In Royce Smaller-Companies Growth Fund, we hold three companies specializing in the payment acceptance and processing category—Agilysys (Nasdaq: AGYS), PAR Technology (NYSE: PAR), and Cantaloupe (Nasdaq: CTLP)—that I see as innovators in this evolving industry.

Roughly seven or eight years ago, the industry was more hardware oriented, with companies providing the point of sale terminals that we see on every checkout counter. Although these terminals contained software, the sale to the business consisted mainly of hardware, which meant pretty lumpy revenue patterns. For example, a company might have a big quarter after selling terminals to a retail, hotel, or restaurant chain only to come up empty handed in the next quarter. As a result, Agilysys, PAR, and Cantaloupe each began to shift their respective business models to sell the service on a recurring revenue, SaaS (“Software as a Service”) style subscription model while the equipment piece has become a smaller component of each company’s overall business.

As the industry evolved and these companies innovated, the mission-critical nature of their services and the recurring revenue model appeared especially appealing. If a consumer-facing business can’t receive payment, its not long for this world. Credit cards have the biggest piece of the payments pie, particularly as these companies process both credit cards and other forms of payment. This provides recurring revenues that are paid on a SaaS subscription line (which is typically the largest component of revenues), as well as revenues from payment processing hardware and professional or other customer services.

Each company also tends to have high margins because once they set up the payment processing system, its related software, and back office processing, every incremental store location or customer typically provides significant incremental profitability. Certain fixed costs can be leveraged as top line growth increases—creating opportunities for significant margin expansion. None of these holdings are currently the largest players in the market, but each has R&D capabilities where they’re creating new products, enhancing services, and/or making acquisitions to improve their product offerings or expand into new markets and new verticals. These kinds of strategies have allowed all three to capture more market share over the last few years.

Agilysys initially focused on casino and gaming payment technologies but more recently has been moving into the hospitality space, a move driven by a new management team that came in during 2017. In both areas, they needed to reengineer legacy products while refocusing on and improving R&D spending, moves that enabled the company to step up their sales and marketing efforts in order to take share from bigger industry players. Today, Agilysys specializes in several payment processing areas, including point of sale, property management, inventory and procurement, document management, workforce management, and mobile and wireless products. The company pays particular attention to providing safe and secure payment processing, which is a top priority for hotels and resorts—as well as their guests—that offer additional services, such as restaurants, spas, exercise facilities, and outdoor activities. The broad spectrum of activities creates a need for safe and secure data collection and operations management.

Agilysys (Nasdaq: AGYS)
12/31/23-12/6/24

Past performance is no guarantee of future results.

In 2018, PAR Technology brought a new management team on board. Its focus is mainly on quick service and fast casual restaurant chains, which gives them a roster of large, well-known brands. More recently, PAR has entered the convenience store market—where many chains are selling more food, competing against some of these same fast food chains—while also building its stadium business. Like Agilysys and Cantaloupe, PAR offers more than just a terminal and processing software. Its technology provides an omnichannel payment gateway for Eurocard, Master Card, and Visa (also known as EMV credit or debit cards), as well as for gift cards. It allows businesses to offer contactless payments via Google Pay, Apple Pay, and Samsung Pay to Pay as well as Text to Pay and QR code payments to name just the best known options. PAR handles security, ensures reliability, and gives businesses data analytics. Restaurants, for example, can access transaction histories, payment settlements, and reconciliation.

PAR’s main competition is a larger player that boasts roughly 150,000 locations out of a market of nearly 400,000 eateries. However, this company’s even bigger parent company is not reinvesting in the business and is therefore creating a great opportunity for PAR, which is currently ranked fourth in its niche, to capture more new business to go along with the location growth of its existing customers, particularly outside the U.S., which is where many chains are growing fastest. PAR’s management thinks it can achieve EBITDA (earnings before interest, taxes, depreciation, & amortization) margins of 20-30%, which is a fairly realistic goal for growing companies with SaaS business models. The company also announced in 2023 that Burger King had selected PAR as its exclusive point of sale software and services provider across its North American operations, which is comprised of more than 21,000 restaurants.

PAR Technology (NYSE: PAR)
12/31/23-12/6/24

Past performance is no guarantee of future results.

Cantaloupe, which used to be known as USA Technologies, got its start as a vending machine hardware provider that allowed those machines to accept credit card payments. Today, it offers a comprehensive suite of solutions including micro-payment processing, self-checkout kiosks, mobile ordering, connected point of sale systems, and enterprise cloud software. Cantaloupe sells this wide-ranging set of products and services to restaurants, hospitality and hotel pantries, office coffee service and pantries, stadiums and concert halls, outdoor festivals, and amusement parks and arcades. In addition, the company makes cashless card readers for laundromats and cashless vehicle services, such as parking, vacuum machines, and self-serve car washes. Among other uses, its software allows a vending chain operator to more effectively manage all of their units while also offering a host of self-checkout collateral, including kiosks, coolers, and cabinetry.

Cantaloupe’s current CEO, who took the helm in 2022, joined the company after a challenging period involving some accounting issues and getting the business back on track so that its ample growth potential could be realized. Today, the company handles more than a billion transactions annually for more than 30,000 customers across the globe, providing end-to-end technology solutions for the unattended retail market—a growing niche. The company has made some recent acquisitions moving into new areas since the market for vending food and beverage have been growing more slowly. We think one very appealing feature of its business was its decision to bundle parts and services with the recurring subscription offering. Under this arrangement, Cantaloupe is basically renting its hardware at a premium while receiving recurring revenues from its SaaS segment. The company has also been expanding by targeting new verticals in micro markets—small, self-service retail spaces, usually found in office buildings or other workplaces, where people can purchase food and drinks without a cashier.

Cantaloupe (Nasdaq: CTLP)
12/31/23-12/6/24

Past performance is no guarantee of future results.

We think all three companies are poised for multi-year periods of robust growth driven by sustainable competitive advantages, innovative technology, and the expanding need of what each offers in their respective areas of expertise.

Important Disclosure Information