CANTALOUPE, INC. Q4 FY2023 earnings call

• Strong Q4 and FY 2023 results with revenue growth and improved margins.
• Expansion in micro market space via acquisition of Three Square Market.
• Scaling Cantaloupe ONE platform to penetrate SMB segment better.
• Migration to AWS Cloud Services for scale and global expansion.
• Hosted Investor Day with 3-year financial targets.
• 2024 focus on operating leverage via driving subscription revenue (accelerating micro markets growth, further penetration of Cantaloupe ONE for SMBs, extending revenue per connection), optimizing COGS, and controlling operational expenses.

For the fourth quarter, revenue increased 11% year-over-year to $64.2 million. Transaction revenue grew 18% and subscription revenue grew 17% year-over-year for Q4. Full fiscal year revenue increased 19% to $243.6 million. Transaction revenue grew 20% and subscription revenue grew 16% year-over-year. Gross margin improved to 33.3% compared to 31.3% in fiscal year 2022. Equipment margin was positive 1.7% in fiscal year '23 after being negative for 2 years. Subscription and transaction revenue margins improved to 44.2% from 39.5% YOY. Equipment margin for Q4 2023 was 20.8% vs negative 4.6% YOY.

• Total revenue expected to be between $275 million and $285 million, representing growth of 13% to 17%.
• Combination of transaction and subscription revenue expected to be between $234 million and $242 million, representing growth of 17% to 21%.
• Total U.S. GAAP net income expected to be between $9 million and $15 million.
• Adjusted EBITDA expected to be between $28 million and $34 million.
• Total operating cash flow expected to be between $28 million and $38 million. Adjusted EBITDA expected to be more heavily weighted towards the back half of FY '24.

Q: Clearly, a big milestone with the company achieving 40% gross margin, even with a couple of the onetime small benefits that you mentioned. How should we think about the opportunity for expansion in fiscal '24 and how to incorporate that into the guidance for this coming year?

A: 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 onetime benefit that we mentioned on the call. Without that, we'd be just south of 20%, so we 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 two quarters. Historically, we've been at 80% to 85%. Third quarter, we're closer to 90%. And this quarter, we were above that. As we rolled to 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 scale back just a little bit in the second half of the year as we continue our international expansion and the sale of Cantaloupe ONE [ph] And then on the equipment sales, this year without the onetime benefit that we had this quarter, we would be at 14.1%. 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.

Q: 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 to foster growth there. Where do we stand on that? Is there a time line for a rollout? What's been done? And how are you 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?

A: Thanks, Josh. 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 1 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.

Q: You've done a really good job. The micro markets opportunity is clearly growing very quickly relative to traditional food and beverage vending 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 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?

A: Yes. 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, think about kind of a 3 to 5-year time horizon, I expect it to grow to be a more meaningful 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. 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, we'll end up at that level.

Q: How are you doing? A couple of questions here. In 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 - 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?

A: Yes, Gary, thanks for the question. It's a little bit of both. So we do have higher margins on the Three Square Markets, average micro markets could sell anywhere from $5,000 to $20,000 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 4G upgrade cycle. And as Ravi mentioned in the prepared remarks, we're seeing a lot more responsible pricing, I would say, from competitors. It's allowed us to increase our margins as well.

Q: Can you comment on where your Cantaloupe ONE Seed stand? You were at about 20,000 at the end of Q3. How much has that increased?

A: Yes. So overall, we're closer to 24,000 now as we end June 30. 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 for equipment sales towards the end of the quarter that might have lightened up on the Cantaloupe ONE deals. But as we roll into this next quarter, we are seeing that same traction around 5,000 per quarter.

Q: 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 is that something of a white space within your customer base at this point?

A: 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 deactivated. So there is a little bit of ebb and flow there, but it is in that range. And yes, you're correct that 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. So anything - any 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 whitespace just within the places where we have cashless and can deploy Seed Software.

Q: Can you talk about subscription revenue, the growth slowed a little bit this quarter? You previously targeted at least 20% 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 would be great.

A: Sure. So yes, Chris, overall, we did see a slight dip in our subscription fees this quarter compared to last quarter. Part of that was due to the 3G, 4G upgrade cycle, where we did have some devices and 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 onetime dip. As we look out to 2024, we are projecting our subscription revenue to grow somewhere in the 18% to 22% range. 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 higher than the transaction. And we foresee that as we go out into the next 2 to 3 years as well.

Q: Any update on like the M&A environment, talk about your balance sheet and kind of what you're seeing out there in the market?

A: Yes. Our cash position and balance sheet is measurably better than it was 6, 7 months ago, which is a lot of great work done across multiple areas from Scott's team as well as collaborating with other departments. The M&A environment continues to be competitive, and we see both 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 are 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 tuck-in acquisition targets for us. So - 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 about what multiple we would pay for a target even if it makes sense, otherwise, from a synergies perspective.

Q: 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 meant changing your go-to-market strategy in terms of more salespeople, anything else that you would sort of call out there that's responsible for this?

A: Yes, George, thank you very much for that question. And yes, the 4G upgrade cycle had required us to be high on defense and also incent and support. More importantly, our customers through that cycle so that they don't lose revenue just because they didn't upgrade the device. Having got through that, our customers' wallets have also freed up much more, right? So instead of investing in upgrade of a device, which 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 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 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.

Q: Ravi, you mentioned meaningful potential revenues internationally in '24. Can you explain to us what's built into your guidance for '24? And how are you defining meaningful?

A: 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 consider it 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 the first year of meaningful contribution from other markets, I think that's a good barometer to use.