Cantaloupe, Inc.
Q3 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Cantaloupe Inc. Third Quarter Fiscal Year 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to your first speaker today, Alicia Nieva-Woodgate, VP of Corporate Communications and Investor Relations for Cantaloupe Inc. Please go ahead.

[Alicia Nieva-Woodgate:]

Thank you and good afternoon everyone. Welcome to the Cantaloupe third quarter fiscal 2021 earnings conference call. With me on the call this afternoon are Sean Feeney, Chief Executive Officer. Wayne Jackson, Chief Financial Officer and Anant Agrawal, Chief Revenue Officer.

[Sean Feeney:]

Thank you, Alicia, and thank you, everyone for joining us today. I hope everyone is safe and well. A few days from now we'll mark my one year anniversary at the company. I'm proud of my team's accomplishments over the past 12 months and look forward as we execute on our plans for innovation and growth. Today marks the milestone of reporting Cantaloupe for the first time. As you know we officially changed our name in April and celebrated by ringing the closing bell at NASDAQ in person. Now to move on to our fiscal third quarter results. Our financial results for the quarter improved sequentially. We saw the effects of the resurgence of the pandemic in January and February. But as schools, businesses and other organizations across the country began to reopen March was significantly better. Revenue for the quarter increased 12% sequentially when compared to the second quarter of 2021 and was roughly flat when compared to the third quarter of 2020.

[Anant Agrawal:]

Thanks, Sean. I will touch on three focus areas today. First, our platform as a service. This is a single platform for the unattended retail market. It's quick to implement, it's easy to integrate, it's flexible to operate, it gives our customers real time insight into their business operation. As a result, it provides high ROI to our customers. We have observed a 25% to 35% increase in revenue at our customers machines where E-port digital payments are used. Also customers have reported at 30% to 40% OpEx reduction after implementation of our seed offer solutions. What's great is that this technology provides us with a compelling land and expand strategy that deepens our existing relationships by leveraging our complete platform as a service, and provides our customers many points of entry onto our platform based on their immediate business needs. During the quarter, we had many such upgrade cells. One example of this is with global connect a provider of vending, micromarkets and office coffee services through its affiliate operator network. We have entered into a strategic agreement to facilitate the conversion of several of their affiliates on to seed over the coming years. CRH Caring, which is one of the largest vending companies in the northeast, has upgraded to 4G and is fully deployed on seed. And several of our Pepsi bottler of clients across the country have upgraded to 4G as well and are deployed on seed. We also added a number of new customers of all sizes during the quarter, including a Pepsi parlor in the southeast who will be fully deploying our full platform across their operations, as well as Texas Star Refreshments, an independent operator in Texas, who will be deploying both e-port digital payments and seed software. And as Sean mentioned, we are excited about the launch of Seed Cashless+ during the quarter.

[Wayne Jackson:]

Thanks Anant. And good afternoon everyone. Revenue for the third quarter of FY21 totaled $42.8 million relatively flat to a predominantly pre-COVID Q3, FY20 and a 12% increase sequentially. During the quarter active devices increased 3% from the prior year, and was relatively flat compared to the second quarter of FY21. License and transaction revenue totaled $34.7 million for the third quarter, a 1% decrease year-over-year, and a sequential increase of 4%. Even as the number of active devices were flat from Q2 to Q3 of this year, we experienced a very positive increase in transaction revenue in the latter part of the third quarter. Equipment sales for the current quarter of $8.1 million increased 59% sequentially, as we gain momentum on converting our customers to 4G, as well as continue to grow our new customer count. Equipment revenue for Q3 FY21 was down 1% compared to the prior year third quarter which includes the shipment of devices from a significant new customer contract entered into during FY20. Total gross margin for the quarter was 30% compared with total margin of 26% for the prior year third quarter and 32% in the second quarter of FY21. License and transaction margin improved to 41% in the third quarter of this fiscal year up from 36% in Q3 of last year, as license revenue was slightly higher in the current quarter than in the prior year. Equipment margin for our Q3, FYI21 was negative 19% compared to negative 21% in the prior year.

[Sean Feeney:]

Thanks Wayne. To wrap up we are pleased with the quarter and our momentum heading into the last few months of our fiscal year and incredibly excited about the future of Cantaloupe. This new chapter to the company's life will help us drive the industry forward tapping new opportunities that create value for our customers and other stakeholders, propelled by the pandemic retail has seen a significant shift in shopper expectation for an increasingly self served safe and secure buying experience. We are a technology and payments company that gives our customers scale and flexibility in their retail value chain.

[Operator:]

We will now open the call to questions. We will now take her first question coming from the line of Mike Latimore from Northland Capital. Your line is open.

[Mike Latimore:]

Great, thank you. Congratulations on the nice quarter there. Looks great. I guess just you talked a little bit about seeing some improvement in March. I guess can you provide a little more color around that? Is that solely related to some kind of school reopenings? Or is there sort of natural seasonality there? And then any color on the kind of transaction volumes you've seen in April would be great too?

[Sean Feeney:]

Yes. Mike, thanks. That's a good question. So what we saw in January and February was kind of transactions remaining relatively flat from what we saw at the end of the year as the pandemic kind of continued. We began to see improvement the last week of February and improved sequentially every week in March and that has continued into April. We attribute that to vaccines getting out, people beginning to do more pleasure travel, probably not business travel yet and some returning to offices. We remain very optimistic because we see the number of vaccines and the number of states reopening, banks in New York saying that their people are going to be come back to work. That's kind of the last thing that it really hasn't come back much at all is our operators who serve primarily urban locations with their unattended retail solutions. And we're confident that we're beginning to see that and we'll continue to see that trend in this quarter and then in the fall as people fully come back to the office.

[Mike Latimore:]

Great, great. Nice to see the license and transaction gross margin back into the low 40s here I guess is that sustainable in your view?

[Sean Feeney:]

I will let Wayne answer that one, Mike.

[Sean Feeney:]

Hi, Mike. So as I mentioned, a bit in the prepared remarks part of that is just the fact that the license revenue was a little bit higher percentage of the total. And of course, those have much higher margins than the transactions. But we're optimistic that over time, we're doing some things that will get the transaction margins up a little bit higher. But news on that , as next year comes along.

[Mike Latimore:]

Got it and just very last one here. You've reiterated kind of the year guidance including EBITDA, the upper end of your EBITDA guidance suggests fourth quarter EBITDA might be down a little bit sequentially. I guess is that what would be the factor there?

[Sean Feeney:]

I think we just we stuck with our guidance here. We'd like probably guided last quarter we've got some 4G devices out there that we've talked about before that we want to make sure we get that to our customers. We're comfortable with the range right now and see how the fourth quarter goes.

[Mike Latimore:]

Got it. All right. Thanks very much.

[Wayne Jackson:]

Thank you.

[Operator:]

Your next question comes from the line of George Sutton from Craig-Hallum. Your line is open.

[George Sutton:]

Thank you. Sean, you referenced the resigning of your largest customer. I'm assuming that's the largest customer that has a lot of franchisees and you mentioned a deployment of 4G with them. I'm curious, given the low margins of hardware, can you just give us a sense of how that rolls out? How that fits into the guts of that contract? Thanks.

[Sean Feeney:]

Thanks. I really thought you'd open with the crypto question since you called out the you are the first guy to crypto on the last call.

[George Sutton:]

My second question and then that’s my follow up just to be clear.

[Sean Feeney:]

Okay. So we're excited with the renewal of that agreement. They will deploy those 90 or they're all their E-port devices, 3G to 4G, over probably the first two or three quarters of FY22. And we will, the margin will essentially be flat for .

[George Sutton:]

Okay. But in that, so basically this was done in an effort to maintain the customer over a multiyear period obviously a very important sizeable customer.

[Sean Feeney:]

Yes. We have some very good upside with their franchisees there and some things in the agreement that kind of we think will drive additional seed and E-port sales.

[George Sutton:]

Understand. By the way, you mentioned sort of at the end of your prepared remarks we help the world buy it and go. I wondered, I don't know if that is an official tagline or is that just a Sean made up line at the end of a comment?

[Sean Feeney:]

No, that's our official vision statement. And we think it fits pretty well with helping the world buy and go.

[George Sutton:]

Got you. So my follow up question is on the relationship, and I'm just curious how you see that structurally working? Do you think that will be incremental to customer transactions?

[Sean Feeney:]

I think nobody knows, I think how the adoption of crypto will kind of roll out. But I think from your question last quarter and kind of momentum around it and we leveraged our CTOs coming over from back to work with them on that and we'll see. It will be available with devices in October. And we will see kind of what the take rate is on it.

[George Sutton:]

Can I ask one other question related to that, is there a loyalty component associated with this?

[Sean Feeney:]

We have a loyalty program now with our more card and we're very focused on loyalty kind of in a number of areas. And we'll talk more about that in the, if not in the next quarterly call. There will be some announcements and some things we do as we move towards our big conference and announcing a number of things there.

[George Sutton:]

Got you. Okay. Super. Thank you.

[Sean Feeney:]

Thanks George.

[Operator:]

Your next question comes from the line of Cris Kennedy from William Blair. Your line is open.

[Cris Kennedy:]

Hey, guys, thanks for taking the questions. I guess the first one, after being at the company for a year do you have any kind of long term either growth objectives or margin targets that you could talk about?

[Sean Feeney:]

Cris, after being here year, I've got a much better feel for the company. And I'm continuing to be excited kind of more every day. We're really excited about FY ‘22. And we've got some really cool things coming for FY ‘23. We will give guidance on the next call for what we think ‘22 looks like but I'm confident that you'll see some good things there. And we are very much focused on kind of continuing that growth as we go forward. And as I've said, kind of I'd like to run the business for a quarter or two without COVID to really feel confident in that but I'm excited about what we're seeing and transactions are coming back and people are going back to the offices and we've got some good stuff coming. So I think growth will be good. We are investing to drive some of that growth but we are, we believe that we are improving the margin in the business and some of the operating efficiencies that we will put in place. You'll begin to see next year and we'll really see, I think really bear fruit in ‘23. So I've talked about that my aspirational goal is the rule of 40. We're not there yet. But we are making progress towards that and I like the investments that we're making in the strong balance sheet that we have to drive growth in the future.

[Cris Kennedy:]

Okay, great. And then just any update on initiatives to grow outside of the U.S. kind of what are you seeing in the market? What are the opportunities for you guys? Thanks a lot guys.

[Sean Feeney:]

Sure. We are making progress on developing a plan of action in Latin America. Our team down there has made progress. We briefed our board last week. And we are making progress towards a partnership one that we've talked about before in Asia specifically in Japan. And we're excited about the opportunity there. That's a very large vending market there and as we get into ‘22, we're looking to hire business development people in other markets as well.

[Cris Kennedy:]

Thank you.

[Operator:]

And there are no further questions over the phone line at this time. This concludes today's conference call. We thank you all for participating. You may now disconnect. Have a great day.