Cantaloupe: Out-Growing A History Marred By Lack Of Profitability (NASDAQ:CTLP)

Front View Of Supermarket With Empty Aisles And Different Products On Shelves — onurdongel/E+ via Getty Images

The following segment was excerpted from this fund letter.

Cantaloupe Inc. (NASDAQ:CTLP) is new to our portfolio for the second time, as we previously owned this company in 2020 and 2021. The original thesis was part special situation as the Company regained compliance with the SEC related to timely filing of financial statements and would thus be a beneficiary of forced buying by index funds, and part fundamental improvement under a new and much improved management team. In my view, both legs of that thesis have been playing out, but the market has thus far failed to reward Cantaloupe for the fundamental improvements they have made.

Cantaloupe, perhaps best known in the vending machine world, provides hardware, payments and software solutions to self-serve retail including micro-markets, laundry, arcade, auto air/vacuum, and others. Self-serve retail is reasonably recession resistant, and Cantaloupe’s products help customers increase revenue and cut costs. Payments and software revenue are recurring in nature, and historic churn has been close to zero.

In December 2022, management laid out a three-year plan detailing their ambitions around growing revenue at a 15% CAGR by continuing to penetrate their markets, expanding internationally, and increasing ARPU. Importantly, there is significant operating leverage in the model, which management belief will lead to a 70% CAGR in EBITDA. This operating leverage is already beginning to kick in, and Cantaloupe is out-growing a history marred by a lack of profitability.

Thus far, the Company is on track to reach their goal of approximately $75M in EBITDA for fiscal 2026 (June 2026 YE), although with a different revenue mix than expected. In brief, they have been overperforming on Transaction growth, and underperforming on Subscription fees. That being said, management has indicated that the problem with Subscription revenues is not a demand problem. Rather, they have a significant backlog of sold hardware that has not yet been installed due to a lack of labor. As these devices are installed and activated, presumably Subscription revenue will continue to grow.

To be clear, Subscription revenue is more attractive than Transaction revenue, but in my view focusing on this “disappointment” without referencing valuation is short sighted. If the Company hits their goal of $75M in EBITDA, given a net cash position, substantial NOLs, and limited CapEx, I estimate this EBITDA will translate into approximately $60M in FCF regardless if the revenue is from Subscriptions or Payments. This suggests the company trades for a mid-high single digit multiple of FCF looking out a year or two.

Considering that other payments linked companies trade at north of a 20x multiple, there should be plenty of upside to come for CTLP. Insiders at CTLP are seemingly confident as they recently purchased shares near current prices.

Disclaimer

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