Rekor Systems, Inc. Q1 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to today's Rekor Systems, Inc. Conference Call. My name is Matt, and I'll be your coordinator for today. At this time all participants are in a listen-only mode. A question-and-answer session will follow the presentation. As a reminder, this conference is being recorded. Before we start, I want to review the company's abbreviated safe harbor statement. I want to remind you that statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, products and product releases, partnerships and any other statements that may be construed as predictions 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 disclaimers in our earnings release. You should also review a 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 would now like to turn the conference over to Mr. Robert Berman, Interim President and CEO of Rekor Systems.

Thank you, Matt, and good afternoon, everyone. We appreciate you joining us today to discuss Rekor Systems' first quarter 2025 results. Normally, we begin our presentation by having our CFO Eyal Hen review the numbers. But as described in our last earnings call, we've been going through an extensive review and realignment of our operations since the end of last year. We anticipated that the market and the economy might face a period of uncertainty. For the long-term benefit of our shareholders, we felt it would be less important to concentrate on future projects at this point than it would be to emphasize the revenue potential of what we've already achieved. As you've been told repeatedly, Rekor has seen adoption of its tech and is now in the early stages of launching into larger markets that are overdue for it. Competitors are racing to catch up, but everyone is meeting the current challenges in the markets and the economy. So for now, we want to remain focused on exploiting the commercial potential of what we've already produced. So it is important to put the numbers Eyal discusses into perspective as we began our review process. We prioritized steps that would immediately reduce our expenses. In some cases, this led to a temporary increase in expenses, but you'll see solid evidence of the success of these efforts. These expense reductions haven't been done blindly and they are not finished. But our overall objective was to position Rekor for stronger, more predictable and scalable growth moving forward. We've learned that our prior approach, while visionary, was not sufficiently grounded in the revenue driven execution our shareholders deserve. We spent too much time building a company in anticipation of growth rather than ensuring that our approach and leadership were structured toward delivering revenue, sustaining revenue against defined milestones. That was a mistake and it needed to be addressed. Beginning in Q2, Rekor is implementing a new general manager structure to sharpen our focus on customers and accelerate the adoption of our products in a way that produces a business with sustainable revenues. We've been in the process of evolving the structure over the last few months and expect you to see the benefits very shortly. Under this structure, each core business unit is led by a dedicated general manager with clear profit and loss responsibility. By reorganizing into focused units, we aim to improve operational accountability, foster greater innovation and enhance our customer focus. This structure also positions Rekor to scale revenue more effectively as we expand our reach into domestic and international markets. Our new GM structure is anchored by experienced leaders who bring deep industry expertise and a global perspective to Rekor. One of these is Mark Phillips, a seasoned roadway technology executive with significant international experience. Mark's global background of Q-Free and elsewhere in scaling businesses will help position Rekor solutions on a worldwide stage. He will leverage his international expertise to drive global market penetration and ensure that Rekor's offerings meet the needs of customers across different regions. Mark's leadership is also expected to strengthen Rekor's domestic presence, aligning our products with international opportunities and partnerships. Mark is both a talented business leader and a skilled electrical engineer. In the early 2000s, Mark founded a company that developed an innovative data logger used by DOTs around the world, which was later acquired by Q-Free, a Norwegian technology company specializing in intelligent traffic systems. The company operates globally with offices in Europe, Asia, Australia and the Americas, and following the acquisition, he remained with Q-Free to help establish a global distribution network. We expect the full scope of our organizational changes to be completed and formally announced in Q2. Leaders will manage their respective business units with an entrepreneurial approach, enabling each unit to respond quickly and effectively to customers' needs. The GMs will be supported by shared services, including engineering which is now led by Shobhit Jain as Chief Product and Technology Officer. Shobhit has held senior leadership roles at both Verra Mobility and HERE Technologies. He served as Vice President of Product and Innovation for Government Solutions at Verra Mobility, a leading provider of smart mobility technology solutions for government agencies and commercial fleets. He was previously Head of Innovation at HERE Technologies, a global leader in mapping and location-based platform services. Under the GM structure, Rekor's operations are now organized into dedicated business units centered around our customers' needs in each of our core solution areas. Each unit is empowered to focus on its product portfolio and customer base, enabling more agility and specialized attention. While restructuring Rekor around these solution-focused units, each led by strong management, we can better serve the needs of each new and existing customer. Customer centricity is a core objective and each GM is tasked with staying close to the customer base and their domain and rapidly responding to feedback and tailoring offerings to solve specific problems for those user groups. The shift to a GM structure led organization is designed to deliver several strategic benefits: greater accountability, where each GM will be responsible to build a team that focuses on sustainable growth within their own segment, enhanced innovation. By giving them more control, each unit will be able to concentrate on innovations that are most valuable to their customers on a near-term basis. Top priority in product development will be given to customer value, improved customer focus. By concentrating more intensively on the needs of new and existing customers, our teams will become more focused on learning what their current needs are rather than imagining what their needs might be in the future; scalable revenue growth. By concentrating on distinct product lines and regions, each unit can pursue growth opportunities more effectively. Mark Phillips' international expertise, for example, will help replicate successful go-to-market strategies across global markets. This focused approach lays the groundwork for scalable revenue streams as each business unit expands its market share. The new structure also makes it easier to integrate future acquisitions or partnerships directly into the relevant unit fueling further growth. We expect the structure to unlock new levels of performance, resulting in a more agile company that can sustainably scale revenue and maintain a leadership role in our industry. So thank you for your continued support as we embark on this new chapter, and we are confident that these changes will drive meaningful improvements in our operations and accelerate Rekor's growth trajectory on a global stage. Now I'll turn the call over to our CFO, Eyal Hen, for a deeper look at our financial results for Q1 2025.

Thank you, Robert, and thanks to all of you joining us today to discuss our first quarter of 2025 results. We reported revenue of $9.2 million for Q1 2025, representing a 6% decrease compared to the same quarter last year. Despite this reduction, we achieved a $2 million improvement in our adjusted EBITDA loss, thanks to meaningful reductions in our operating expenses. Revenue was impacted across all three of our business segments. Factors such as adverse weather conditions in the Southeast, delays in contract signings and budget constraints from DOTs and public safety agencies, largely due to the uncertainties surrounding the new administration created significant headwinds to sales execution. That said, we did see stability in our recurring revenue which totaled $5.1 million for the quarter, making a modest 3% increase from Q1 2024. Adjusted gross margin for the first quarter of 2025 was 48.2%, up from 46% in the same period last year, primarily driven by a higher mix of margin accretive offerings. Looking forward, we anticipate continued gross margin expansion, supported by a growing share of SaaS-based revenue and increased contributions from our pay-for-data contracts. Adjusted EBITDA loss was $7.4 million, significantly improved from $9.4 million in Q1 2024. This was a result of the efforts Robert mentioned to optimize our cost structure, which we started in November of 2024. Moving forward, we will continue to work towards steady declines in adjusted EBITDA losses as revenue grows, supported by an improving gross margin. It is worth noting that our cost optimization initiatives, which include targeted workforce realignment and voluntary compensation reductions in exchange for equity were initiated to improve our cash flow and operational efficiencies. By sharpening our focus and reducing expenses, we have been able to deliver tangible financial benefits. As a result, operating expenses in Q1 2025 were significantly lower than they would have been without these initiatives, contributing directly to our adjusted EBITDA loss. We remain diligent in managing our cost structure, as we balance growth investment with the path to profitability. Our first quarter in 2025 was affected by seasonal and other factors that we do not expect to continue throughout the year. Looking ahead, we anticipate continued improvement in adjusted EBITDA as we progress through 2025. The combination of revenue growth and expanding gross margin gives us confidence that our adjusted EBITDA losses will keep narrowing down in upcoming quarters. We expect gross margins to improve steadily, driven by an increasing mix of higher-margin SaaS revenue and data services, as well as efficiency in our delivery of solutions. At the same time, our cost optimization efforts are ongoing. We will maintain the discipline that we established last year, ensuring that any expense growth stays well below our revenue growth rate. In practical terms, this means we plan to deliver sequentially better EBITDA results as the year unfolds, supported by both top-line momentum and margin expansion. Our sales pipeline remains strong and we remain encouraged by the traction we are seeing with state departments of transportation and public safety agencies. As these opportunities convert into revenue, the incremental sales should flow through at a higher contribution margin, further bolstering our profitability. We are also targeting additional operational efficiencies in 2025, which we expect will help offset inflationary pressures and sustain the trajectory of EBITDA in progress. Overall, our goal is to exit 2025 on significantly stronger financial footing than we entered it. We are working towards achieving breakeven adjusted EBITDA in the foreseeable future and each quarter, we intend to move closer to that milestone. The first quarter results, while not where we ultimately wanted to be, show that we are making progress in the right direction. Before I conclude, I want to acknowledge our shareholders. We recognize that our Q1 performance came in below our expectations and likely below the expectation of some of you listening today. We do not take this lightly, rest assured the entire management team is focused on improving execution and delivering the results you expect from us. We have a clear plan in place to drive growth and margin improvement, and we are confident in our path forward. Importantly, we are grateful for the continued support and patience of our investors as we navigate these changes and strive to unlock Rekor's full potential. Your support has been crucial as we implement necessary changes and invest for future success. We remain committed to building shareholder value and rewarding that trust through our actions and results in the coming quarters. Thank you for your attention and for your support. We are confident that the steps we've taken to optimize costs, direct our capital structure and drive growth will position Rekor for improved performance throughout 2025.

Yes, thank you. I'd now like to open the call for questions from our shareholders.

At this time we will be conducting a question-and-answer session. First question is from Mike Latimore from Northland Capital. Please go ahead.

Hi. This is Aditya on behalf of Mike Latimore. Could you give some color on the pipeline for Scout and how are the bookings in Q1 for Scout?

Sorry, I'm not clear with the question.

Can you provide an update on the pipeline for Scout and the bookings for Q1?

I think that's a fair question. We were just looking at Scout the other day since launching Scout in 2019, it has grown by more than 700% in revenue. And frankly, we dropped the ball with it a bit in 2024 and part of this reorganization is getting back to Scout, less on the law enforcement side and more on the commercial side, which is where the majority of our ARR is from Scout. So I think that you'll see a lot more activity with Scout as a product over the next actually 30 to 60 days.

Got it. And are there any partnerships that you're working on just like SoundThinking last year?

We do have some that are actively in discussion that we just can't talk about because they're not concluded, and it's not public, but we are always working on those and primarily with Scout for sure. But also with Discover now, having brought Mark Phillips on, in changing a little bit the way we approach the sales methodology with Discover as a piece of technology that's fully productized that we can sell out of the box through distributors and others in markets that we've not penetrated yet. We're just entering now.

Next question is from Tim Moore from Clear Street. Please go ahead.

Thanks. Just trying to build a bit more conviction around the possibility for maybe double-digit organic sales growth drivers this year. I know there was a weather issue and the election overhang in the March quarter. I think the September quarter was probably negative organic growth. If you strip out the ETD acquisition contribution. So we know that many legacy transportation and monitoring device systems are inaccurate or not effective. And they're pretty much simply obsolete. Can you provide us maybe a better sense of how the task order side, not big projects or new big wins, but the task order size might backfill or help sales growth this year instead of waiting for a lumpy new sales state win? Are you expecting to roll out a lot of Discover and Edge units for repair and replacement this year?

That's a really good question. And I think as we said earlier in the call with regard to the reorg, the way we're structured now with this GM structure. Discover is fully productized. It takes time to get governments to adopt technology. We are seeing broad adoption with Discover. And I think as we get deeper into this quarter, okay? And we announced a reorg, we'll be able to give you some clarity with respect to the growth in that. And I think you're going to see a substantial change with that because of a little bit of modification with our pricing structure on Discover and the go-to-market strategy with it. Look, it has been a learning process, right? We're dealing with government. We're replacing legacy technology that they've been using for decades and decades. And to think that we were trying to push certain business models into the way governments do business, maybe was a mistake on our part. And I think now that we understand more the way that the DOTs buy, I think you're going to see a lot more growth with Discover. And it is a fantastic model because it's got a strong ability to deliver a piece of a device that does provide a service, but also has strong recurring revenue and higher margins to it. So a little bit of a learning curve, right? But having launched in 2022, takes some time, but I think we're there. And I think they'll see more than in the coming weeks.

That's good to hear. Now, switching topics, you mentioned that you reduced the EBITDA loss by $2 million despite a decline in sales, which is impressive. I'm curious about how much of the $15 million in annual cost savings and expense realignment has been implemented this year. Also, is that $15 million target from November dependent on achieving a certain level of sales growth? Do you need to see teenage growth to meet that goal? I'm interested in any details you can share about the cost implementation.

Yes, I think it's realizing that we've got things that are fully productized, and we're focusing on those. We have a lot of expenses that were related to R&D of products that we can't tie revenue to in the near term. So it is changing our focus and looking at things that we can do today. And I think you're going to see more reductions. And I think as you see additional revenue, you are going to see incremental margin along with the reduction in cost. Eyal, would you agree with that?

Yes, absolutely. That's true. And then as we said, the $15 million will go along the year and not just the first quarter. So we will see, as we mentioned, continued reduction in the cost improved in the EBITDA as we go.

Look, it is a really good point you're raising. We're developing technology to replace decades-old legacy tech, and it is a learning curve. And we had to get there and understand the customer. And I think now with the approach we're taking to it, we get it. We don't need to do the R&D, the product's there, it works. It's just delivering a product and not thinking about 3 years from now, it's about thinking about today. And I think that's the big change here. And I think you'll see the incremental savings as well as the revenue growth come from that, which is going to give us margin to eliminate the burn and drive the company to profitability.

No. That would be really good if you can come up with the $15 million. My last question is really a different question. I mean, you aggregate, I think, more than 20 trillion data points for roadway intelligence. Is there any other way to maybe monetize that? Or can you license some of that out to maybe a user fee to some cities that you don't have any contracts with?

That is also a good question. I think I'm going to drop back and say, what we've realized is we've got three really healthy product platforms here, Discover, Command, and Scout. Scout is the most mature. Obviously, it has been out there for a while. We're focused more on the commercial side now than on law enforcement. But with the Command and Discover, I think what I'm trying to say is we're going to stop where we are and sell what we have, and we've realized that that's what we need to do because there's demand for it. So that's where we're going to stay focused. And the nice thing about the way the technology has developed is that we can always import additional data and provide additional services, but that's not a necessity in driving revenue today and growth today and profit today. And I think that was the mistake that we made historically. And as I said earlier, building a company for future growth in revenues as opposed to focusing and realizing what we have is, I hate to say good enough, but it is good enough, okay? And there is demand for it, and we're seeing adoption, and that's where we need to focus rather than confusing customers with just more and more and more.

Understood. Thanks for the color and taking my question.

Next question is from Noah Levitz from William Blair. Please go ahead.

Good afternoon. Thanks for taking my question. To start off, I thought it was interesting about your new GM structure, your particular hire of Mark. You noted that he has a lot of international experience in particular. And I'm curious if with the procurement environment being as difficult as it is in the U.S. Are you already selling in international markets? Or do you see a particularly high level of demand there and opportunity there? That Mark, for example, could help Rekor take advantage of?

We do see that almost every developed nation utilizes some form of data collection for planning and traffic operations. That's what makes Rekor Discover valuable; it serves both purposes, eliminating the need for multiple devices on the road. We notice demand, but there are subtle differences in classification. In the U.S., we have 13 bends, while countries like Ireland have 7, and others have varying amounts. They’re all quite similar, relying on machine learning and training, which our customers grasp. Mark is currently in Europe, carrying out an installation for a pilot project in another country. We believe there's widespread demand for this product. This aligns with our aim to be box ready and reinforce the importance of having a strong GM structure, as we have proven products with established adoption. It's essential for the leaders in each vertical to manage the P&L and drive sales. We are transitioning from a research and development approach focused on tech in this changing world to a mindset of selling our valuable offerings. That's the direction we're headed.

That's great. And then my last question is on your partnership for PlateRanger with SoundThinking. Can you just provide a little bit of color on the adoption of that system and whether or not you're currently recognizing any revenue or when you would hope to see that start to hit? Thanks.

We have a contract with SoundThinking that secures revenue for us in 2025, 2026, and 2027. They are actively selling and are a strong company. The law enforcement market is well-suited for them, involving a lot of fundamental work. You can discuss this with them, but we believe they will succeed. Early signs indicate they are on the right path, having invested money into it. We will let them lead that effort while we focus on the commercial aspects, which set Scout apart from those who are solely focused on law enforcement and LPR. Most of Scout's Annual Recurring Revenue comes from this sector. We recognize that we missed opportunities in 2024; having previously grown over 4,000% mainly in the commercial domain, we now aim to return our focus there. I believe SoundThinking will perform well with the product, and their efforts are directed there, so it would be beneficial to speak with them about it.

Next question is from a private investor.

Thank you for taking my call. A couple of questions. Actually, the last caller tapped into my question. I had mentioned a couple of quarters ago to David about overseas contracts. And you mentioned there was enough revenue to be focused in the U.S. What I saw, I believe you will be attending the ITS European Congress May 19. Can we expect more of that?

Yes, we are actively pursuing that. One key aspect we want to highlight is that once a technology is productized and ready for market, along with the necessary sales materials for channel partners, we can begin to sell it. Every developed nation has its own method for measuring speed, similar to what we do in the U.S., and they utilize that data for traffic management. We are in a position to sell that product internationally, and that is precisely what we are doing. While we have only scratched the surface in the U.S., we are beginning to witness adoption. It takes time, and we have discussed numerous states and contracts, but no changes have occurred. We believe those opportunities are forthcoming. However, we see no reason to overlook the international market, given the demand for the product, and we are prepared to supply it. This is our strategy.

And last quarter, you mentioned a little over 15 proof of concepts. And I would have thought maybe by the release of the new revenue today, we would have maybe heard one or two. Can we expect that full drift to continue throughout the year? Or would they be a little bit of a quicker process?

I can tell you that almost all of the states where we have proof-of-concept systems. New York, as an example, has actually acquired technology in the majority of the other states. When I say adoption, we are now seeing more orders; we're seeing larger contracts. And I think that, to be frank about it, I think we had the sales approach and pricing in such a way that wasn't consistent with the way that these agencies procure. And if you think about how complicated it is, we needed to make sure that we configured the way we sell and to the way they buy as opposed to swimming upstream. And I think we figured that out over the last few months, and we made those changes. And I think you'll see the results of that very soon.

In today's press release, you mentioned about the adverse weather conditions with a slowdown in revenue. With Hurricane season not too far away, do you plan on having more personnel in that area before that happens?

It's interesting to note that one of our customers in the southernmost state required our assistance between the two hurricanes they experienced last year. The technology performed effectively. The issue isn't about the number of personnel available; it's more about our readiness to deploy products as a technology company rather than functioning as a contractor. This distinction is crucial. Rekor operates as a technology software data company, not a construction firm, which is why we have adjusted our operational model. We can deploy the technology without necessarily performing the physical work ourselves, allowing us to generate the same revenue and recurring revenue through other parties. Our products are now ready for deployment in this manner, although it took some time to reach this point. Therefore, the focus should not be on the manpower available, but rather on the demand for our product. With our recent business model modifications, I anticipate we will begin to see significant growth, which is something we were aiming for.

And my last question is, I mentioned a couple of quarters ago to David, and he said, stay tuned. But is the QSR kind of a debt sector right now? Or are you still focused on that or revenue isn't high there?

That's a good question. It's an interesting area because Scout started out as a license plate recognition system. We generate significantly more data from Scout and hold various patents related to anonymizing that data. This ensures that privacy information shared does not pose a problem for commercial customers who may not want the same information that law enforcement agencies might access. I believe this sector is going to open up more opportunities. We have previously succeeded with companies like Six Flags and other casino businesses, and we recognize more value in that data now than we did six months to a year ago. Our marketing strategies and focus have shifted, and we're redirecting our attention back toward commercial applications. Therefore, quick service restaurants are definitely a part of that. For example, Chick-fil-A has utilized drones over their properties to monitor traffic flow in and out of their stores. Just imagine that and consider the valuable data we can provide from Scout for our clients. This data holds significant value for businesses in retail, whether they are quick service restaurants, large retail stores, sports stadiums, or casinos. That's where our current focus lies, and I anticipate you will see more developments in this area in the upcoming weeks and months.

And you believe we're still on track then for profitability by the end of the year?

I personally believe that we’re on track for profitability before the end of the year. I don't want to commit to it, but I think we are going to get there. I think it's around the corner. And that's what we're doing. We're working to drive the company to scale revenue, become efficient, not just from the standpoint of being efficient, I mean cutting costs and overhead by being able to deliver the product to the customer with less bureaucracy. And look, Rekor was just overbuilt, okay, too bureaucratic for its size, with great products that there was demand for that we couldn't get out the door because we just had this process here that just didn't work. And we are going to fully announce the structural changes that are coming with this GM structure and the Board is actively looking. I'll stay here as long as it takes to make this work and help to continue to stay on the Board because I believe in the company, but we are going to find the right person to manage it and right people to do what we're doing. And I think we have that structure in place now. And I think you are going to see the results of that, and it's not going to take a long time.

Okay. And will there be any update on Mexico?

I can't provide details on that at the moment because it's confidential information. However, we will provide an update as soon as we can.

I understand. That's all I have. I appreciate your time.

This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Thank you for your patience. Every company experiences growing pains, and I believe Rekor is overcoming ours as we have identified issues that were hindering our growth, scaling, profitability, and margins. The Board is fully engaged in this process, and we believe we have established the right structure and plan. We have suitable General Managers in place, and we will share more details in the coming weeks this quarter. We are also actively searching for a permanent CEO. Although I am currently serving as the interim CEO, I am committed to steering the company through this phase until we achieve our goals. We will make necessary changes when the right candidate is found. I am confident we will navigate through this situation swiftly, within weeks rather than across multiple quarters. Thank you all for your continued support.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.