Genasys Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 13, 2024

There are 9 speakers on the call.

Operator

And welcome to the Genesis Fiscal First Quarter 20 24 Conference Call. All lines have been placed on a listen only mode and the floor will be open for questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host, Brian Alger, SVP VP of Investor Relations and Corporate Development. Welcome, Brian. The floor is yours.

Speaker 1

Thank you, Karen. Good afternoon, everyone. Welcome to Genesis' 1st Quarter Fiscal 20 24 Financial Results Conference Call. I'm Brian Alger, SVP of Investor Relations and corporate development for Genesis. Today's earnings release is available up on our corporate website in the Investors section And it should be crossing the wires any moment now.

Speaker 1

There's been a delay with our filing service and we apologize for the delay in this call. But for those of you looking for the numbers and looking for our commentary, you can find it on the website right now or it should, as I said, cross the wires here shortly. With me on today's call is Richard Danforth, our CEO and Dennis Kwan, the company's CFO. 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. The company's results may differ materially from the projections described in these forward looking statements.

Speaker 1

Factors that might cause 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, 2023. 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, February 13, 2024. 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 the operational metrics, including adjusted EBITDA, bookings, backlog and adjusted net loss, which we believe provide helpful information to investors with respect to evaluating the company's performance. For reconciliation of adjusted EBITDA to GAAP Financial metrics.

Speaker 1

Please see the table in the press release issued by the company at the close of market today. As I said, it should be coming across any moment. We consider bookings a backlog leading indicators of future revenues and use these metrics to support production planning. Bookings is an internal operational metric 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 12 months.

Speaker 1

Finally, a replay of this call will be available in approximately 4 hours through the Investor Relations page on the company's website. Now at this time, it's my pleasure to turn the call over to Genesis' CEO, Richard Danforth. Richard?

Speaker 2

Thank you, Brian, and welcome, everyone. The strategic vision of Genasys Protect is being realized. Yesterday's announcement describing the integrated use of Genasys' cloud based software and hardware 37 dams in Puerto Rico is only the first is only the most recent example of our differentiated approach to protective communications. To recap, Genasys has been selected through a competitive solicitation to engineer, procure and install a comprehensive emergency warning system for 37 dams on the island of Puerto Rico. Genesis had the highest score beating the competition in all evaluation categories.

Speaker 2

This project has been fully funded by FEMA and is expected to generate $60,000,000 to $70,000,000 of revenue for Genasys. More than $50,000,000 of hardware is expected hardware revenue is expected to be installed over the planned 18 month project line. Importantly, all of the sensors, data streams and communication channels will be managed with the Genasys Protect software. In addition to approximately $1,900,000 up for a 3 year software license, it is expected that we will also provide hardware maintenance services that could generate between $3,000,000 $10,000,000 depending on the length of the maintenance agreement. Our investments in developing the Genasys Protect software drove the selection for the Puerto Rico project.

Speaker 2

As a result, not only we will generate recurring revenues, but we will also be delivering more than a full year's of incremental hardware revenue for this project. The selection of Genasys Protect's platform, including both hardware and software for the Puerto Rico Dam Emergency Warning System Is yet another example of what of the differentiation of our approach to protective communication. Already in fiscal 2024, we have been selected for a multi year engagement with Los Angeles County, a county with more residents than most states in the Union, The Department of Corrections for the entire state of Utah and most significantly the project I just outlined for the island of Puerto Rico. Our engagements are getting larger, but they are also becoming more comprehensive as the advantages of our platform approach became more evident. Our transition to a more balanced hardware software company is well underway.

Speaker 2

Our software business continues to gain momentum and build scale. Synergies from the acquisition of EVERTEL are beginning to be realized. And as a result, ARR for our Connect business grew nearly 18% sequentially in the Q1 as part of Genesis Protect. Similarly, we are getting significant leverage from our partnership with Ladrus, Total realized ARR exiting the fiscal Q1 was $5,000,000 and we expect to exit our 2nd fiscal Quarter with nearly $7,000,000 of ARR. Coming into this year, we had exceptionally low hardware backlog.

Speaker 2

And as we communicated in early December, we expected financial results to be heavily weighed towards the second half of the fiscal year. Though quarterly revenues were substantially lower than prior year, hardware bookings were in line with Q1 historical averages and up nearly 90% versus the prior year's quarter. Dennis will provide more detail on the hydro revenues momentarily. As we look out over the remainder of our fiscal 2024, we see a growing need for protective communications in communities, enterprises and critical infrastructure across the globe. Too many events, including natural disasters, civil unrest and geopolitical tension Require a more complete solution to protect the various constituents.

Speaker 2

Mass notification messages and 60 year old sirens are not adequate. More is expected and frankly deserved. Internationally, we are finally beginning to see our hardware business recover and we are also seeing new and growing interest for our software solutions as well. Recent wins And the continuing deal activity and pipeline expansion give us greater confidence in our second half of twenty twenty four and our fiscal twenty twenty five outlook. Unchanged from our outlook in December, we are confident that the software revenues for fiscal 2024 Well, at least double over fiscal 2023.

Speaker 2

We continue to see a very back end loaded year for our hardware business. Though there remains near term uncertainty around the timing of the U. S. Federal budget approval, recent bookings and the Puerto Rico selection bolster our confidence in Based on our assumptions that the U. S.

Speaker 2

Federal budget is approved in the March timeframe, we expect to be profitable on our adjusted EBITDA basis in the second half of twenty On a full year, we continue to expect to report a negative adjusted EBITDA, though improved quite a bit from fiscal 2023. Now I will turn the call over to Dennis to go through the financials and outlook in greater detail. Dennis?

Speaker 3

Thank you, Richard. In 2023, we successfully grew our recurring software revenues each quarter. In the Q1 of fiscal 2024, that growth accelerated to 85% year over year. Revenues for the Q1 of this fiscal year were $4,400,000 a decrease of 58% over the prior year's record 1st quarter revenue. As compared to the same prior year period, total software revenue increased 57 percent to $1,400,000 And to reiterate, our recurring software revenues were up 34% sequentially and nearly 85% year over year.

Speaker 3

More than offsetting that growth, hardware revenue decreased 72% to $2,900,000 As Richard mentioned, Genasys started fiscal 2024 with exceptionally low hardware backlog. In addition to a low backlog entering the quarter, we also had nearly $1,500,000 of revenue that was booked and built during the December quarter, The U. S. Government was unable to pick up the orders until the 1st week of January. Gross profit margin was 34% in the fiscal Q1, A decline of 12 percentage points or $3,400,000 from the prior year period.

Speaker 3

The drop in gross profit Was attributable to lower hardware revenue in this year's quarter and the related reduction in overhead absorption. On a more positive note, Software gross margins improved nearly 15 percentage points year over year. Quarterly operating expenses, including the Q1 of expenses were $8,700,000 up 5 percent from $8,300,000 in the Q1 of fiscal 2023. The increase was primarily tied to the acquisition. On a GAAP basis, our first fiscal quarter operating loss was $7,200,000 compared to a loss of $3,500,000 in the year ago quarter.

Speaker 3

Adjusted EBITDA, which excludes non cash stock compensation, Was a negative $6,100,000 compared to last year's negative $2,400,000 The year over year decline in adjusted EBITDA due to the lower hardware revenues and subsequent reduced overhead absorption. Cash, cash equivalents and marketable securities Totaled $13,600,000 as of December 31, 2023, compared with $10,100,000 as of the prior year end. Cash used in operating activities in the 1st fiscal quarter was $5,700,000 Other working capital increased $1,500,000 As Richard mentioned, we continue to expect software revenues to at least double in fiscal 2024 and hardware revenues should rebound close to fiscal 2022 levels. We continue to expect adjusted EBITDA loss to improve in fiscal 2024 and fiscal 2023. And now, I'd like to open the call to Q and A.

Speaker 3

Operator?

Operator

Thank you. Ladies and gentlemen, the floor is now open for questions. And we'll take our first question from Brian Colley from Stephens. Please go ahead, Brian. And it looks like we lost Brian.

Operator

So we will move to Scott Searle from Roth MKM. Please go ahead, Scott.

Speaker 4

Hey, good afternoon. Thanks for taking the questions. Hey, maybe just to quickly dive in, in the comfort level for the hardware ramp in the second half of this year. Just want to clarify again, you're talking about a recovery to past historic levels. It really implies that back end loaded ramp Starting in June September, I think you gave the caveat of U.

Speaker 4

S. Budgetary approval, I think, The continuing resolution, which is now targeted at March. I was wondering if you could provide a little bit more color around that, the timing of the budgetary Potential resolution and how much of the pipeline and backlog is actually tied to that?

Speaker 2

Scott, the March date, I think, is the 3rd date they've Given so far with the extension, so we'll see. But we have It's an Army program that it is a new Army program that we have expectations for Revenue in this fiscal year. I don't think we've put out have we put out anything about what we thought it would be? Not yet. But it's a significant number for us.

Speaker 2

So we'll see. That's the most significant thing. There'll be other ancillary issues where there can be no new starts under a CR. And we get lots of hardware and software business through grants. No budget will have an effect on that.

Speaker 2

So It can be a significant hit to us if it doesn't pass.

Speaker 4

Got you. And maybe just to follow-up on that, Rick, in terms of the overall opportunity pipeline, it seems like the funnel had been growing. You've given some metrics, I think, on the past call. I'm wondering if you could just indicate what you're seeing sequentially. Have And in your opening remarks, you talked a little bit more about civil unrest And geopolitical tensions, which has not necessarily been, I'd say, the core staple of your business.

Speaker 4

Is that becoming a bigger portion of the pipeline going forward?

Speaker 2

Civil unrest involves local police. Almost every local police agency in the United States has some LRADs. So, Navy's around the world. Yes, it can certainly can drive demand, particularly for LRAD hardware. In terms of your question on the pipeline, it continues to grow.

Speaker 2

When we talk about pipeline, we Don't usually include some of the large opportunities like the one we announced with Puerto Rico. And We continue to see the pipeline grow. We continue to increase a look at our forecast for bookings. Some of what had slipped last quarter or last year, all year long, have started to close and we remain optimistic for the year With an outlook unchanged from our prior conference call. It makes for a quick second half.

Speaker 2

So

Speaker 4

The previous pipeline that you guys had talked about though, so did not reflect Puerto Rico. Is that correct? The larger opportunities like that are not having that full amount Put into them. And secondly, I wonder if you could just talk a little bit about EVERTEL and the cross selling opportunities, how that's being received and kind of what your outlook is for the second half of this year? Thanks.

Speaker 2

Yes. You are correct. The large opportunities are usually kept separate from our pipeline. In terms of EVERTEL, EVERTEL in 1 quarter has grown their ARR, as I said, by 18%. The cross selling opportunities have begun.

Speaker 2

We recently re upped, I think it was Marin County. Was it Marin? For what? For just a re upped for eVac And sold them, EVERTEL. So the re up Dennis, correct me if I'm wrong, but some of it.

Speaker 3

No, it wasn't re in, but We have.

Speaker 2

But it was re upped for EVAC at $250,000 and then add a LIBORIS on top of it For $390,000 that kind of a thing. So we're selling to the same people, Scott.

Speaker 4

Great. Thanks. I'll get back in the queue.

Operator

Thank you. And next we'll go to Brian Colley from Stephens. Please go ahead, Brian.

Speaker 5

Hey, guys. Thanks for taking my question. So It seems like the Puerto Rico contract should kind of get you close to hitting your FY 'twenty six targets next year. I'm curious if you view that as a new base off of which you can grow or if we should see a decline in the hardware revenue once Puerto

Speaker 2

Puerto Rico will provide Substantial revenues in our fiscal 2025, for sure. We'll have to win something like that. We'll build the pipeline even larger with the normal LRAD stuff. So it's hard to replace $60,000,000 to $70,000,000 one time order. However, this puts us in a different position in the critical infrastructure protection There are dam projects all around the world.

Speaker 2

There are dam projects here in San Diego. There Dan projects in South America and Europe that we are chasing, not to the size of Puerto Rico, but it will certainly give us great credentials and a calling card To further the CIP kind of vertical.

Speaker 5

Got it. And then in terms of Kind of the cadence of revenue for Puerto Rico. How should we think about the split between FY 'twenty five and this year? I mean, should you

Speaker 2

maybe Should

Speaker 5

it be 80% next year, 20% this year or more heavily?

Speaker 2

It will largely be next year. So the current schedule, Brian, is there's a 6 month process to get approval on all of the dam designs. That will put us at the end of our fiscal 2024. And then the vast majority of the revenue will occur in the fiscal 2025.

Speaker 5

Okay. Got it. That's helpful. And then also, I was curious if you could provide an update on the Crowe's order And your confidence level in getting that award?

Speaker 2

It's pending a DoD budget. So as soon as if that goes, Brian, the CROs will go as well.

Speaker 5

Got it. Okay. And then last question for me is, I was hoping you could maybe just talk about the software pipeline, how that's trending relative to your expectations and And what the composition of that pipeline looks like between Connect, Alert and EVAC and kind of where you're seeing the most demand today?

Speaker 2

Alert and EVAC represent the biggest dollar volume of our software offerings. The Connect we're just getting started on and those are a lower dollar value software sale. The Ladderas piece, as I mentioned a moment ago, we can have a pretty good uptick And both ARR revenue from that, as I mentioned, the $390,000 just for one county. So the pipeline is dominated by Alert and EVAC.

Speaker 1

Maybe just as a follow on to that, Brian, And this was in Richard's prepared remarks. The value of the entire platform is becoming more and more real. So where we've already sold EVAC, We are seeing increasing accelerated etcetera interest in our other offerings, whether that's Connect, Alert, Traffic AI, etcetera, and oh, by the way, also Acoustics. It really should be apparent to everyone That the Genasys Protect platform that includes both software and hardware Has an enormous potential. Puerto Rico is a Genasys Protect win.

Speaker 1

Without the software, We would not have won that RFP opportunity. It's the software that got us in there. And as a result, You're seeing over $50,000,000 of hardware from one order from the software differentiation.

Speaker 5

Got it. Thank you for the time,

Speaker 2

gentlemen. Thank you.

Operator

And we'll take our next call from Mike Latimore from Northland Capital. Please go ahead, Mike.

Speaker 6

All right, great. Thanks. On the Hardware bookings in the Q1, can you did you give a number there? I'm not sure I heard that or you said I think you said I got back But can you give a little more detail on the hardware bookings in the Q1?

Speaker 2

Sure. Historically, hardware bookings in Q1 is the lowest quarter. What we achieved in this Q1 is consistent with other first quarters, albeit substantially higher than what we booked In fiscal 2023 Q1. So it's a small win. In fact, it's almost double what we booked in Q1 Of 23 versus 24.

Speaker 6

Okay, got it. On the Crowe's deal, if that's approved through this budget passes, how much of that Business would you see this year versus over multiple years?

Speaker 2

Well, if you assume a budget gets passed by March 8, As soon as we probably would see any money flow would be, I don't know, end of June. So there would only be a couple of months left in our fiscal year at that point. And it is a new program, which means there'll be A start up phase that we haven't had to deal with for the U. S. Army in many years.

Speaker 2

So it will be a little slower at the start and a strong finish.

Speaker 1

Mike, remember like our previous program of record, each year there's a new purchase order placed Against the program of record. The same is expected to be true for Crowe's.

Speaker 6

Yes. Okay. Makes sense. In terms of your SaaS software or SaaS pipeline, how much of the pipeline is A prospect wanting one part of the stack versus sort of the full software stack?

Speaker 2

It's a significant mix. And as Brian mentioned, we often get Competitive RFPs for Alerik. And we will always answer those introducing EVAC. And as I mentioned in the prior calls, there's a couple of large counties where we did that and after the award of Where it came, we went into a negotiation with Ebac and subsequently booked those orders. So the cross selling opportunity It's clearly there and we've achieved it and it's continued with the EVERTEL piece as well.

Speaker 6

Great. And then just last on the Puerto Rico deal, you said $50,000,000 hardware. So overall, what Are you considering gross margin to be and do you have to add much OpEx to sort of deploy this thing?

Speaker 2

We'll have OpEx for well, we don't have a significant increase in OpEx expected for the island Puerto Rico. What was the other question? The gross margin. Gross margin. Gross margin on The hardware coming out of the factory in San Diego will be consistent with historical actuals and the equipment that is The equipment and services will typically be a lower gross margin than our hardware gross margin, but still a significant contributor to the company.

Speaker 6

Okay, great. Thank you.

Operator

Thank you. And next we'll go to Ed Woo from Ascendiant Capital. Please go ahead, Ed.

Speaker 7

Yes. Just a clarification on the gross margin that you mentioned. On these bigger deals, why wouldn't you have much Better leverage considering the contracts aren't that much bigger. Was pricing a big determinant for winning the contract?

Speaker 2

Yes. The multiple award criteria price was worth 35%. But don't mistake, this quarter will give significant contribution margin to the company. At $50,000,000 Ed, approximately, that's bigger than most Years of hardware. So if you have that plus our normal business, you're going to have significant absorption And gross margins on the balance of the business, balance at the base of the factory will enjoy The improvement to the contribution margin from normal activities.

Speaker 7

Great. And this win and obviously last year's win with Maraco, should we anticipate much bigger Type of deals going forward, are you guys specifically targeting much bigger deals?

Speaker 2

The Genasys Protect platform approach is introducing larger deals to us. In the case of Puerto Rico, If you look at the traditional competitors we face in hardware and software, they weren't in the picture. So Genesis as a company was the most qualified to respond to that RFP and was reflective in the scores that the customer gave us. So I think, yes, we will continue to pursue larger opportunities To exploit the Genasys Protect platform capabilities around the world.

Speaker 7

Great. Well, thank you and congratulations again.

Speaker 3

Thank you.

Operator

And we'll take our next question from Martin Yang from Oppenheimer. Please go ahead, Martin.

Speaker 8

Hi. Thanks for taking my question. I think you answered part My but the first question I have regarding OpEx associated with Puerto Rico. I know there's not a lot of increase, but if anything change for OpEx for Puerto Rico project, what would it be? And should we assume a major operating leverage coming from the Puerto Rico project?

Speaker 2

So second question first, yes, of course. That's what I just I think I just said talked about that. The contribution margin That it will avail will be significant. And as I said, the base business will also benefit from that increased absorption. From an OpEx perspective, travel will go up.

Speaker 2

We will hire More people on the island, but it's a single digit kind of number. I don't see us adding anybody in the factory. I don't see us adding anybody in purchasing or sales or marketing. So I think it's nominal from a headcount perspective.

Speaker 8

Got it. Thank you. The second question is about your Enterprise customers, can you maybe give us an update on how are you seeing customer engagement and the pipeline regarding your sales

Speaker 2

Yes. For us, it's led first and enterprise to be opportunistic. Aramco fell into that and there's been several others. I don't think we've released anything on a win with Those yet, but you'll see some coming shortly.

Speaker 3

Thank you. That's it for me. Okay.

Operator

Okay. And there appear to be no further questions at this time. I'd like To turn the floor back over to Brian Alger for closing remarks.

Speaker 1

Great. Thank you everyone for participating in today's call. You should see the press So you can find it on our website. A replay of the call will be available on our website here shortly. For additional information and up to date news and activity regarding Genesis, our products, customers we serve, again, I'll strongly recommend that you follow us On our various social platforms, whether that's LinkedIn or X, we actively post and comment and a number of our customers do the same.

Speaker 1

So to stay on top of things, I Strongly encourage you all to follow us on those social networks. Otherwise, Have a great night. We look forward to speaking with you again next quarter when we report fiscal 2nd quarter 2024 results. Thank you.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation.

Powered by Quartr
Earnings Conference Call
Genasys Q1 2024
00:00 / 00:00