Genasys Inc. (GNSS) Earnings Call Transcript

Good day, Ladies and Gentlemen, and welcome to Today's Genasys Financial First Quarter 2020 (sic) [ 2021 ] Conference Call. [Operator Instructions] It is my pleasure now to turn the floor over to Satya Chillara. Sir, the floor is yours.

Thank you. Thank you, Dagma. Good afternoon, everyone. Welcome to Genasys' Fiscal First Quarter 2021 Financial Results Conference Call. I'm Satya Chillara, Investor Relations for Genasys. With me on the call today are Richard Danforth, Chief Executive Officer; and Dennis Klahn, Chief Financial Officer of Genasys. Before we begin, I would like to take this opportunity to remind you that during the course of this call, management will make forward-looking statements. Other than the statements of historical facts, statements made during this call that are forward-looking statements are based on current expectations. During this call, we may discuss company's plans, expectations, outlook or forecast for future performance. These forward-looking statements are subject to a number of risks and uncertainties including the consequences of COVID-19 outbreak and other risks and uncertainties, many of which involve factors or circumstances that are beyond the company's control. These forward-looking statements are based on information and management expectations as of today. Future results may differ materially from our current expectations. For more information regarding potential risks and uncertainties, please refer to the Risk Factors section of the company's Form 10-K for the fiscal year ended September 2020. Genasys disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We may also discuss non-GAAP operational metrics of bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance. We consider bookings and 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 the 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 our website. At this time, it's my pleasure to turn over the floor to Genasys' CFO. Dennis Klahn. Dennis?

Thank you, Satya, and welcome, everyone. I will open today's call with a recap of the fiscal first quarter 2021 financial results. Richard will then provide an update on the business. Afterwards, we will open the call for questions. Revenues for the first quarter of fiscal 2021 were $8 million, down from $8.8 million in the prior year quarter due to the delayed shipment of an order because the customer required payment had not yet been received prior to the quarter end. Had the payment been made on time, revenue would have been essentially in line with Q1 of the prior year. The delayed payment was subsequently received and the order shipped in early January. Gross profit was $3.7 million or 46.1% of revenue. Gross profit decreased from the first quarter in fiscal 2020 due to lower hardware shipments, a 95% increase in software engineering personnel over last year from the recent addition of Amika Mobile and additional employees to support the Australia, European Union and enterprise software initiatives. And additional engineering charges resulting from a more precise process to charge engineering expenses to cost of sales. Excluding this additional cost, gross profit as a percentage of sales would have been 51% compared with 52.4% in the prior year. Operating expenses were $4.4 million, an increase from $3.9 million in the same period a year ago. The growth was largely due to a 50% increase in sales and marketing personnel over the prior year period to support future revenue growth opportunities. Net loss for the quarter was $600,000 or $0.02 per share compared with net income of $600,000 or $0.02 per share in the first quarter of fiscal 2020. The change was due primarily to the lower revenue and increased engineering, sales and marketing expenses. We generated $1.3 million in cash from operating activities in spite of the lower revenue and increased operating expenses. Our balance sheet remains strong. Cash, cash equivalents and marketable securities totaled $27.5 million on December 31, 2020, down from $31.4 million on September 30, 2020, principally due to the acquisition of Amika Mobile. Working capital totaled $25.6 million on December 31, 2020, compared to $29.8 million on September 30, 2020. With that, I'd like to turn the call over to Richard.

Thank you, Dennis, and good afternoon to everybody on the call. During our last call, I mentioned that despite record revenues in fiscal year 2020, bookings had been impacted by the worldwide pandemic as governments, communities and businesses were adapting to the new normal. We saw this play out as fiscal 2021 quarter bookings were a record $12.2 million, 43% higher than the first 6 months of fiscal 2020. Backlog at December 31, 2020, was $21.5 million, down slightly from the period fiscal year's quarter. A strong business pipeline, bookings and expected backlog in the fiscal second quarter, positioned the company for another year of record revenues. Last quarter, we completed the acquisition of Amika Mobile, booked a $5.1 million U.S. Army follow-on order, successfully completed an EU public warning system initiative pilot program for a large European country and responded to RFPs from several European countries and experienced a surge in software business activity in North America, giving us a strong start to fiscal 2021. To help meet the growing domestic and international demand for Genasys systems and solutions, we have added 16 more people to our sales force in the last 4 quarters. Stood up international offices in Singapore and Dubai and appointed business development professionals with extensive regional sales experience in the Asia Pacific, the Middle East, Africa, Central Asia and Latin America. The technology and personal investment we continue to make a significantly increasing business opportunities for Genasys mass messaging software, enterprise safety and emergency management software and integrated solutions. Many of these opportunities include governments and communities that are moving ahead with planned emergency warning initiatives to better protect citizens and workers as part of a reopening and adjusting to the new normal. Our Australian emergency alerting awards and the pandemic have increased interest and awareness of the national emergency warning solution for the European Union national public warning System directive. RFPs are underway as many EU member states plan to allocate EU COVID funds to fulfill the directive that mandates that every EU country implemented public warning system that can send emergency alerts to the mobile phones of residents and visitors alike. We are currently participating in several RFPs with multiple countries and mobile network operators, and recently completed a successful pilot program with a large EU country and its mobile telecom providers. The pilot program demonstrated our NEWS, cell broadcast, location-based SMS, Genasys speaker arrays and performance across 2G, 3G, 4G and 5G networks. To give some additional content around these opportunities, there are between 2 and 5 mobile network operators per EU member state, all of which will likely deploy a software platform similar to NEWS that features SMS, cell broadcast or a combination of both. The integration and rollout of our enterprise safety software is quickly progressing. Government agencies and business enterprises are evaluating software systems that help ensure the safety and productivity of the many staff members and employees that continue to work from home. Many agencies and businesses are adapting to and even encouraging this growing work-from-home trend. In addition to professional sports teams, stadiums, Canadian and U.S. government agencies, and large North American companies who currently use Genasys software, we are working to close multiyear recurring revenue contracts with cities, universities and additional government agencies and businesses in several U.S. states and Canada. While the enterprise safety software market forecast to grow exponentially this decade, Genasys is in an extremely strong position to win first time contracts and replace license renewals with our unified multichannel solutions. After approving our emergency management software and implementing integrated safety systems in Laguna Beach, Mill Valley and Newport Beach over the last 2 years, we are now on track to land additional integrated solutions contracts. In addition to the ongoing expansion of Laguna Beach's citywide early warning system and enhancing the installation in Mill Valley and Newport Beach, contracts from other cities and communities in California and elsewhere are expected this fiscal year. We are also competing for integrated software and hardware contracts that include national tsunami and earthquake early warning systems, regional public safety systems, and visitor contact tracking for areas with large tourism-based economies. As the only provider of a unified platform that includes emergency management software, industry-leading voice broadcast speaker arrays and multichannel alerting solutions, we anticipate substantial growth in this emerging area of our business. While much uncertainty related to COVID-19 remains, to date, we have managed through the disruptions caused by this worldwide pandemic. Genasys team members around the world continue to do terrific work and moving our key business initiatives forward, despite many of them continuing to work from home due to the local COVID restrictions. Our manufacturing facility remains open, and fulfilling orders for our essential communication systems that help keep people safe. This fiscal year, we are continuing to pursue additional synergistic acquisitions as part of our strategy to expand the company's business, grow revenues and maximize shareholder value. We also anticipate several integrated public safety mass notification system awards and another large U.S. Army program of record award for the LRAD 450XLs. Our multiyear contracts and awards in Australia and the many recent and expected request for proposals from the European Union initiative and from North America for our enterprise software solutions, have us well positioned for a record software bookings and revenue. In summary, I'm very optimistic about the future and the growing software and hardware business opportunities, with record fiscal first quarter bookings and strong bookings and backlog growth expected in our fiscal second quarter, Genasys is on pace for another year of record revenues. With that, I'll turn the call back over to the operator for Q&A.[Operator Instructions]. Our first question comes from Mike Latimore.

The bookings look very strong there. Congratulations on that. So I just wanted to touch on a little bit of the -- I guess, first the European trial. You said -- I think you said it was complete. I guess, any more color that you can provide there? What would be the next step? And if so, when would that next step be?

Next step would be RFPs, and they're in process now, Mike.

Okay. Then you also said you responded to, I think, you said, multiple country RFPs. I guess, are you responding to country specifically? Or is it countries and MNOs? And then kind of are you seeing sort of everybody wanting cell broadcast and SMS or are some wanting kind of one or the other to start?

Several countries, as well as network operators within those countries, front end and back end, SMS and cell broadcast, all of the above.

Okay. And when you say country, do you mean a government entity within the country or the mobile operator in the country?

No, it will be the government entity for the front end and the mobile operators for the back end.

Okay. All right. Great. And then are they giving you any indication on how long before they make some decisions?

They are. They are stating that it could be within the next couple of months, but like all these things, they take longer than anybody ever expects.

And is that a little bit more near-term than you -- I mean, I think originally, you were talking about, I think, midyear or maybe second half of the year. So is that a little bit sooner than expected?

It is, but I'm going to stick with what I said before, Mike. I think the principal revenue will begin in our fiscal 2022.

Sure, sure. Okay. And then just last on the sales force hires. I think you said you've added 16 people, I can't remember. Is there more to go beyond that? And if so, when do you think that will be done?

Yes. So far in our second quarter, we've added 5 additional, and we still have more to go.

Okay. And it should be -- the hirings you think will be complete in the next couple of quarters then?

Yes.

Our next question comes from Ed Woo with Ascendiant Capital.

My question is on the Amika acquisition. Have you guys feel like you guys have fully integrated the team and the salespeople?

Yes, the team and the salespeople we have, Ed, we're still completing the integration of the software platforms, and that will continue throughout this fiscal year. But yes, the sales team is integrated and the engineering team are integrated.

Great. And then you did mention that you guys are still on the hunt for additional acquisitions. How is the M&A opportunities, market valuation out there looking?

I think there's plenty out there, Ed. As you're well aware, the companies that operate in the SaaS market, the multiple demands are very high. So it's -- that's the challenge we face through all of this, if we're going to buy in the SaaS world.

All right. Great. And then my last question, you mentioned that there was a big order right at the end of the quarter that got pushed out. And part of it was due to new normal to the pandemic. Is that something we should be expecting for the next couple of quarters as well?

No. It can happen, but this was a particularly complicated transaction in a foreign country.

All right. Great. Wish you guys good luck.

Our next question comes from Ryan MacWilliams with Stephens, Inc.

Questions. So just on the software side of the house, can you talk about some of the conversations you're having in the enterprise, along with the state and local market? And do you think demand for emergency communications in these markets could actually be stronger this year versus last year?

I do. I think they'll be -- they already are stronger, Ryan. And to your first question, we're seeing cities, counties, enterprise, private enterprise business, colleges, townships, so municipalities and large businesses.

That's great. And then are you seeing more demand in the U.S. and Canada? And then are you seeing more demand from these large enterprises as their workforces are now remote? Like do they feel a need for a new solution to protect their employees now that those employees are more distributed and not in a central hub or headquarters?

Yes. That's absolutely driving demand. So 2 things are happening in the industry. There's still a great deal of people that are working from home or working partially from home and partially from in the office on different days and different shifts within days. So the coordination of all of that is something that the enterprise is looking for, and we're doing our best to prosecute the opportunities.

Excellent. Yes, I definitely think duty of care for those more attribute employees is going to be a theme this year. I have 2 questions on public warning, if you don't mind. Just to start, as you're having these conversations for public warning systems, generally, are you bidding on the front end and the back end at the same time? Or do you think the back end is generally still going to be a separate bidding process with the mobile network operator?

It will absolutely be a second bidding process. So there'll be an RFP for the front end, typically from the -- not typically, but from the country government. And then -- whether it's location-based SMS or cell broadcast, it would be the individual carriers.

And do you think those mobile network operator discussions, they could follow through beyond the June 2022 deadline. It's just the countries that really need to have the system in place beforehand or a deal in place to implement the system beforehand?

I don't believe the June 2022 deadline is going to be met, Ryan. I mean, there's been -- I mean it was probably unrealistic to begin with and then you throw the worldwide pandemic, and it only moves things to the right. So I think while we have begun to see the RFPs flow, and I think we'll see that all through the first -- at least the first half of next year. So it's going to be a 2022 -- late 2022, 2023 kind of notional implementation process.

Perfect. And last question for me is I like to see that you're expanding your sales distribution globally. But in many countries that aren't covered under this EU opportunity. I just wanted to hear your thought process on some of those new offices opening up and like, why you think of public warning as a global opportunity?