Cantaloupe, Inc. (CTLP) Earnings Call Transcript & Summary

All right. Good morning. Thanks for joining us today, both in-person and online. My name is Cris Kennedy. I'm a research analyst at William Blair covering the fintech and payments space. For a complete list of research disclosures and/or potential conflicts of interest, please visit our website at williamblair.com. Next up, we have Cantaloupe. From the company, we have the CEO, Ravi Venkatesan; and the CFO, Scott Stewart. Cantaloupe is a leading provider of payments and software solutions to the unattended retail sector. We've been covering this company since 2017. Ravi joined in 2020 and became the CEO in 2022, and that's when Scott joined the company. There's been a lot of changes at the company and in the industry over the recent years, which I'm sure we're going to learn about. So with that, let me pass it over to Ravi.

Thanks, Cris. It's nice to see everyone here. Some faces of folks that have followed us for a long time and our investors and some that we haven't had the pleasure to meet one-on-one yet, but look forward to taking you all through the story of Cantaloupe. And one of the things we did for this session was we are gearing up for an Investor Day in the fall. We plan to do that sometime in the September time frame. And I would say we pulled forward some of the materials to provide people a preview of some things that we'll unveil at that Investor Day. So there's a little bit of what you've probably heard before and hopefully, a little bit of what you hear for the first time here, okay? All the usual caveats around forward-looking statements apply. As Cris mentioned, I'm the CEO. I've been in that seat for 3 years, but at the company for closer to 5 years. And then Scott's been at the company closer to 5 years as well and in the CFO seat about 3.5 years, okay? So just to start with what we are trying to build here, we have a vision of being the technology provider globally that leads the market for self-service commerce. We used to be the guys that used to do technology for unattended retail, predominantly in the vending space and then also in areas like parking, car wash, laundromats, et cetera. So there were a set of places where we were in. The history of the company very briefly is we started replacing every place where you paid using bills and coins with card payments, but we also did the telemetry needed to interface with equipment that's dispensing products and services because it's not just -- in that world, you don't just take a payment, you have to actually instruct a machine to dispense a product or a service in the simple case of a parking gate, something needs to tell the gate to open and close, right? So the telemetry is what we built out. And over the last 3 decades, the company has been around since the '90s. We've got the best compatibility matrix of equipment manufacturers makes models, firmware combinations, which obviously creates a big moat for us. However, now the future is all around kiosk-based marketplaces where you can grab, scan, pay and go, smart stores, which are our newest product, you'll hear a little bit more about it, which are a theft buster and have applicability in more traditional retail in addition to unattended retail to provide a frictionless consumer experience and kind of deal with labor costs. So we'll cover a lot of that as we go through. I want to give you kind of a bird's eye view of the company and where we stand right now. We have 34,000 customers. We've been increasing our customers more rapidly than the locations that we serve based on a higher emphasis focus on SMBs. We see better margins, better growth and lots of opportunity in fostering entrepreneurs that enter whether it's food and beverage or whether it's amusement or the areas where they can build out unattended storefronts. And so we've intentionally gone after the SMB space more than the enterprise space, while we continue to do very well in the enterprise space. The active locations that we serve are 1.26. And the way we look at this is an active location could be a corporate break room with a kiosk-based marketplace where somebody is grabbing a sandwich, a drink, scanning it at the kiosk, paying and going or it could be a vending machine or it could be an air-vac machine at a gas station where you fill air in your tires and you tap to pay. So it could be all kinds of unattended self-service commerce conducting locations. And again, they can be products as in the case of the kiosk-based market or vending or they can be services like a massage chair sitting at an airport, okay? We provide services to both. We do over $3 billion in transaction dollars, but we do close to $1.5 billion in transaction volume. So it's a lot of transactions for smaller dollars. And we are 1 of maybe 4 or 5 players who know how to handle small ticket and large ticket transactions in a cost-efficient manner, which again gives us a pretty big moat. We touch about half of the country's population in terms of -- in some way, shape or form, they use our services. As I said, if you've recently or ever filled air in your tires at a gas station, you probably used us. If you shopped at a vending machine, you probably used us. Just numbers at a glance, and Scott will dive a little bit more into this. We'll do about $305 million in revenue this year. Our growth rates have been in the 15-plus percent, 17% CAGR in the last 3 years. So if you project that forward, we aspire to be kind of in the $350 million range next year and then grow onwards from there. So we've had a fairly good, steady clip of growth. And we've also pivoted the company while sustaining growth to profitability. So we are definitely a growth at a reasonable price strategy, and we are very -- I won't say we are conservative, but we are prudent and fiscally responsible in terms of how much we invest in R&D, how much we invest in M&A. And we've had a tremendous focus in making sure that [Technical Difficulty] is sustainable. The business model is robust and resilient, and that's what leads to the results that you see here, right? 65% CAGR for the last 3 years on the EBITDA front. And we've had a tremendous focus on the recurring revenue, which is the payment processing and the software subscription revenue, which we've actually grown even faster at an 18% CAGR. So those are some numbers to pay attention to. The last one is also super important. I always like businesses where -- I joke about it, where everybody goes to the movies and the business will still grow 10%, right? And we are one of those businesses with a couple of reasons. One, there is a continued tailwind of people shifting from cash to cashless. When Scott and I started, that number used to be 50%, now it's 80%. And there's still continued runway because it keeps steadily increasing. Eventually, it will hit 90-plus percent and then people will turn off their bill acceptors and their coin acceptors because it's just not cost efficient to operate those cash accepting all the paraphernalia that's needed. And so it will jump, we think, to 100% at that point. That's probably 4, 5 years away. Until then, we continue to enjoy, I'd say, 4% to 5% growth just coming out of that conversion. The other big macro trend is that the product mix of what we sell at our storefronts has been shifting from lower ticket to higher ticket valued items. So if you think about selling cans of Coke, which are $1 and trade sales or whatever to now selling Cobb salads and tuna sandwiches and the value of the product keeps going up. And that helps us both on the margin on payment processing, which will -- Scott will dive a little deeper into, but also the net value of what we are selling, driving average ticket sizes up. So per location, we are now starting to get more. So that's what you see in that ARPU number where on the payment processing side, because of product mix shift and conversion from cash to cashless, we have a nice tailwind that we get of growth even before the unit growth starts kicking in. And similarly, on the software side, we have developed add-on modules and upsold them to our base, which gives us a nice tailwind even before new logos and new units start kicking in. So that's why you see that 15% growth in ARPU for the combination of both the software side as well as the payment side. In terms of the strategy that we have, and in very brief, this is not unique to our company, but we always look at where do we invest in R&D and scale through technology investment, where do we scale through strategic acquisitions. And we've done 4 tuck-in acquisitions in the last 4 years, all of which have been tremendously successful and accretive. And then finally, this is a third leg of this stool that I think a lot of companies tend to neglect is where can we leverage partnerships? Where can we use R&D dollars that have been invested by our partners, but they don't have a strong distribution into our world, which is primarily the unattended self-service commerce world. And I'll give you 3 very, very quick stories to underscore that. You've all experienced the just walkout experiences from a very large player that I won't name specifically, where you can -- you've seen them at airports where you can enter pickup products and walk out at the other end, and it will charge you. Well, that very large and mighty company still came to us to say, how do we enter this space of corporate break rooms, hospitals, university campuses, hotels, et cetera, and have done an integration with our enterprise software, which has become the operating system for unattended retail. So that's the power of the ecosystem. And similarly, the largest kind of beverage providers, and you all know who those are, and they've also partnered with us on our new smart store formats to enter this world. So to underscore the fact that because of the ecosystem we've built, we now have even very large players when they come up with an innovation and want to enter this space, they tend to come to integrate with our payment system and our software, okay? This will be new for most folks who have been following us. In 2022, we did an Analyst Day, and the company used to talk about a much bigger TAM. We actually narrowed it to about $7 billion. And I still remember -- Cris will remember this, we kind of got people jeering at us a little bit to say, nobody narrows their TAM. Everybody seems to just keep expanding it beyond the limits of the universe. So what are you guys doing? And the rationale there was we were very, very thoughtful about, look, if we have a right to win an established right to win, then we count it as our TAM. And by the way, we divide our TAM into core and adjacent verticals and core being anywhere where we have more than 15% market share and adjacent where we have a pathway to get there, right? So we did that. Now fast forward 3 years later, and we've executed on everything that we shared as part of that plan, we feel fairly confident that we have a bigger TAM now. And that's as a result of having entered the stadiums and concert venue space. And by the way, we've also gone from lighting up stadiums to lighting up whole islands now if you've seen the news about Carnival that we announced where Carnival is going to open a new island in the Bahamas and everything there from ordering on your mobile phone to ordering at a kiosk to at cofteas, all that will be Cantaloupe powered. And so that's opened up a whole new world for us. And we've also launched new products in amusement and the smart stores, which have applicability in locations where we were not present earlier. So all that leads to a more expanded TAM. We've also developed a different way of looking at our TAM. Earlier, we used to look at it in terms of core and adjacent verticals. Now we look at it in terms of upsell opportunities where we have current customers who are already on our platform to whom we can sell additional products or add-on products and verticals that are adjacent to us where we now have developed products that we can go after. And then finally, international markets where we have now established a presence and hence, can penetrate further. Europe and Latin America being the first 2 of them, okay? This is a little bit about our footprint as it stands and the breakup of the TAM. It's still largely North America, but we do have considerable opportunity in Europe and Latin America. And as we adapt more of our product portfolio to those markets, that will continue to expand, and that will expand in other areas as well. I'll skip past a couple of these things. In terms of the moat that we have and takeaways for this audience, the reason we win and we will continue to win is it's very hard to have an integrated payment and telemetry solution. That's the reason Verifone and Ingenico don't compete with us on the payment terminal. And that's also the reason why a PayPal and an Authorize and a Square don't compete with us in processing the payment because it's hard to combine that functionality. That's number one. Number two, verticalized software with integrated payments, and you can look at many, many industries, whether it's government, whether it's hospitals, you will see that they are starting to win a lot more because it's always more convenient to have the payment processing integrated with your ERP system. And we are the ERP system for anybody providing food and beverage to corporate break rooms, to universities, to hotels, to hospitals, et cetera. That gives us a big moat as well. The third one is the innovations that we have done initially through acquisition and then building on top of it of kiosk-based marketplaces. And in that industry, we are essentially 1 of 2 players that dominate that market. And we're actually not the market leader. We are the upstart and are starting to take a lot of share away. But there's so much white space and it's so new that there's enough growth for all industry players. What's happening there is people are replacing hot food cafeterias with unattended kiosk-based marketplaces to get rid of the labor cost, to get rid of all the infrastructure they have to have in place, et cetera. So you'll see these crop up in a lot of office buildings in a lot of airports and a lot of other places. And then finally, this is a product that we are most proud of. And in my career, I've never had a product other than this one where we have presold 2 quarters ahead. And it's really supply constrained versus being demand constrained. And I feel like I'm selling the iPhone in the early days or Tesla because it's -- there's so much demand for it. And the reason there is, is because retail theft has been picking up. So people are suffering very high levels of shrink, which wasn't the case even some time back. I was on a call with somebody who distributes cosmetics into traditional retail like Kroger and Albertsons and places like that. And they were saying, especially in an area like cosmetics, the theft is now starting to get to 15%. They just don't have the margin to sustain that, right? And the exploration I had was, look, so one -- and I said, so what are people doing? And the answer from the CEO was they are locking everything up. And when they lock everything up, the sales go down by 40%, 50%. That's not sustainable either, right? So what's -- how do you solve it? Our smart store does that very elegantly. It sits in a corner in a store. The consumer walks up to it, that's the card. It unlocks, they open, they pick up the product and walk away. 100% accurate, no theft, and it's all AI-powered. It's all powered by weighted shelves. It's been a runaway success. So that's the one that we are most proud of and has really taken off rapidly. We launched it in [Technical Difficulty] and this is the first quarter, I think we'll kind of meet the demand, and we are ramping up supply like crazy, okay? I'm going to skip past this and a couple of slides. I want to give Scott a little airtime here to take you through some of the financials as well since we've already talked about most of this. Well, one other note, we continue to monitor our G&A very, very carefully and maintain a pretty good sales efficiency ratio as well for folks that are keyed into it. With that, Scott, maybe a little bit on the financials and leave room for a couple of questions.

Sure. All right. So how we make money? Starting with revenue. Overall, we have 3 revenue streams: our subscription revenue, our transaction revenue and our equipment revenue. The subscription revenue is based off of our fee that we charge for our telemetry and cashless service plus for our software. And that's been growing at a CAGR of about 12% over the past 4 years. We bill on a per device per month basis. When you look at our transaction revenue, that's based off of a fixed percentage of the overall total gross transaction amount. Generally, that percentage runs anywhere from 3% to 6%. On average, for the past 12 months, we've been at 5.2%, which when we talk about margins, I'll talk about how it's been up from the past 3 years, we are at 4.7%. And our transaction fees have been growing at a CAGR of 22%. Transaction fees are very predictable. So we consider them to be recurring. We do have assets very diversified across the country and in different location types. So as a swimming pool, they might be closed during the winter, but we also have assets at a ski lodge so it's going to be open during the winter. So overall, there's not much seasonality to our transactions and it's very predictable. So we consider the subscription revenue and transaction revenue to be recurring. And then on the equipment side, that is made up of our point-of-sale devices that we sell. On average, they're about $250 to $350. And it's also our micro markets. We not only sell the kiosks, but we also sell the coolers that go with it, the shelving, the rack space, everything that you need to build out a micro market. And on average, those range anywhere from $5,000 all the way up to $50,000 per market. When you look at our revenue, how it's been trending over the past 4 years, we've been growing our recurring revenue at an 18% CAGR over the past 4 years, and we've been growing total revenue at a 17% CAGR. So over the past couple of years, we've worked hard, put a lot of effort into increasing our average revenue per unit. It's been growing. We've been able to do it at 15% over the past 4 years. When you look at the breakdown, subscription has been growing at 9%. There's really 2 drivers of that. One is further penetrating our Seed software onto the connected devices that we have. The other is all the add-on modules that we've developed over the past 3 or 4 years, things like RPC, Seed analytics, business intelligence, ad management, just to name a couple of them. When you look at our transaction ARPU, it's been growing at a rate of 18% CAGR over the past 4 years. And really what's driving that is a couple of different things. You have average ticket sizes continue to get higher. So just with product diversity and product mix shift, the form factor of vending has been evolving over the past 4 years. You go to the airport, you can buy headphones out of a vending machine now. With our micro markets, a lot more fresh food is being sold. We talked about on our earnings call selling Cobb salads as opposed to candy bars. So that's really pushing up the overall average ticket size. Another driver is our take rate. I just mentioned we went from 4.7% up to 5.2%. That's also helped push up the ARPU on transaction revenue. And then the third driver is the move from cash to cashless. Ravi mentioned earlier, 4 years ago, we were at 50% of our transactions were being done cashless. Now it's at 80%, and we think that will continue to grow. We joke now that where no one carries cash anymore. If you're under the age of 30, no one's carrying cards anymore. It's all on their phone. That's all my kids use now. All right. So looking at the overall transactions that we have going across our platform. On an annual basis, we have $3.5 billion in gross transactions that go across our platform. When you look at the growth, transactions themselves have been growing at 10%, while the dollar value has been growing at 20%. A big driver of that is that average ticket price continue to increase that I talked about. Another little nuance to this, though, is with the transactions, you can also do basket purchases. So with our point-of-sale devices, now on vending machines, you can buy 2 or 3 devices with just tapping your card once. With micro markets, a lot of people are buying 2 or 3 items of 1 transaction as opposed to just one single item. So that's why you don't see the growth in the transactions matching the growth in the dollar value. Then looking at the margins. We put a lot of work over the past 3 years on improving our overall margins. When you look at the subscription margin, we've done a lot of contract renegotiation with our network carriers. We were at about 80%, 85% about 3, 4 years ago. We're now up to 90%. This is something that we continually push on as our volume grows, we're always reaching back out to the network carriers asking for lower rates and driving that price down. On the transaction fees, we've done a lot of work there. It's kind of a threefold approach. One, we've increased our take rate, which has helped with the margins. Two, we've worked with the COGS side, making sure that all of our transactions are routed as efficiently and as cost effectively as possible. And then the third driver is the increase in average ticket prices. So a portion of interchange is fixed and a portion is a percentage of the transaction. Because of that fixed component, as our transactions get higher, our margins will improve. And then on equipment, the company used to always think of it more of the razor blade model. They would almost give the equipment away for free just to get the transaction revenue and subscription revenue. Over the past couple of years, we put a lot of emphasis on increasing our margins as it relates to equipment. There's a lot of work and development that goes into the firmware that goes on the equipment. We've been able to drive that price up with very little pushback from our customers. And this is my favorite slide. This is the money slide, I'll call it. So if you look to the chart on the left, it shows the growth in revenue, the growth in COGS and the growth in our SG&A. So we've been able to grow revenue at 17% CAGR, but not growing the COGS near as fast. And then SG&A, we've been growing that at half the rate, a little bit less than half the rate that we've been growing revenue at. So really unleashing that operating leverage has been driving us to profitability. So if you look to the chart on the right, in FY '21, we were at $7.6 million in adjusted EBITDA. We've grown that at a 65% CAGR. We're in our fourth quarter of our fiscal 2025 year, and we believe we'll be ending right around the $48 million is the midpoint of the guidance that we provided.

And the one thing I'll add on that slide, Scott, if you go back for a second is as much as I've studied business is the right one. There's always a tipping point where a combination of industry dynamics and frankly, good management teams and discipline starts bringing operating leverage into a business. And when the -- like the jaws of the crocodile start opening, they tend to open for a while after that. So if you looked at this chart, you will see that somewhere in the '23 time frame when that starts to happen here, and it continues to expand. So we feel pretty bullish about the next chapter in terms of how much operating leverage can come. And we think a lot of the hard work in terms of dealing with fundamentals and laying the foundations have actually happened. For those of you who followed us for a long time, know kind of the checkered history the company has had. 30 years of operating, we accumulated close to $400 million in losses, accumulated losses. So there's a lot of, frankly, value destruction in the past. Now it's ironic how sometimes sins of the past can turn into a gift in the future. So we have now NOLs that are at a present value level, $50 million and at a net present value level, depending on where net income lands at $25 million to $30 million. So that's cash benefit on the tax front and things that will actually help us continue to expand this and continue to be more of a cash generation machine in the next few years. Okay. With that, maybe -- and that's our guidance. So maybe a couple of questions, I think if we have...

Yes. Maybe I'll first start it out. You alluded to it and you're seeing it in the numbers, but just talk about kind of the revenue opportunity as you move from traditional food and beverage vending machines up to smart stores and micro markets, the volume opportunity is much larger.

Yes, significantly larger, right? And I think the big prize when I look at this is the collision of unattended retail and retail because retail as it's currently conducted is ripe for disruption. It suffers from, I would say, 4 issues. Number one, the product is not close to the consumer, right? I was talking to an operator who's putting our micro markets and smart stores in apartment complexes in South L.A. And I said, why are you being so successful? Their volumes were going through the roof. And that person told me, well, if you're a single woman in an apartment complex in South L.A., after dark, you're not going to walk a block to get a gallon of milk. It is that bad, right? But if you have a micro market in the lobby, you're going to shop there, right? So that's number one, is bring the product closer to the customer, which we are able to do. Second, make the experience of shopping frictionless for the customer. I have a friend who is in New York who says, now if they go to a CVS or a Walgreens to buy a pack of batteries, it takes them an hour because there -- everything is locked up. They wait there for a store clerk to come. There aren't enough of them, right? So take the friction out. The third factor is labor costs. In California and New York, you are now paying $30 for someone who, by the way, can legally not prevent somebody from stealing as long as they're stealing below a certain dollar amount. I mean in what world does that make sense, right? So that's the third factor. And the last one is just make this whole thing more efficient, like get rid of theft. Theft is a huge, huge issue right now for retailers. So when I think about growth, I think about kind of it in terms of old stuff and new stuff. So the traditional kind of vending, laundromats, air-vac machines, all that stuff, parking, all that stuff that we have. I actually like it because it gives me a high gross retention rate. Our GRR is in the 90% range. So it's a very downside protected business. And then the new stuff, which is all around how do we embed our solutions into traditional retail, how do we light up more stadiums, more concert venues, more hospitals, more amusement parks. After the Carnival deal, we are now in talks on all kinds of amusement parks. So that's where I think the growth comes from for the future.

Great. Looks like we're out of time. We're going to end it there, and we'll have the breakout session upstairs.

All right. Thank you all.

Thanks, everyone.