CANTALOUPE, INC. Q1 FY2024 earnings call

• Revenue increased 8% YOY to $62.7 million, with transaction revenue up 18% and subscription revenue up 15%. - Adjusted EBITDA for Q1 was $7.8 million, a 246% increase YOY. - Focused on expanding operating leverage via 3-pronged strategy: driving subscription revenue, optimizing COGS, controlling operational expenses. - Driving subscription revenue through accelerating micro market growth (notable wins like Pee Dee Foods, Pyramid Foods), penetrating Seed Software (continued adoption, Seed markets as industry standard), and adding new products (Smart Coolers, Smart Store solutions). - International expansion: successful UK launch event, new international customers like Decorum Vending, and progress in Latin America. - Optimizing COGS and controlling operational expenses: OpEx declined 5% YOY, G&A declined 10% YOY, and integration of Three Square Market business completed.

During the first quarter, revenue increased 8% year-over-year to $62.7 million. Transaction revenue grew 18% and subscription revenue grew 15% year-over-year. Equipment revenue was $7.5 million, a decrease of 30% compared to Q1 FY23. Total gross margin for the quarter was 38.8% compared to 24.5% in the same quarter last year. Subscription and transaction revenue margin was 42.5% versus 35.5% in prior year. Equipment revenue margin for Q1 FY24 improved to positive 12.2% from negative 23.8% in prior year. Adjusted EBITDA for Q1 was $7.8 million, a 246% increase over last year's first quarter.

• Reiterated FY24 guidance: total revenue between $275 million and $285 million (13%-17% growth), transaction and subscription revenue between $234 million and $242 million (17%-21% growth), net income between $9 million and $15 million, adjusted EBITDA between $28 million and $34 million, and operating cash flow between $28 million and $38 million. - Adjusted EBITDA weighted towards second half due to investments in sales, marketing, installation services, and international expansion, leading to higher SG&A in Q2 but expected to drive subscription revenue throughout 2024.

Q: Great to see the margin improvement across all the segments and good control of the operating expenses with healthy EBITDA. Just looking here, sales were up 8.5% or so in the first quarter, but I know the company is targeting a pretty meaningful acceleration closer to 15% for the full year. How much of that is really attributable to international growth and the micro markets? And how good is the visibility you guys have into the back half, based on some of these early stage wins you've been announcing?

A: Josh, thanks for the question. And, yes, we're very pleased with the margin expansion and continued, expansion in operating leverage, which is the journey we've been on. In terms of the growth side of the equation, we actually have pretty good visibility to that ramp because there is a significant backlog of both micromarket as well as cashless payment acceptance services where we've sold, but there is an installation backlog. So that gives us pretty good visibility. And that the problem that we had alluded to in the last quarter around device activation timelines being longer because of labor shortages, continued into our first quarter, but we've now seen that window shrink and get much closer to what is normal. So that just means that as our sales velocity, which has already been up, starts being matched by installation velocity, we'll start seeing that revenue ramp up.

Q: That's great to hear. It sounded like you had some good traction with Cantaloupe ONE. I know you've been adding like 4000 to 5000 or so kind of new subs. Is that the type of trajectory you guys are continuing to see? And any commentary on what you're seeing in terms of upsells for things like inventory management and remote price change would be helpful?

A: So overall, we continue to see great traction with Cantaloupe ONE program, the cost of capital has continued to increase, so it's especially attractive in the small and mid-market, and it continues to be. We're not providing the actual number of licenses that we have out there, but it has continued to grow, at the same rates or same percentage, but our overall equipment sales have grown up.

Q: I wanted to just dwell a little bit into and I don't know if you mentioned it in the narrative, but you had this launch event in the UK. And what really was the focus of what you were trying to sell there, was it basically micro markets or are you starting with more of individual vending machine products?

A: It's our full portfolio of products, including cashless payment acceptance, telematics that lets dispensation of a product or service happen from whether it's a vending machine or a golf ball dispenser, as I mentioned, a variety of different equipment that's dispensing products or services unattended, as well as our Seed software. So it's our full complement of services. In particular, we've seen a lot of interest in Europe with smart coolers, smart store concepts, etcetera, which is attractive in terms of margins and very exciting in terms of being more innovative and on the bleeding edge of using technology.

Q: Kind of building on that question about Cantaloupe ONE from earlier. Can you guys talk a little about your view for the pipeline of that service and kind of considering adding in new capabilities or refining pricing?

A: Yes, what we've done is over time, we've broadened the suite of products that are offered as part of those Cantaloupe ONE bundles. The information is actually available on our website along with the pricing. It's very transparent pricing. But what's happened is over time we are seeing more and more demand from particularly the small business segment of our customer base. As Scott mentioned, the cost of capital going up is driving them to look at Cantaloupe ONE instead of more traditional lease or purchase options to expand their business. So we're seeing it go from just being payment acceptance devices to bundling software to now micro markets as well.

Q: Could you guys provide some color kind of around growth in micro markets and how much of that's coming from new logos versus upsell?

A: So we have and I'm very pleased to share that we've actually doubled the sales velocity after we had done the acquisition of Three Square Market. Now, we took a little bit of time to get the installation velocity also going and that has now started matching the sales velocity, I would say, just in the last couple of months. Till then, it was significantly lagging behind. And then in terms of a mix of new logos versus current logos. I would say there's been a lot more new logos for that product, but not necessarily new logos for us as a company. So we've done a lot of cross sell and upsell, if that makes sense.

Q: Ravi, you mentioned in your remarks that you're experiencing some good progress with equipment manufacturers. I was wondering if you could talk a little more on that.

A: Yes. It's particularly in the international markets, in Latin America and in Europe. We found that when we work with equipment manufacturers and sort of embed our solutions, there is a much faster and more efficient distribution model. And we are finding more traction in going to market that way, in addition to kind of our traditional channels.

Q: And you did mention Latin America there. I know we had a few notable wins in Europe, but would be curious to know about the progress in LatAm as well?

A: Latin America continues to be positive and we have gone through a few implementations. There are competitive reasons why we sometimes mention or don't mention a particular name or not. So, the trajectory is actually very good, but the nature of the implementations is such that we are not sharing the names of specific customers yet for Latin America.

Q: Scott, do you have, you gave the total transactions for this quarter, but do you have the absolute increase, the percentage increase year-over-year on transactions, so handy?

A: Overall, the number of transactions, not the dollar value of transactions? Yes. So we're up 3% year-over-year. We're up 2% sequentially.

Q: So in terms of I mean, Three Square Markets was doing business in Europe, correct, and they had some seed software there, or they had their product there and you were going to try and cross sell Seed software. Is that correct?

A: That's correct. And we actually have implemented Seed software and cross sold already. That happened a couple of quarters ago and it is in place.