Gorilla Technology Group Inc. Q4 FY2023 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by. And welcome to the Gorilla Technology Group Fiscal Year Ended December 31, 2023 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I'll turn the call over to Mr. Cody Fletcher of the Blueshirt Group. Mr. Fletcher, please go ahead.

Thank you, and good morning, everyone. Thank you for joining us on today's call to discuss financial results for the full year of 2023. Gorilla released these results before the U.S. market opened on Thursday, April 4th. The release is available on Gorilla's website and from newswire services. With me on the call are Jay Chandan, Gorilla's Chief Executive Officer and Chairman; and Daphne Huang, Gorilla's Chief Financial Officer. Jay and Daphne will make prepared remarks, then we will have a question-and-answer session. If you have any additional questions, please send them to gorillair@blueshirtgroup.co, and we will respond as soon as possible. Before we get started, I would like to note that certain statements made during this conference call that are not historical facts, including those regarding our plans, objectives, growth and expected performance, including our outlook for the fiscal year 2024 and beyond, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are our outlook only as of the date of this call. While we believe any forward-looking statements we make are reasonable, actual results may differ materially, because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether because of added information, future events, or otherwise. Further information on these and other factors that could affect the company's financial results is included in filings we make with the SEC from time to time, including the section titled Risk Factors in the company's form 20-F previously filed with the SEC. And now let me turn the call over to Gorilla Technology's CEO and Chairman, Jay Chandan.

Thank you, Cody, and thank you everyone. Good morning for joining us today. First of all, I want to thank everybody for taking the time to listen in to this conference call today. This past year has marked a transformative era for Gorilla, distinguished by record-breaking accomplishments and a clear demonstration of our unmatched innovation and unwavering determination. Now in 2023, we didn't just meet our financial goals. We far exceeded them. That is also helping launch Gorilla into a league entirely of its own. But this year wasn't just about financial achievements. It was a testament to Gorilla's resilience, innovation, and more importantly, our unwavering commitment to our vision. We have defied expectations not by chance, but through a strategic orchestration of our resources, a deep understanding of our market, and an unparalleled drive to innovate. Now, I always quote the saying by James Watkins, and this lies at the heart of everyone at Gorilla today: A river cuts through a rock, not because of its power, but because of its persistence. And at Gorilla, we are truly persistent. Now our story is actually built on three foundational pillars: relentless innovation, strategic market expansion, and our commitment to customer success. Firstly, relentless innovation is something I talked about. At Gorilla, innovation is not just to significantly enhance our product offerings, but it's not just a buzzword. It is also to build upon what we offer, taking into account the burgeoning demand for AI, IoT, and cybersecurity solutions. Our R&D team has worked tirelessly to ensure that our technology not only meets but exceeds the evolving needs of our clients, setting new standards in the industry. Secondly, I talked about strategic market expansion. Our remarkable revenue growth is a direct result of our aggressive yet thoughtful market expansion strategies. We have actually entered new geographies for strategic partnerships and diversified our client base, which has not only amplified our market presence but also fortified our revenue streams. This calculated expansion has allowed us to tap into unprecedented opportunities and cater to a broader spectrum of needs. Finally, when I talk about commitment to customer success, this is at the heart of Gorilla's achievement where what lies is that unwavering commitment to our customers. Our growth is a reflection of the success we've been able to drive for our clients. By aligning closely with their objectives, we have not only earned their trust but their loyalty, which has also been instrumental in our recurring revenue and our impressive sales pipeline. Moreover, we have actually continued to capitalize on the demand for AI, IoT, and cybersecurity solutions in our areas where R&D efforts and business operations have yielded significant advancements. This commitment to innovation has not only fueled our revenue growth but has also announced that operational efficiencies leading to a dramatic turnaround in profitability. Now, before I go on, I'd like to hand this over to our CFO, Daphne Huang, who will add a little more color to our financial results. Daphne?

Sorry, guys, for the delay. I was having issues unmuting. Thank you, Jay. Driving deeper into our financial performance, our revenue grew to $64.7 million, a historical high for the company that reflects our strategic foresight and operational agility. This exceptional year-over-year increase of 189% is a direct result of our global expansion strategy, our execution of key projects, our industry-leading products, and our focused project management capabilities. Moreover, our ability to identify and seize high-margin opportunities and rapidly scale our operations to meet market demand has played a pivotal role in our growth trajectory. Our gross margin for the year improved significantly to 69%, up by 32 percentage points from the previous year. This is a direct result of our improved sales structure as our system integration service is by nature a higher-margin business. Furthermore, our ability to swiftly establish cost centers in low-cost regions such as India and Egypt enables us to optimize labor costs while staying proximate to our clients for prompt responsiveness. We're also delighted to report a net profit of $19.9 million for the year, which also marks the first time Gorilla reports a profitable full-year result since the de-SPAC, primarily due to higher sales conversion rates, our disciplined financing approach, and improved operational efficiency. We also fully depreciated most of our R&D equipment in 2022, and considering the one-off expense from stock lifting in the same year, it won't be part of the P&L going forward. We expect our future profitability to continue to benefit from efficient operating expense control, boding well for the bottom line. Our adjusted EBITDA stood at $29 million, reflecting our operational efficiency and our disciplined approach to expense management. This represents a 587% increase over the previous year, highlighting our ability to drive profitability while investing in growth initiatives. 2023 was a year marked by high inflation and high interest rates, posing many challenges for small-cap companies striving to achieve business expansion at comfortable labor and borrowing costs. Gorilla successfully achieved that goal, thanks to our strong cash position and agility to venture into new markets with more cost-effective operational centers, providing us with the flexibility to pursue strategic growth opportunities and further enhance shareholder value. Looking ahead to 2024, our financial priorities will be continuous operational efficiency management while driving our top-line growth. We have a deep pipeline and promising sales leads in markets with robust demand for smart government projects. We will aim for high growth opportunities while also guarding our profitability through active expense control and financial oversight to ensure we are well-positioned to navigate future market dynamics with confidence. Now, I hand it back over to Jay for closing remarks. Jay?

Thank you, Daphne. Now all of you have actually heard from Daphne about our numbers, exciting as they may be, I think the future bodes well for the business. But this year is not merely about financial achievements. It represents a significant leap beyond the bounds of skepticism, underscoring our strategic foresight and signaling to our investors that they are at the forefront of a transformative era. Now, Gorilla Technology is not merely participating in this evolution, we're actually spearheading it. Our commitment to this path is evident in the array of strategic partnerships we've forged and continue to cultivate. Our footprint is expanding, highlighted by our recent ventures into the MENA region with the establishment of our operational hub in Cairo. We want to be at the forefront of AI and cybersecurity innovation, meticulously designing custom hardware components to fit our customers' unique requirements. In collaboration with Lanner Electronics, we're also setting the industry gold standard by delivering tailor-made AI-enhanced cybersecurity solutions that ensure unparalleled security and resilience. In Thailand, we made strides with the prestigious hospital integrating our video management system and intelligent video analytics solution, thereby setting new standards in security convergence for healthcare institutions. Moreover, our partnership with Protactics in Colombia marks a significant step towards bringing our advanced security convergence and smart city solutions to new markets. Looking ahead, our direction is unequivocal: our dedication to investing in tomorrow's technologies, broadening our market presence, and our unwavering promise to deliver unmatched value to our clients remains at the core of our strategy. We stand not at the cusp of just sustained success, but of defining the future landscape of innovation. We've built a pipeline surpassing $1 billion, and our ongoing strategic expansions are geared towards achieving remarkable milestones. I extend my heartfelt thanks to our entire team at Gorilla, every single investor of ours, and our Board for their pivotal roles in this extraordinary journey. Our narrative is one of overcoming not only the challenges before us but transcending traditional boundaries of possibility. As we advance, propelled by our accomplishments and our collective ambition, my confidence in Gorilla's capacity to pioneer new frontiers of innovation and success has never been stronger. I express my profound appreciation once again to our dedicated team whose expertise and diligence form the bedrock of our success to our valued clients who've stood by us thick and thin for their trust and partnership, more importantly, and finally to every single investor of ours, whether you're on this call or not today, for their steadfast support and confidence in our vision. Together, we've not merely scaled new peaks; we've laid the groundwork for an era marked by unparalleled growth and innovation. Thank you all once again for joining in today. We're truly thrilled about the journey ahead and eagerly anticipate sharing our ongoing developments with you. I'll hand it over to Cody.

Thank you, Jay, and thank you, Daphne, and thank you to everyone for participating in today's call. Now, I'll hand it over to the operator, for our question-and-answer session. Operator?

And your first question comes from the line of John Roy from WTR.

So Jay, in terms of competitive positioning, I mean, obviously there's a lot of players out there. I'm curious to where you see you are now? And what are your plans to enhance that in the future?

Hey, John. Good to hear from you. It's a good question. So, we believe that we are in a state of disruptiveness today, and we see that everything around us is being transformed. Whether we work, the way we work, the way we communicate, the way smart cities are built, the way smart cities are being thought of today. Now most people look at it and say, hey, smart cities. It's a very simple concept. That's great. But what is it we can do? What is it you can do specifically for us? What we are doing today is we are actually creating an ecosystem, which we can help our customers. Now think of us, whether it's smart city, smart energy, smart transportation, smart retail, or including safe cities as we call it, our aim is to create what we call an ecosystem or a platform-as-a-service. To do that, we've been focused on three very important aspects: data intelligence, video intelligence, and security convergence. In each of these segments, we have been absolutely focused on building solutions so that we can provide the support to our customers. Now, if you look at the IT, OT side, we have been creating technologies across various application layers including your vulnerability scanner, your audit logs, your accountability, your API securities, and so on. We have built a framework for our smart cities and safe cities. So think of us as building multiple layers on what we call smart layers, smart solution layers, application layers, your network layers, your control layers, and your perception layers. Now the second part of this is where we actually focus on creating infrastructure. The infrastructure we are creating is built around technology. We're working very closely with what we call smart cities today to do three very important things: improve the quality of life through our solutions, create a local economic competitiveness, and finally, provide sustainable living. Hope that answers your question.

Yes. Great. Kind of as a follow-on to that, what are the customers' pain points? What are their emerging trends? What are they really asking for, yeah, recently?

Well, so today, the increasing threat again, I touched upon, you know, the whole security convergence. Let me kind of give you an overview of this. The increasing integration of these environments today and networks around what we call Internet of Things or Operational Technology has made it easier for all these threats to move across the environments. Now the threat posed by such movement can result in breaches and loss of control over different environments. Now simply, when I woke up in the morning, I'll give you an example of a customer who called me on Tuesday of last week. They talked to me about, Jay, I've got some very serious issue because I don't seem to have visibility into my network activity across all my different networks. I need you to help me come and harden that infrastructure. That's one issue someone has come up with. The second one, someone has come back to me and said, hey, my OT needs a lot more control. Do you have security around the OT side of it? Can you help me create asset inventories, risk assessments, control and authentication, endpoint detection, and so on and so forth? Now other customers have other issues. For example, there's a project we're working on with one of the customers, in Asia, focused on 5G lawful interception. They are worried more about how certain authorized authorities perform interception of communication traffic for very specific users including, let's say, activation, deactivation, interrogation procedures, and so on and so forth. And on the other side, we've talked about this pillar to post, where we call the Air Gap Network project, right? It's about creating complete isolation between two networks so that there can be no malicious actors across the region. So each customer has a unique pain point today, and the benefit of someone like Gorilla is that we provide a consultative approach, and that consultative approach has really brought us up that radar. People have come to us and said, I like what you're doing. Can you stay with me and hand-hold me to the process of what we call our digital journey? So that's kind of the high-level issues we're seeing today.

Your next question comes from the line of Mike Latimore from Northland Capital Markets.

I guess, obviously, you're just a big customer here. Can you just talk a little bit about what you deployed or what services in Egypt in 2023? And what are the kind of key things you expect to do for Egypt this year? And then, how much control do you have over kind of those next stages versus having to rely on, I don't know, third-parties or Egypt itself to provide a resource to get some of these things done?

In Egypt, we are currently developing an Air Gap Network for the government. An Air Gap Network is a secure connection that keeps a computer isolated from outside networks, preventing hacking. This system provides complete separation between networks to protect sensitive information. It has been utilized for decades in military and government contexts, and we are now extending its application to critical sectors like medical systems, nuclear facilities, aviation, and industrial controls. So far, we have completed the proof of concept and design phases for the government project and are now entering the deployment phase. We have already tested some of the equipment and found it to be functioning well. This year, we will focus on bringing in hardware, testing our software, and integrating everything. Regarding the broader market, Egypt is just one part of our expansion strategy. We have formed partnerships with governments in Colombia and Thailand, and we are actively seeking larger projects in various regions. Each of these governments has approached us with different needs, whether it be video analytics, AI, or safety improvements. Commonly, they all share social, economic, and environmental goals, which we refer to as the SEE perspective. Gorilla is positioned uniquely to address these challenges, and we are eager to assist with proof-of-concept initiatives to ensure stakeholders succeed in their efforts. We are committed to supporting them to achieve their objectives.

And then just a basic question: how many employees do you have and where do you see that headcount going by your end?

Nearly 200 today. As you know, we've been through some process last year, but we see that growing very quickly. Daphne touched upon a very important expansion plan into India, Egypt, and other regions. While we have made Cairo our hub for both our manufacturing side and our services side, we're also expanding very rapidly in India. Initially, it was only the customer success team. Our CTO, Dr. Rajesh, has been to India recently, building up an R&D team there. We were at zero until September of last year. We are now nearly about 30 to 40 people. By the end of this year, we look to be growing to nearly 200 people in India, and about another 50 people in Egypt. That is excluding all the other manufacturing processes we have set in Egypt along with our partner, Lanner. This will include probably another 150 to 200 people through our partner network as well.

Your next question comes from the line of Brian Kinstlinger from Alliance Global Partners.

Can you provide some more detail around the pipeline, maybe average deal size, number of programs you're tracking or competing for? And then I'm curious, how capital intensive are these programs upfront, and does your balance sheet impact in any way what you're bidding on today as a result?

Well, we are truly excited. Listen, there's a lot of chatter about our $1 billion pipeline being real and so on and so forth. But let me absolutely affirm to everybody on this call and outside that our pipeline is real. We are working very hard. So much so, I haven't seen my family in months. We're all working very hard. If you're asking me what that pipeline looks like today, unfortunately, I won't be able to give you an average deal size because let me give you an example. Some of them are proof-of-concepts. In some of the emerging economies, especially South America, Northern Africa, and parts of the Middle East, we have some proof-of-concepts that range between $0.1 million and $1 million, but that's not our pipeline. When I've completed the proof-of-concept, these projects are typically between $10 million and $30 million. That said, we are also being invited in some very large deals. Without giving you the names of the regions, some of the average deal sizes in the large category are between $80 million and $200 million. We have a couple of very large deals that are still not in the pipeline, by the way, because we are still developing them. Those are between $250 million and $750 million each as well, and that's not in the pipeline. We believe those will likely enter the pipeline by the end of next year. Again, many of these are proof-of-concepts. The important issue we have today is that all these smart cities have been burnt before. They had some very capital-intensive, strong infrastructure building projects that have actually turned out to be nearly garbage and have not seen much utilization. They are now reluctant to spend huge amounts of money. They approach us and say, can you show me if you can do a small project in a small place? For example, the Casanova project in Colombia is a small region with about 450,000 to 500,000 people. It's a test bed. Once we test it out, we could potentially roll it out across Colombia, a much larger country. We could do the same in countries like Brazil, Chile, Ecuador, and so on. We could replicate that across Egypt, Northern Africa, the Middle East, and big countries like India, which have a population of over 1.5 billion. The second part of your question was about how capital intensive this is. When doing proof-of-concepts, these are not capital intensive. We have the resources, the technology, and deep partnerships. But when we go into project mode, these can sustain projects between $5 million, $10 million, and $15 million, which are easy on a balance sheet. However, much larger projects, say $30 million to $100 million, will require us to seek additional capital. I hope that answers your question.

Yes. Perfect. And so then how many $80 million to $200 million programs are represented in that pipeline? And then what's your sense of how long the sales cycle for these larger programs will be? And maybe how long the proof-of-concept in general is on average?

It's a good question. Let me break that down for you. The first part is the proof-of-concept. These have budget allocations, so they can be done as soon as possible. It's a discussion between us and the customer. When the customer finds our proposal appealing, we have what I like to call a honeymoon period. These budgets range from $100,000 to sometimes $0.5 million. The second category consists of some customers who just want to proceed straight to a test case. This would be something like what we did in Colombia, where we are collaborating on a smaller region, a county, or area such as Casanova, which has about 0.5 million to 1 million people. This serves as a good test bed for us to trial technologies and resolve any issues that may arise. This phase typically takes about 2 to 6 months, with budget allocations ranging between $1 million and $10 million. The larger projects, which range between $10 million and $100 million, generally have longer sales cycles of about 3 to 12 months. However, these do not have pre-allocated budgets but may have a governmental mandate. We generally avoid the traditional bidding process, and we are selective in our engagements. When the customer selects us as one of their four prospects, we devote 25% of our project time to that project. For projects that exceed 12 months, I personally become involved, as these require substantial guidance for government approvals, budget approvals, and other regulatory requirements. Typically, those projects take between 12 to 24 months. I hope that answers your question.

The gross margin in the second half of 2023 was quite impressive and much higher than I would have thought headed in. Can you discuss the mix of revenue that drives that? And then how we should think about mix and gross margin in 2024?

2023 has been an exceptional year for us. Our gross margins were high because we did a lot of software development work. We carried out many services for customers, and most of the products we've built for the client have gone through extensive testing. We've utilized a lot of offshore resources, which has allowed us to increase our gross margins. In 2024, we're forecasting margins between 30% and 40%. We aim to achieve around the 40% gross margin levels. Why? Because we want to ensure that every product we deliver is engaging and polished for the customer. This focus will take some time to accomplish, and that's why we've projected a 40% margin. I would love for margins to be higher; however, we will remain EBITDA positive and cash positive in 2024.

I guess maybe just briefly touching on the working capital needs for 2024. Could you maybe just help quantify what you're looking for or what you need externally to fund working capital throughout the year? Or do you think working capital is going to be positive this year just based on what happened last year?

That's a good question. Hey, Daphne. Do you want to take this? I've been...

Yes. I was going to say, Brett, it's good to have you on the line, obviously. The working capital, until we get paid by the Egypt government on the Egypt project — which will be later in the year, they typically pay once a year — we do have heavy project planning, scheduling, and procurement of software, POs, and delivery scheduled. The short-term working capital pressure will be on for a few months. The working capital fundraising plan will be as we initially expressed. We will look to raise additional funds to pay vendors before we get compensated.

And then on the new kind of deal that you guys announced in Colombia, I don't know if you talked about it on the call; I might have missed it. But any insights into the size and duration of that contract and when maybe you'll start doing project on that or doing work on that?

Sure. I can take that, Daphne. So, Brett, once again, good to speak with you. The project is set to commence in May. We're currently conducting a very detailed requirements analysis. Our team will be traveling to Colombia, which is a great place. Once they have traveled there, they will conduct the initial proof-of-concept, which should take roughly around 2 to 4 weeks. After completing that initial proof-of-concept, it will move into a full budget deployment. We hope that it will close before the end of this year. The maximum slippage expected is until March of next year, but that would be for this particular contract. Just to share, we have the entire Colombian government, including the mayor of Bogota, visiting us about 3 weeks ago. I'm not exaggerating; there were over 20 people here. What is important for them is that this acts as the test case. They have been involved in many projects but feel they haven't received a good return on investment. So they want to ensure the ROI, and I emphasized this point earlier. Every customer talks about ROI now: What is my return on investment? That is exactly what we're focused on. When we work with a customer, we develop a model and present it to them, showing the expected gains from the investment, whether financial or economic. That is very unique, and this isn’t just for the sake of this conversation or this call. We take care to ensure our customers' success, and we encourage a sense of mutual benefit. I hope that gives you insight into the Colombian deal, which we believe will expand into several tens of millions of dollars over the next 2 to 3 years. At least, that's our focus today.

There seem to be no questions at this time.

Heidi, would you mind if I just make a quick statement? I know this is completely out of the blue, but I'd like to make a quick statement to every single investor who's listening to this call. I know a lot of them have had some very troubled times. Gorilla's share price hasn't actually shown through. I know people have endured tough times with Gorilla stock, and I want to first of all thank every single investor who stood by me, by us, thick and thin. I'm personally thankful for every single one of you who has believed in Gorilla. I take note of every comment that comes my way. Do not think that I do not see your feedback. I’m well aware of the negative discussions about me, and that’s okay. I want to ensure that you believe in this business because I am in this business. I have also invested heavily — I’m down as well — so I'm on the same journey as every single one of you. All I'm asking is for you to believe in me, believe in my team, and we will make this happen. Gorilla will become a successful story, and I absolutely will not rest until it becomes a success story, no matter what anybody says. Thank you.

Thank you. We still have no questions in the queue.

If anybody's got questions, they can reach out to me personally or through Cody. Every single one of you, we’ll make sure we can respond to you at any given point of time.

Thank you. If you're happy, this concludes today's conference call. Thank you for participating. You may now disconnect.