Genasys Inc. (GNSS) Q3 2022 Earnings Call Transcript

Good day, everyone, and welcome to the Genasys Inc. Fiscal Third Quarter 2022 Conference Call. All lines are currently in listen-only mode, and we will open up for questions and comments after the presentation. It is now my pleasure to hand the call over to Kim Rogers, Investor Relations for Genasys. Kim, the floor is yours.

Thank you, Karen. Good afternoon, everyone, and welcome to the Genasys Incorporated fiscal third quarter 2022 financial results conference call. I'm Kim Rogers with Hayden IR, the Investor Relations firm for Genasys. With me on the call are Richard Danforth, Chief Executive Officer; and Dennis Klahn, Chief Financial Officer of Genasys. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook and the 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. Factors that may cause such differences and other potential risks and uncertainties can be found in the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2021. Other than statements of historical facts, forward-looking statements made on this call are based only on information and management's expectations as of today. 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 other operational metrics, including adjusted EBITDA, bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance. 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 metric that measures the total dollar value of customer purchase orders executed in a given period regardless of the timing of 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. At this time, it's my pleasure to turn the call over to Genasys, Chief Executive Officer, Richard Danforth.

Thank you, Kim, and welcome, everybody. We had another terrific quarter with strong Q3 revenues leading to nine month record revenues. Our operating activities generated more than $2.5 million in cash, further strengthening our balance sheet with the capital to fund our growth investments. Bookings for the quarter were nearly $20 million, growing our backlog $6 million to a total of $30 million exiting Q3, keeping us on track for our revenue expectations for the year. Our bookings remained strong, more than $20 million for the quarter. Fiscal year law enforcement and public safety bookings are already at a record level for the third consecutive year. Genasys Software Services will use numerous times to deliver flash flood warnings and evacuation notices during the Eastern Australian floods in April, and in late June and early July during the New South Wales floods that displaced more than 85,000 people. First responders and emergency management agencies deployed Genasys software evacuation resources during 12 wildfires in June alone in Northern California. During these fires, more than 250,000 new users accessed the Genasys Zonehaven community website for real-time evacuation alerts and repopulation notifications. During the ongoing McKinney fire near the California-Oregon border, the performance of the Zonehaven AWARE platform has been exceptional. Users have accessed the site more than 400,000 times for updated fire evacuation and repopulation information. Many California counties made Zonehaven a key element in their 2022 emergency preparedness campaigns, encouraging residents to memorize their zone numbers and bookmark the Zonehaven community website for faster access to vital information throughout wildfires and other public safety threats. For the second time this year, Laguna Beach emergency personnel activated the city's Genasys Integrated Mass Notification system to alert residents and broadcast evacuation warnings during the May 11 coastal fire. The coastal fire burned just south of Laguna Beach, destroying 20 homes and damaging 12 others in neighboring Laguna Niguel. Two weeks after the coastal fire, the Laguna Beach City Council discussed the further expansions of the city's outdoor warning systems. Berkeley, California selected the first five installation sites for the city's Genasys emergency warning network that was announced earlier this year. 10 additional sites will also be selected for the system that will alert residents to fires, earthquakes, tsunamis and other life safety hazards like broadcasting audible, hyperlocal warnings and notifications. Under our contract with Alameda County, Berkeley first responders and residents have access to the Zonehaven evacuation resources. Nine-month revenues for mass notification hardware integrated with GEM Software increased 425% to $8.4 million compared to $1.6 million in the first nine months of fiscal 2021. We received new SaaS contracts from cities, counties, universities and enterprise software customers in 12 states, which include our first contracts in Colorado, Georgia, Indiana, Oklahoma, Oregon and New York. Genasys has replaced competitive software services in almost all of our SaaS contracts to date. Genasys software and integrated mass notification systems are now helping safeguard millions of people in several countries and 20 states. SaaS revenue has nearly doubled year-over-year and SaaS bookings in the first nine months increased 27% over the same period last year, reflecting the growing momentum of our GEM and Zonehaven solution. GEM and Zonehaven are providing excellent cross-selling and up-selling opportunities as we expand our critical communication and public safety resources in North America and throughout the world. Last year, we made the strategic decision to invest globally in our SaaS critical communication platform in response to the large and growing opportunity to help keep people safe in a world that is becoming increasingly dangerous. We continue to add personnel and other resources essential to executing our SaaS growth strategy. As we announced last week, the hiring of 25-year software veteran, Dennis Walsh, as our Chief Revenue Officer, is one of these important resources. Dennis' experience building and running successful SaaS technology companies makes him the ideal choice to serve as our CRO and lead our sales and marketing team. He has built and led high-performing sales, marketing and support organizations, spearheaded sales for new SaaS business applications to many worldwide corporations and significantly increased revenues for companies in which he served. We welcome Dennis and his extensive global experience driving software revenue growth. It’s also important to note that the growth investments we are making continue to be funded by our operating activities, providing us the capital to fund our initiatives in the current economic environment. At an investor conference in June, I shared an updated long-term model for Genasys. We expect the revenue drivers for the next few years will be one, a macro backdrop that is increasing the need for critical communications, two, a growing pipeline for higher margin software opportunities, three, the Zonehaven greenfield opportunity in the United States and internationally and four, the synergies of our software solutions and our hardware systems. In addition to these drivers, this week’s announcements of a commercial security order from a global enterprise company is one of several business opportunities we’re working on in this sector. Government and enterprises are acutely aware of the escalating security risk to employees, citizens, and critical infrastructure facilities. Additional commercial and critical infrastructure security orders are expected this quarter and next fiscal year. After a 425% increase in year-over-year revenues for the first nine months, the outlook for our GEM Integrated Mass Notification System is extremely positive. Beyond installations currently underway in the city of Berkeley, Southern Marin County, Puerto Rico, Japan, and other locations, multiple IMNS projects are in the pipeline with several anticipated to close in coming quarters. As reflected by our recent GEM partnership with the Boston Red Sox, SaaS orders and pipeline growth are expected to accelerate through the end of the fiscal year and beyond. We are continuing to replace competitors’ offerings by providing superior comprehensive life-saving services for governments, commercial enterprises, and other entities. Based on our $30 million quarter-end backlog and supported by a rapidly growing business pipeline, we are well positioned for a sixth year of revenue growth.

Thank you, Richard. Revenues for the fiscal 2022 third quarter were $14.2 million, up 12% from the prior year quarter. The revenue increase was driven by the $3.9 million from IMNS shipments up 756% from the prior year quarter. North American SaaS revenue in the third quarter was 144% greater than the fourth quarter of fiscal year 2021. Gross margin was 46.5%, a decrease of 440 basis points compared to 50.9% in the third quarter of fiscal 2021. The lower gross margin percentage was largely due to higher costs of components in this year’s quarter. We continue to expect gross margin to be plus or minus 50% for the full year, although there may be some fluctuations quarter-to-quarter. Operating expenses were $7.2 million, up from $5.9 million in the same period a year ago. The increase was due to a 15% increase in SG&A related to strategic growth spending to accelerate SaaS revenue and a 52% increase in research and development spending with a significant increase in SaaS development. As a reminder, our fiscal 2022 business plan includes a year-over-year increase in operating expense for strategic growth initiatives targeted at materially shifting our revenue mix toward a higher proportion of software revenue and expanding our margins. Net loss for the quarter was $589,000 or $0.02 per share, a decrease from the net income of $290,000 or $0.01 per share in the fiscal 2021 third quarter. The change was due to the increase in operating expenses, which I just discussed. Adjusted EBITDA for the fiscal 2022 third quarter was $364,000 compared with $1.4 million in the prior fiscal year third quarter. We believe this information in comparisons of adjusted EBITDA enhances the overall understanding and visibility of our business performance. To that effect, a reconciliation of our GAAP results to non-GAAP figures has been included in our financial results release. Turning to our year-to-date results, for the first nine months of fiscal 2022, revenues were $38 million, up 19% from $32 million in the same period last year. Gross margin was 49.2%, up 100 basis points from the first nine months of fiscal 2021. Operating expenses were $21.4 million, up from $15 million in the same period last year, again, due to a 35% increase in SG&A related to strategic growth spending to accelerate SaaS revenue and a 72% increase in research and development spending. Net loss for the first nine months was $2.4 million or $0.07 per diluted share compared with a net loss of $67,000 or zero per share in the first nine months of fiscal 2021. This decrease was due to the higher operating expenses, partially offset by higher revenues in the current year period. Adjusted EBITDA for the first nine months of fiscal 2022 was $805,000 compared with $2.3 million in the prior year period. Our balance sheet remains strong with cash, cash equivalents and marketable securities totaling $19 million as of June 30, 2022, compared to $20.7 million as of the prior year end. Working capital totaled $17.6 million as of June 30, 2022, compared with $18 million as of September 30, 2021. Cash used in operating activities for the first nine months of fiscal year 2022 was $600,000, this compares to cash provided by operating activities of $8.3 million in the same period last year. The fluctuation primarily reflects this year’s higher net loss, a lower balance in customer deposits, and a higher inventory on hand compared with the same period last year. We expect the higher inventory balance to convert to revenue through customer shipments this fiscal year. The company has an authorized share buyback program to repurchase shares up to $5 million through December 31, 2022. During the three months ended June 30, 2022, no shares were repurchased. Fiscal year to date, 259,310 shares were repurchased for approximately $1 million. We may, from time to time as market conditions warrant, repurchase shares in open market transactions. However, investing in our business for future growth remains our primary objective for the allocation of our capital. The $1.7 million change in our cash position from $20.7 million at the end of last fiscal year to $19 million as of June 30, 2022 is largely attributable to share repurchases. This affirms the strong underlying cash engine that is supporting the strategic investments we are making to fuel our next phase of growth. We will now open the call for Q&A.

Thank you. Our first question comes from Brian Colley from Stephens. Please go ahead.

Hi guys. Thanks for taking my questions. So apologies if I missed it, but did you disclose what the software revenue was for the quarter?

We did not.

Okay.

No. I mean, in total it’ll be disclosed in the 10-Q and I believe that it’s a little over $700,000 for the quarter. Now that’s a mix of – it has grown, it’s a mix that has changed year-over-year. Last year had a fair amount of professional services involved. However, this year the SaaS-based recurring revenue has grown essentially enough to offset all of the reduction in professional services.

Got it. Okay. That’s helpful. Thank you. And then I also wanted to ask just about recent demand trends as it relates to a weaker economic backdrop. I presume, you’re relatively well insulated given the nature of your products and customer base being in government and sled verticals. But have you seen any softening in demand for either hardware or software related to recent macro uncertainty, whether it’s lengthening sales cycles or more budget scrutiny?

No. Brian, quite the opposite when it comes to the SaaS offerings. The amount of activity is amped up substantially in the last three months for us. So that’s very good. From a hardware perspective, you’re right. We’re somewhat insulated from the economics of inflation and that kind of thing. And given what’s going on in the world, there is an increasing demand for our software, our hardware, and our system solution. So right now the answer to your question is no, we don’t see an impact from it.

Understood. Well, that’s encouraging to hear. Lastly, I wanted to ask about the new Chief Revenue Officer, Dennis Walsh. I know he is still brand new to the job, but can you talk about any early strategy or view on his plans to expand your software business? What that might entail?

He’s been here a week and two days. So we’re going to give him a little more time to lay that out. But you can rest assured that that’s in process and we’ll talk about that when it’s more complete.

Got it. Okay. If I could sneak one last question in here. I’m curious how much you all are leveraging channel partners today for your software business and if expanding your channel ecosystem is an opportunity that you’re actively pursuing.

It is. We have one channel partner, I think at this time, Brian. So it’s not been tapped into hugely yet. Most of our software sales are direct, but certainly as we expand particularly outside the United States, it’ll likely be much higher use of channel partners.

Okay. Got it. Well, I appreciate the time today, guys.

Thank you.

And next, we’ll take a question from Ed Woo from Ascendiant Capital. Please go ahead.

Yes. Congratulations on the quarter. In terms of supply chain and inflation, it looks like it impacted the quarter. What is your visibility? Is it getting better? And what’s your visibility into the next six months?

The supply chain from an availability is, as I said last quarter, is manageable. And we have been managing it. We have seen an increase in pricing that’s reflected in a slightly lower gross margin for the quarter. Although the gross margin for the nine months is actually ahead of where we were last year. So I think, Ed, I put that in the same category, we are managing that. We expect our gross margin, as we historically have, to be plus or minus 50%. And again, the supply chain, we have delivered record revenues over three years with the supply chain challenges. And I think that will continue.

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

Thank you.

Thank you. And our next question comes from Mike Latimore from Northland Capital. Please go ahead.

Hi. I’m Vivek on for Mike Latimore. My first question is what percent of bookings was software in the quarter?

We don’t disclose that yet. That will be something we’ll likely do as we enter our next fiscal year.

Okay then. So can you just tell me how many sales people do you have?

The number grows every day almost. So I don’t know what the number is right here talking to you, but we can get that and get it over to you.

Okay. Any approximate numbers?

For the United States, it’s 20.

Okay. So did Slovenia go live in July? So how is that operating any color on that?

Yes, sure. It went live on schedule in July and it’s operating as we speak today.

Cool. My last question is that, do you have any European deals in the pipeline for this calendar year?

Yes.

And next we’ll go to Kris Tuttle from SoundView Capital. Please go ahead.

Okay. Thank you. Yes, I just had a couple on the newer business, the deal that you announced with the Red Sox. Did they have any kind of existing system in place? And in general do you find that sports teams and large arenas have something already in place or is it more of a greenfield opportunity for you?

It’s both. In the case of the Red Sox, there wasn’t an incumbent that we took out. There have been other sports arenas, sports stadiums that we’ve won where there hasn’t been an incumbent. But it does go, Kris, to any place a large gathering of people will be has a need for the GEM platform. We’ve sold it out to the Red Sox, the Green Bay Packers to MetLife, and there are others in the pipeline.

Okay. And one other question just related to the historical, the LRAD business. I mean, you guys announced, I think, like a $15 million-ish order with the Army. What’s the timeframe for delivery of that kind of order?

There’ll be some in our Q4 and the balance in our fiscal 2023.

Okay. So like next 12 to 16 months, something like that, it will be fulfilled?

It's likely in the next 12 months.

Okay. And can you give – I mean, what's your – at least qualitatively, looking at the branches of the service and the installed base of the older LRAD systems. Does this represent sort of like the Army will be fully upgraded with their older systems? Or in general, like there's a lot more to go in terms of the upgrade opportunity for the LRAD?

In the current program of record, Kris, it is not a replacement of previously purchased LRAD products. It has three very specific use cases and we continue to deliver on those use cases as we cultivate new use cases for the United States Army and other armies around the world. But I think the United States Army will continue for a long time to be a very good customer of Genasys.

Okay. And then I had one last question just on the demand for these kind of emergency response systems. I have been told that in particular, state and local municipalities in more rural states have radios, police radios that are designed more to function outdoors than indoors, and that has led to some communication issues inside large buildings like schools. And I'm just wondering, have you all seen an increase in demand or any sign of demand from those kinds of municipalities looking to change out their older radio systems that are more designed for outdoor use than indoor use?

We have – I mean, I mentioned GEM, the demand for GEM ramping up quite a bit. And that's across state and local governments, across colleges and universities and large enterprises. So the GEM platform can put geo-specific messages to your phone, to your desktop, to your laptop, to digital signs, to a radio, to TV. An HF radio is just one channel. And with the GEM platform, we can use the HF radios or many of the other channels like I just mentioned.

Okay, got it. All right, well, thanks very much, guys. Appreciate it.

You’re welcome.

And we'll take another question from Brian Colley from Stephens. Please go ahead.

Hi, thanks for taking the follow-up. I was curious if you could provide an update on public warning activity in the EU. Everbridge mentioned earlier this week that there were 12 different countries with RFPs and RFIs out there right now. Are there any countries you feel particularly strongly about your ability to win? I'm curious if that market is still seeing highly competitive pricing.

It certainly is with respect to cell broadcast. Europe is in the month of August and not a lot happens in the month of August, but there are countries and network providers that they are active RFIs and RFPs. And as I said earlier, I believe, Brian, some of those will close before the end of this calendar year.

Okay. Got it. And then on the software side, it seems like most of the growth that you're pursuing is with new customers. I'm curious if upselling existing customers...

No, that's not – yes, I'm sorry to interrupt you, Brian, but the software – the SaaS we're selling, the GEM SaaS we're selling is almost always replacing an incumbent. In the case of the Zonehaven software, there is no incumbent. So that's always going to be new. Frequently, it is the same people that are buying GEM. So there's no incumbent to replace with Zonehaven. There certainly is with GEM. And I will say it again, almost always we're replacing the company.

Got it. Yes. I guess I meant more so you're adding new customers, whether it's you're replacing an incumbent or not. They're new customers to you. I'm curious if kind of upselling your existing customer base that is your software customer base, additional solutions represents a meaningful growth driver as well. Do GEM and Zonehaven have enough add-on functionality to make upselling kind of a key priority there?

It certainly does. So it actually goes three different ways, Brian. So GEM is pulling Zonehaven. Zonehaven is pulling GEM and the integrated mass notification system is pulling both of them. There are several counties and communities in the United States that have been GEM customers that have upsold Zonehaven and vice versa. And where we've had integrated mass notification systems, selling them the GEM communication platform as well as the Zonehaven software is showing great promise.

Okay. That's encouraging. And then lastly, just as it relates to the international expansion opportunity at Zonehaven, when – are you already kind of pursuing that opportunity today? Are you kind of going after other states in the U.S. first? And if the latter is the case, I'm curious when you might start to pursue the international opportunity with Zonehaven?

We will begin first in Europe, and plans are underway now.

Okay, got it. I’ll leave it at that. Thank you for the time today.

Thank you.

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

Thank you. We regularly discuss our business at investor events during the year, and you are invited to join us for these events. We are participating in the Windy City MicroCap Rodeo in Chicago on October 13, contact the event organizer to schedule a one-on-one meeting. We will also be at the LD Micro main event on October 25. You can register for the conference and book a meeting through the LD Micro website. In mid-November, we are participating in the Stephens Annual Investment Conference. Contact your Stephens representative for more information. Thank you for participating in today's call. We look forward to speaking with you again later this year when we report our fourth quarter and fiscal year 2022 results.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.