Genasys Inc

NASDAQ:GNSS

Earnings Call Transcript 2024-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to the Genasys Fiscal First Quarter 2024 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Brian Alger, SVP of Investor Relations and Corporate Development. Welcome, Brian, the floor is yours.

[Brian Alger, executive]

Thank you, Karen. Good afternoon, everyone. Welcome to Genasys' first quarter fiscal 2024 financial results conference call. I'm Brian Alger, SVP of Investor Relations and Corporate Development for Genasys. Today's earnings release is available up on our corporate website in the Investors section, and it should be crossing the wires any moment now. There's been a delay with our filing service, and we apologize for the delay in this call. But for those of you looking for the numbers and looking for our commentary, you can find it on the website right now, or as I said, across the wires here shortly.

With me on today's call is Richard Danforth, our CEO; and Dennis Klahn, the company's CFO. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook and future financial performance that involves certain risks and uncertainties. The company's results may differ materially from the projections described in these forward-looking statements. Factors that might cause such differences and other potential risks and uncertainties can be found in the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2023. Other than statements of historical facts, forward-looking statements made on this call are based only on the information and management's expectations as of today, February 13, 2024. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated.

We will also discuss non-GAAP financial measures in the operational metrics, including adjusted EBITDA, bookings, backlog and adjusted net loss, which we believe provide helpful information to investors with respect to evaluating the company's performance. A reconciliation of adjusted EBITDA to GAAP financial metrics, please see the table in the press release issued by the company at the close of market today. As I said, it should be coming across any moment. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning. Bookings is an internal operational metric that measures the total dollar value of customer purchase orders executed in a given period regardless of the timing of 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 4 hours through the Investor Relations page on the company's website.

Now, at this time, it's my pleasure to turn the call over to Genasys' CEO, Richard Danforth. Richard?

[Richard Danforth, executive]

Thank you, Brian, and welcome, everyone.

The strategic vision of Genasys Protect is being realized. Yesterday's announcement describing the integrated use of Genasys' cloud-based software and hardware for 37 dams in Puerto Rico is only the most recent example of our differentiated approach to protective communications. To recap, Genasys has been selected through a competitive solicitation to engineer, procure and install a comprehensive emergency warning system for 37 dams on the island of Puerto Rico. Genasys had the highest score of beating the competition in all evaluation categories. This project has been fully funded by FEMA and is expected to generate $60 million to $70 million of revenue for Genasys. More than $50 million of hardware revenue is expected to be installed over the planned 18-month project line.

Importantly, all of the census data streams and communication channels will be managed with the Genasys Protect software. In addition to approximately $1.9 million for a 3-year software license, it is expected that we will also provide hardware maintenance services that could generate between $3 million and $10 million depending on the length of the maintenance agreement. Our investments in developing the Genasys Protect software drove the selection for the Puerto Rico project. As a result, not only we would generate recurring revenues, but we will also be delivering more than a full year's of incremental hardware revenue by this project.

The selection of Genasys Protect platform, including both hardware and software for the Puerto Rico Dam Emergency Warning System, is yet another example of the differentiation of our approach to protective communication. Already in fiscal 2024, we have been selected for a multiyear engagement with Los Angeles County, accounting with more residents than most states in the Union, the Department of Corrections for the entire state of Utah and most significantly, the project I just outlined for the island of Puerto Rico.

Our engagements are getting larger, but they are also becoming more comprehensive as the advantages of our platform approach became more evident. Our transition to a more balanced hardware software company is well underway. Our software business continues to gain momentum and build scale. Synergies from the acquisition of Evertel are beginning to be realized. And as a result, ARR for our CONNECT business grew nearly 18% sequentially in the first quarter as part of Genasys Protect. Similarly, we are getting significant leverage from our partnership with Ladris, which provides our traffic AI solution. Recurring software revenue grew 85% year-over-year. Total realized ARR exiting the fiscal first quarter was $5 million, and we expect to exit our second fiscal quarter with nearly $7 million of ARR.

Coming into this year, we had exceptionally low hardware backlog. And as we communicated in early December, we expected financial results to be heavily weighed towards the second half of the fiscal year. Though quarterly revenues were substantially lower than prior year, hardware bookings were in line with first quarter historical averages and up nearly 90% versus the prior year's quarter. Dennis will provide more detail on the hardware revenues momentarily.

As we look out over the remainder of our fiscal 2024, we see a growing need for protective communications in communities, enterprises and critical infrastructure across the globe. Too many events, including natural disasters, civil unrest and geopolitical tension, require a more complete solution to protect the various constituents. Mass notification messages and 60-year-old sirens are not adequate, more is expected and frankly deserved. Internationally, we are finally beginning to see our hardware business recover, and we are also seeing new and growing interest for our software solutions as well.

Recent wins and the continuing deal activity and pipeline expansion give us greater confidence in our second half of '24 and our fiscal 2025 outlook. Unchanged from our outlook in December, we are confident that the software revenues for fiscal 2024 will at least double over fiscal 2023. We continue to see a very back-end loaded year for our hardware business. Though there remains near-term uncertainty around the timing of the U.S. federal budget approval. -- recent bookings and the Puerto Rico selection bolster our confidence in approaching fiscal 2022 levels of hardware revenue despite the exception of low performance in the first quarter. Based on our assumptions that the U.S. federal budget is approved in the March time frame, we expect to be profitable on our adjusted EBITDA basis in the second half of 2024. On a full year, we continue to expect to report a negative adjusted EBITDA, though improved quite a bit from fiscal 2023.

Now I will turn the call over to Dennis to go through the financials and outlook in greater detail. Dennis?

[Dennis Klahn, executive]

Thank you, Richard.

In 2023, we successfully grew our recurring software revenues each quarter. In the first quarter of fiscal 2024, that growth accelerated to 85% year-over-year. Revenues for the first quarter of this fiscal year were $4.4 million, a decrease of 58% over the prior year's record first quarter revenue. As compared to the same prior year period, total software revenue increased 57% to $1.4 million. And to reiterate, our recurring software revenues were up 34% sequentially and nearly 85% year-over-year. More than offsetting that growth, hardware revenue decreased 72% to $2.9 million. As Richard mentioned, Genasys started fiscal 2024 with exceptionally low hardware backlog. In addition to a low backlog entering the quarter, we also had nearly $1.5 million of revenue that was booked and built during the December quarter, but the U.S. government was unable to pick up the orders until the first week of January.

Gross profit margin was 34% in the fiscal first quarter, a decline of 12 percentage points or $3.4 million from the prior year period. The drop in gross profit was attributable to lower hardware revenue in this year's quarter and the related reduction in overhead absorption. On a more positive note, software gross margins improved nearly 15 percentage points year-over-year. Quarterly operating expenses, including the first quarter of Evertel expenses were $8.7 million, up 5% from $8.3 million in the first quarter of fiscal 2023. The increase was primarily tied to the acquisition.

On a GAAP basis, our first fiscal quarter operating loss was $7.2 million compared to a loss of $3.5 million in the year ago quarter. Adjusted EBITDA, which excludes noncash stock compensation, was a negative $6.1 million compared to last year's negative $2.4 million. The year-over-year decline in adjusted EBITDA was due to the lower hardware revenues and subsequent reduced overhead absorption.

Cash, cash equivalents and marketable securities totaled $13.6 million as of December 31, 2023, compared with $10.1 million as of the prior year-end. Cash used in operating activities in the first fiscal quarter was $5.7 million, while the working capital increased $1.5 million. As Richard mentioned, we continue to expect software revenues to at least double in fiscal 2024, and hardware revenues should rebound close to fiscal 2022 levels. We continue to expect adjusted EBITDA loss to improve in fiscal 2024 than fiscal 2023.

And now I'd like to open the call to Q&A. Operator?

[Operator]

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And we'll take our first question from Brian Colley from Stephens. And it looks like we lost Brian, so we will move to Scott Searle from ROTH MKM.

[Scott Searle, analyst]

Maybe just to quickly dive in, in the comfort level for the hardware ramp in the second half of this year. Just want to clarify, again, you're talking about a recovery to past historic levels. It really implies that back-end loaded ramp starting in June and September. I think you gave the caveat of U.S. budgetary approval, I think, for the continuing resolution, which is now targeted at March. I was wondering if you could provide a little bit more color around that, the timing of the budgetary potential resolution and how much of the pipeline in backlog is actually tied to that?

[Richard Danforth, executive]

Scott, the March date, I think, is the third date they've given so far with the extension. So we'll see. But we have Army program that it is a new Army program that we have expectations for revenue in this fiscal year. I don't think we've put out. Have we put out anything about what we thought it would be? Not yet. But it's a significant number for us. So we'll see. That's the most significant thing. There will be other ancillary issues where there can be no new starts under a CR, and we get lots of hardware and software business through grants. No budget will have an effect on that. So it can be a significant hit to us if it doesn't pass.

[Scott Searle, analyst]

Got you. And maybe just to follow up on that, [ Rick ]. In terms of the overall opportunity pipeline, it seems like the funnel had been growing. You've given some metrics, I think, on the past call. I'm wondering if you could just indicate what you're seeing sequentially? Have things been growing, even though they haven't been coming out the bottom of the funnel, is that getting larger?

[Richard Danforth, executive]

It is.

[Scott Searle, analyst]

And in your opening remarks, you talked a little bit more about civil unrest and geopolitical tensions, which has not necessarily been, I'd say, the core staple of your business. Is that becoming a bigger portion of the pipeline going forward?

[Richard Danforth, executive]

Civil unrest involves local police. Almost every local police agency in the United States has some LRADs. So...

[Dennis Klahn, executive]

Navies around the world...

[Richard Danforth, executive]

Yes. It certainly can drive demand, particularly for LRAD hardware. In terms of your question on the pipeline, it continues to grow. When we talk about pipeline, we don't usually include some of the large opportunities like the one we announced with Puerto Rico. And we continue to see the pipeline grow. We continue to look at our forecast for bookings. Some of what had slipped last quarter or last year, all year long, have started to close, and we remain optimistic for the year with an outlook unchanged from our prior conference call. [indiscernible] second half of fiscal.

[Scott Searle, analyst]

The previous pipeline that you guys had talked about those so did not reflect Puerto Rico. Was that correct? The larger opportunities like that are not having that full amount put into them? And secondly, I wonder if you could just talk a little bit about Evertel and the cross-selling opportunities, how that's being received and kind of what your outlook is for the second half of this year?

[Richard Danforth, executive]

Yes, you are correct. The large opportunities are usually kept separate from our pipeline. In terms of Evertel, Evertel in one quarter has grown their ARR, as I said, by 18%. The cross-selling opportunities have begun. We've recently re-upped, I think it was Marin County. Was it Marin?

[Dennis Klahn, executive]

For what?

[Richard Danforth, executive]

For just...And sold them Evertel. So the re-up, Dennis, correct me if I'm wrong, but...

[Dennis Klahn, executive]

No, it wasn't Marin... we have...

[Richard Danforth, executive]

But it was re-upped for evac at $250,000 and then add Ladris on top of it for $390,000, that kind of a thing. So we're selling to the same people, Scott.

[Operator]

And next we go to Brian Colley from Stephens.

[Brian Colley, analyst]

So it seems like the Puerto Rico contract should kind of get you close to hitting your FY '26 targets next year. I'm curious if you view that as a new base off of which you can grow or if we should see a decline in the hardware revenue once Puerto Rico rolls off.

[Richard Danforth, executive]

Well, Puerto Rico will provide substantial revenues in our fiscal 2025 for sure. We'll have to win something like that. We'll build the pipeline even larger with the normal LRAD stuff. So tied to replace a $60 million to $70 million onetime order. However, this puts us in a different position in the critical infrastructure protection marketplace. There are dam projects all around the world. There are dam projects here in San Diego. There are dam projects in South America and Europe that we are chasing, not to the size of Puerto Rico, but it will certainly give us great credentials and a calling card to further the CIP kind of vertical.

[Brian Colley, analyst]

Got it. And then in terms of kind of the cadence of revenue for Puerto Rico, how should we think about the split between FY '25 and this year? I mean maybe should it be 80% next year, 20% this year or more heavily...

[Richard Danforth, executive]

It will largely be next year. So the current schedule, Brian, is there's a 6-month process to get approval on all of the dam designs. That will put us at the end of our fiscal 2024. And then the vast majority of the revenue will occur in the fiscal 2025.

[Brian Colley, analyst]

Okay. Got it. That's helpful. And then also, I was curious if you could provide an update on the CROWS order and your confidence level in getting that award.

[Richard Danforth, executive]

It's pending a DoD budget. If that goes, Brian, the CROWS will go as well.

[Brian Colley, analyst]

Got it. Okay. And then last question for me is, I was hoping you could maybe just talk about the software pipeline, how that's trending relative to your expectations and kind of what the composition of that pipeline looks like between CONNECT, ALERT and EVAC and kind of where you're seeing the most demand today?

[Richard Danforth, executive]

ALERT and EVAC represent the biggest dollar volume of our software offerings. The CONNECT we're just getting started on, and those are a lower dollar value software sale. The [indiscernible] piece, as I mentioned a moment ago, we can have a pretty good uptick in both ARR revenue from that, as I mentioned, the $390,000 just for one county. So the pipeline is dominated by ALERT and EVAC.

[Dennis Klahn, executive]

Maybe just as a follow-on to that, Brian. And this was in Richard's prepared remarks, the value of the entire platform is becoming more and more real. So where we've already sold EVAC, we are seeing increasing accelerated, et cetera, interest in our other offerings, whether that's CONNECT, ALERT, Traffic AI, et cetera. And oh, by the way, also acoustics. It really should be apparent to everyone that the Genasys Protect platform that includes both software and hardware has an enormous potential. Puerto Rico is a Genasys Protect win. Without the software, we would not have won that RFP opportunity. It's a software that got us in there. And as a result, you're seeing over $50 million of hardware from one order from the software differentiation.

[Operator]

And we'll take our next call from Mike Latimore from Northland Capital.

[Mike Latimore, analyst]

All right. Great. On the hardware bookings in the first quarter, did you give a number there? I'm not sure I heard that, I think you said it got back to normal. But can you give a little more detail on the hardware bookings in the first quarter?

[Richard Danforth, executive]

Sure. Historically, hardware bookings in Q1 is the lowest quarter. What we achieved in this first quarter is consistent with other first quarters, albeit substantially higher than what we booked in fiscal '23 first quarter. So it's a small win. In fact, it's almost double what we booked in Q1 of '23 versus '24.

[Mike Latimore, analyst]

Okay. Got it. On the CROWS deal, if that's approved through the budget passes, how much of that business would you see this year versus over multiple years?

[Richard Danforth, executive]

Well, if you assume a budget gets passed by March 8, as soon as we probably would see any money flow would be, I don't know, end of June. So there would only be a couple of months left in our fiscal year at that point. And it is a new program, which means there'll be a start-up phase that we haven't had to deal with for the U.S. Army in many years. So it will be a little slower at the start and a strong finish.

[Dennis Klahn, executive]

Mike, remember, like our previous program of record, each year, there's a new purchase order placed against the program of record. The same is expected to be true for CROWS.

[Mike Latimore, analyst]

Yes. Okay, makes sense. In terms of your SaaS software or SaaS pipeline, how much of the pipeline is a prospect wanting one part of the stack versus sort of the full software stack?

[Richard Danforth, executive]

It's a significant mix. And as Brian mentioned, we often get competitive RFPs for ALERT, and we will always answer those introducing EVAC. And as I mentioned in the prior calls, is a couple of large counties where we did that. And after the award of [indiscernible] came, we went into a negotiation with EVAC and subsequently booked those orders. So the cross-selling opportunity is clearly there, and we've achieved it, and it's continued with the Evertel piece as well.

[Mike Latimore, analyst]

Great. And then just last on the Puerto Rico deal. You said $50 million hardware. So overall, what are you considering gross margin to be? And do you have to add much OpEx to sort of deploy this thing?

[Richard Danforth, executive]

Well, we don't have a significant increase in OpEx expected for the island of Puerto Rico. What was the other question?

[Mike Latimore, analyst]

The gross margin...

[Richard Danforth, executive]

Gross margin. Gross margin on the hardware coming out of the factory in San Diego will be consistent with historical actuals and the equipment and services will typically be a lower gross margin than our hardware gross margin, but still a significant contributor to the company.

[Operator]

And next, we'll go to Ed Woo from Ascendiant Capital.

[Edward Woo, analyst]

Yes. Just a clarification on the gross margin that you mentioned. On these bigger deals, why wouldn't you have much better leverage considering the contracts are that much bigger. Was pricing a big determinant for winning the contract?

[Richard Danforth, executive]

Yes multiple award criteria, price was worth 35%. But don't mistake this quarter will give significant contribution margin to the company. At $50 million, Ed, approximately, that's bigger than most years of hardware. So if you have that plus our normal business, you're going to have significant absorption and gross margins on the balance of the business, balance of the base of the factory will enjoy the improvement of the contribution margin from normal activities.

[Edward Woo, analyst]

Great. And this win and obviously last year's win with Aramco. Should we anticipate much bigger type of deals going forward? Are you guys specifically targeting much bigger deals?

[Richard Danforth, executive]

Well, the Genasys Protect platform approach is introducing larger deals to us. In the case of Puerto Rico, if you look at the traditional competitors we face in hardware and software, they weren't in the picture. So Genasys as a company was the most qualified to respond to that RFP, and it was reflective in the scores that the customer gave us. So I think, yes, we will continue to pursue larger opportunities to exploit the Genasys Protect platform capabilities around the world.

[Operator]

And we'll take our next question from Martin Yang from Oppenheimer.

[Martin Yang, analyst]

I think you answered part of my, but the first question I have regarding the OpEx associated with Puerto Rico. I know there's not a lot of big increase, but if anything changed for OpEx for Puerto Rico project, what would it be? And should we assume a major operating leverage coming from the Puerto Rico project?

[Richard Danforth, executive]

So second question first. Yes, of course. That's what I think I just said, talked about that, the contribution margin that it will avail will be significant. And as I said, the base business will also benefit from that increased absorption. From an OpEx perspective, travel will go up. We will hire more people on the island, but it's a single-digit kind of number. I don't see us adding anybody in the factory. I don't see us adding anybody in purchasing or sales or marketing. So I think it's nominal from a headcount perspective.

[Martin Yang, analyst]

Got it. The second question is about your enterprise customers. Can you maybe give us an update on how are you seeing customer engagement and pipeline regarding your sales into the enterprise market?

[Richard Danforth, executive]

Yes. For us, it's Slide 1, an enterprise to be opportunistic. Aramco fell into that, and there's been several others. I don't think we've released anything on a win with those yet, but you'll see some coming shortly.

[Operator]

[Operator Instructions] Okay, and there appear to be no further questions at this time. I'd like to turn the floor back over to Brian Alger for closing remarks.

[Brian Alger, executive]

Great. Thank you, everyone, for participating in today's call. You should see the press release, it did cross the wire in the middle of our commentary. So you can find it on our website. A replay of the call will be available on our website here shortly. For additional information and up-to-date news and activity regarding Genasys, our products, customers we serve, again, I'll strongly recommend that you follow us on our various social platforms, whether that's LinkedIn or X, we actively post and comment and a number of our customers do the same. So to stay on top of things, I strongly encourage you all to follow us on the social networks. Otherwise, have a great night. We look forward to speaking with you again next quarter when we report fiscal second quarter 2024 results. Thank you.

[Operator]

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