Rekor Systems, Inc. Q4 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Rekor Systems Conference Call. My name is Robin. I'll be your coordinator for today. As a reminder, this conference call is being recorded for replay purposes. Before we can start, I would like to read you the company's abbreviated Safe Harbor statement. I would like to remind you that statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, product and product releases, partnerships and any other statements that may be construed as a prediction of future performance or events are forward-looking statements. Such statements can involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from those expressed or implied by such statements. We ask that you refer to the full disclaimer in our earnings release. You should also review the description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be discussed on the call. The company believes the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. I'd now turn the call over to Mr. Eyal Hen, CFO of Rekor Systems.

Good afternoon and thank you for joining us. Today we'll discuss Rekor's results for the year ended December 31, 2021 and provide you with an update on key business topics. On the call with me today are Robert Berman, CEO and David Desharnais, President, who will give you additional color on our business after I go over our relevant results. 2021 was an important and defining year in Rekor's young history. In 2021, we had a follow-on offering that allowed for acquisition in our nine-year-old investor base where we presented our Rekor platform to the investment community. The introduction of Rekor and the acquisition of Waycare has put us in a position to jumpstart the adoption of our operating platform, accelerate our growth, and claim our place as the leader in the emerging intelligent infrastructure market. David will provide more details regarding our go-to-market strategy and our near-term and forward-looking opportunity. Since the second quarter of 2021, we've been moving from a product-oriented transactional revenue model to a solution-oriented recurring revenue model. The sales solution, as compared to products, spreads revenues out over a longer period of time, thus reducing revenue in the short term. This shift from point-in-time revenue to recurring revenue has had an important impact on near-term revenue, but we continue to generate year-over-year revenue growth as our newly refined go-to-market strategy also had a positive impact on our growth. With that, as we go over the financial results for the year ended December 31, 2021, our company achieved significant revenue growth for the year compared to 2020. Revenue for the year ended 2021 was $14.3 million compared to $9.2 million in the same period last year, a robust increase of 55%. Recurring revenue was $4.6 million for the year ended December 31, 2021, which represented an increase of $1 million or 28% compared to $3.6 million for the year ended December 31, 2020. The year-over-year increase in revenue is primarily due to the expansion of our product and service offerings. Our current sales model emphasizes revenues generated through direct sales, but we've also seen increases in our eCommerce revenue and customer support revenue. We benefited from this strategic marketing initiative that we launched at the beginning of 2021 and are seeing measurable results from our focus on recurring revenue. We expect the update on SaaS-based initiatives in our current go-to-market strategy to generate long-term growth well beyond what we could have achieved under the previous model. We will, however, continue to monetize the opportunities that are transactional in nature. Total operating expenses for the year ended December 31, 2021 were $39.3 million compared to $17.6 million during the same period in 2020. We've recorded a significant increase in payroll and related expenses. The addition of headcount due to the Waycare acquisition played a part in this increase. While we continue to add important new hires to our engineering and sales and marketing teams, we have extended our sales and marketing efforts as we add additional resources to promote our products and services. Finally, we've strategically invested in research and development to develop new solutions and improve our products. This investment will enhance our competitive edge as we continue developing additional state-of-the-art solutions to address our customers' growing needs. Our adjusted gross margin for the year ended December 31, 2021 was 66%, a decline from the 62% we reported on December 31, 2020. The decline in margin for the year ended December 31, 2021 is primarily attributable to the evolution of our go-to-market strategy as we continue to focus our near-term efforts on sales that generate higher margin recurring revenue. We expect to see improvements in our adjusted go-to-market strategy. Adjusted EBITDA for the year ended December 31, 2021 was a loss of $21.8 million as compared to a loss of $9 million in the period last year. This increase in loss was due to the investment to position Rekor for future growth that I've just discussed. During 2021, we released enhanced key performance indicators to help provide visibility and a more concise view into our success and progress. We hope that over time, these KPIs will provide our shareholders better insights into our business. In 2021, we posted contract value at $8.9 million, which is an increase of 35% compared to $6.6 million of total contract value during the year ended December 31, 2020. As of December 31, 2021, the remaining contract performance obligations amounted to $22.6 million, an increase of 35% from $16.7 million reported as of December 31, 2020. Moving to our financial condition and liquidity, our cash balance on December 31, 2021 was $25.8 million, up from $20.6 million as of December 31, 2020. We raised $70.1 million in net cash proceeds in a public offering in February 2021 and used $39.9 million for the acquisition of Waycare Technologies in August 2021. Working capital on December 31, 2021 was $17 million, down from $18.2 million as of December 31, 2020. The increase in cash and cash equivalents was primarily due to the net proceeds from our public offering in the first quarter of this year, partially offset by cash payments as part of the total considerations for the Waycare acquisition. The decrease in working capital was primarily due to an increase in accounts payable and accrued expenses to address supply chain issues and secure vital components of our product, as well as the expansion of our sales, marketing, and research and development efforts. In summary, we are enthusiastic about our growth prospects. The enhanced teams have been extremely busy winning new client relationships, keeping existing ones, and forming new partnerships. We feel very good about our pipeline and the strong momentum we are experiencing. While the investments we're making in our go-to-market strategy may negatively impact our margins in the early years, we fully expect our margins to improve significantly in later years as we reap the benefits of these investments. There is significant operating leverage in our business model, and we will remain focused on creating shareholder value and making decisions that will benefit our long-term shareholders. With that, I will now turn the call over to Robert.

Thank you, Eyal. Good afternoon, everyone, and welcome. Today, you are going to hear a brief overview of our business and the progress we have made during the past 12 months. First, I would like to highlight our strategic acquisition of Waycare in August 2021. This support and development has propelled our company forward. There's a lot going on here at Rekor that already marks us as a leader in the intelligent infrastructure sector. Rekor is actively innovating and building to expand our software portfolios so that we can address not only our customers' current challenges, but also the evolving challenges they will face in the future. There's no mistake about it. We are a development stage company. Yet we can compare ourselves to other large cap, private equity, and venture capital-backed companies that are scrambling to get off the launchpad. We've already cleared the launchpad and are miles ahead when it comes to understanding the intelligent infrastructure market. We excel at AI and machine learning as it relates to vehicle recognition, intelligent data processing, 5G, edge processing, and cloud computing. Technology is one of the three pillars of our business model, standing alongside real estate and expertise. We will continue to grow our capabilities by adding all three pillars. As Rekor begins the next leg of its journey, like most great companies with a bright future, we're attracting amazing talent. I'd like to mention how proud we are that David Desharnais has joined Rekor as our President. David's background is quite remarkable. I'll let him get into the details and formally introduce himself, but with his vast tech product and marketing experience as a senior veteran of the management teams at IDEMIA, American Express, and Amazon Web Services, we are pleased he has chosen to lead the way at Rekor as we begin to reimagine the future of intelligent infrastructure. With that, I will now turn the call over to our President, David.

Thank you, Robert. I'm honored to be at Rekor and part of its senior leadership team. Good afternoon, everybody. It's a pleasure to be with you today. As a way of introduction, perhaps some quick background on me would be helpful. For more than 25 years, I've been deeply involved in building leading-edge software and technologies, building cloud, big data, and AI platforms, building global high-performing teams and strong strategic partner networks. I've also had the opportunity to build multiple billion-dollar businesses and, in the process, established myself as a passionate leader in digital transformation and scale. During my career, I have served in global senior leadership roles at large publicly traded companies, VC-backed startups, and private equity-led firms, and have headed up multiple technology, product, and business organizations around the world, numbering in the thousands. I've had the opportunity to learn from mentors such as Jeff Bezos, Ken Chanel, Steve Quayle, Liz Button, Andy Jassy, and more along the way. I absolutely love what I get to do every day. I'm passionate about technology, people, and connecting the dots to find solutions for big problems and opportunities. All of these experiences with technology and products have led me to Rekor. As I joined Rekor as President a little over eight weeks ago, I've been focused on engaging with our global teams, technology and capabilities, meeting with and listening to key customers and partners, and diving deeper into our position and opportunities within the emerging intelligent infrastructure market. Mobility of people, vehicles, materials, and information is integral to nearly every aspect of our daily lives. We step from our homes into a road system that leads to work and school to get our food and to many of our daily family and social functions. Infrastructure is the backbone of a functioning economy and depends on well-maintained and synchronized network systems. Unfortunately, many areas of the world face aging and legacy infrastructure today, resulting from decades of neglect and underinvestment, creating unprecedented mobility, equity, sustainability, and public safety challenges to cities, states, and municipalities. The myriad of problems with our roadways is well-known and we feel it every day. Globally, auto crashes cause nearly 1.3 million preventable deaths and 50 million serious injuries every year. It is the leading cause of death for children and young people worldwide. These numbers in both absolute and relative terms have remained largely unchanged for the past 20 years, and it is unacceptable. Keeping pace with fast-changing global technology, sustainability, and public safety dynamics and concerns requires inventive approaches to modernize our infrastructure backbone. Advancements in data collection, analytics, and communications must be employed at the core alongside the infrastructure, thereby making it intelligent. Spurred by the 2021 Infrastructure Investment and Jobs Act in the United States, a once-in-a-generation $1.2 trillion surge of investment is being dedicated to improve existing transportation infrastructure and to increase public safety and sustainability for a modern, efficient, connected infrastructure. This is creating a massive new intelligent infrastructure market opportunity. Now, companies looking to successfully meet the demands of this emerging and massive intelligent infrastructure economy must not only have scalable software solutions, modern platform architectures, and operate in the cloud, they must also have an AI playbook and be armed with data, algorithms, and machine learning models that fuel their solutions. This is exactly where Rekor is highly differentiated, and this is where we will create the most shareholder value. As I look forward, I believe that our strength in data, proprietary AI technology, deep domain expertise, and the mission-critical solutions we deliver, coupled with the privileged position of access and trust that we have earned with our customers, puts us in an advantaged market position and at the forefront of this new intelligent infrastructure economy. We are at the right place and time with the right talent and technology to capture significant growth in an inevitable future. I firmly believe that for Rekor, the best is yet to come. Once again, it is a pleasure to be with you today, and I look forward to speaking with you and updating you on our progress. At this point, I would like to turn the call back to Robert for closing remarks.

Thanks, David. And I'd like to close by saying first that I agree with David, we are seeing exceptional growth, and we are attracting exceptional talent like David and our new Chief People Officer, Deb Hennessy. We're growing organically and will remain opportunistic when it comes to exploring additional accretive acquisitions. So stay tuned. At this point, I'd like to turn the call back to our investor conference call coordinator for questions.

Our first question today comes from Max Michaelis with Lake Street Capital Markets. Please go ahead with your question.

Hey guys. Nice quarter. I was wondering if you could just give me a fourth-quarter number for your recurring revenue segment, and as well as, given the quarter is almost over for Q1, how has that trended in the last 90 days? Thank you.

Sorry about that. Yeah. Sorry. I might be a little muffled. I was just wondering if you could give me a solid Q4 number for your recurring revenue because I know you only gave the full year, and then as well as how that has trended over Q1 since the quarter is pretty close to wrapped up here. ...and I can't reference Q1 because it's not public information, but Q1 overall revenues, we have $3.2 million compared to Q4, sorry, $3.2 million as compared to Q3, which was $1.6 million, and that quarter has substantially changed our revenue model.

Okay. And then just given your statements about gross margin improvement, how is that trending? Do you guys see directionally over fiscal year 2022? When should we start seeing improvement? Should we see it in the first half, or are we thinking more about the second half of the year?

Yeah, as we said also in September in the last investor call, we'll see substantial improvement in gross margin and some other KPIs as we get into the second and third quarter of 2022. So we can start to see this improvement on the backend of 2022.

Okay. Thanks. That's it for me. We're good.

Our next question comes from the line of Zach Cummins with B. Riley Securities. Please proceed with your questions.

Yeah. David, just starting with you, appreciate you getting on the call for an introduction. Can you talk about what really attracted you to Rekor from the get-go and what really is your overall vision for the company as you start to build out your teams?

Yeah, I'd love to do that, Zach. Thanks for the question. So looking at the opportunities in the market, what has always interested me is a high growth opportunity. And if I look at Rekor Inc., it is really a growth company, a startup company. The way I view it, the way I think the market should view it, this is a very, very large fragmented market. There's a lot of money being poured into the market, and when I think of the opportunity ahead, it was very attractive and compelling. Of course, the people that I met during that sort of introduction process also compelled me. I like the mindset of the leadership team here, and I like the technology that we're sitting on, which I think has a lot of room to run. So I would say as a headline, those are some of the big attractors for me. When I look at the path forward here, I think in many ways, the company would have been cast as a hardware company or really in a very defined segment around law enforcement or public safety over time. I don't see that. I think that is just a component of our business. I look at this very much as a big data company. I think it is really about the transportation market, and with the whole infrastructure building kicking off, not only here in the U.S. — clearly, we see indicators of that — but just globally, there are a lot of problems to fix, and it's going to be data-driven. The old way of managing infrastructure, monitoring it, and improving it is going to change; it's going to be very, very rooted in data and AI, and these are areas that I'm well-versed in. I've spent my career in that segment, and I look at what we have today in technology. I look at the data that we currently consume and just transform, and the market opportunities there. So I really had no logical choice, if I can say that, but yeah, I'm thrilled about the conditions for success here, and we're going to go after it.

Understood, that's helpful. And Robert, can you provide us any sort of update around your current pilot programs that you have with Rekor 1? Is there any sort of sense you could give us of the potential square mileage opportunity under coverage, and maybe when we should start to see some of these pilots converting into contracts?

Sure. I think the ones that the market is aware of, such as Chattanooga, Winchester, and Philly, those are moving along nicely. The implementations are near completion; in some cases they are completed in segments of those cities. I'm pleased to say that we've added a number of smaller deployments, and I don't have the exact square miles, but I can tell you that the footprint is growing. I think that as we get into the second and third quarter this year, we're going to see some of those things start converting, and the results of the effort to get those pilots going will provide us better KPIs and better information that we can leverage moving forward. We remain very confident about the value of what we think this technology provides. I think when David joined, one of my concerns, frankly, with having him here, was that folks said he was going to uncover something where maybe we were drinking our own Kool-Aid, and I think we've confirmed that we believe in the value of the data. We've learned that there are many more use cases outside of government, and some of the numbers that we've thrown around, not formally yet, but we all talk about, are realistic, and maybe in some cases might even be on the low side. David, do you want to add anything to that?

Yeah, I totally agree. I think when we looked at the market sizing back during the Investor Day, it predates my time, but I was an observer and saw the numbers and dug into the data. I think it's looking at a very narrow view of what is possible, and when I think of both commercial aspects and what you traditionally view as government or B2G, the commercial side was not really contemplated in that. And, second of all, it was rooted in sort of a legacy mindset starting from ATMS or Automatic Traffic Management Systems, like signaling sort of legacy infrastructure approach. When I think of this concept with intelligent infrastructure, there is infrastructure out there; we see it every day. We drive on it; we see it on roadways. The idea of digitizing that and being able to marry physical and digital infrastructure is really the opportunity, and that's something that is, I would say, new — a really large and new opportunity for us, and the monetization is quite significant. If you think about, if you have intelligent infrastructure in a location, the ability to serve multiple missions — consider traffic moving across a roadway, the value that information provides to commercial entities, and even something as simple as commercial real estate — how they build, where they build, how they monetize resale, and how they think about that whole space. That was never contemplated back during the Investor Day in terms of where the value or pockets of value sit. So I do think it's significant. I do think that the approach we are taking is quite unique, and I truly believe that we'll provide disproportionate value to customers as we look across not only B2G but also commercially.

Understood, that's helpful. And final question for me geared more towards Eyal. Can you discuss the cash burn that we saw here in the quarter, kind of some of the items that were impacting that amount? I realize you're making some pretty aggressive investments and headcount expansions, but how should we think about available cash when it comes to executing your plan going forward?

Again, we cannot discuss anything not here, but as you can see in the cash flow, we made significant capital investments to secure inventory and ensure we have enough inventory on hand, even as we face supply chain constraints. So you can see a significant investment in that area. Other than that, the Q4 burn rate increased to $2 million for operating cash flow, and that's what we expect to maybe grow as we hire more people in 2022.

That's helpful. Well, thanks for taking my questions, and best of luck here going forward.

Thanks, Zach.

The next question is from Mike Latimore with Northland Capital Markets. Please go ahead with your question.

Hi, this is on behalf of Mike Latimore. Could you tell me what needs to happen or the key milestones that need to be achieved in order for you to give guidance?

Mike, that's a fair question. It's a good question. I think I need to do my best to frame the answer by starting as an example with the company that you're covering that was acquired by Stack, looking at what they do in a similar business model, different sector to a certain degree. The point is that when you're public and fledgling, it is very difficult to do. That company was around for 20 years. I learned today that the average startup from founding to IPO is roughly nine to eleven years right? So, we're three years into this from the standpoint of Rekor. As we look at it today, if you consider that 50% of our resources went into other things that are not related to the core business, 2022 is the first year that this is 100% focused on what we're doing. I think that if folks are willing to have a little patience, and you guys have been great with us and we appreciate it, and we've got a good group of shareholders, it's not that far out. I think we need a little bit more maturity with some of the pilots and use cases that David and his team are working on for us to be able to start to give guidance. I think that's possible by the end of this year. If we get there before the end of the year and are able to provide guidance going into 2023, I think, frankly, that's rather remarkable given that we're 36 months into this. So that's the best answer I can give you. We just don't want to put anything out there that isn't going to be accurate and can't be relied upon. We're getting there; we're almost there. This business plan marks the first time we've filed a document where there are no legacy issues or businesses that were no longer involved. 100% of the focus, effort, time, and resources are going into the business that you see. This should be a pivotal year for us, and I think it's not unrealistic that by the end of the year we'll be in a position to provide guidance.

All right. Can you also give some color on how cities are deploying your platform? Is it across all square miles or is it like a subset? Just on the PCS.

Yeah. It's both. It depends. It's very location-dependent on where they see the need, where they see traffic, and where we can provide value through analytics, observability, and security. So it's a little bit of both, I would say.

All right, fine. Thank you.

To summarize, we are confident that Rekor is well-positioned to serve the needs of our customers while maintaining financial discipline. Combined with the strong fundamentals of our business, this will enable us to deliver long-term value to our shareholders. We will be looking at strategic acquisitions, but we are intently focused on continuing to improve our business with growing sales and an expanded global customer base. The future continues to look very bright for Rekor as the government and commercial markets continue to adopt our technology and experience the growing opportunities that provide for their missions. Thank you all once again for your support as we look forward to another exciting year.

This concludes today's conference. Thank you for your participation.