Earnings Call Transcript - CTLP Q2 2021

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the USA Technologies Fiscal Year Second Quarter 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 your conference over to your first speaker today, Alicia Nieva-Woodgate, Vice President of Corporate Communications and Investor Relations for USA Technologies. Please go ahead.

Alicia Nieva-Woodgate, Vice President of Corporate Communications and Investor Relations

Thank you and good afternoon everyone. Welcome to the USA Technologies second 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. Before we begin today's call, I 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 as a result 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 with our filings with the SEC and in the press release issued earlier today. Listeners are cautioned not to place undue reliance on any such forward-looking statements which reflect management's view only as of the date they are made. USA Technologies undertakes no obligation to update any forward-looking statements whether as a result 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 USA Technologies' operating results. These non-GAAP financial measures are supplemental to and not a 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 the reconciliation between these non-GAAP financial measures, as well as most comparable 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.usatech.com. And with that, I would now like to turn the call over to our Chief Executive Officer, Sean Feeney. Sean?

Sean Feeney, CEO

Thank you, Alicia, and thank you, everyone for joining us today. I hope everyone is safe and well. During the second quarter, we continued to make an enormous amount of progress on the things within the company's control. Even as the COVID-19 pandemic continues to have an adverse impact on most of our customers' operations, which is reflected in our second quarter results that Wayne will walk you through shortly. During the quarter, we continued to build out the team with talented new hires, and we successfully preserved and grew our customer base despite the difficult macro environment. In addition, we further reduced the company spend on external professional services and reallocated some of those savings towards investments in products and services to better serve customers, as well as systems that the company needs to scale in the years to come. This is the first time in a long time that the company has invested in product innovation and platform infrastructure to drive future growth. Although we made a tremendous amount of progress on the things within our control, the variables beyond our control, namely COVID-19, continue to create a challenging operating environment. As it relates to transaction volumes, we saw a steady recovery from July to October of 2020. However, in November, we saw a reverse net trend as COVID cases spiked; the second COVID wave led to additional lockdowns, further delayed openings of office buildings and schools, and caused some operators to temporarily deactivate additional devices. I am optimistic that volumes will rebound relatively quickly once schools and businesses reopen. For equipment sales, we are seeing positive momentum in our efforts to upgrade customers to the 4G ePort device. Some operators, still cautious of their liquidity during the pandemic, are committing to upgrades but are waiting to take delivery on hardware until later this calendar year. This upgrade effort is the key initiative as cellular networks sunset 2G and 3G technology over the next two years. As a result of COVID's persistence and our updated assumptions around the timing of a successful vaccine rollout, we have pushed out our expectations on when the virus will have less of an impact on our market and business. Therefore, we have revised our fiscal year 2021 revenue guidance to be between $163 million and $171 million, down from a range of $170 million to $180 million. We have revised our net loss applicable to common shares to be between $21 million and $17 million, down from $14.1 million and $11.1 million. We have revised our adjusted EBITDA range to positive $1 million to $4 million from the prior guidance of $2 million to $5 million. So, while the economy's recovery from COVID is several months behind the pace that we had anticipated, my confidence in our growth once we return to normal is higher today than when I started back in May. With the growing consensus amongst the business community that the economic impact of COVID will materially diminish by this summer and into the fall, I am prepared, based on the progress we are making, to tell you that we believe we can drive revenue growth in the mid-teens in fiscal year 2022. Of course, as the circumstances around COVID continue to become clear, we will update our outlook in future quarters. Turning back to the second quarter, we remain focused on the initiatives that position the company to capitalize on an economic rebound and optimize our long-term growth opportunity. As a reminder, the strategic initiatives we laid out for this fiscal year are: position the company to drive sustainable organic growth, right size the company's cost structure, and invest in people and culture in order to achieve excellence. Keeping these in mind, let me give you some highlights for the quarter. First, as part of our ongoing investment in talent, we recently appointed Ravi Venkatesan as Chief Technology Officer, a newly created position for the company. He joined us from Bakkt, a subsidiary of ACE, where he was the Head of Innovation and was previously the CTO at Bridge2 Solutions, an innovative loyalty platform. He is responsible for our technology products and innovation strategy; I'm thrilled to have someone of Ravi's caliber and expertise. We have been successfully educating our customer base on the critical importance of setting a conversion timetable before the inevitable 2G and 3G sunset of devices. As a result, as I previously mentioned, we are starting to see the steady migration and transition to 4G. In December, we added a new feature to Seed mobile that has been very well received by our customers. This new feature enables real-time feedback from our drivers in the field. This will be an integral feature for some of the future product launches. And while we are on the topic of new products, we were recently awarded an exciting new patent which was developed by Mandeep Arora, Co-founder of Cantaloupe, a few years ago titled Method and System of Personal Venue; this technology is focused on creating an unmatched shopping experience in an unattended retail location by reimagining the customer journey through the consumer's mobile device. We are thrilled to receive this recognition of our culture of innovation. I will now turn the call over to Anant, our Chief Revenue Officer, to give you more color on the quarter's business performance. Anant?

Anant Agrawal, Chief Revenue Officer

Thanks, Sean. I want to touch on four focus areas today. First, our platform as a service. We continue to make progress with existing and potential new customers who are seeing the value of being on a single platform for both cashless and logistic software. Jackson Brothers of the South is a great example of this. As we recently highlighted in a case study on our website, they decided to make a change from the legacy VMS solution in 2019 to the Seed platform, bringing their ePort cashless devices and software solution onto a single platform. Since then, they have expanded their use of our platform to help manage their growing micro markets and office copy-lines of business. And now, with the recent announcement on upcoming cellular sunsets, Jackson Brothers has decided to upgrade all their devices with us to 4G LTE and EMV simultaneously. As a result, Jackson Brothers now has one central place to view, manage and adapt to its client needs across the whole business with a single solution provider. Second, penetrating the broader unattended retail market outside of traditional vending. As an example, we recently expanded our business by deploying cashless on 100% of the machines at a major commercial water dispensing company that has thousands of machines across the country and is growing at a rapid pace. Third, the move to cashless. Following the study we published in September 2020, we continue to see the shift to cashless payments accelerate. In the study sample set from January 2020 to July 2020, we saw cashless grow to nearly 62% of total sales, while the use of cash continued to decline. When we look at our own data for transactions, we see cashless accelerate from 61% in September 2020 to 65% of total transaction volume at the end of December 2020. Our customers are seeing similar trends, where cash continues to accelerate across their business, like Jackson Brothers, demonstrating how operators are seeing the benefit of enabling all forms of payment, particularly cashless. And fourth, growth in international markets. Since Fernando joined us a few months ago, we have engaged with several potential in-country partners and early anchored customers in Latin America. We are encouraged by the activity and the potential that international unattended retail markets represent as an opportunity for the business. With that, I'd like to turn it over to Wayne to review our second quarter results in full detail. Wayne?

Wayne Jackson, CFO

Thanks a lot. Good afternoon, everyone. Revenue for the second quarter of 2021 totaled $38.3 million, a decrease of 13% over the prior year second quarter and an increase of 3.8% from Q1. License and transaction revenue totaled $33.2 million for the second quarter, a decrease of 7% compared to the prior year, which was not impacted by the COVID virus, while license and transaction revenue increased slightly over Q1 as transaction momentum gained in the second half of Q1. Unfortunately, in the first half of Q2, we lost this momentum as COVID cases began to increase in mid-November. Equipment sales for the current quarter of $5.1 million decreased 39% compared to the prior year quarter of $8.3 million. The decrease was primarily due to lower hardware shipments during the second quarter of 2021 compared to the same period last year, which included a large contract with a new customer. Sequentially, equipment sales increased by 35% as we continued our focus on new customer growth and 4G conversions. Total gross profit margin for the quarter was 32.1%, compared to a total margin of 29% from the prior year’s second quarter and 38.6% in the first quarter of FY21. License and transaction margin improved to 38% in the second quarter of this fiscal year, up from 36.8% in Q2 of last year, as transaction revenue had higher margins than in the prior year. License and transaction margins declined from 41.6% in Q1 due to a lower percentage of license revenue. The total license and transaction revenue in Q2 had equipment margin at negative 5.8% for the quarter, compared to negative 5% in the prior year, as we provided incentives for 4G upgrades. Equipment margins for Q2 declined from a positive 12.4% in Q1, as the prior quarter included a one-time out-of-period adjustment. Operating expenses in the second quarter totaled $14.9 million, a 28% decrease over the prior year. SG&A expenses in the second quarter of FY21 totaled $13.8 million, which decreased 14% from $16.2 million in Q2 of the prior year. The change was driven by lower professional services costs and lower severance expenses in the current quarter compared to the prior year. Sequentially, SG&A decreased 18% primarily due to lower professional service fees and network outage costs incurred in Q1 compared to the current quarter. The operating loss for the second quarter was $2.6 million compared to a loss of $7.8 million in the second quarter of the previous year. In addition to SG&A savings, the other primary driver of the improvement in the second quarter of FY 2020 is a $3.3 million reduction in investigations, proxy solicitation, and restatement expenses. The net loss applicable to common shareholders for the second quarter was $2.9 million or a loss of $0.04 per basic share, compared to $8.4 million or a loss of $0.13 per basic share in the prior year period. I will now turn the call back over to Sean for closing remarks. Sean?

Sean Feeney, CEO

Thanks, Wayne. Before we open it up for questions, there are three more important Q2 updates to highlight. First, in November, we were re-listed on the NASDAQ Global Select Market. This represents an important milestone in our journey to build a better, stronger company for our customers, employees, and stakeholders that achieves and reflects the operational and financial progress we have accomplished in the past six months, the fundamental strength of our core business, and our ability to capitalize on the opportunities that lie ahead. In November, we also announced that we will transition our corporate identity to exclusively operate under the name Cantaloupe Inc with a new ticker symbol. This is another major milestone for us as the Cantaloupe name has great brand equity in the industry, strong customer loyalty, and communicates our vision as the leading hardware and software platform for a contactless economy. The adoption of the new brand later in 2021 puts our company in a great position to better compete in the growing global market and delivers on our mission to help the world buy and go. Third, as I'm sure you saw in the earnings release, we have updated our device and customer count disclosures, which we believe are both better representations of our business. This is the result of my team digging into the historical data and creating systems to monitor key operating metrics, which I will use to track our business drivers and measure progress against our targets. First, active devices, which include devices that have connected with us in the last 12 months, was 1.15 million during the quarter. Second, active customers, which now includes customers with at least one active connection in the last 12 months, was 18,000 during the quarter. To wrap up, we continue to increase active devices and active customers throughout the pandemic. While growth has been slower than anticipated, we are not sitting idle. We are squarely focused on positioning the business to capitalize on the rebound. Over the past six months, we've introduced new products, and the increased investments we are making in our tech roadmap and product developments are very exciting for our future offerings, which we will roll out in the next 12 months. We continue to make investments in our go-to-market team and strategy that we believe will pay dividends in both growing our current customer base domestically and internationally, as well as fortifying our existing customer base as they migrate their devices to 4G technology. While our near-term 2021 guidance has been impacted by the pandemic, I'm optimistic that we are taking the necessary actions within our control to best position ourselves to capitalize on the exciting market opportunity in front of us. We believe we have the right team in place, the tailwinds that we expect will drive our business for years to come, such as the shift to unattended retail and the increased demand for cashless products. As well as making the right investments to position us for success. With that, let me hand it over to the operator.

Operator, Operator

Thank you. We will now take our first question from George Sutton. Your line is now open.

George Sutton, Analyst

Thank you, Sean. I wondered, you had mentioned that you are continuing to grow in spite of the COVID scenario. As you know, industry numbers are hard to come by, I'm curious if you think you are gaining share in this environment, if you could just give us some perspective there?

Sean Feeney, CEO

George, I think that what we are seeing is some conversions from other providers. We are probably seeing some of our current operators expanding their cashless devices as well as some new operators that are coming in. There is a lot of transition in this end of the market. Those guys are going to come in and out of business, and there's been numerous sales of those businesses. So, we are taking away some new customers and then some expansion of existing customers is what we've seen.

George Sutton, Analyst

Got you. My other question, you and we've been first thing for new KPIs. So, we appreciate those and there is about 200,000 between active devices and total connections, and I'm curious if you could give us a sense of whether that is an opportunity set that exists if once COVID becomes sort of normalized?

Sean Feeney, CEO

No, I don't think the way to look at it is as an opportunity. George, I think active devices is just a better way to look at what we have. Essentially the connections number was basically all active devices that were sold at one time; they may have then been disconnected. It just is a tighter representation of what's active in the field. So, there may be some there, but I wouldn't look at it as 200,000 as an untapped market waiting to be activated.

George Sutton, Analyst

Got you. Perfect, thank you.

Gary Prestopino, Analyst

Good afternoon, everyone. And Gary, could you give us a read on your thoughts about the cashless and logistics software on a single platform? As I recall, when the legacy Cantaloupe was purchased, there was very little penetration across the legacy customer base of USA Technologies. So, could you give us some idea of where that penetration stands right now? And what you are doing to try and really aggressively get an uptake from customers that are not taking on the logistics software?

Sean Feeney, CEO

Sure. I think what we've talked about is the penetration of Seed probably being somewhere in the neighborhood of 50% of our existing customers and probably tilted more towards the larger end of that. We are beginning to implement some incentives for our salespeople, and really what we're trying to drive is an all-in approach. So, we are focused on ePort devices that don't have Seed and trying to expand that. We've discussed how in the years post-acquisition, the company used the Seed software but probably deeply discounted it, and we're living with some of those deals to get connections. So, we are working with potential partners that we think can increase the penetration in the entire market. We're also striving to make the installations easier at the lower end of the market, and our entire team has been incentivized around pushing the complete solution.

Gary Prestopino, Analyst

Okay, that's helpful. And then in terms of new devices that you signed up, which is phenomenal given how the country is closed. Are you basically seeing more of a concentration with the new devices with bigger entities? And I guess the other question would be, given what's going on in the industry, are you seeing a lot of consolidation, a lot of the smaller operators basically selling out to bigger players in the market?

Sean Feeney, CEO

As always, you've wrapped several questions into your one, but let me take a crack at it. I do think that you've seen a good amount of what I would call movement in the market as we get contacted to transfer devices. We probably saw a little bit of an acceleration of some M&A opportunities this quarter. What we also saw, as we've talked about, is some deactivations, as we saw some operators on the smaller end reach a point where they couldn't sustain without another PPP loan. So, we saw increased deactivations; they had to take the devices out. The new devices are really spread across the board; larger operators can move the needle a bit more, but it's fairly consistent across our customer base where we've picked up active devices. There are some areas where people are doing quite well around manufacturing and those sorts of facilities. We also have a number of operators supporting some retail players who are expanding significantly, and you can guess who they are; those are doing well and adding additional devices as those retail outlets build out more.

Gary Prestopino, Analyst

Okay, thank you. You're welcome.

Mike Latimore, Analyst

Great. Yes, thanks a lot. Good afternoon. On the move to the new payment processor, can you give an update there? I think, as you said, it was on track, but maybe an update there and when you see that might be influencing the license and transaction gross margin?

Sean Feeney, CEO

Yes, I think you're talking about our move to Fiserv. The process continues to move forward. We are finishing up our last certification, testing data, and we will begin migrating customers within this current quarter. It's going well; we may be about 30 to 60 days behind where I would have liked to have been when I started here, but we are working closely with Fiserv, and they have been supportive in moving this along. I think the savings outlined in prior quarters by previous management will have a full impact in FY22 as we will be careful in moving people over, which will take most of the second half to complete. So, think about it impacting FY22 rather than this fiscal year.

Mike Latimore, Analyst

And then in terms of the upgrade to 4G devices. Can you give us some sense of what percent of the hardware volume you're seeing relate to that?

Sean Feeney, CEO

Yes, as I highlighted in the comments, we are seeing increasing interest. Some competitors are trying to pressure customers to act right now. We are educating customers that they have time, but I think we're seeing people being cautious with liquidity. If you look at our customers, it's still less than 10% that have moved so far.

Mike Latimore, Analyst

I guess my last question would be on transaction volumes. I think in December had some holiday effects, what about January? Any improvement in January?

Sean Feeney, CEO

We saw January was pretty similar to what we saw in December, and we planned our forecasting for that seasonality. We've seen, as I said in the prepared remarks, November, December, and January have kind of been flat. We've spoken to some excellent operators who have seen similar things. I'm very optimistic, though. We've increased the number of devices, and while the cashless volume grew from 61% to 65%, that is a significant shift in a short period. We believe that as things normalize, more devices will be in service. We are seeing greater adoption of cashless, so I'm optimistic that things will rebound, albeit it may take time to fully return, especially in offices. But things are improving, and there’s more momentum with vaccinations. I remain optimistic about our outlook.

Mike Latimore, Analyst

Yes, great, thank you.

Robert Napoli, Analyst

Hey guys, thanks for taking the questions. I appreciate the details in the press release. Sean, you mentioned the goal of getting to mid-teens growth in fiscal 2022. Can you talk about the margin profile of the business next year?

Sean Feeney, CEO

Well, I think we expect to see the margin profile improve a little bit. We're working hard to reduce costs in the business. Regarding the margins on our hardware, the challenge is that to maintain our share of the 3G and 2G upgrades, we may need to get aggressive with pricing, which can create short-term negative impacts on margins. Although I expect improvements, I'd like to give that caveat. As we have noted before, the value of a cashless endpoint is clear, and we anticipate these 4G devices will be in service for about 5 to 10 years. While we may experience some short-term margin hits, I'm confident that our sales team can capitalize on the opportunities we have.

Robert Napoli, Analyst

Okay, great. And then you mentioned the international opportunity. Can you talk about the structural differences outside the US and how that would impact your margins?

Sean Feeney, CEO

What I would say is let us provide you with more details when we get closer to solidifying those plans. So far, we've been encouraged by the activity since we've rebranded as Cantaloupe; it has helped us access potential partnerships and markets easier than expected. We've found we are able to get meetings and start discussions, and our engagements are fruitful. However, revenue contributions will likely begin in the back half of fiscal year '22 and into '23, taking us a bit of time to realize our ambitious goals. But the communication lines show promising activity.

Robert Napoli, Analyst

Great, thanks a lot.

Gary Prestopino, Analyst

Yes, just in terms of the cost structure of the business now, Sean and Wayne, have you got it to where you want it to be? I mean, your SG&A expenses look like they were $13.8 million this quarter. Obviously, not a lot of T&E in there. So, as the business ramps up, you would expect that to go up, but is that kind of the state of play where you want to be?

Wayne Jackson, CFO

Thanks for the question. This is Wayne. We look at SG&A on a sort of cash basis, which is SG&A minus stock-based compensation and depreciation and amortization. So, this quarter’s SG&A was over $12 million to $12.2 million. As we ramp up, some costs should impact Q3 and Q4 on investments. I think we will settle around $12.5 million to $13 million going forward. We won't see major changes unless we need to drive revenue or get products to market.

Gary Prestopino, Analyst

I'm sorry, where that number is without stock comp and what else was the other thing?

Wayne Jackson, CFO

The depreciation and amortization. You can find it in the adjusted EBITDA calculation.

Gary Prestopino, Analyst

Right. Yes. I just wanted to make sure. Okay, thank you very much.

Wayne Jackson, CFO

You're welcome.

Operator, Operator

Thank you. There are no further questions. You may continue.

Sean Feeney, CEO

Great. We appreciate your interest in the company. As I said, I'm excited about the things that we're doing. I've got the team built now and now it's about executing. I just need to, and we all need, the pandemic to resolve. I go to bed every night praying for more vaccines and needles in arms. So, we look forward to one-on-one meetings and further discussions with you all moving forward. Thank you.

Operator, Operator

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