the sale of closed one.

Marissa Newman: Details of these non-gap financial measures, a presentation of the most roughly comparable gap financial measures, and a reconciliation between those non-gap financial measures can be found in our press release issued this afternoon, which has been posted on the investor relations section of our website at www.cantaloupe.com.

And then on the equipment sales this year without the onetime benefit that we added this quarter we.

We will be at 14, 1%.

I think thats a good mark going forward, we could be a little bit lower what we have built into our budgets around 10% to 15% and that's as we scale internationally.

Ravi Venkatesan: And with that, I would like to turn the call over to Robbie. Thanks Marissa, good afternoon everyone and thanks for joining us today for our fourth quarter and fiscal year 2023 earnings call. It has been an incredible year for cantaloupe capped off by a strong fourth quarter. For the fourth quarter, our revenue increased 11% year over year to $64.2 million. Importantly transaction revenue grew 18% and subscription revenue grew 17% year over year for Q4. Adjusted EBITDA for Q4 was $9.2 million, a four-fold increase over last year's corresponding number.

We could take.

Take advantage of some situations of our balance sheet as we look to make some deals with some people overseas.

Okay.

Thanks, and then just to elaborate on that a little bit since you mentioned the national expansion here.

You've talked about leveraging channel partner relationships to foster growth, there where do we stand on that is there a timeline for rollout.

What's been done.

<unk> going to be balancing the company's growth versus.

Being cost conscious on how you invest some of the capital going forward for this international rollout.

Ravi Venkatesan: For the full fiscal year, our revenue increased 19% to $243.6 million, a new record for the company. Transaction revenue grew 20% and subscription revenue grew 16% year over year. We also improved gross margin to 33.3% compared to 31.3% in fiscal year 2022. Importantly, we improved gross margins sequentially through each quarter of the financial year. After two years of negative equipment margins, we delivered a positive equipment margin of 1.7% in fiscal year 23.

Josh we continue to stay committed to the philosophy of growth at a reasonable price and.

And we continue to balance profitability and growth, which are reflected in our guidance as well.

The development of channel partners in the Phase one international markets, which for US are Europe , and Latin America is going on very well and we have identified selected and enabled and empowered those partners already and the chalk up some revenue from those markets in fiscal year, 'twenty, three and expect meaningful revenues to <unk>.

Coming out in fiscal year 'twenty four.

Thanks, Ravi and then last question for me.

Ravi Venkatesan: This improvement was a result of more responsible competition in the marketplace for telemetry and payment devices following the 4G upgrade cycle where discounts were needed to incentivize and support our customers through it. It is also driven by diversification of our equipment product portfolio, which now includes higher margins, smart coolers and micro market key offs. We also improved our margins for the combination of subscription and transaction revenue from 38.8% in fiscal year 22 to 40.2% in fiscal year 23.

You've done a really good job the micro markets opportunities clearly growing very quickly relative to traditional food and beverage.

In here, if you can just elaborate a little bit like what percentage of that of the company's revenue is today and what type of growth rate do you expect to see from the micro markets business given that the overall growth rates are much higher than anything else that we've seen in the space today.

We don't disclose the specific breakouts, but it is well under 10% today.

And in the long term and when I say long term I think about kind of a three to five year time horizon I expect it to grow to be a more meaningful and our 25% 30% level.

Ravi Venkatesan: Our initiatives to accelerate subscription revenue growth and control expenses accelerated operating leverage, which we highlighted as a priority at our investor day last December. Consequently, adjusted EBITDA for the fiscal year was 17.8 million dollars and 80% increase from last year. Finally, we ended the fiscal year with over 28,000 active customers, a 19% increase over fiscal year 22.

Off the company's overall revenues now keep in mind, that's not just the micro market space, but also associated products like smart coolers and smart retail and so on so there are some some things that are bundled kind of in a broader.

Ravi Venkatesan: In addition to these financial accomplishments, I'm also pleased with operational accomplishments from this fiscal year that create a great platform for long-term growth and profitability.

A definition of that micro market space in all of those put together I think will end up at that level.

Yes.

I appreciate the clarity thanks guys.

Thank you. Thank you one moment for our next question.

And our next question comes from the line of Gary <unk> from Barrington Research. Your question. Please.

Hi, Robert Hi, Scott how are you doing.

Ravi Venkatesan: First, we successfully expanded our footprint in the fast growing micro market space with the acquisition of 3-square market. Second, we continued to scale candle of one, our platform as a service offering, which has enabled us to penetrate the SMB segment better. Third, we completed the move over to AWS cloud services, which has enabled scale business process optimization and global expansion of the candle of platform.

Alright.

Hey.

Couple of questions here and your long term guidance that you gave at the analyst day, you were actually talking about a 10% equipment margin, obviously, you're higher than that right now and I think you kind of said for your modeling purposes. You are talking about maybe 10% to 14% margin is a lot of that lift due to 30.

<unk>.

And what they're contributing to the mix of equipment sold.

Ravi Venkatesan: Lastly, but importantly, we hosted our inaugural investor day where we were able to showcase our leadership team as well as provide a longer-term outlook with three-year financial targets. We remain committed to increased transparency and visibility into key drivers of the business for our investors. For 2024, we will focus on expanding operating leverage as we shared at our investor day last year. We will accomplish this through a three-pronged strategy, driving subscription revenue, optimizing cogs and controlling operational expenses.

Hey, guys. Thanks for the question.

It's a little bit of both so we do have higher margins on the three square markets.

Average by micro markets can sell anywhere from $5 to $20000, depending on the size of the market and the margins on that are more around the 30% range.

But we are also seeing.

We did a price increase in January of this past year. After we got out of the <unk> upgrade cycle and as Ravi mentioned in the prepared remarks, we're seeing a lot more responsible pricing I would say from competitors and so that has allowed us to increase our margins as well.

Okay.

Thank you and then can you comment on on where Youre Cantaloupe one seat Stan you were at about 20000 at the end of.

Ravi Venkatesan: I want to spend a few minutes elaborating this. We will drive subscription revenue by focusing on three areas. First, accelerating growth in micro markets. The total addressable market for this space is over $1.7 billion. We are already the market leader on the software side and are now positioned to grow as a comprehensive solution, including key-off payments and software, since our acquisition of 3-square market, we've been acquiring new customers because of the appeal of our comprehensive suite of solutions.

Q3, how much has that increased.

Yes, so overall, we're closer to 24000 now.

As we end June 30th.

We were tracking to about 5000 per quarter or the fourth quarter came in right around 4000.

I think we had a big push to equipment sales towards the end of the quarter that might have lightened up on the kind of a bond deals.

As we roll into this next quarter, we are seeing that same traction around 5000 per quarter.

Okay, and then just a couple more here.

Ravi Venkatesan: This includes take a break, canteen of Northern California and vacation land vendors who have gone all in on our seed software, cashless solutions and micro market solutions. This showcases the appeal of a complete platform for our customers. On the good market front, we continue to expand into indirect channels more. In Q4, we expanded our partnership with the AVS companies as one of our master resellers in vending and amusement. They now offer cantaloupe card readers, micro market key offs and cooler cafe payment terminals along with smart locks added to their cool blue cooler line.

As you look across your entire enterprise with your connections was at one $107 million.

What percentage of those right now.

No real.

Software that's associated with the connection.

And I'm kind of looking at that is that something of a white space within your your.

Customer base at this point.

Yes, it's still close to 40% to 50% range and the reason there is a little bit of a range there is.

Some of the software add ons can be activated and be active Richard so so there is a little bit of ebb and flow there, but it is in that range. Yes, you are correct that there is.

Ravi Venkatesan: The second driver of subscription revenue is further penetration of our cantaloupe one platform for SMBs. As an example of this during Q4, SAMs and existing customer used cantaloupe one to deploy a seed in addition to expanding their rollout of cashless e-port devices. They were also able to sign up for a remote price change add-on. Another customer like SAMs was peninsula bottling who were under deployed on cashless. Our team was able to bundle the rest of their fleet on to cashless along with seed pro software.

There is quite a bit of white space, there now keep in mind that.

The software that applies to different segments will really for example.

If it's a parking meter.

The <unk> software that lets you manage your warehouse and manage restocking doesn't apply to that vertical or targets or anything and any number of machines in that vertical are not part of the addressable market for that software. So so you have to factor that when you look at what's white space just within the places where we have cashless Amgen.

Deploy seed software.

Ravi Venkatesan: The third driver of subscription revenue is extending our revenue per connection. We will do this by continuing to launch meaningful revenue driving add-on modules that our customers can purchase on top of their current service stack. We will also leverage our customer success management teams to execute against this strategy.

Okay and then.

I guess, when you're talking about getting better terms and transaction routing is that because you've hit.

Such a masked in terms of your volume process that.

You have the ability now to go back to your processors and say Hey, we're generating X amount of dollars, we need better terms and they're taking that.

Ravi Venkatesan: Two examples of exciting new add-ons that we debuted at the NAMMA conference in May are the cantaloupe go product line and the seed pick easy solution. The cantaloupe go sales service product line was developed so that consumers can buy it and go. It includes self checkout kiosk smart store concepts and the cantaloupe go management platform. The seed pick easy solution is a cloud-based technology solution designed to deliver time and operational cost savings to operators by optimizing warehouse picking.

As part of it.

And then there is a whole set of other complex things bought around how transactions are route.

What kind of fraud checks that are in play there.

There are a number of levers we have to improve the cogs on the transaction processing and hence improve the margins on that and then just that thank you.

Okay.

So yes. We are also looking at overall gross take rate in China increased side as well. So if you look at fourth quarter of 2022 overall gross take rate was 487%.

Last quarter, we got up about above 5% and we're about 5%. This quarter two we see that last thing as we continue on so it's another area of focus not just improving the Cogs side of the house, but also increase in the overall gross take rate.

Ravi Venkatesan: Unlike other competitive offerings, this plug-and-play solution integrates directly with an operator's vending management software allowing warehouse workers to quickly generate digital pick lists. Operators can deploy seed pick easy without disrupting current processes and scale the solution rapidly as their warehouse capacity grows. In addition to extending revenue per connection with existing customers, these add-on products and solutions enable us to further penetrate the enterprise segment.

Okay. Thank you.

Yes.

Thank you one moment for our next question and as a reminder, ladies and gentlemen, we do have a question at this time. Please press star one one.

Our next question comes from the line of Chris Kennedy from William Blair. Your question. Please.

Yes. Good afternoon. Thanks for taking the question and it's great to see the leverage in the business can you talk about subscription revenue.

Ravi Venkatesan: To highlight a few other customer wins with add-on products. In Q4, we signed an agreement with CSE Service Works, one of the largest providers in the country of air-wack machines to roll out remote price change across their entire fleet. We also signed a deal with Blue Rhino, leveraging outdoor vending solutions equipment to roll out Cantaloupe card readers with vertical specific add-ons across all their outdoor propane tank refill stations in the United States.

The growth slowed a little bit this quarter.

Previously targeted at least 20%.

Ascription revenue growth over the next couple of years just talk about.

Your confidence in that and if you could talk about the quarter that'd be great.

Sure So yes overall.

We did see a slight dip in our subscription fees this quarter compared to last quarter part of that was due to the <unk>.

<unk> upgrade cycles, where we did have some devices <unk> devices that went dark and they went in and deactivate those a lot of that is the activation happened in the fourth quarter. So we took a little bit of a hit but we have seen is a lot of those devices now have been replaced.

Ravi Venkatesan: This is a great example of success with our strategy to penetrate adjacent verticals. Finally, in Q4 Pepsi, Mid-America, one of the largest Pepsi bottleers committed to replacing their current VMS provider with Cantaloupe and have agreed to go all in on seed to support their vending, micro market and office coffee business. Utilizing seed software along with available add-ons for these specific businesses. Through fiscal year 23, we've seen tremendous success in the bottleer space and are excited about the opportunity with them in fiscal year 2024.

And there the.

New devices are backup and transacting. So we see that just a one time that as we look at the 2024, we are projecting our subscription revenue to grow somewhere in the 18% to 22% range and the guidance that we provided on the transaction and subscription revenue was in the 17% to 21% range. We think the subscription will be a little bit high.

Other than the transaction and we foresee that as we go out into the next two to three years as well and as a reminder, we had prior to doing the <unk> acquisition. We had said that we expect to.

Ravi Venkatesan: In addition to driving subscription revenue, the second area of focus for fiscal year 24 will be optimizing the cost of goods sold. We will do this by negotiating better terms and optimizing transaction routing for payments. We'll also continue to manage the cost of our equipment while navigating a complex supply chain environment.

For the year to be in the low teens, then we when we did the <unk> acquisition, we said it would be in the mid to high teens. So we are still in that range, albeit on.

On the lower side in terms of the overall subscription revenue year on year growth.

Okay very helpful. Thank you for that clarification and then just.

Ravi Venkatesan: The final area of focus to drive operating leverage is related to controlling operational expenses. Fiscal year 24 will benefit from FY 23 initiatives including our migrations to the AWS for cloud infrastructure, maturing the rollout of Salesforce CRM, Netsuit ERP and other IT infrastructure improvements.

Ravi any update on like the M&A environment talk about your balance sheet and kind of what youre seeing out there in the market. Thank you.

Our cash position and balance sheet is measurably better than it was six seven months ago, which is.

And a lot of great work done across multiple areas from Scotts team as well as collaborating with the other departments.

Ravi Venkatesan: To wrap up, I'm incredibly proud of what our team has accomplished in fiscal year 23. I'm even more excited about being well positioned to address the opportunities in front of us for fiscal year 24.

The M&A environment continues to be.

Competitive NBC.

What good companies with good products that could be an opportunity for us to acquire however, even though the public markets have significantly corrected down we're still seeing a little bit of dissonance in terms of expectations. When it comes to the private market side, particularly with smaller companies that could be.

Scott Stewart: With that, Scott will now review our Q4 results in more detail as well as outline our outlook for fiscal year 24. Scott? Thanks, Robbie. As Robbie mentioned, we delivered another strong quarter of revenue growth and record profitability. Our 4K 23 revenue was 64.2 million up 11% year over year. Our combined transaction and subscription revenue grew 18% to 53 million during the quarter. This includes 17.5 million subscription revenue, a year over year increase of 17%.

Tuck in acquisition targets for us. So so there have been cases, where a company or an acquisition where it made sense for us. However, we just did not want to pay the multiple.

The valuation that they were aspiring and and we continue to be very disciplined.

About what multiple we would pay for.

Scott Stewart: And 35.5 million of transaction revenue, an increase of 18% year over year. The overall increase in revenue was driven by processing volumes, including contributions from our three-term acquisition and higher average transaction ticket sizes, along with the accelerating subscription growth from Canada 1. Our equipment revenue was 11.2 million, a decrease of 15% compared to Q4 FY 22. This was primarily due to prior year being our largest quarter on record for equivalent sales driven by the 4G upgrade cycle.

For the target even if it makes sense otherwise from a synergies perspective.

Great. Thanks for taking my question.

Thank you one moment for our next question.

And our next question comes from the line.

George Sutton from Craig Hallum. Your question. Please.

Thank you.

Post the upgrade cycle to <unk>, we talked about how you were going to be going on offense and you did mentioned pricing, but you ran through a pretty impressive list of name brand wins this quarter and I'm curious if you can just give us any sense of how offense is meant changing your go to market strategy in terms of more sales.

Scott Stewart: Total growth margin for the quarter was 44.1%, compared to 29.5% in the Jackson, David and Transaction Revenue margins were 44.2% versus 39.5% in the prior year. The fourth quarter did benefit from a processing rebate of 775,000 related to prior quarters. Without this benefit, the subscription and transaction revenue margin was at then 42.6%. Still a significant increase from prior year. As the subscription revenue becomes an increasingly larger share of our overall revenue, we expect to realize margin expansion both in the terms of gross profit and operating margin.

People.

Else that you would sort of call out there that's responsible for this yes, George Thank you very much for that question and yes.

The <unk> upgrade cycle had required us to be.

Hi on defense and also in turn support more importantly, our customers through that cycle. So that they don't lose revenue just because they are an upgraded device.

Having got through that our customers' wallets are also freed up much more right. So instead of investing in upgrade of a device. It's really gives them zero added functionality. They are now looking at how do I make my business more resilient more operationally efficient and that has led to better appetite and adoption of <unk>.

Scott Stewart: Equipment revenue margin for Q4 FY23 improved to a positive 20.8% from negative 4.6% in prior year. We also had a one-time benefit of 750,000 related to our equipment cost for the fourth quarter. Without this benefit, equipment revenue margins would have been a positive 14.1%. Total operating expenses in Q4 FY23 were 22.3 million compared to 19.2 million in Q4 FY22. Net income applicable to common shares for the fourth quarter was 2.8 million or 4 cents per share compared to on that loss of 2.1 million or negative 3 cents per share in the prior period.

Software site and as that happens more and more it'll.

It will benefit the subscription revenue side of the equation.

More importantly, it will also make our customers be more stickier. So we're definitely on the offensive on that side.

And we are on the offensive with adjacent verticals like amusement et cetera, where again the upgrade cycle had a little bit of a drag effect.

Got you and then just second and last for me Ravi you mentioned.

Meaningful potential revenues internationally and 24 can you explain to us what's built into your guidance for 'twenty four and how are you defining meaningful.

Scott Stewart: Adjust the EBITDA was 9.2 million in the fourth quarter compared to 2 million in the prior year period an increase of 362%. The transaction process between rebate and one-time equipment cost benefit previously mentioned had to combine 1.5 million positive impact on adjusted EBITDA. We ended fourth quarter with our cash and cash equivalence of 50.9 million and generated 8.4 million in cash from operations.

So we haven't broken that out and for competitive reasons I'm reluctant to share a specific percentage, but what I will say is I considered meaningful as it starts cresting kind of the 5% 8% level and.

Over a few years of course, it will become much more meaningful than that but for what I would call. It the first year of meaningful contribution from other markets I think that's a good barometer to use.

Scott Stewart: As Robbie alluded to our capital allocation priorities continue to target profitable growth and are specifically focused on driving operational improvements to control optics, expanding our market offering and investing in our domestic and international go-to market strategy and product development.

Got you perfect just a comment Scott at the analyst day, when you laid out your expectations, particularly for margins I think everybody thought you were a little nuts and you've blown away those expectations. So congratulations great. Thank you George I appreciate that comment thank you.

Scott Stewart: Now turning to FY24 guidance, based on what we see today we expect the following. Total revenues to be between 275 million and 285 million, representing growth of 13 to 17 percent. The combination of transactions and subscription revenue to be between 234 million and 242 million, representing growth of 17 to 21 percent.

Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one one.

Yes.

And this does conclude the question and answer session as well as today's program. Thank you, ladies and gentlemen for your participation in today's conference you May now disconnect. Good day.

Scott Stewart: Total US gap net income to be between 9 million and 15 million. Adjusted EBITDA is expected to be between 28 million and 34 million and total operating cash flow to be between 28 million and 38 million. We expected just as EBITDA to be more heavily weighted towards the back half of FY24 as we make investments in sales, marketing and implementation capacity early in the year and benefit from the ramp up of subscription and transaction revenue throughout 2024.

Okay.

Okay.

[music].

Ravi Venkatesan: With that I'm now turning the call back over to Robbie for a few concluding remarks.

Ravi Venkatesan: Robbie, thanks God. As you can see from our results in fiscal year 23 and guidance for fiscal year 24 we continue to execute against the three year financial targets we outlined last December.

Operator: With that we'd like to turn the call back over to the operator for the Q&A session.

Josh Nichols: Operator Certainly, one moment for our first question. And our first question comes from the line of Josh Nichols from Be Riley, your question please. Yeah, thanks for taking my question, clearly a big milestone with the company achieving 40% gross margin, even with a couple of the one-time small benefits that you mentioned.

Scott Stewart: How should we think of the opportunity for expansion in fiscal 24 and how to incorporate that into the guidance for this coming year? Hey, Justin, thanks for the question. Yeah, it's a great question. And we have worked very hard over the past 18 months improving our gross margin, especially on the transaction processing side and the description fees, and then just more recently on the equipment side. So as we look at those individually, transaction margin, this quarter was just north of 20%.

Scott Stewart: We did have that one-time benefit that we mentioned on the pre on the call. Without that, we'd be just south of 20. So we'd be in the high teams. And that's what we're expecting going forward as we roll into 2024. As you look at the subscription fees, we've seen an increase of the past two quarters. Historically, we've been at 80 to 85%. Third quarter, we're closer than 90% and this quarter, we were above that.

Scott Stewart: As we rolled to 2024, we expected to be more in the 85 to 90%. I think it'll be higher in the first half of the year, and then maybe scale back just a little bit in the second half of the year as we continue our international expansion and the sale of code one. And then on the equipment sales, this year, without the one-time benefit that we had of this quarter, we would be at 14.1%.

Scott Stewart: I think that's a good mark going forward. We could be a little bit lower. What we have built into our budgets around 10 to 15%. And that's as we scale internationally, we could take advantage of some situations of our balance sheet as we look to make some deals with some people overseas.

Ravi Venkatesan: Thanks, and then just to elaborate on that a little bit since you mentioned the international expansion here. You've talked about leveraging channel partner relationships, the foster growth there. Where do we stand on that? Is there a timeline for a rollout? What's been done and how are you going to be balancing in the company's growth versus being cost conscious on how you invest from the capital going forward to this international rollout? Thanks, Josh.

Ravi Venkatesan: We continue to stay committed to the philosophy of growth at a reasonable price. And we continue to balance profitability and growth which is reflected in our guidance as well. The development of channel partners in the phase one international markets which for us are Europe and Latin America is going on very well. And we have identified selected and enabled and empowered those partners already and did chalk up some revenue from those markets in fiscal year 23 and expect meaningful revenues to start coming out in fiscal year 24. Thanks, Robbie.

Ravi Venkatesan: And then last question for me, you've done a really good job. The micro markets opportunity is clearly growing very quickly relative to traditional food and beverage bending here. If you could just elaborate a little bit like what percentage of that of the company's revenue is today and what type of growth rates you expect to see from the micro markets business given that the overall growth rates are much higher than anything else we've seen in space.

Ravi Venkatesan: Yeah, today we don't disclose the specific breakouts but it is well under 10% today. And in the long term and when I say long term you know think about kind of a three to five year time horizon, I expect it to grow to be a more meaningful you know 25 to 30% level of the company's overall revenues. Now keep in mind that's not just the micro market space but also associated products like smart coolers and smart retail and so on.

Ravi Venkatesan: So there are some things that are bundled kind of in a broader definition of that micro market space and all those put together I think will end up at that level. I appreciate the clarity. Thanks, guys.

Unknown Executive: Thank you.

Operator: One moment for our next question.

Gary Prestopino: And our next question comes from the line of Gary Prestopino from Barrington Research. Your question, please. Hi, Ravi. Hi, Scott. How are you doing? Good. Hey, a couple of questions here. In your long-term guidance that you gave at the analyst day, you're actually talking about, you know, a 10% equipment margin. Obviously, you're higher than that right now. And I think you kind of said, in your modeling purposes, you're talking about maybe 10 to 14% margin is a lot of that lift due to 32M and what they're contributing to the mix of equipment sold.

Gary Prestopino: Yeah, Gary, thanks for the question. It's a little bit of both. So we do have higher margins on the three-square markets. The average of micromarkets can sell anywhere from $5,000 to $20,000 to paying on the size of the market. And the margins on that are more around the 30% range. But we are also seeing, we did a price increase in January of this past year after we got out of the 4G upgrade cycle. And as Ravi mentioned in the prepared marks, we're seeing a lot more responsible pricing, I would say, from competitors. It's a lot to increase our margins as well.

Scott Stewart: Okay. Thank you. And then can you comment on where your panel of one seed stand? You were at about 20,000 at the end of Q3. How much has that increased? Yes, overall, we're closer to 24,000 now as we end June 30th. We were tracking to about 5,000 per quarter. The fourth quarter came in right around 4,000. I think we had a big push to equipment sales towards the end of the quarter that might have lightened up on the cantaloupe one deals.

Scott Stewart: But as we roll into this next quarter, we are seeing that same traction around 5,000 per quarter. Okay. And then just a couple more here. As you look across your entire enterprise with your connections, it was at 1.17 million. What percentage of those right now have no real software that's associated with the connection? And I'm kind of looking at that as that's something of a white space within your your customer base at this point.

Scott Stewart: Yeah, it's too close to 40 to 50 percent range. And the reason there is a little bit of a range there is some of the software add-ons can be activated and deactivated. So there's a little bit of ebb and flow there. But it is in that range. Yes, you're correct. There's quite a bit of white space there. Now keep in mind that the software, that applies to different segments will vary. For example, if it's a parking meter, the seed software that lets you manage your warehouse and manage restocking doesn't apply to that vertical at all.

Scott Stewart: So anything in a number of machines in that vertical are not part of the addressable market for that software. So you have to factor that when you look at what's white space, just within the places where we have cashless and can deploy it seats off. Great. Okay. And then I guess when you're talking about getting better terms and transaction routing, is that because you've got such a mass in terms of your volume process that you have the ability now to go back to your processors and say, hey, we're generating X amount of dollars, we need better terms and they're taking that.

Scott Stewart: That's part of it. And then there is a whole set of other, you know, complex things both around how transactions are routed, you know, what kind of fraud checks are in place. So there are, there are a number of levers we have to improve the cogs on the transaction processing and hence improve the margins on that. And then just thank you.

Scott Stewart: Okay. We were also looking at overall gross take rate and trying to increase that as well. So if you look at fourth quarter of 2022, overall gross take rate was 4.87%. Last quarter, we got up about five percent and we're about 5% of this quarter too. We see that last being as we continue on. So it's another area of focus not just improving the cog China's House but also increasing the overall gross take rate. Okay. Thank you.

Operator: Thank you one moment for our next question.

Chris Kennedy: And as a reminder ladies and gentlemen, if you do have a question at this time, please press star 11. And our next question comes in the line of Chris Kennedy from William Blair.

Ravi Venkatesan: Your question please. Yeah, good afternoon. Thanks for taking my question and it's great to see the leverage in the business. Can you talk about subscription revenue? You know, the growth slowed a little bit this quarter. You previously targeted at least 20 percent subscription revenue growth over the next couple of years. Just talk about your confidence in that and if you could talk about the quarter, that'd be great. Sure. So yes, Chris, overall, we did see a slight dip in our subscription fees this quarter compared to last quarter.

Ravi Venkatesan: Part of that was due to the 3G, 4G upgrade cycle, where we did have some devices, some 3G devices that went dark and they went in and deactivated those. A lot of that deactivation happened in the fourth quarter, so we took a little bit of a hit. What we have seen is a lot of those devices now have been replaced and the new devices are back up and transacting. So we see that just as a one-time dip.

Ravi Venkatesan: As we look out the 2024, we are projecting our subscription revenue to grow somewhere in the 18 to 22 percent range. The guidance that we provided on the transaction and subscription revenue was in the 17 to 21 percent range. We think the subscription will be a little bit higher than the transaction and we foresee that as we go out into the next two to three years as well. Yeah, and as a reminder, we had prior to doing the 3-2M acquisition, we had said that we expect to for the year to be in the low teams.

Ravi Venkatesan: Then when we did the 3-2M acquisition, we said it would be in the mid to high teams. So we are still in that range, albeit on the lower side in terms of the overall subscription revenue year-on-year growth.

Ravi Venkatesan: Okay, very helpful. Thank you for that clarification.

Ravi Venkatesan: And then just Ravi, any update on like the MNA environment? Talk about your balance sheet and kind of what you're seeing out there in the market. Thank you. Yeah, a cash position and balance sheet is measurably better than it was six, seven months ago, which is in a lot of great work done across multiple areas from Scott's team as well as collaborating with the other departments. The MNA environment continues to be competitive and we see both good companies with good products that could be an opportunity for us to acquire.

Ravi Venkatesan: However, even though the public markets have significantly corrected down, we are still seeing a little bit of dissonance in terms of expectations when it comes to the private market side, particularly the smaller companies that could be there. So there have been cases where a company or an acquisition would have made sense for us. However, we just did not want to pay the multiple or the valuation that they were aspiring to. And we continue to be very disciplined, you know, about what multiple we would pay for for a target, even if it makes sense, otherwise from a synergies perspective.

Unknown Executive: Great. Thanks for taking the question.

Operator: Thank you one moment for our next question.

George Sutton: And our next question comes from the line, George Sutton, from Craig Hallum. Your question please. Thank you.

Ravi Venkatesan: Post the upgrade cycle to 4G. We talked about how you were going to be going on offense and you did mention pricing. But you ran through a pretty impressive list of name brand wins this quarter. And I'm curious if you can just give us any sense of how offense has been changing your go-to-market strategy in terms of more sales people, anything else that you would sort of call out there that's responsible for this.

Ravi Venkatesan: Yeah, George, thank you very much for that question. And yes, the 4G upgrade cycle had required us to be high on defense and also incentive support. More importantly, our customers through that cycle so that, you know, they don't lose revenue just because they don't upgrade a device. Having got through that, our customers wallets are also freed up much more, right? So instead of investing in upgrade of a device, it really gives them zero added functionality.

Ravi Venkatesan: They are now looking at how do I make my business more resilient, more operationally efficient. And that is led to better appetite and adoption of our software side. And as that happens more and more, it will benefit the subscription revenue side of the equation. And more importantly, it will also make our customers way more stickier. So we're definitely on the offensive on that side. And we are on the offensive with adjacent verticals like amusement, etc. Where again, the upgrade cycle had a little bit of a drag effect. Gotcha.

Ravi Venkatesan: And then just a second and last for me, Robbie, you mentioned meaningful potential revenues internationally in 24. Or can you explain to us what's built into your guidance for 24 and how are you defining meaningful? So, we haven't broken that out. And, you know, for comparative reasons, I'm reluctant to share a specific percentage. But what I will say is, you know, I consider it meaningful as it starts cresting kind of the 5%-8% level.

Ravi Venkatesan: And, you know, over a few years, of course, it'll become much more meaningful than that. But for what I would call the first year of meaningful contribution from other markets, I think that's a good parameter to use. Got you. Perfect.

George Sutton: Just a comment. Scott, at the analyst day, when you laid out your expectations, particularly for margins, I think everybody thought you were a little nuts and you blown away those expectations. So congratulations. Okay. Thank you, George. I appreciate that comment. Thank you.

Operator: And, as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11.

Operator: And, this does conclude the question and answer session as well as today's program.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect.

Operator: Good day.