Genasys Q2 2023 Earnings Call Transcript

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May 8, 2023

There are 8 speakers on the call.

Operator

Day, ladies and gentlemen. Welcome to the Genesis Incorporated Fiscal Second Quarter 2023 Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be provided at that time. I would now like to turn the call over to your host, Brian Alger.

Operator

Brian, you may begin.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to Genesis' fiscal 2023 2nd quarter financial results conference call. I am Brian Alger, SEP, Investor Relations and Corporate Development for Genasys. With me on the call today are Richard Danforth, Chief Executive Officer and Dennis Kwan, Chief Financial Officer. During today's call, management will make forward looking statements regarding the company's plans, expectations, outlook and future financial performance that involve certain risks and uncertainties.

Speaker 1

The company's results may differ materially from the projections described in is forward looking statements. Factors that might cause such differences and other potential risks and uncertainties can be found in the Risk Factors section of the company's Form 10 ks for the fiscal year ended September 30, 2022. Other than statements of historical facts, forward looking statements made on this call are based only on the information and management's expectations as of today, May 8, 2023. We explicitly disclaim any intent or obligation to update those forward looking statements except as otherwise specifically stated. We will also discuss non GAAP financial measures and operational metrics, including adjusted EBITDA, bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance.

Speaker 1

For a reconciliation of adjusted EBITDA to GAAP financial metrics, please see the table in the press release issued by the company at the close of the market today. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning. Bookings is an internal operational that measures the total dollar value of customer purchase orders executed in a given period regardless of the timing of the related revenue recognition. Backlog is a measure of purchase orders received that are scheduled to ship in the next 12 months. Finally, a replay of this call will be available in approximately 4 hours through the Investor Relations page on the company's website.

Speaker 1

Now at this time, it's my pleasure to turn the call over to Genasys' CEO, Richard Danforth. Richard?

Speaker 2

Thank you, Brian, and welcome, everyone. As expected, financial results for the March quarter was similar to our 1st fiscal quarter with slight sequential improvements in revenue and adjusted EBITDA. Based on our pipeline and bookings, we expect to see growth resume and accelerate in the second half of this fiscal year. Steady growth in our software revenues are expected to be augmented by improved hardware bookings, particularly from international customers. Over the course of the last past several quarters, we have proven that the Genasys Protect solution has both diverse demand and differentiation versus competitive alternatives.

Speaker 2

In numerous cases, including Riverside County, Aramco BMW, San Diego County and Los Angeles County, we have despised much larger incumbents. As I will detail in a bit, we expect our recent investments in marketing and sales will lead to increased demand, higher conversion and greater velocity of new business, beginning with a revamped revenue focused campaign launched in our 4th fiscal quarter. Last quarter, we talked about the success of our land and expand strategy. In Q2, we continue to see success with this strategy, expanding relationships with San Diego, Alameda and Riverside Counties in California to each include the complete Genesis Protect platform. In the case of Alameda County, our entire platform is being used by not only the county, but also the City of Berkeley as well as UC Berkeley.

Speaker 2

As discussed on our February call, Genesis Protect played a critical role for numerous California customers this past winter with the various weather and flood events that devastated so many communities and affected millions of people. In early March, Governor Newsom declared a state of emergency for 21 counties in California, affecting over 17,000,000 residents. Our team takes great pride in the improved outcomes facilitated by the Genesis Protect solutions and the lessons learned were instructional to public safety officials and to Genesis as we expand our coverage throughout California and increasingly into other regions. While we will continue to expand our footprint and offerings with existing accounts, we are also targeting a number of new opportunities, including statewide opportunities that we believe we are well positioned for. In the second half of the fiscal year, we will be augmenting our go to market and sales initiatives.

Speaker 2

I want to take some time to discuss the significance of this effort and why we believe it will result in greater velocity and predictability of revenue and profit growth. The objective of our cross functional go to market launch is to grow profitability and drive business growth by building a predictable pipeline with high conversion. Our investment over the past several quarters in sales, marketing, product and customer success teams helped lay the foundation of our unified platform. Genesis Protect combines the most comprehensive preparedness, communication and analytical solutions to keep people, communities and assets protected. Our unified platform offers a diverse range of applications, including emergency warning and mass notification for public safety, critical event management for enterprise, de escalation for defense and law enforcement as well.

Speaker 2

In the second half of this fiscal year and leading into FY 2024, we will roll out enhancements to the product UI that unifies our solution set, introduces a new platform pricing structure that scales to meet the needs of our diverse customer base, execute subvertical focused demand generation campaigns and launch a repeatable and scalable sales methodology that is rooted in best practices. Obviously, our hardware solutions are an integral component of the Genesis Protect offering and how we position ourselves against less complete alternatives. However, in the majority of our situations, our hardware revenue are still coming from a traditional end markets and use cases. Hardware bookings continued to be a challenge in the March quarter, however. Subsequent to quarter close, we have seen activity both domestically and internationally that gives us improved confidence in achieving full year bookings targets for hardware.

Speaker 2

The inconsistent bookings in the first half of the fiscal year has been from both domestic and international customers. The net result is that our hardware backlog declined in the March quarter to $6,500,000 as compared to $21,400,000 in the year prior. Our current forecast of qualified hardware business that has yet to be closed represents over $40,000,000 in bookings. As we expect coming into this fiscal year, international bookings make up a substantial portion of this opportunity. On last quarter's conference call, I said we expect fiscal 2023 bookings to follow our typical patent with large step up in the fiscal Q3, driven by international orders.

Speaker 2

Hardware bookings in our fiscal 2023 are expected to substantially exceed fiscal 2022 hardware bookings. Everything about that statement remains true today. The recent improvements in activity and momentum in contracts bolsters our confidence in the second half outlook that Dennis will detail in a moment. Q2 against our gross margin pressure as a result of the higher cost materials against orders that we priced and booked prior to us experiencing inflationary factors we discussed at length on our last call. Looking at our current component cost, the hardware backlog and anticipated shipments for the remainder of the fiscal year, we expect to see rapid improvements from our Q2 gross margins.

Speaker 2

Moreover, as our software revenues scale, we would anticipate higher trending margins with normalized hardware margins and increasing software contribution. As I look into our current bookings and pipeline, I am confident as ever that our decision to invest in our software offerings and to shift our go to market will yield significant growth in both revenue and profits. The impact from our growing software bookings in ARR gives us much more visibility and confidence in Outyear's revenue and profit margins. Previously, we discussed a 3 to 5 year target model of $80,000,000 in sales generating adjusted EBITDA margins of 22% to 26%. With the bookings secure to date and the success we have witnessed in both the SLED and Enterprise markets, improved focus and the investment in our Genasys Protect go to market gives us the confidence to update that long term target model to begin at an annual run rate at least $100,000,000 in sales and greater than 20 percent EBITDA margins within the next 3 years.

Speaker 2

Now, I'll turn the call over to Dennis to go through the financials and outlook in greater detail.

Speaker 3

Dennis? Thank you, Richard. Revenues for the fiscal 2023 second quarter were 11,200,000 15% less than the prior year quarter. As compared to the same prior year period, hardware revenue decreased 17% to $10,400,000 partially offset by a 27% increase in software revenue to 853,000 recurring revenue grew 34% compared to last year's quarter. Versus the prior year quarter, 70% growth in our core Genasys Protect software is offset by attrition in our international news software offerings.

Speaker 3

It is worth noting that there is a period of time between booking a software win and when revenue begins that is associated with configuration and implementation. Gross profit margin was 43.9% this quarter compared to 54.5% in the prior year quarter. As Richard mentioned, the gross margin percentage was negatively impacted by inflationary pressures on material cost against pricing and backlog established before the inflationary impacts. To a lesser degree, the mix of hardware revenue and installation costs also contributed to the year on year and sequential decline in gross margins. In our 3rd fiscal quarter, our gross margins will significantly improve as material costs have been factored into new bookings pricing and our backlog reflects the adjusted pricing.

Speaker 3

Operating expenses were $8,400,000 up from $7,500,000 $8,000,000 in the Q2 of fiscal 2022 and Q1 of fiscal 2023 respectively. The increase is directly tied to the planned investment to grow and accelerate our software business. On a GAAP basis, our operating loss was $3,400,000 compared to $500,000 in the year ago quarter. Excluding stock compensation and depreciation and amortization, our quarterly adjusted EBITDA was a negative $2,300,000 compared to last year's positive $900,000 The difference in both cases relates to the lower revenues, gross margin percentage and our intentional investments in improving and focusing our software offerings and marketing strategy Cash, cash equivalents and marketable securities totaled $12,500,000 as of March 31, 2023, compared with $19,900,000 as of the prior year end. Cash used in operating activities in the Q2 was $2,600,000 Included in that number is approximately $1,400,000 for inventory purchased to facilitate revenues in the second half of fiscal twenty twenty three.

Speaker 3

This compares to cash used in operating activities of $500,000 in the same period last year. The fluctuation primarily reflects the negative adjusted EBITDA in this year's quarter. With our current backlog and forecasted bookings, we expect full year fiscal 2023 revenues will be down slightly from fiscal 2022 revenues. Considering our expected improvement gross margins, we anticipate positive adjusted EBITDA in the second half of fiscal twenty twenty three. So full year adjusted EBITDA is expected to be negative, reflecting the $5,000,000 in incremental costs to support SaaS business growth discussed at the beginning of the fiscal year.

Speaker 3

Though hardware bookings and revenues could shift, our current expectation is that fiscal Q3 of 2023 will see similar revenues to the Q3 of 2022. And now, we'd like to open the call to Q and A. Operator?

Operator

One moment while we compile the Q and A roster. Your first question comes from Brian Colley of Stephens.

Speaker 4

Hi, guys. Thanks for taking my question. So I wanted to start off just asking about your visibility in the back half of the year. Could you just speak to what specifically gives you confidence in a rebound in hardware revenue, but also just Kind of how you see software sales ramping in the back half of the year as well.

Speaker 2

Yes. From a bookings perspective, Brian, we have infinite visibility into our current forecast. So we know exactly what the contracts are, where they're coming from, what date they're expected on. It's business that's all been won, yet not awarded. So a great deal of visibility to answer your question.

Speaker 2

From The software revenue continues to grow quarter over quarter. So the second half of the year, we expect to see that trend to continue.

Speaker 4

Okay, got it. And I wanted to ask about the recent Everbridge situation in Florida. They've gone through some contract changes with the state. Do you think that's business that you could potentially When as that contract comes up for renewal at the end of this year?

Speaker 2

Ideally, it's well within our capacity and capabilities to win that.

Speaker 4

Okay, great. And then

Speaker 2

lastly, the current outlook for go ahead, Brian.

Speaker 4

No, go ahead Richard, sorry to interrupt.

Speaker 2

Yes, you know this, but the contract is expected to be complete with Everbridge at the end of this calendar year. And the state plans on getting an RFP out and An award made probably in the early fall timeframe.

Speaker 4

Okay, understood. And then last question I had was just, I'm curious if the weaker economic backdrop has had any impact on the pace of contract awards or discussions in any of your businesses, whether it's hardware or software. And particularly, I'm curious if it's impacted the pipeline at all on the enterprise software side?

Speaker 2

No, not at all. In fact, we saw an increase in our pipeline by about 25% on software. And again, it gets back to what we've talked about before. The world is increasingly becoming more dangerous, whether it's from weather related events or terrorism or just pandemic and other things. So enterprises and communities, governments are more and more aware of their responsibility to keep people safe and we see that trend continuing.

Speaker 4

Got you. And what is it that caused the delays in booking international hardware orders?

Speaker 2

Yes, good question. International has been particularly hurt from a booking perspective during the COVID years. Our international bookings used to make up somewhere between 30% 50% of our total, and during those COVID years, it was almost non existent. All of the opportunities we had before COVID are still there. We're having to refresh proposals and get everything up to date with pricing and it just it takes a long time.

Speaker 2

But I do believe we will close on several of those this quarter.

Speaker 4

Got it. All right. Well, thank you for taking my questions today.

Speaker 2

You're welcome.

Operator

Your next question comes from Ed Woo of Ascendiant Capital.

Speaker 5

Yes. Thank you for taking my question. Can you give us any update on your Aramco contract? And also, how does your pipeline look, especially with enterprise customers?

Speaker 2

Yes. Ramco, we took the contract at the end of December. We initially went live on the first site at the end of March. We turned over the entire system, including the second site at the end of this month. So it's going well.

Speaker 2

Your next question was relative to enterprise, Ed?

Speaker 5

Yes. So obviously, Aramco is a big customer for you guys to win. Have you guys been able to use that to increase your ability to make proposals to other enterprise customers?

Speaker 2

Not yet. We go live fully in a couple of weeks. So we want to have reference set that can be reached versus someone calling Aramco and saying, yes, we're planning on going live. So Over the next several weeks, we will do that, Ted.

Speaker 5

Great. Well, thanks for answering my questions and I wish you guys good luck.

Speaker 2

Thank you.

Operator

Your next question comes from Martin Yang of Oppenheimer.

Speaker 5

Hi, thank you for taking my question.

Speaker 6

First, I want to ask about the updated long term model. Can you give us a sense of the share of software revenues in that new $100,000,000 long term model?

Speaker 2

Brian, do you want to take that one? I don't have it in front of me.

Speaker 1

Yes, happily. Good afternoon, Martin. So that target model obviously assumes continuing growth in the hardware Historically, we've seen 20 plus percent CAGR going back several years and that's a strong history with our hardware business. We expect growth to continue in that business and what $100,000,000 contemplates is maybe not quite that much growth in hardware, but the growth being augmented by a software business. And where we are today with the bookings that we have, the forecast that's in the pipeline that we talked about, we feel really good with where we're going to exit this year from an ARR standpoint.

Speaker 1

And as you all know on this call, ARR is something that compounds at a very high rate of growth as you move forward. And it's really a mathematical equation that gets you to $100,000,000 plus 3 years out. And the positive side of this is with the hardware gross margins coming back to normal and the software margins kicking in, you end up throwing off quite a bit to the bottom line. You'll see a chart in our upcoming investor deck illustrating what this means in terms of the leverage coming through to the P and L.

Speaker 6

Got it. And is there an update on potential operating margin count from the software business?

Speaker 1

Yes, the operating profit model for the software business improves as you ramp and scale, right? Right now, we're making investments and You see this in our segmented reporting, of course, right, where the software business is running an operating loss. Very quickly, as that revenue grows and you're able to leverage the operating expenses that we're making today, you see that turn into a profit generation And that's something we expect to see occur over the next 3 year timeframe.

Speaker 6

Got it. But do you expect your software to be operating to be profitable at operating level in 3 years' time?

Speaker 2

Yes, we do.

Speaker 6

Got it. Thanks. Last question is a follow-up on the international sales. Is there any particular geography that caused the

Speaker 5

delay or is it more spread out?

Speaker 2

Europe has actually been behaving okay. APAC and the Middle East have been delayed.

Speaker 6

Got it. Thank you very much.

Speaker 2

Welcome.

Operator

Your next question comes from Vivek Palani of Northland Capital.

Speaker 7

Hi. I have a couple of questions with me. The first one is, do you have good visibility into the next U. S. Army order for the acoustic hailing device?

Speaker 2

Yes. Now there is a process that the government goes through that's ongoing as we speak through various committees and ultimately the Defense Appropriation Committee. So yes, we're aware of that. We know where it is. We expect our expectations we expect to have the budget as soon as the government doesn't go into a prolonged CR.

Speaker 2

We expect an award probably around this time next year.

Speaker 7

Okay. My next question is, do you have any statewide public alerting things in the pipeline?

Speaker 2

Yes. In my remarks, I mentioned several.

Operator

At this time, it appears there are no further questions. I'd like to turn the call back over to Brian Alger for any closing remarks.

Speaker 1

Great. Well, thank you. As you all know, we regularly discuss our business and investor conferences throughout the year. Later this week, we'll be participating in the inaugural EF Hutton Global Conference in New York and the 8th Annual Oppenheimer Emerging Growth Conference virtually. And in June, we'll be attending the LD Micro Conference in Los Angeles.

Speaker 1

Thank you for participating in today's call and we look forward to speaking with you again next quarter when we report the fiscal third quarter results later this year. Thank you everyone. Good night.

Operator

This concludes today's presentation. Thank you everyone for

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Earnings Conference Call
Genasys Q2 2023
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