Yahoo Finance Cantaloupe, Inc. (NASDAQ:CTLP) Q2 2024 Earnings Call Transcript
Cantaloupe, Inc. (NASDAQ:CTLP) Q2 2024 Earnings Call Transcript February 8, 2024
Cantaloupe, Inc. beats earnings expectations. Reported EPS is $0.04, expectations were $0.02. Cantaloupe, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to Cantaloupe's Second Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Dara Dierks, Investor Relations. Please go ahead.
Dara Dierks: Thank you. Good afternoon, everyone and welcome to the Cantaloupe's second quarter earnings conference call. With me on the call today is 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 results to differ materially from such forward-looking statements is included in our filings with the SEC and in the press release issued earlier today.
Listeners are cautioned to not place undue reliance on any such forward-looking statements which reflect management's views only as of the date they are made. Cantaloupe undertakes no obligation to update any forward-looking statements whether because of new information, future results 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 Cantaloupe's operating results. These non-GAAP financial measures are supplemental to and not substitute for GAAP financial measures. 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 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 with that, I would like to turn the call over to Ravi.
Ravi Venkatesan: Thanks, Dara. Good afternoon, everyone and thank you for joining us today for our second quarter of fiscal year 2024 call. During the second quarter of fiscal year '24, our total revenue increased 7% year-over-year to $65.4 million, driven by 17% year-over-year transaction revenue growth and 10% year-over-year subscription revenue growth. We now expect subscription and transaction revenue to be at the lower end of the 17% to 21% range for the fiscal year due to a slower-than-anticipated ramp in international revenue and delayed activations domestically. We now expect subscription revenue to be in the 12% to 15% range for fiscal year '24. Our backlog of shipped devices and micro markets remains robust. We anticipate growth in subscription revenue in the second half to increase as we work through this backlog and continue to invest in decreasing activation time lines.
We've spoken before about our initiatives to drive subscription revenue growth, a key driver of continued expansion in operating leverage and we continue to be laser-focused on this. In addition to a robust backlog, our international pipeline continues to build and we are as excited as ever about the successes we are having in Europe and Latin America. I want to highlight the progress we've made in recent quarters on another key driver of operating leverage which is expansion of our gross margins. Total gross margin for the quarter was 37.2% compared to 30% in the same quarter last year. This increase in gross margin was driven by higher margins across all lines of revenue. Transaction margin or transaction revenue, the largest of our 3 revenue streams, realized gross margins about 20% this quarter, up from the high single-digit percentages just a couple of years ago.
Recall that we had previously outlined the plan to drive transaction margins to 20% plus by fiscal year '25. I'm delighted to report that we've reached that goal a year ahead of schedule as there is no additional SG&A expense associated with the incremental dollars we received through transaction processing revenue, this gross margin expansion has a positive impact to our EBITDA and free cash flow, helping drive profitability. We now expect to be at the high end of our adjusted EBITDA guidance for fiscal year '24. All in, we are pleased with our performance for the first half of the year. In addition, we kicked off the second half of the year with some exciting news. Last week, we announced the acquisition of CHEQ. This strategic investment positions Cantaloupe for expansion into the large and rapidly growing sports entertainment and restaurant sectors with a comprehensive suite of self-service solutions.
There is tremendous synergy between our combined product line which will enable growth across our combined customer base. The addition of CHEQ will fit nicely into our long-term strategy and create a new growth vector for the business. We are excited to welcome the CHEQ team to the Cantaloupe family. I now want to highlight select customer wins from this quarter. There is a growing trend among customers seeking all-in-one solution providers that can manage cashless payments, vending management software and micro market solutions. Canteen of Northern California, a vending operator serving Sonoma, Napa and Marin counties migrated from competitor kiosks to our platform and integrated Seed software throughout their operation. Paramount Vending was another great example of a competitive cross-sell win in the micro market space.
Nick De Pascal [ph] of Paramount Vending stated, "We had previously used Three Square Market but had a combination of other micro market kiosks and we have been seeking a more streamlined way to manage our entire business. We were already all in on Seed as our VMS and we're excited to take advantage of the trade-up program to upgrade to Cantaloupe Go, moving our entire micro market business to Cantaloupe as we continue to grow." Our sales team continues to grow penetration in the small business micro market space with several wins, including TechSun Vending, MeFit Vending, who all deployed micro markets and Cooler Cafes. We also continue to see increased penetration of Seed. We are seeing steady adoption of Seed markets which is becoming the industry standard for combining management of vending micro markets and office coffee businesses.
During the second quarter, we posted a number of competitive wins with customers converting their operations to Seed, including Culinary Ventures Vending, a large vending operator in the tri-state area and Vend West Services in Coos Bay, Oregon, who completed a full conversion to Seed and ePort. On the product side, we recently released 2 new subscription products, Seed Analytics and Seed Intelligence. These tools are designed to transform the way vending operators leverage data for revenue growth, improving real-time decision-making and enhancing productivity. Seed Pick Easy, our warehouse picking solution is now fully integrated with the Three Square Go kiosk, opening up opportunities with micro market operators that need a nimble warehouse picking solution.
The Seed platform, including Seed Entrepreneur and Seed Enterprise is now available in Mexico with full Spanish language support. Seed was showcased at our Cantaloupe LIVE Mexico event held in December. We hosted over 100 industry leaders there. Prospects were able to hear strong endorsements from Riviera vending and Feel Good Market who described the utilization of Cantaloupe's vending and micro market solutions. We also continue to see expansion into the mid-market segment, a newer segment for us, as well as with channel partners and in adjacent verticals. For example, our partnership with AVS Companies, one of our master resellers continues to build as they purchase additional devices in Q2 and also expanded into the micro market space by purchasing Cantaloupe Go kiosks.
Growth in adjacent verticals was driven by an expansion into the amusement sector with Mendota Valley Amusement, a supplier of music and gaming machines through the United States. CEO, Bill Lethert stated, "Thanks to Cantaloupe, we are seamlessly transitioning from zero to implementing hundreds of cash card readers with plans for further expansion. This strategic move is projected to boost our revenues by at least 25%. Choosing Cantaloupe was a clear decision for us as their innovative solutions perfectly cater to business growth objectives across the gaming and restaurant spaces." On the international front, our event in Mexico City in December was a success. Since that event, we've started pilots with multiple customers in Latin America which we expect to scale in Q3 and beyond.
In Europe, we've secured a number of deals with telemetry and cashless payment acceptance. These deployments are going through the stages of pilots followed by larger scale deployments. We also continue to experience growth in our micro market solutions for the European market, bringing on new customers such as Canny Local Vending, The Vending People and RGs Coffee [ph]. So as you can see, the shift we made to our go-to-market strategy over the last 12 months are showing results. We also remain focused on the continued optimization of cost of goods sold. As mentioned earlier, we've made significant progress in expanding gross margins through the optimization of COGS, especially in transaction processing. Lastly, being disciplined on operational expenses is also a priority and we expect to finish the year with a decrease in OpEx as a percentage of revenue.
In Q2, OpEx increased slightly year-over-year which was driven by our investments in international expansion and also the inclusion of Three Square Market related expenses this quarter. We remain excited about the long-term opportunity for Cantaloupe, driven by secular tailwinds, including decreased use of cash, increased use of credit cards and the increased use of touchless payment options which continue to drive industry growth. While we are excited about the growth prospects in adjacent verticals, Berg Insight forecasts that the number of connected vending machines worldwide will grow at a CAGR of 16.4% to reach 12.3 million units by 2027, a forecast that augurs well for the growth of our core vending and micro market business. In addition, Consumer Research confirms increased willingness to buy more items and buy more expensive items from vending machine.
As for the operators, labor shortages and a higher reliability derived from cloud processing continues to drive increased adoption of Seed as an industry platform. Seed technology continues to be a proven solution to help customers drive revenue and deliver cost reductions. In summary, I could not be more proud of our team's abilities to execute on strategic priorities, especially the expansion of gross margins and discipline with operational expenses, that have led to strong growth in adjusted EBITDA. We are proud of our product innovation that enables our customers to increase revenue through new modes of payment, additional consumer engagement features, as well as new business tools for running a more efficient operation. With that, Scott will now review our Q2 results in more detail as well as review our updated outlook for fiscal year '24.
Scott?
Scott Stewart: Thanks Ravi. As Ravi mentioned, we delivered another strong quarter. Our 2Q '24 revenue was $65.4 million, up 7% year-over-year. Our combined transaction/subscription revenue grew 15% to $56 million during the quarter. This includes $18.1 million of subscription revenue, a year-over-year increase of 10% and $37.9 million of transaction revenue, an increase of 17% year-over-year. The overall increase in revenue was again driven by increased processing volumes, higher average transaction ticket sizes and subscription revenue growth for micro markets. As you may have noticed in our earnings release, we are now providing a new operating metric, average revenue per unit or ARPU. This is defined as our total subscription and transaction fees for the trailing 12 months, divided by average total active devices for the same period.
Management uses this metric to measure the impact of new products and features, as well as higher ticket items being sold through our points of sale. The ARPU for 2Q '24 was $182, up 14% from the prior year period. Our equipment revenue was $9.3 million, a decrease of 25% compared to Q2 FY '23. This was primarily due to prior year benefiting from the 3G upgrade cycle that is now behind us. But overall equipment revenue was down, we did see an increase in active device growth of 7% year-over-year. Total gross margin for the quarter was 37.2% compared to 30.1% in the same quarter last year, driven by higher margins across all 3 revenue lines. Subscription and transaction revenue margin was 43.1% versus 38.3% in prior year. This increase was driven by an improved processing take rate, reduced processing costs and subscription revenue representing a larger share of our overall revenue.
Equipment revenue margin for Q2 FY '24 improved to a positive 1.8% from a negative 2.3% in prior year. This is down from the immediate prior quarter of 12%. The sequential decrease was driven by several opportunistic deals we were able to replace competitor devices. Total operating expenses for Q2 FY '24 were $20.7 million compared to $19.4 million in Q2 FY '23. Net income applicable to common shares for the second quarter was $3.1 million or $0.04 per share compared to a net loss of $0.6 million or $0.01 per share in the prior period. Adjusted EBITDA was $8.5 million in the second quarter compared to $3.9 million in the prior year period, an increase of 119%. We ended the second quarter with cash and cash equivalents of $43.5 million. Our capital allocation priorities continue to target profitable growth and are specifically focused on driving operational improvements to control OpEx, expand our micro market offerings and investing in our domestic and international go-to-market strategy and product development.
Now turning to our FY '24 guidance. We continue to expect total revenue between $275 million and $285 million. We continue to expect transaction subscription revenue to be between $234 million and $242 million. As Ravi mentioned earlier, we anticipate being on the lower end of this range due to a slower-than-anticipated ramp in international revenue and delayed activations domestically. In addition, we expect higher-than-anticipated equipment revenue in FY '24 which will ramp throughout the second half of the year as our international presence ramps. We continue to expect total U.S. GAAP net income to be between $9 million and $15 million. We expect to be at the higher end of our previously provided adjusted EBITDA guidance of between $28 million and $34 million and total operating cash flow to be between $28 million and $38 million.
With that, we'd now like to turn the call back over to the operator for the Q&A session. Operator?
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