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.

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.

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%…

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…

[Operator Instructions] Our first question comes from the line of Cris Kennedy of William Blair.

So it's been over a year since your Investor Day and at the end at Investor Day, you talked about 20% plus subscription growth for the business I think, over the next 3 years. Can you just give your updated thoughts on achieving that goal?

Yes, Cris, thanks for asking the question. We are on the right trajectory for the long-term goals we outlined. The challenge that we faced and continue to face is delayed activation time lines. The good news is it's not a demand problem. We have a significant backlog of sold and shipped devices in micro markets, the challenge is more of an installation and activation time line issue and we are continuing to invest in various ways to tackle that challenge. So as that normalizes, we expect the subscription revenue growth to ramp. And we still believe that a long-term sustainable target growth rate for our subscription revenue is the 20%, acknowledging the fact that right now, we are at a much lower number than that number.

Got it. Okay. And then real quickly on international, it's been a strategy for a long time and you guys seem very confident about it moving the needle, I think, in the back half of this year but it seems like it's taking a little bit longer than expected. Can you just talk about the puts and takes with the international business?

Thank you. So on the international business, as I mentioned, we've now gone through several stages of doing launch events, doing pilots, proving out various aspects of the solution, including cashless payment acceptance, telemetry, Seed software, as well as the micro market kiosks. And now we are starting to scale all those. So while it's taken longer than perhaps I would have liked, maybe answering this question 2 years ago, right now, we are shooting from a position of strength and I'm seeing great reception to our products and solutions in both Europe and Latin America. So that's what gives us the confidence in the ramp in the back half of this fiscal year.

Our next question comes from the line of George Sutton of Craig Hallum.

Ravi, just a follow-up on the European piece of that. You mentioned you're in the pilot phase for many of these deals. Can you just walk through a time frame that a pilot would typically take? And then when would we start to see those deals roll out?

Yes. Thanks for the question, George. And typically, these pilots run 3 to 4 months. And a majority of them were actually started at various points in the last quarter, some of them even earlier than that. We almost chose not to disclose too much information about all the specific customers and all the specific pilots for competitive reasons but it's a juicy ramp. It's the best way I can describe it and I'm very excited about where we are with Europe and Latin America.

Not sure how much you want to disclose but you talked specifically about trade-up program. And just curious how that trade-up program works.

It's as it sounds, it's an incentive for operators who may be stuck with equipment and micro markets, in particular, that are older. Like anything else, if you set something up 4, 5 years ago, it starts looking dated as -- from a consumer experience perspective and our trade-up program offers customer an opportunity to kind of trade up to the latest and greatest with us and we provide some incentives for that.

And just to add to that a little bit, too, it also helps the customers that they want to be all in with Seed. So if they've been using Seed Markets and they have Seed on their vending machines but don't have Three Square Market kiosks is the way for them to trade out and get a Three Square Market kiosk.

Understand. Lastly, Ravi, you mentioned with CHEQ. There's a -- you see that as a new vector of growth. Can you just talk about how this works with the rest of your distribution capability?

Absolutely. Look, our mission simply put is we want to move as much commerce as possible to self-service commerce and we want to be the leading provider of technology that powers that self-service commerce. When we looked at CHEQ, in the stadiums and live events space, CHEQ has built an incredible set of technology capabilities that allow consumers to order from a mobile app on their phone. They have an app that's embedded into the various league apps and the various teams apps and it also works by scanning QR codes at various locations at a stadium. There are kiosks that are distributed at various locations, handheld devices as well as even cashier-assisted point of sale solution. So in other words, it's a pretty comprehensive suite of self-service capabilities that cut out the long lines and some of the challenges that these live events face and enable more frictionless commerce. So it fits very nicely. The best part about the acquisition as we dug into it, was the same companies that we serve in the vending and micro market space are the companies that provide convenience services to these live events in stadium. However, they don't currently benefit from the value proposition that Seed is providing around optimizing their warehouse workflow, optimizing and dynamically scheduling field services to go out and deliver food products and beverage products. As well as doing smart merchandising because they have now real-time inventory data, real-time sales data, et cetera. So with what CHEQ has in terms of tech capabilities and what Seed brings to the table in terms of these things, it's a very powerful solution and we can pitch to the exact same companies that we've already been selling into and have large and deep relationships with.

Our next question comes from the line of Griffin Boss of B. Riley.

Just want to jump back to CHEQ real quick while we're on that point. Is there -- I mean, I know it's a relatively nascent business, only found out a few years ago but is there any more color you can give on the revenue profile or margins, considering that the purchase price was relatively nominal?

Sure. I'll let Scott jump in with the margin profile and the breakup of revenue.

Yes, sure. So overall, the revenue profile is they're predominantly transaction revenue. So 95% of the revenue is transaction based. They do have some subscription revenue. Overall, the margin profile, it's a little hard to say right now but we do know that there's going to be lots of synergies that we're going to receive from bringing them into our transaction processing realm and be able to get the type of volume discounts that we get will help really improve their margin profile. But with them only being in the business for 2 years, it's not really worth talking about, I think, the margin profile.

Sure. Yes. No, fair enough. Appreciate it. And then next for me, just on the cash flow -- operating cash flow guide. I'm just curious if you can give more color on the cadence in the back half of the year? Is it -- are you sort of expecting to see something similar as you saw last year in terms of sort of front-loaded in 3Q? Or is it going to be more evenly weighted this operating cash flow coming in the back half?

Yes. It will be probably evenly weighted over third quarter and fourth quarter. We had a decrease in our operating cash during the second quarter but a lot of that was just the mechanics of our credit card processing. During the -- because of the holidays at the end of the year, there's always a little bit of a decrease in the volume. And then this year also happened to end on a Sunday. We had 3 days of transaction processing revenue that increased our accounts receivable. They got paid out the first week in January. So that decrease is very temporary. And then you'll start to see that cash -- operating cash build up in the third quarter.

Our next question comes from the line of Michael Latimore of Northland Capital.

This is Aditya [ph] on behalf of Mike Latimore. Could you give some color on the hardware revenue? Do you expect it to grow higher sequentially for the rest of the year?

Yes, we do. So we expect it to grow sequentially in the third quarter and be even more heavily weighted in the fourth quarter. And a lot of that has to do with our international ramp.

All right. And in terms of the international pipeline, do you think Europe is a bigger contributor? Or is it Latin America, who is a bigger contributor?

In the near term, Europe will be the bigger contributor. But as I've mentioned in the past, Latin America is an interesting market. It's a barbell market where you've got many number of very small players and then a very small number of very large players. So as we get any one of those large players to come on board and that is in progress, then it will move in a very lumpy manner to large numbers of connected devices. So near term, Europe will definitely be bigger. I think medium term, we'll see growth in both kind of evenly based.

Thank you. I would now like to turn the conference back to Ravi Venkatesan for closing remarks. Sir?

Thank you, operator. Again, thanks for joining us this afternoon. In summary, I'm very excited about getting ahead of schedule and plan on our transaction revenue journey and arriving upon margin profiles that we expected or anticipated to reach in fiscal year '25 and we are there almost a year ahead of schedule and we'll continue to consolidate and build on those strengths. We remain committed to delivering operating leverage expansion in this business and the goals that we outlined at our Investor Day in December 2022 and look forward to executing on that trajectory. Thank you.

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