Thank you for standing by, and welcome to the Cantaloupe Fourth Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only-mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Marissa Neuman, Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to the Cantaloupe fourth quarter earnings conference call. With me on today's call are 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 market 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 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 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'd like to turn the call over to Ravi.

Thanks, Marissa. Good afternoon, everyone, and thanks for joining us today for our fourth quarter and fiscal year 2023 earnings call. It has been an incredible year for Cantaloupe, capped off by a strong fourth quarter. For the fourth quarter, our revenue increased 11% year-over-year to $64.2 million. Importantly, transaction revenue grew 18% and subscription revenue grew 17% year-over-year for Q4. Adjusted EBITDA for Q4 was $9.2 million, a fourfold increase over last year's corresponding number. For the full fiscal year, our revenue increased 19% to $243.6 million, a new record for the company. Transaction revenue grew 20% and subscription revenue grew 16% year-over-year. We also improved gross margin to 33.3% compared to 31.3% in fiscal year 2022. Importantly, we improved gross margins sequentially through each quarter of the financial year. After 2 years of negative equipment margins, we delivered a positive equipment margin of 1.7% in fiscal year '23. This improvement was a result of more responsible competition in the marketplace for telemetry and payment devices, following the 4G upgrade cycle where discounts were needed to incentivize and support our customers through it. It is also driven by diversification of our equipment product portfolio, which now includes higher-margin smart coolers and micro market kiosks. We also improved our margins for the combination of subscription and transaction revenue from 38.8% in fiscal year '22 to 40.2% in fiscal year '23. Our initiatives to accelerate subscription revenue growth and control expenses, accelerated operating leverage, which we highlighted as a priority at our Investor Day last December. Consequently, adjusted EBITDA for the fiscal year was $17.8 million, an 80% increase from last year. Finally, we ended the fiscal year with over 28,000 active customers, a 19% increase over fiscal year '22. In addition to these financial accomplishments, I'm also pleased with operational…

Thanks, Ravi. As Ravi mentioned, we delivered another strong quarter of revenue growth and record profitability. Our 4Q '23 revenue was $64.2 million, up 11% year-over-year. Our combined transaction and subscription revenue grew 18% to $53 million during the quarter. This includes $17.5 million of subscription revenue, a year-over-year increase of 17% and $35.5 million in transaction revenue, an increase of 18% year-over-year. The overall increase in revenue was driven by processing volumes, including contributions from our 32M acquisition and higher average transaction ticket sizes, along with the accelerating subscription growth from Cantaloupe ONE. Our equipment revenue was $11.2 million, a decrease of 15% compared to Q4 FY '22. This was primarily due to prior year being our largest quarter on record for equipment sales, driven by the 4G upgrade cycle. Total gross margin for the quarter was 40.1% compared to 29.5% in the same quarter last year, driven by higher margins across all three revenue lines. Subscription and transaction revenue margins were 44.2% versus 39.5% in the prior year. The fourth quarter did benefit from a processing rebate of $775,000 related to prior quarters. Without this benefit, the subscription and transaction revenue margin would have been 42.6%, still a significant increase from prior year. As subscription revenue becomes an increasingly larger share of our overall revenue, we expect to realize margin expansion both in the terms of gross profit and operating margin. Equipment revenue margin for Q4 FY '23 improved to a positive 20.8% from a negative 4.6% in prior year. We also had a onetime benefit of $750,000 related to our equipment COGS for the fourth quarter. Without this benefit, equipment revenue margins would have been a positive 14.1%. Total operating expenses in Q4 FY '23 were $22.3 million compared to $19.2 million in Q4 FY '22. Net…

Thanks, Scott. As you can see from our results in fiscal year '23 and guidance for fiscal year '24, we continue to execute against the 3-year financial targets we outlined last December. With that, we'd like to turn the call back over to the operator for the Q&A session. Operator?

Certainly. One moment for our first question. And our first question comes from the line of Josh Nichols from B. Riley. Your question, please.

Yeah. Thanks for taking my question. Clearly, a big milestone with the company achieving 40% gross margin, even with a couple of the onetime small benefits that you mentioned. How should we think about the opportunity for expansion in fiscal '24 and how to incorporate that into the guidance for this coming year?

Hey, Josh, thanks for the question. It's a great question. And we have worked very hard over the past 18 months, improving our gross margin, especially on the transaction processing side and the subscription fees and then just more recently on the equipment side. So as we look at those individually, transaction margin this quarter was just north of 20%. We did have that onetime benefit that we mentioned on the call. Without that, we'd be just south of 20%, so we be in the high teens. And that's what we're expecting going forward as we roll into 2024. As you look at the subscription fees, we've seen an increase over the past two quarters. Historically, we've been at 80% to 85%. Third quarter, we're closer to 90%. And this quarter, we were above that. As we rolled to 2024, we expect it to be more in the 85% to 90%. I think it will be higher in the first half of the year and then maybe scale back just a little bit in the second half of the year as we continue our international expansion and the sale of Cantaloupe ONE [ph] And then on the equipment sales, this year without the onetime benefit that we had this quarter, we would be at 14.1%. I think that's a good mark going forward. We could be a little bit lower what we have built into our budgets around 10% to 15%. And that's as we scale internationally, we could take advantage of some situations of our balance sheet as we look to make some deals with some people overseas.

Thanks. And then just to elaborate on that a little bit since you mentioned the international expansion here. You've talked about leveraging channel partner relationships to foster growth there. Where do we stand on that? Is there a time line for a rollout? What's been done? And how are you going to be balancing the company's growth versus being cost conscious on how you invest some of the capital going forward for this international rollout?

Thanks, Josh. We continue to stay committed to the philosophy of growth at a reasonable price. And we continue to balance profitability and growth, which is reflected in our guidance as well. The development of channel partners in the Phase 1 international markets, which for us are Europe and Latin America is going on very well, and we have identified selected and enabled and empowered those partners already and did chalk up some revenue from those markets in fiscal year '23 and expect meaningful revenues to start coming out in fiscal year '24.

Thanks, Ravi. And then last question for me. You've done a really good job. The micro markets opportunity is clearly growing very quickly relative to traditional food and beverage vending here. If you could just elaborate a little bit, like what percentage of that - of the company's revenue is today? And what type of growth rate do you expect to see from the micro markets business, given that the overall growth rates are much higher than anything else that we've seen in the space.

Yes. Today, we don't disclose the specific breakouts, but it is well under 10% today. And in the long term, and when I say long term, think about kind of a 3 to 5-year time horizon, I expect it to grow to be a more meaningful 25% to 30% level of the company's overall revenues. Now keep in mind, that's not just the micro market space, but also associated products like smart coolers and smart retail and so on. So there are some things that are bundled kind of in a broader definition of that micro market space. And all those put together, I think, we'll end up at that level.

I appreciate the clarity. Thanks, guys.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Gary Prestopino from Barrington Research. Your question, please.

Hi, Ravi. Hi, Scott. How are you doing?

Good.

A couple of questions here. In your long-term guidance that you gave at the Analyst Day, you were actually talking about a 10% equipment margin. Obviously, you're higher than that right now. And I think you kind of said for - in your modeling purposes, you're talking about maybe 10% to 14% margin. Is a lot of that lift due to 32M and what they're contributing to the mix of equipment sold?

Yes, Gary, thanks for the question. It's a little bit of both. So we do have higher margins on the Three Square Markets, average micro markets could sell anywhere from $5,000 to $20,000 depending on the size of the market. And the margins on that are more around the 30% range. But we are also seeing - we did a price increase in January of this past year after we got out of the 4G upgrade cycle. And as Ravi mentioned in the prepared remarks, we're seeing a lot more responsible pricing, I would say, from competitors. It's allowed us to increase our margins as well.

Okay. Thank you. And then can you comment on where your Cantaloupe ONE Seed stand? You were at about 20,000 at the end of Q3. How much has that increased?

Yes. So overall, we're closer to 24,000 now as we end June 30. We were tracking to about 5,000 per quarter. The fourth quarter came in right around 4,000. I think we had a big push for equipment sales towards the end of the quarter that might have lightened up on the Cantaloupe ONE deals. But as we roll into this next quarter, we are seeing that same traction around 5,000 per quarter.

Okay. And then just a couple more here. As you look across your entire enterprise with your connections, it was at 1.17 million. What percentage of those right now have no real software that's associated with the connection. And I'm kind of looking at that is that something of a white space within your customer base at this point?

Yes, it's still close to 40% to 50% range. And the reason there is a little bit of a range there is some of the software add-ons can be activated and deactivated. So there is a little bit of ebb and flow there, but it is in that range. And yes, you're correct that there's quite a bit of white space there. Now keep in mind that the software that applies to different segments will vary. For example, if it's a parking meter, the SEED Software that lets you manage your warehouse and manage restocking doesn't apply to that vertical at all. So anything - any number of machines in that vertical are not part of the addressable market for that software. So you have to factor that when you look at what's whitespace just within the places where we have cashless and can deploy Seed Software.

Okay. And then, I guess when you're talking about getting better terms and transaction routing, is that because you hit such a mass in terms of your volume process that you have the ability now to go back to your processors and say, hey, we're generating x amount of dollars. We need better terms and they're taking that. That's part of it. And then there is a whole set of other complex things both around how transactions are routed, what kind of fraud checks are in place. So there are a number of levers we have to improve the COGS on the transaction processing and hence, improve the margins on that. Thank you.

Yes, we were also looking at overall gross take rate and trying to increase that as well. So if you look at fourth quarter of 2022, our overall gross take rate was 4.87%. Last quarter, we got up above 5%, and we're above 5% this quarter, too. We see that lasting as we continue on. So it's another area of focus, not just improving the COGS side of the house, but also increasing the overall growth take rate.

Okay, thank you.

Thank you. One moment for our next question. [Operator Instructions] And our next question comes from the line of Chris Kennedy from William Blair. Your question, please.

Yes. Good afternoon. Thanks for taking the question and it's great to see the leverage in the business. Can you talk about subscription revenue, the growth slowed a little bit this quarter? You previously targeted at least 20% subscription revenue growth over the next couple of years. Just talk about your confidence in that? And if you could talk about the quarter, that would be great.

Sure. So yes, Chris, overall, we did see a slight dip in our subscription fees this quarter compared to last quarter. Part of that was due to the 3G, 4G upgrade cycle, where we did have some devices and 3G devices that went dark and they went in and deactivated those. A lot of that deactivation happened in the fourth quarter. So we took a little bit of a hit. What we have seen is a lot of those devices now have been replaced and the new devices are back up and transacting. So we see that just as a onetime dip. As we look out to 2024, we are projecting our subscription revenue to grow somewhere in the 18% to 22% range. The guidance that we provided on the transaction and subscription revenue was in the 17% to 21% range. We think the subscription will be a little bit higher than the transaction. And we foresee that as we go out into the next 2 to 3 years as well.

Yes. And as a reminder, we had - prior to doing the 32M acquisition, we had said that we expect to - for the year to be in the low teens, when we did the 32M acquisition, we said it would be in the mid to high teens. So we're still in that range, albeit on the lower side in terms of the overall subscription revenue year-on-year growth.

Okay. Very helpful. Thank you for that clarification. And then just Ravi, any update on like the M&A environment, talk about your balance sheet and kind of what you're seeing out there in the market? Thank you.

Yes. Our cash position and balance sheet is measurably better than it was 6, 7 months ago, which is a lot of great work done across multiple areas from Scott's team as well as collaborating with other departments. The M&A environment continues to be competitive, and we see both good companies with good products that could be an opportunity for us to acquire. However, even though the public markets have significantly corrected down, we are still seeing a little bit of dissonance in terms of expectations when it comes to the private market side, particularly with smaller companies that could be tuck-in acquisition targets for us. So - so there have been cases where a company or an acquisition would have made sense for us. However, we just did not want to pay the multiple or the valuation that they were aspiring to. And we continue to be very disciplined about what multiple we would pay for a target even if it makes sense, otherwise, from a synergies perspective.

Great. Thanks for taking the questions.

Thank you. One moment for our next question. And our next question comes from the line of George Sutton from Craig-Hallum. Your question, please.

Thank you. Post the upgrade cycle to 4G, we talked about how you were going to be going on offense, and you did mention pricing, but you ran through a pretty impressive list of name brand wins this quarter. And I'm curious if you can just give us any sense of how offense has meant changing your go-to-market strategy in terms of more salespeople, anything else that you would sort of call out there that's responsible for this?

Yes, George, thank you very much for that question. And yes, the 4G upgrade cycle had required us to be high on defense and also incent and support. More importantly, our customers through that cycle so that they don't lose revenue just because they didn't upgrade the device. Having got through that, our customers' wallets have also freed up much more, right? So instead of investing in upgrade of a device, which really gives them zero added functionality, they are now looking at how do I make my business more resilient, more operationally efficient, and that has led to better appetite and adoption of our software side. And as that happens more and more, it will benefit the subscription revenue side of the equation. And more importantly, it will also make our customers be more stickier. So we're definitely on the offensive on that side, and we are on the offensive with adjacent verticals like amusement, et cetera, where, again, the upgrade cycle had a little bit of a drag effect.

Got you. And then just second and last for me. Ravi, you mentioned meaningful potential revenues internationally in '24. Can you explain to us what's built into your guidance for '24? And how are you defining meaningful?

So we haven't broken that out. And for competitive reasons, I'm reluctant to share a specific percentage. But what I will say is I consider it meaningful as it starts cresting kind of the 5%, 8% level. And over a few years, of course, it will become much more meaningful than that. But for what I would call the first year of meaningful contribution from other markets, I think that's a good barometer to use.

Got you. Perfect. Just to comment, Scott, at the Analyst Day when you laid out your expectations, particularly for margins, I think everybody thought you're a little nuts and you loan away those expectations. So congratulations.

Thank you, George. I appreciate that comment. Thank you.

Thank you. [Operator Instructions] And this does conclude the question-and-answer session as well as today's program. Thank you, ladies and gentlemen, for your participation in today's conference. You may now disconnect. Good day.