Earnings Call
Genasys Inc. (GNSS)
Earnings Call Transcript - GNSS Q1 2021
Satya Chillara, Investor Relations
Thank you. Thank you, Dagmar. 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 the company's plans, expectations, outlook or forecasts for future performance. These forward-looking statements are subject to a number of risks and uncertainties, including the consequences of the 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 four 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?
Dennis Klahn, CFO
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. Afterward, 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 then 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, 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 and 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 would like to turn the call over to Richard.
Richard Danforth, CEO
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 first quarter bookings were a record $12.2 million, 43% higher than the first six months of Fiscal 2020. Backlog at December 31, 2020, was $21.5 million, down slightly from the prior 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 salesforce in the last four quarters, established 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 personnel investment we continue to make significantly increase business opportunities for Genasys' mass messaging software, enterprise safety, 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's 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 implement a 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 context around these opportunities, there are between two and five mobile network operators for each 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 that currently use Genasys software, we are working to close multi-year 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 is 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 multi-channel solutions. After proving our Emergency Management software and implementing Integrated Safety Systems in Laguna Beach, Mill Valley, and Newport Beach over the last two years, we are now on track to land additional integrated solutions contracts. In addition to the ongoing expansion of Laguna Beach's city-wide 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 multi-channel 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 central 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. Multi-year contract awards in Australia and the many recent and expected requests for proposals from the European Union initiative and from North America for our enterprise software solutions have us well positioned for 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.
Mike Latimore, Analyst
Hey, guys. The bookings look very strong there. Congratulations on that. So, I just wanted to touch on a little bit of I guess, first is the European trial. I think you said it was complete. Any more color that you can provide there? What would be the next step? And if so, when would that next step be?
Richard Danforth, CEO
Next step would be RFPs and they are in process now, Mike.
Mike Latimore, Analyst
Okay. You mentioned that you responded to multiple country RFPs. Are you focusing on a specific country, or are you dealing with multiple countries and M&Os? Are you seeing demand for both cell broadcast and SMS from everyone, or are some interested in just one of those options to start?
Richard Danforth, CEO
Several countries along with network operators in those countries, frontend and backend SMS and cell broadcast, encompass all of the above.
Mike Latimore, Analyst
Okay. And when you say country, do you mean a government entity within the country? Or the mobile operator in the country?
Richard Danforth, CEO
No, it will be the government entity for the frontend and the mobile operators for the backend.
Mike Latimore, Analyst
Okay, all right. Great. And then are they giving you any indication on how long before they make some decisions?
Richard Danforth, CEO
They are stating that it could be within the next couple of months, but like always, they take longer than anybody ever expects.
Mike Latimore, Analyst
Is that timeline a bit sooner than you initially anticipated, since you were previously mentioning mid-year or possibly the second half of the year?
Richard Danforth, CEO
It is, but I'm going to stick with what I said before, Mike. I think the principal of revenue will begin in our Fiscal 2022.
Mike Latimore, Analyst
Sure. Okay. And then regarding the salesforce hires, I believe you mentioned you’ve added 16 people. Is there a plan to add more beyond that? If so, when do you expect that to be completed?
Richard Danforth, CEO
Yes. So far in our second quarter we've added five additional and we still have more to go.
Mike Latimore, Analyst
Okay. And the hiring, do you think it will be complete in the next couple of quarters then?
Richard Danforth, CEO
Yes. Thank you, Mike. Operator, next call, please.
Edward Woo, Analyst
Yes, thank you. My question is on the Amika acquisition. Have you guys feel like you had fully integrated the team and sales people?
Richard Danforth, CEO
Yes, the team and the salespeople we have, Ed, were 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.
Edward Woo, Analyst
Great. And then, you did mention that you guys are still on the hunt for additional acquisitions. How does the M&A opportunities market valuation out there looking?
Richard Danforth, CEO
I think there is plenty out there, Ed. As you're well aware, the companies that operate in the SaaS market, the multiple demands are very high. So that's the challenge we face through all of this if we're going to buy in the SaaS world.
Edward Woo, Analyst
Great. And then my last question, you mentioned that results, big order at the right at the end of the quarter that got pushed out, a part of it was due to the new normal with the pandemic. Is that something we should be expecting for the next couple of quarters as well?
Richard Danforth, CEO
No. It can happen, but this was a particularly complicated transaction in a foreign country.
Edward Woo, Analyst
All right, great. Well, thanks for the color and wish you guys, good luck. Thank you.
Richard Danforth, CEO
Thanks.
Satya Chillara, Investor Relations
Thank you, Ed. Operator, next call please.
Ryan MacWilliams, Analyst
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 the demand for emergency communications in these markets could actually be stronger this year versus last year?
Richard Danforth, CEO
They already are stronger, Ryan. And to your first question, we're seeing cities, counties, enterprise, private enterprise, business, colleges, townships, municipalities, and large businesses.
Ryan MacWilliams, Analyst
That's great. Are you experiencing higher demand in the U.S. and Canada? Are you noticing increased demand from large enterprises as their employees are now working remotely? Do these companies feel they need a new solution to protect their employees since they are more distributed and not centralized in a headquarters?
Richard Danforth, CEO
Yes. That's absolutely driving demand. So, two 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 in 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.
Ryan MacWilliams, Analyst
Excellent. Yes. I definitely think duty of care for those more distributed employees is going to be a theme this year. I have two 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 and the backend at the same time? Or do you think the backend is generally still going to be a separate bidding process with the mobile network operator?
Richard Danforth, CEO
It will absolutely be a second bidding process. So, there will be an RFP for the frontend from the country government and then whether it's location-based SMS, or cell broadcast, it would be the individual carriers.
Ryan MacWilliams, Analyst
Do you believe that discussions with network operators could extend beyond the June 2022 deadline? The countries need to have the system or the deal in place before then.
Richard Danforth, CEO
I don't believe the June 2022 deadline is going to be met, Ryan. 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 late 2022-2023 kind of notional implementation process.
Ryan MacWilliams, Analyst
Thank you for your time. I appreciate the expansion of your sales distribution globally. However, I am interested in your thoughts regarding some of the new offices opening in countries that aren't part of the EU opportunity. Could you share why you view public warning as a global opportunity? Thank you.
Richard Danforth, CEO
I've mentioned this in a previous call, but regarding our international business development, we historically managed it from the United States. Our global presence and office banking capabilities in the region, along with our ability to reach our customer base despite the pandemic and varying time zones, enhance our capacity to secure public safety systems. I'm seeing growth in public safety systems from integrated systems like Laguna Beach, as well as SMS and cell broadcasts, especially in the Asia-Pacific and Middle East regions. So, I believe it's a matter of following the increasing demand for public safety systems worldwide.
Ryan MacWilliams, Analyst
Excellent. Appreciate the color, Thanks guys.
Satya Chillara, Investor Relations
Thank you, Ryan. Next call. Yes, go ahead please.
Rick Neaton, Analyst
Hi, good afternoon, gentlemen. Most of my questions have been asked and answered, but in looking at the prospective exponential increases in opportunities in Emergency Management, in the software as a service, where we should be looking at these in the 2022 through 2024? Is that the timeframe we should be looking at for this exponential increase?
Richard Danforth, CEO
Yes.
Rick Neaton, Analyst
Okay. Thanks. Everything else has been asked, answered and covered in your prepared remarks. So, thank you for being so thorough.
Richard Danforth, CEO
You're welcome.
Satya Chillara, Investor Relations
Thanks, Rick.
Robert Smith, Analyst
Yes. All right, good afternoon. Thanks for taking my questions. Looking at the EU-mandated opportunity, is there a way to come up with a figure as to what the total market possibility is there? Opportunity?
Richard Danforth, CEO
There is, Robert. But I have not commented on that publicly. It would lead to potential pricing disclosures. There is public data that's out there that gives an opinion on the overall size of the market in the EU.
Robert Smith, Analyst
Okay, thank you. So, your comments about the year that touched upon top-line revenue, but there is no comment about the bottom line, so to speak. Is that a reflection of a margin question? Or you don't want to say anything about them?
Richard Danforth, CEO
We expect our gross margins to be in line with historical averages for year-over-year. We expect in our experience and that I've been talking about it for several quarters that we are experiencing an increase in expenses associated with particularly sales and marketing to support our growth initiatives. And that expense will be higher in our Fiscal 2021 than it was in 2020. We still expect the company to record record revenues, be profitable, and be a positive cash generator in our Fiscal 2021.
Robert Smith, Analyst
Okay, thanks so much.
Richard Danforth, CEO
Okay.
Lloyd Korten, Analyst
Yes. Hi, gentlemen. Just one question. The comment you just made on what's out there publicly on the size of potential market, can you tell me what that number is?
Richard Danforth, CEO
No. I'll point you to where to go to find it and it's out there. Even Ryan was talking earlier as published things on that size of that market.
Lloyd Korten, Analyst
Where do I go for it?
Richard Danforth, CEO
Lloyd, I will point out point you to a site that will have it. I just don't have that if I was sitting here right now but I'll send it to you.
Lloyd Korten, Analyst
Thank you so much. Bye.
Richard Danforth, CEO
Bye.
Will Hamilton, Analyst
Hey guys. Just a question on the salesforce. Can you give us a sense as to what are the productivity targets for reps that you hire? I mean obviously, not in year-one, but once they mature, what kind of revenue do you expect these guys or women to bring in?
Richard Danforth, CEO
Different depending on the flavor of products systems and software they're selling. So, it's much different in Europe for the EU initiative than it is in the enterprise market here in the U.S. I won't give you a specific number, Will, but I'll tell you that the EU initiatives by country are in the millions and you can get a small city here in the United States or Canada for $25,000. So it's all over the map.
Will Hamilton, Analyst
Right. How many of the 20 you've hired or so are dedicated towards Europe versus U.S. or other markets?
Richard Danforth, CEO
The 16 individuals we hired last year include five in Europe, meaning that 11 are in the enterprise suite here in the U.S. This also accounts for the three or so who joined us through the acquisition.
Will Hamilton, Analyst
Okay. And then one question just on cadence of revenue. I think previously you talked about maybe a 40-60 split this year. Correct me if wrong, but is that what you're still thinking in terms of the cadence of the revenue during the first half-second half?
Richard Danforth, CEO
It will be similar to that, Will.
Operator, Operator
And it doesn't look like we have any further questions.
Unidentified Analyst, Analyst
Bruce Carnegie and I have a question about the Navy Research contract. Could you give us a little information about that?
Richard Danforth, CEO
Sure, Bruce. We competed in one for our Phase I SBIR with the United States Navy to do some Research on next generation Long Range Acoustic Device technology.
Unidentified Analyst, Analyst
Is there a payment associated with that? How does it go forward?
Richard Danforth, CEO
The first phase is approximately a $240,000 development project. There will be an evaluation and reports submitted by us to the Navy. The Navy will then make a decision to go onto a Phase II SBIR. The limits on Phase II SBIRs are right around $1 million and if it gets through Phase II and moves on to Phase III, it's at a point where the product will be commercialized.
Unidentified Analyst, Analyst
Great.
Richard Danforth, CEO
And the IT is owned by the company.
Unidentified Analyst, Analyst
Great, thank you, Richard. Great, thank you.
Richard Danforth, CEO
You're welcome.
Robert Smith, Analyst
Just thought, if this contract has not been pushed into the subsequent quarter, what might the numbers have looked like for the reporting period?
Dennis Klahn, CFO
The revenue would have been flat compared to the prior year, and it would have been significant. The loss would have been probably cut in half or a little bit more than that.
Robert Smith, Analyst
Okay, thank you.
Satya Chillara, Investor Relations
Dagmar, that's all the time we have right now.
Richard Danforth, CEO
Thank you. We regularly discuss our business at investor events during the year. We invite you to join us for these events. Thank you for participating in today's call. We look forward to speaking with you again in a few months when we report fiscal 2021 second quarter results.
Operator, Operator
Thank you, this concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.