Genasys Inc

NASDAQ:GNSS

Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the Genasys Inc. Fiscal Third 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, and good afternoon, everyone. Welcome to Genasys' Third Quarter Fiscal 2024, Fiscal Financial Results Conference Call. I'm Brian Alger, SVP of Investor Relations and Corporate Development for Genasys. The earnings release should be hitting momentarily. For those of you looking for the financials, you can reference our 10-Q, which is already on file at the SEC website under EDGAR, under the company's ticker. We'll be discussing the results on the call and hopefully, the earnings release will hit momentarily.



With me on the call today are 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 involve 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 particular risks and uncertainties can be found in the Risk 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 information and management's expectations as of today, August 6, 2024. We explicitly disclaim any intent or obligation to update these forward-looking statements, except as otherwise specifically stated.



We will also discuss non-GAAP financial measures and operational metrics, including adjusted EBITDA, bookings, and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance. For 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 the market today. 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 timing of the related revenue recognition. Backlog is a measure of purchase orders that are received and scheduled to ship within the next 12 months. Finally, a replay of this call will be available in approximately 4 hours through the Investor Relations website -- company website, right.



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. I am in Puerto Rico working through the final items for the PREPA agreement. As we finalize the contract negotiations and with documentation widely out of the way, we now look forward to moving into the implementation phase of the project. To recap the Puerto Rico Dam project is fully funded by FEMA and is expected to result in $75 million worth of revenue for Genasys. Importantly, cash inflows will precede revenue recognition. While timing of precise revenue recognition is not yet known, we do expect to recognize most of the revenues in our fiscal 2025 and 2026.



The significance of the Puerto Rico overall voltage system goes beyond the favorable financial implications. This project is the most significant and public demonstration of how Genasys Protect software is able to unlock and enable much larger hardware opportunities. With a growing pipeline of critical infrastructure protection opportunities, we believe the Puerto Rico Dam project is just the beginning of Genasys' realizing a significant return on the deliberate software investments we have made over the past 3 years.



Since our last earnings call, we announced further EVAC coverage in California with the addition of Santa Barbara County, and the activation of San Diego County. Tragically, 2024 is shaping up to have another intense fire season with many of our customers throughout the Western U.S. actively using our system as I speak today. Importantly, Genasys Protect EVAC is helping emergency managers and first responders across the country plan for and manage evacuations much more efficiently and safely. In Northern California, the nearly 2-week-old park fire is only 35% contained and has burned over 400,000 acres and more than 600 structures have been destroyed. Thankfully, the residents have been able to get out of harm's way with no civilian life lost.



From California, Oregon, Washington, Idaho, Montana, Wyoming, Utah, Nevada, and Colorado, the current focus is on fire. But out here in the Eastern United States, the danger is of a much better variety as development Atlantic coast states prepare for hurricane season with Ceridian and Georgia facing changing evacuation conditions just recently over the past couple of days. The unfortunate reality is that evacuations need to be planned for and managed throughout the country for a variety of reasons, not just natural disasters. Genasys EVAC back has proven to be a critical tool for emergency managers and first responders across the country.



Later this week, we are hosting a number of law enforcement leaders in Boston for an appreciation event that will include presentations from Commissioner Richard Worley of Baltimore PD, and Chief Chris Cook from the White Settlement Texas PD. Each presents key learnings and lessons while managing cross-agency communications during and in the way of major events. Additionally, Genasys' own, Jeff Halstead, will be speaking to the very current topic applying cricket consumer apps and text messaging among government employees especially those in law enforcements, need to be replaced with secure and compliant communications solutions like Genasys CONNECT.



As we announced last month, we have begun to realize synergies with combined sales efforts of CONNECT and our traditional LVAD hardware to a shared customer base of longer fuse. Not only are we seeing strong customer growth on the CONNECT side, but we are also seeing a meaningful uptick in [ LRAD ] bookings. Year-to-date, our law enforcement hardware bookings are already nearly 50% higher than the fiscal 2023 total. While some of this is likely due to the civil unrest we have witnessed this year, the combined sales engagement of both CONNECT and LRAD is also contributing in a meaningful way.



And back to the [indiscernible] business, in fiscal 2023 and 2024 have been challenging to say the least. In 2023, we had a number of forecasted opportunities get delayed. As we have progressed through 2024, some of those opportunities have been converted into bookings. But without the balance of the prior program of record bookings and revenues have not kept pace the prior year's reported results. But that only tells part of the story. When we strip out the booking of revenue from the prior year's program of record, you see that this year's bookings activity is actually on a record pace, before we start thinking about Puerto Rico or the new program with the United States army. I already discussed how large as been hardware bookings at the top, but international bookings are also showing strength up 117% year-over-year for the first 3 quarters of fiscal 2024.



Exiting fiscal year 2024, we will have built backlog in international and long poster hardware in addition to having secured several years of very significant hardware revenues from the Puerto Rico Dam project and the U.S. Army Pros AHC Programme. Though annual purchase holders will vary in size, the aggregate of hardware business across these projects is well north of $200 million. Moreover, our software business, which remains on pace with these double recurring revenues and ARR in fiscal 2024, gives us tremendous visibility and stability in revenues over the next few years. Exiting the year's quarter, ARR was $7.6 million, up approximately 135% year-over-year. With extremely low customer churn and average contract length in excess of 4 years, we remain extremely bullish on the outlook for our software business, let alone the implications it has for expanding and accelerating our hardware business.



What I said last quarter remains true today. Genasys is in the best strategic position in its history. Our product portfolio is diverse and differentiated, and we have one and will have a high degree of visibility on record revenues for the next several years.



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

[Dennis Klahn, executive]

Thank you, Richard. In the third quarter, we continued to see strength in our software business with year-over-year growth of 120%, with recurring revenues growing 138% over the same time period. Revenues for the third quarter of this fiscal year were $7.2 million, a decrease of 50% over the prior year's third quarter revenue, which benefited from approximately $8.6 million from the prior program of record completed in 2023. Excluding the Army Program of Record, sales in the June quarter of '23, fiscal Q3 '24 hardware sales increased 8% year-over-year. Software revenue this quarter was $2.1 million, reflecting the 138% annual growth in recurring revenues. More than offsetting that growth, hardware revenue decreased 62% to $5.1 million.



It is important to remember that Genasys started fiscal '24 with exceptionally low hardware backlog. Excluding the program of record completed in '23, hardware bookings in the first 9 months of the fiscal year '24 are up over 40%. Within those bookings, international hardware bookings are up approximately 117% over the same time frame. Gross profit margin was 53% in the fiscal third quarter, a 6 percentage point improvement largely due to the mix of revenue in this year's quarter. Gross profit declined $2.9 million from the prior year period due to lower hardware revenue, partially offset by the improved software revenue.



Quarterly operating expenses were $9.1 million, up 12% from $8.1 million in the third quarter of fiscal '23. SG&A increased 11%, while R&D increased 17% over the prior year period. The difference being largely attributable to the addition of [ Pivotel-related ] expenses. On a GAAP basis, our third fiscal quarter operating loss was $5.4 million compared to a loss of $1.4 million in the year-ago quarter. Adjusted EBITDA, which excludes non-cash stock compensation, was a negative $4.3 million compared to last year's negative $0.4 million. The year-over-year decline in adjusted EBITDA was due to the lower hardware revenues and higher operating expenses.



In the June quarter of this year, we incurred $1.4 million of other expenses. Included in this amount was $1.1 million associated with debt issuance costs, $0.2 million of interest expense, and a fair value adjustment to the loan of approximately $0.1 million. Going forward, we expect to incur approximately $400,000 of quarterly interest expense, depending on the 90-day SOFR. Cash, cash equivalents, and marketable securities totaled $12.7 million as of June 30, 2023 -- sorry, 2024, compared with $10.1 million as of the September fiscal year-end. Excluded from the cash figure, is $3.5 million being held as a bid bond for the Puerto Rico project. We anticipate a rapid return of the bid bond following the contract signing.



Cash used in operating activities in the third fiscal quarter was $7.5 million. As we have discussed in our earnings release and this call, there are a number of large opportunities that we are excited about. Between the Puerto Rico and CROs AHD business alone, we're expecting over $200 million and have a profitable revenue in the coming years. Our software business continues to grow rapidly, and it is on track to post triple-digit growth in ARR this year. That said, given the nature of our end markets and the remaining uncertainty around the timing of revenue recognition from our larger awards, we are not in a position to provide more granular guidance.



And now we'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 Mike Latimore from Northland Capital. Please go ahead, Mike.

[Unknown Analyst]

Yes, hi, this is [ Vijay Devar ] for Mike Latimore. Yes, I look at the press release, I just have this in the 10-Q, I'm open in front of me. Maybe if you can quickly talk about the [ medical aid ] problem once again. I think I missed a little bit in terms of the visibility and the revenue expected for this fiscal year.

[Brian Alger, executive]

We're not in a position to give guidance at this point, which is consistent with what we discussed in the last quarter.

[Unknown Analyst]

Okay. And in terms of the ARR, do you have any visibility into what would be the exit ARR for here in the, let's say, 2025?

[Brian Alger, executive]

Our expectation is that it would at least be double last year's.

[Unknown Analyst]

And in terms of the hardware bookings, we expect a healthy hardware bookings quarter in the fourth quarter?

[Brian Alger, executive]

Richard, do you want to take that?

[Richard Danforth, executive]

[Technical Difficulty]

[Brian Alger, executive]

The expectation for bookings in the fourth quarter of this fiscal year is expected to be exceptionally strong with the inclusion of Puerto Rico, of course. We expect that negotiation to conclude rapidly and for the orders from Puerto Rico to be added to our backlog as we exit this fiscal year. Excluding the Puerto Rico opportunity, however, as both Dennis and Richard said, international is seeing a significant uptick from the prior year, up 117% for the first 3 quarters of this year. That's an important recovery for us is since COVID, international bookings have been exceptionally weak and to see that come back and diversify our revenue base has been encouraging.

[Unknown Analyst]

Okay. All right. And do have a little hypothetical opportunities. If you were to kind of answer the question, as I stop to [ argue ], but if you answer every question, what do you think in terms of the impact on the demand or the timing of deployment?

[Dennis Klahn, executive]

Brian, I'll take that. I don't see that a significant recession is going to have a big difference in our business. Our best revenue year occurred during COVID. So we're very resilient.

[Brian Alger, executive]

Yes, I think [Indiscernible].

[Operator]

[Operator Instructions] We'll take our next question from Scott Searle from Roth Capital. Please go ahead Scott

[Scott Searle, analyst]

Thanks, directory, thanks for taking my questions. I apologize I'm a little late to the call, so I hope I'm not redundant, but I just want to dive in, Rich, quickly on PREPA. We've got the approvals. It sounds like it's still a little fluid at the current time. I'm wondering as we get into the December quarter, what's the cadence of the number of dams per quarter that we should be thinking about?

[Richard Danforth, executive]

I can't comment on that yet. What I said in the remarks, Scott, is that we expect most of the revenue for the Puerto Rico order to recur in our 2025 to 2026. And the granularity of my dam, we need more work with PREPA before we can comment on that.

[Scott Searle, analyst]

Interesting. Fair enough. And then on CROs as well, it sounds like that is also starting to ramp up for an impact in 2025. I'm wondering if you could frame the size kind of the worst-case scenario, best case scenario of what that contract would look like, and how we should think about that on an annualized basis going forward beyond '25.

[Richard Danforth, executive]

To answer the last one first, I think sizing it on a go-forward basis of $10 million to $15 million a year is reasonable. And the FY '24 budget, defense budget for the AHC for CROs, there's $15 million in that budget for that.

[Scott Searle, analyst]

And lastly, if I could, we continue to see weather-related events, whether it's wildfires in California, hurricanes, tornadoes, et cetera, that continued to increase as well as in other first-person shooter event. So is there a way -- have you been quantifying the pipeline of opportunities for CONNECT and EVAC? Is there some way that you can help us understand the magnitude of the opportunity there, be it in terms of pop coverage sales or otherwise? Thanks.

[Richard Danforth, executive]

I think we'll put that data out, Brian or Dennis if you could help me with that.

[Brian Alger, executive]

Yes, we -- Scott, we've talked about this before, where the opportunity set and the talent opportunity becomes very hard to calculate because in many cases, we're starting through the same population base multiple times. The example that we've used often is the case of Berkeley, right, where we have the University of California at Berkeley. We have the town of Berkeley, California, and we have the county of Alameda, all buying each of our software solutions, as well as our acoustics hardware systems. And against that same population base, you see a very large revenue contribution, right? It's very different from the early customers that we might have, say, where we're opening up a new territory, like San Colorado, where we maybe are only selling to that group with the EVAC solution today. Our intention, of course, is to sell all of our suites and to sell the hardware equipment as well.



In aggregate, you're talking hundreds of millions of dollars for our Genasys Protects operate suite. But when you look at critical infrastructure as Puerto Rico illustrates, it's a much bigger number on a global basis, billions of dollars for critical infrastructure protection.

[Scott Searle, analyst]

That's very helpful, Brian. And if I could just follow up. With Everbridge being acquired by Tomovava, I think it closed in the last several weeks. I'm wondering how that's impacting the competitive landscape, if at all? I know they shifted their focus more toward the enterprise side of the equation. So I'm wondering what you're seeing in general? And then what you're seeing in terms of some of the enterprise opportunities for Genasys?

[Richard Danforth, executive]

Scott you're right. Everbridge, I think, focuses more on enterprise than state and mobile government and our focus on state and local government. So I don't see any impact right now as subsequent to their acquisition.

[Scott Searle, analyst]

Great, thanks.

[Operator]

[Operator Instructions] And next, we'll take a question from Ed Woo from Ascendiant Capital.

[Edward Woo, analyst]

Yes, thank you. And following up on the prior question. What does your pipeline international look like?

[Richard Danforth, executive]

It's been growing significantly. And as I mentioned and I think Brian mentioned that for the first time since COVID, we expect to be back to levels of bookings from international customers to reach the more normal levels that were pre-pandemic, and we expect to do that this year.

[Edward Woo, analyst]

Very well. Thank you for answering my question, I wish you guys good luck. Thank you.

[Richard Danforth, executive]

Thank you.

[Operator]

And we'll take any follow-up questions at this time. Okay. I'd like to turn the floor back over to Brian Alger for closing remarks.

[Brian Alger, executive]

Great. Thank you, everyone, for tuning in tonight. And again, apologies for the delayed release, which is on the wires at this point in time. Look forward to meeting with all of you over the next couple of months, and we look forward to presenting our fourth quarter and financial fiscal full-year results in early December. Thank you, and good night.

[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.