Good day and thank you for standing by. And welcome to the Cantaloupe Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, [Dara Dierks] (ph), Investor Relations. Please go ahead.

Thank you and good afternoon, everyone. Welcome to the Cantaloupe Second Quarter Earnings Conference Call. With me on the call this afternoon is Ravi Venkatesan, Chief Executive Officer; and Scott Stewart, Chief Financial Officer. Before we begin today’s call, I would like to remind you that all statements included in this call, other than the 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 market and economic conditions. A detailed discussion of the risks and uncertainties that could cause actual results and events 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 events 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, such as net income or loss. Details of these non-GAAP financial measures, a presentation of the most directly comparable GAAP financial measures and a reconciliation between these non-GAAP financial measures, as well as the most comparable GAAP financial measures can be found in our press release issued this afternoon, which has been posted on our Investor Relations section of our website at www.cantaloupe.com. And with that, I would like to turn the call over to Ravi.

Thank you, Dara. Good afternoon and thank you for joining us today. I'm pleased to report solid financial and business results from the second quarter of our fiscal year 2023. This was my first quarter as CEO and we made a lot of progress on strategic initiatives, which are led by our vision to become the global market leader, providing technology that powers self-service commerce. We successfully closed on the acquisition of Three Square Market in December positioning us to accelerate Cantaloupe's presents in the high growth micro market industry, while also immediately expanding Cantaloupe's international footprint for a full suite of self-service technology products. We held our first Investor Day at NASDAQ, which was well attended. During this session investors and analysts were able to meet our executive team. Listen to key customers and here our vision and strategy. We also shared a long-term financial outlook for the company and onetime KPIs that demonstrate the opportunity we see ahead of us. Our focus continues to be on accelerating the high margin subscription revenue growth. We were successful in doing this by scaling the Cantaloupe program and selling subscriptions including seed software, device management and remote price change. As a reminder, our Cantaloupe ONE platform is the only bundled subscription offering in the market that enabled self-service operators to eliminate upfront capital expenditures. We continue to see strong interest from our growing small and medium business customers, given the light capital nature of this offering. We also reported strong financial results for Q2. We reported a record in total revenue of $61.3 million, up 20% over last year's second quarter. We reported a record in transaction revenue, which grew by 21% year-over-year and a record in subscription revenue, which grew by 15% year-over-year. While we anticipated an acceleration of subscription…

Thanks, Ravi. As Ravi stated our 2Q 2023 revenue was $61.3 million, up 20% year-over-year. As a reminder, we had 30 days of Three Square Market in our 2Q numbers. Revenue growth excluding Three Square Markets would have been 17% for the quarter. Our combined transaction subscription revenue grew 19% to $48.9 million, which was driven by accelerating subscription growth from Cantaloupe ONE and higher average transaction ticket sizes. Our equipment revenue was $12.4 million, an increase of 25% compared to Q2 FY 2022. Total gross margin for the quarter was 30.1%, down from 31.3% in the same quarter last year, driven by slightly lower gross margin on transaction fees due to a shift in card mix and the associated processing fees. Gross margin on equipment improved slightly to negative 2.3% from negative 2.8% in prior year. We look forward to driving to positive margins in Q3 and Q4 for equipment as we move past the 4G and EMV upgrade cycles. Total operating expenses in the second-quarter of 2023 were $19.4 million compared to $16.3 million in Q2 FY 2022. The increase was mainly driven by integration and acquisition expenses of $2.8 million encouraged as part of our Three Square Markets acquisition. Net loss applicable to common shares for the second quarter was $573,000 or a loss of $0.01 per share, compared to a net loss of $468,000 or $0.01 per share in the prior-period. Adjusted EBITDA was $3.9 million in the second quarter compared to $2.4 million in the prior year period. A few notes on our balance sheet and liquidity since last quarter. We ended the second-quarter with cash and cash equivalents of $28.1 million. This was down $23.7 million from our cash balance of $50.8 million at the end of the first quarter. Roughly half of the…

[Operator Instructions] And our first question comes from Chris Kennedy with William Blair. Your line is open.

Good afternoon, and thanks for taking the question. Can you talk about your expectations between your customer base, whether it's enterprise mid-market or small businesses as we look into calendar 2023 with the uncertain macro-environment?

Great. It's a really good question. This is Ravi. We see the food and beverage side of our business, in particular, be very resilient to macroeconomic headwinds. And in fact, one of the unique trends in our businesses as more-and-more small businesses start businesses in micro markets and vending that's driving interest in and demand for our products and services. So, so far we are actually seeing it be a positive, not a negative in terms of the macroeconomic environment.

Great. Very helpful. Just a quick follow-up on the prospects for Cantaloupe ONE in this year, can you talk about kind of your expectations? Thanks a lot.

Yeah, I'll give you a little bit color and then also ask Scott to add to it. The Cantaloupe ONE product has been very well received, particularly by small and medium businesses. Enterprises that are large continue to prefer a model where they purchase equipment and depreciate it. But small businesses, absolutely love the idea of not having to put upfront capital and derisking themselves from any kind of product obsolescence. So Scott, why don’t you add some color financially as well.

Yes. So overall, we are seeing great growth with Cantaloupe ONE program, we're seeing it not just in the small businesses, but also in the mid-market as well. So we're starting to put a lot of effort and focus in that mid-market. Overall, that's one of the largest drivers that we have for our subscription revenue growth over this past quarter and we see that continuing into third and fourth quarter.

Right. Thank you.

Thanks, Chris.

Thank you. One moment for our next question. And our next question comes from Gary Prestopino with Barrington Research. Your line is open.

Hey. Good afternoon Ravi, and Scott. A couple of questions. First of all, Scott, do you have the transaction number, the number of transactions and the growth in absolute transaction.

Yeah, sure. So year-over-year the number of transactions increased by 3%. When you look at the total dollar volume of transactions, that increased by 17%. So the dollar value of transactions is growing faster than the overall transactions themselves. I'll give you a little detail behind that. So last year, our average ticket size was $2.12, this quarter we’re at $3.40. Until we're starting to see a lot of growth within an average ticket price, that's driven partially by overall inflation, the large part of it, but also what we're seeing too is that, when you look at more and more move into the self-service commerce you're seeing higher ticket prices or high higher-ticket items, for instance, we have kiosk machines within airports to their vending headphones and charging forward. So we're starting to see the shift to self-service commerce at higher ticket value items.

And even within food and beverage, it's more expensive [indiscernible] drinks versus a can of soda, right? So there is a shift in the products as well.

Okay, great. And then, was there any impact. I know you mentioned that the margins on subscription and transaction fees were down. It looks like over 100 basis-points. You did mention some card mix there, but was there also an impact from the acquisition that impacted the margins even though it was only a month in in terms of revenue contribution.

No, we really -- there wasn't. When you look at overall, the transaction revenue being our largest revenue line-item, the impact of the acquisition for 30 days has a very, very little impact on it.

Okay, so the transactions.

I'm sorry, go ahead. I was just going to say, it truly is just the mix of the cards. I mean, the pricing overall is fairly complex when you look at it, but it is just the mix of the card brands.

So it's more debit -- credit versus debit on the mix.

So it gets a lot more complex than that. So it could be credit versus debit, it can’t be American Express versus Discover. There's different pricing depending on the issuing bank. So lot of factors go into it.

Okay, that's leasing up to 20. And then could you maybe go into what you're doing to integrate the sales forces for the acquisition with your legacy sales force in the micro-market?

Yeah, so the sales area is the one that we integrated first and the approach that we've had and Jeff Dumbrell, our Chief Revenue Officer has done an outstanding job of this using his playbook from the VeriFone days. It's a model where the salespeople have major and minor specializations. So if you're a salesperson that's an expert in selling micro markets and him from the Three Square world we've now cross-train them on the Seed Markets and the other products and they can lead with the micro market sale, but then they bring in the other products and then they also bring in an additional sales person when needed with deeper specialization and sort of do core selling if you will, and it works the other way around also. So a Cantaloupe sales person that might have deep expertise in the software side, but is now gaining expertise on the micro-market site would bring in a former Three Square salesperson with deeper expertise to core sales and deliver the right solution for the customer. So in a certain sense this is -- this has pushed us into a more sophisticated solutions selling model versus selling widgets, which was, card readers and, telemeters and the more elementary software. So this has been a more sophisticated sale and Jeff has led that transformation of the sales force very well.

And then the last question I have is, it just -- it looks like the active devices sequentially were flat, is that correct? And what would account for that if they are flat?

Yeah, so overall quarter-over quarter we’re up 3%, but when you look sequentially, it is flat sequentially. Lot of that is as we're rounding out the EMV 4G upgrade cycle, we're putting a lot of our effort over the past six months has been finishing that out and making sure that we don't have any churn as we do that. As we look to third quarter and fourth quarter, a lot of the focus now is going into new sales.

Thank you very much.

Thank you. One moment for your next question. And our next question is from George Sutton with Craig-Hallum. Your line is open.

Hey guys, this is James Rush on for George. Congrats on the quarter and on the. Success you're seeing with Three Square Markets early-on. And so sort of on the topic of micro markets, I guess some industry data out there sort of imply that micro-market can do 10 times to 20 times annual sales of a vending machine. Could you sort of talk about how that translates into your unit economics on a per device basis between vending and micro markets, like what kind of [indiscernible] could you see per device for micro market versus vending.

I think those numbers are absolutely right on the money, James, in the sense, there are cases where we actually see operators replace a vending machine or two in a location and then go to a micro-market type of model. And you're right, it does go 10 times and it's driven by a lot of different factors. For us the benefits are, we see a direct benefit on the transactional revenue where those increased sales attract better economics for us in processing the transactions. And we also see a big left when it comes to the Seed software product, which for the micro-market is priced approximately four times to five times per location than the vending side of the equivalent product if you will. So, we see a benefit on both of those, the transaction and the subscription line item when a micro market is deployed. Scott, anything to add there?

Well. I think you pretty much covered it. Overall, again, go back to the higher-ticket prices and micro markets, you see a lot more because people are buying [indiscernible] as opposed to [indiscernible].

That's a really good point, ticket sizes are better as well.

Yeah, that makes sense. And then, I guess, how would you sort of describe the appetite of operators you've spoken to for adding new devices, now that we've gone through the upgrade cycle like our operators sitting there with funded budget just ready to pull the trigger in the next few quarters and order a bunch of new devices or would you expect operators to sort of methodically deploy capital and add new devices at a pretty even pace through the rest of the year.

I think we're going to see a more even paced. The demand actually is higher and there is a -- I would almost say there has been some starvation because all of their budgets have been consumed with EMV and the 4G upgrade cycle. However, we are seeing operators be cautious based on the macroeconomic environment in terms of how fast they go into rolling out new locations and there is also the lagging factor of -- yes, 70%, 80% people have come back to offices, but they've come back three days a week and sort of five days a week, and some locations have still not come back and there is still that remote work factor which is making operators hesitate in rolling out new locations very aggressively. So I think we're going to see a gentler and a more even pace of new rollouts.

Got you. And then just one follow-up to that, I guess, if I could. Sort of on the return to the office trend, I guess, are there still some locations today that are below pre pandemic levels? And if so, could you sort of speak to like what percentage that may be of your active devices?

Yes, so as I said, in -- so there are two dimensions to that question. One is, how many locations simply haven't come back, right, from a pre pandemic to post pandemic comparison. I'd say, there is about 15% in that bucket. And then the second part of that question is, for locations that have come back, what are we seeing in terms of depressed or less volumes than before, we're actually not seeing that, for most part they have crossed the pre pandemic levels, but it may not be because people have come back five days to work in the office, but it's more because the ticket sizes -- prices have gone up and they are just maybe buying more premium products and the product mix has shifted. So there are other factors that have compensated and hence the sales per location have exceeded pre pandemic levels already.

Makes sense. Thanks guys.

Thank you. [Operator Instructions] And our next question comes from Mike Lattimore with Northland Capital Markets. Your line is open.

Super. Thanks very much. Yeah, congrats on the strong results there, strong EBITDA. You mentioned a couple remote price change wins, I believe when you went through the customer wins in the quarter. I guess just how prevalent is the interest in remote price change? Is it a sizable part of kind of upsells and new logos you're seeing out there at this point.

It's very exciting and if anything, I think the only thing that's holding us back from accelerating it is that in some cases there are upgrades to the software that are running that -- an operator has running on their machines and things like that. Sometimes it's plug-and-play and sometimes they have to upgrade software components within their infrastructure before they roll it out, but we continue to see very strong up take from this product and a strong ramp-up of it.

Great. And then on Cantaloupe ONE, it sounds like that was an important contributor to the new customer adds, again. I guess, can you give us some ballpark of how many customers are using Cantaloupe ONE at this point or number of active devices or something like that?

Sure. So right now we're seeing approximately 15,000 seats on Cantaloupe ONE and we've been adding them at a rate of about 5,000 per quarter.

Okay. And then just last one on operating expense. I mean, when you think about operating expense for the March quarter. Should we just kind of layer in two more months of Three Square Market or are there some other areas that you can kind of trim expenses.

Yes, so overall when you look at the operating expense. I would say first quarter we had a lot of one-time events. So it's not a good indicator of the run-rate for it. The second quarter is a little bit better of an indicator, but we have also made some cost-savings as well to help decrease it. And then we always in the third-quarter we true-up our sales tax reserve, which last year was around $2 million in savings. We expect it to be around the same this year.

Got it. That's helpful. Thanks a lot.

Thanks, Mike.

And I would now like to turn the conference back to Ravi Venkatesan for closing remarks.

Thank you, operator. So in summary, this was a solid quarter for us with strong revenue growth and a clear pathway to improved profitability. I'm excited about getting past the 4G and EMV upgrade cycles, completing the acquisition of Three Square Market and also early traction in Latin-America and EMEA and look-forward to executing on the strategy that we articulated as part of our Investor Day in December and unlocking significant value. Thank you for your interest in attending this earnings call.

This concludes today's conference call. Thank you for participating, you may now disconnect.