Tantalus Systems Holding Inc

TSX:GRID

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and welcome to the Tantalus Systems Third Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Deborah Honig of Investor Relations. Please go ahead.

[Deborah Honig, executive]

Thank you, operator. Thank you for joining us to discuss Tantalus Systems' financial results and operating performance for the 3 and 9 months ended September 30, 2024. Tantalus issued these results in a press release yesterday, which is posted on the company's website.

Joining me today on the call from Tantalus Systems, herein referred to as Tantalus or the company are Peter Londa, President and Chief Executive Officer; and George Reznik, Chief Financial Officer.

During the call, we will make forward-looking statements about Tantalus' business. These statements are subject to certain risks and uncertainties, which could cause actual results to differ materially. Tantalus refers conference call participants, either today or in the future, to the company's forward-looking statements contained in the presentation and on our website at www.tantalus.com. Statements made on this call reflect management's analysis as of today, November 14, 2024. Management does not assume any responsibility or obligation to update forward-looking statements made during this conference call, unless required by law.

Please note that the financial information referenced on today's call is stated in United States dollars and in accordance with IFRS, unless otherwise stated. The company is also presenting selective non -IFRS financial measures, including gross profit, gross profit margin, adjusted EBITDA, recurring revenue, annual recurring revenue referred to as ARR and adjusted working capital.

Tantalus believes that these non-IFRS measures provide meaningful information to investors. However, they do not have a standardized meaning and are not likely comparable to similar measures presented by other issuers.

I will now turn the call over to Peter Londa, President and CEO. Please go ahead, Pete.

[Peter Londa, executive]

Thank you, Deborah. On behalf of the entire team at Tantalus, George and I are pleased to provide an update on our business through the third quarter of 2024. We'll aim to work through our presentation and provide ample time for questions at the end.

As reflected on Slide 3, we made solid progress from a financial, commercial and R&D perspective. While George will review the financial information in more detail, I'd like to point out a few highlights at the outset of today's call. First and foremost, we witnessed solid revenue growth year-over-year of 14% by delivering $11.6 million of revenue in the quarter. This is the second highest amount of revenue we've ever delivered within a quarter and a testament to the continued hard work and dedication of our entire team.

The third quarter also marked the first period where Tantalus generated revenue from the TRUSense Gateway, as initial shipments were delivered to utilities. This is a major milestone for our team, after dedicating significant time and dollars to develop and commercialize the TRUSense Gateway. We delivered yet another quarter of strong gross profit margins that led to $585,000 of positive adjusted EBITDA, and we ended the quarter with ample cash on our balance sheet to support our go-forward operations.

Beyond delivering strong financial results, our sales team delivered another milestone by converting USD 40.2 million in orders through the first 9 months of 2024. This represents 46% growth on a comparative basis, and we'd like to highlight that at $40.2 million of orders and counting that we have already exceeded the highest dollar amount of orders that our team has ever converted in an entire calendar year. Coupled with the record results in orders, we have also added 26 new utilities to our user community through the first 9 months. This also represents a record for our company.

Continuing on the theme of commercial progress, I'm extremely pleased to report that we have secured initial orders from 21 utilities for the TRUSense Gateway. This is up from 15 utilities reported back in August of this year. We continue to anticipate building momentum from the TRUSense Gateway as we close out 2024 and begin to turn the page for 2025.

Securing orders from 21 utilities for the TRUSense Gateway and being in a position to generate our first dollars of revenue from our new offering is directly tied to our engineering and manufacturing teams securing the necessary certifications for the fiber, Ethernet and cellular gateways during the quarter. We've activated our supply chain and contract manufacturer to ramp production of all 3 versions and we're looking forward to sharing additional updates as we continue to make progress.

While we provide a significant number of updates on the TRUSense Gateway given the order of magnitude of our investment, I'm pleased to announce that we are also continuing to make good progress on the TRUSync grid data management software and on our TRUGrid analytics packages.

George will now walk us through the financial results. Over to you, George.

[George Reznik, executive]

Thank you, Pete. Before diving into the financial results, I would remind everyone that we report in U.S. dollars as reflected throughout the presentation. As Pete mentioned, we delivered $11.6 million in revenue for the third quarter of 2024, representing an increase of 14% from the prior year quarter.

Further reflected on Slide 4 of the presentation, gross profit margin remained strong at 56% for the third quarter of 2024 due to a favorable revenue mix. The company's operating expenses during the third quarter of '24 included an additional investment of approximately $1.1 million in the TRUSense Gateway. Even with the continued investment in the TRUSense Gateway, we delivered positive adjusted EBITDA of $585,000 during the third quarter.

Our net loss of $361,000 during the third quarter of 2024 included approximately $545,000 of non-cash expenses such as depreciation and amortization, share-based compensation and foreign exchange.

Digging deeper into our revenue and gross profit margin recognized during the third quarter of 2024 on Slide 5, revenue from connected devices increased by 11% over the prior year and contributed 62% of total revenue, while revenue from software and services increased by 19% over the prior year and represented 38% of total revenue.

Within our software and services revenue segment, we include recognized recurring revenue in each period. As a reminder, recurring revenue is comprised of Software-as-a-Service, or SaaS, subscriptions, term-based software licenses, software maintenance, technical support and hosting services.

Recurring revenue continues to become a material part of our revenue stream and was 29% of total revenue in the third quarter of 2024. This represents the highest revenue contribution from recurring revenue that the company has generated within a quarter to date. The strong recurring revenue was bolstered by the annual renewal of the TRUSync grid data management term-based software by a large investor-owned utility during the quarter.

Shifting our focus to gross -- profit margin. We exceeded our internal targets by delivering 56% gross profit margin in the third quarter of 2024. The disaggregation of our connected devices and software services is reflected on the chart on the right side of Slide 5. We experienced strong gross profit margin for our connected devices of 41% in the third quarter of 2024 due to continued prudent management of the company's supply chain and a favorable product mix shift in the quarter. Gross profit margin for our software and services segment increased to 81% in the third quarter of 2024 as a result of the increased revenue from software experience.

In evaluating the trailing 12 months of performance through September 30, 2024 as reflected on Slide 6, we continue to believe that the company remains on a favorable trajectory. Revenue for the trailing 12 months to the quarter -- third quarter of 2024 was lower than the prior period due primarily to the record revenue performance in the fourth quarter of 2022 included in the prior year period, which included the delivery of a significant number of customer orders due to pent -up demand following COVID-19 and related electronic component shortages.

Revenue from software and services for the trailing 12 months to the third quarter of 2024 increased to $15.4 million and represented 37% of total revenue compared to 34% in the prior period. Recognized recurring revenue for the trailing 12 months to the third quarter of 2024 increased by 12% to $11.1 million, contributing 25% of total revenue compared to 22% in the prior period.

Gross profit margins increased across the business for the trailing 12 months of the third quarter of 2024, which increased to 54% overall from 50% in the prior period. And as reflected on the slide, the company delivered positive adjusted EBITDA of $223,000 for the trailing 12 months to the third quarter of 2024, while we continue to make significant investments in the TRUSense Gateway and TRUSync software capabilities.

To that end, the company invested approximately $5.4 million in the development of the TRUSense Gateway during the last 12 months. This investment includes approximately $1.5 million of external costs to support our commercialization effort. Said another way, had we not made the investments in these external costs to support the development of the TRUSense Gateway, it's fair to assume that there would be a corresponding improvement in our adjusted EBITDA results.

Net loss for the trailing 12-month period to the third quarter 2024 improved over the prior year and was impacted by significant non-cash items. We anticipate migrating to positive net income in future by continuing to drive revenue growth with strong gross profit margins and increasing operational leverage.

As reflected on Slide 7, our overall balance sheet remained strong during the quarter. Adjusted working capital for the third quarter of 2024 was $7.1 million and remained relatively consistent with our previous quarter. While our cash balance declined quarter-over-quarter, it should be noted that we historically witnessed a trough in cash during the third quarter of every year, which is due to the timing of invoicing and collecting our annual recurring revenue at the beginning of each year from our customer base.

We continue to make progress towards normalizing our inventory, accounts receivable and accounts payable to enhance our cash conversion cycle. This will provide our team with increased flexibility to support the commercialization of the TRUSense Gateway and our other products and offerings.

Beyond adjusted working capital, the company ended the quarter with over $37 million in total assets and outstanding total debt balance of $10.7 million. It should be noted that we continue to have $4.8 million of total availability under our debt facilities to the extent that any additional liquidity is required to support the growth of the business. We believe that the balance sheet has adequate flexibility to scale the business going forward.

I will now turn it back over to Pete to provide our closing remarks.

[Peter Londa, executive]

Thanks, George. I think as already summarized, in the interest of everyone's time, the company remains in a fairly favorable position. We're certainly appreciative of all of the hard work of our team and very appreciative of the continued support we received from our customers. We'll look forward to providing updates through the balance of the year and into 2025.

Operator, we can open it up for Q&A.

[Operator]

[Operator Instructions] The first question comes from Gianluca Tucci with Haywood Securities.

[Gianluca Tucci, analyst]

Good growth in SaaS and ARR, maybe I'll start there. Is this a new quarterly baseline to model from? Or were there some other moving parts in the quarter that caused the outperformance in ARR and SaaS revenues?

[Peter Londa, executive]

George, why don't you go ahead and take that.

[George Reznik, executive]

Sure. Thank you, Pete. It does represent the highest contribution at 29%, Gianluca. And as I highlighted earlier, it was really heavily influenced by the annual renewal of a term-based software license with a large investor-owned utility. So that has significant impact. And then -- but also -- so this would be really higher than our normal quarterly run rate because we'd recognize that during the period. We fulfilled that term software license obligation to the customer.

But having said that, we have added 26 new customers and ARR has been growing over time, but not to the same magnitude that we did this quarter at $3.4 million over the prior quarter. So, it will probably trend down slightly for Q4. But then over time, it will continue, especially on the year-on-year growth over time as we've had 11%, as highlighted in the trailing 12-month period.

[Gianluca Tucci, analyst]

Okay. That's good color, George. And Pete, maybe a question for you here. But on the 21 orders for TRUSense so far, are you able to shed some perspective on how the pipeline is looking at the moment for TRUSense and how you expect the ramp to look into 2025 and beyond?

[Peter Londa, executive]

Gianluca, I don't think we'd necessarily change what we've previously shared and presented. The opportunity for the TRUSense Gateway between the advisory committee and the number of utilities beyond the advisory committee still remains very robust. In terms of specifics about the pipeline, we included in our investor presentation that we're chasing $0.5 billion, some of which obviously, we have better visibility into than others. But it's -- I think, no change. It still remains very favorable and positive, Gianluca.

[Operator]

And the next question comes from Daniel Rosenberg with Paradigm.

[Daniel Rosenberg, analyst]

My first question was just around any updates regarding regulatory approval of the cellular version of the Gateway, I know you guys were kind of close to the finish line. So, just any updates around that, please?

[Peter Londa, executive]

Sure. So, Daniel, thanks for the question. We've received FCC sign-off for the cellular gateway. The only outstanding item is the PTCRB testing. That testing is complete. We are awaiting a report, at which point we'll be in a position to share additional updates. I would think it's just a matter of days, if not week. But we have been given the go-ahead to begin production and manufacturing of the cellular gateway. So there's no surprises there, Daniel. As we've referenced, we're fully expected to receive PTCRB and have completed those tests successfully.

[Daniel Rosenberg, analyst]

Okay. Great to hear. And then it's nice to see continuation of pilots and seems like you're assigning new people onto pilot. Just wondering,, any additional learnings that you're having in your dialogues with customers? Any challenges? Just any color that you could share from what you're seeing in the pilot programs?

[Peter Londa, executive]

Yes, sure. So, Daniel, to give some perspective, of the 21 utilities that have placed initial orders for the TRUSense Gateway, it only includes 3 members of the advisory committee that continue to work with us as we finalize our activities. So 18 utilities beyond the advisory committee have already placed orders. So I think that's a very good indication of the potential scale here.

In terms of activating devices in the field, I'd say we fortunately have not witnessed any significant surprises. When any company launches a new innovative solution and physical device. Every once in a while, some things can crop up. But I'd say there's nothing that has given us pause or that would materially impact timing of really ramping up production on all 3 versions.

In terms of the actual data that we're capturing, it's pretty substantial. And I'd say we have, in a few circumstances, utilities expanding the number of use cases that our team initially mapped out. It's a humbling experience when we work alongside utilities, codify a set of use cases that justifies our investment, and then incremental to that, along the way, find a few other use cases that utilities identify in conjunction with using our technology.

So, I'd say that the number of use cases is expanding. We're working to codify and document some of those. And I'd say we're very fortunate to have the types of utilities that we work with really partnering with our team to bring this innovative technology and solution to market.

[Daniel Rosenberg, analyst]

Okay. Good to hear. I was also curious around the funding sources. I know, obviously, early days with government and whatnot. But any thoughts or anything you're hearing around the funding sources as it relates to a new President in the U.S., how that might shape things going forward?

[Peter Londa, executive]

Yes, you're being polite in phrasing your question, Daniel, so thank you for that, for those of us from the U.S. What I'd say is we are monitoring it extremely closely. We have a quasi-SWAT team internally that activated as soon as the results became apparent in the way the election fell. I'd say as it relates to stimulus dollars, we don't anticipate at this point any disruption to the Infrastructure and Jobs Act. A lot of that money is already legislated and in motion.

Where there may be changes is around tax credits in the IRA. That's where we may see certain types of projects get eliminated. I don't mean this in a tongue-in-cheek way, but the fact that the President Elect has aligned himself with Elon Musk and Elon's vision of the future. We would anticipate continued support on the notion of establishing microgrids really down at the residential level and continued support for the integration of distributed energy resources, all of which is bolstering the distribution grid.

So, I think assuming Elon Musk continues to be influential in the administration, our technology should still have adequate access to capital that's already been allocated in those stimulus packages. The other aspect that we are tracking ties to tariffs. We witnessed that certainly 6, 7 months into Donald Trump's first administration targeting China. Our contract manufacturer helped us navigate that very quickly and effectively. It's hard to predict whether there will be tariffs implemented on other countries beyond China.

And as the President-elect has referenced, tariffs on any imports coming into the United States from any country, including Canada. So, we are tracking that. I'd say we are taking action and trying to think through how we shelter not only the impact to Tantalus, but the impact to our utility customers to the extent that tariffs emerge and those tariffs are allocated to the types of stuff that we build.

[Daniel Rosenberg, analyst]

Okay. Understood. I guess my last question would just be around -- you said there are some use cases that have been coming to light with the pilot programs. I was just curious if you could give us any specifics around kind of the biggest aha moments that you're getting from customers or interesting usage with the TRUSense.

[Peter Londa, executive]

Absolutely, Daniel. So, again, thanks for the thoughtful question there. So, when we designed the TRUSense Gateway, as you know through your coverage, we envisioned it sitting on the side of a home plugged in between an existing meter socket and an existing meter. And while that premise still is very relevant, what we sort of didn't necessarily think about was other locations for the TRUSense Gateway to be deployed.

And I'd say the insight and the aha moment that we are finding ourselves alongside utilities that are starting to really pilot and field trial technology is using the TRUSense Gateway for its power quality measurement and its ability to collect leads and data from other surrounding devices. It does serve as a collector that we always anticipated, but deploying that in various locations across the distribution grid as part of a network communications infrastructure.

And so, as we think about the use case and the aha moment, utilities are taking us down a path where networking communications goes much further beyond just connecting to devices. It's, for lack of better phrase, networking communications with a purpose, not only to collect data, but also to pick up incremental power quality data at really critical junctions from substation to circuit, circuit to feeder and feeder to home.

So as you've seen in some of our modeling that we shared at our Investor and Analyst Day earlier this year, our thought was number of devices per transformer or number of devices per homes, particularly to gain the behind-the-meter control capability that our device offers. I'd say incremental to that is actually using this device as a strategic way to distinguish our communications networking capabilities relative to our competition.

And that's, in grand scheme of things, we should have thought about that. I don't think we really articulated it or thought of it as a strategic element of networking itself. That's the aha moment for us. And I think that's some of the lessons that we're learning very quickly, as example.

[Operator]

[Operator Instructions] Our next question comes from Nick Boychuk with Cormark.

[Nicholas Boychuk, analyst]

In your prepared remarks, Pete, you kind of mentioned that you added another 12 utilities into the mix. Can you kind of share a little bit who those groups are? How you guys are still having success finding new utilities converting them? It seems like the pace of that is accelerating. And I guess, what your base expectations are for these new utilities over the coming years?

[Peter Londa, executive]

Yes, Nick, thanks for the question. The utilities that we've added this year still fall within our sweet spot of public power and electric cooperative utilities. I think through our efforts to articulate the Tantalus Grid modernization platform and really take a much more holistic view of modernizing the distribution grid by harnessing the power of data is resonating with an increasing number of utilities, particularly utilities that are confronted with the emergence of electric vehicles. Regardless of the adoption rate, it does have a direct impact on the stability and reliability of transformers at the pole top level and in the aggregate level at the distribution level.

So, I'd say we still are executing very effectively to our sales organization, both direct and then our indirect channel. And we've also seen really interesting progress with some of the joint action agencies that have selected us over the years as a preferred modernization partner for the utilities that they support and cover. And in some circumstances, those joint action agencies are actually helping a number of smaller utilities that may just not have the IT infrastructure and the team to stand up a true modernization platform.

And the joint action agency is sort of stepping into that void on behalf of those utilities. So, each utility that we list enters into an end-user license agreement with us. In some circumstances though, Nick, a slight pivot that we're seeing is the joint action agencies actually being an extension of not our sales organization, but our representation at the state level, at the region level. And I think that's contributing to the accelerated growth for us.

I'd say we are still putting our toe in the water as it relates to the investor-owned utilities beyond PG&E and United Illuminating. PG&E on the TRUSync software and United Illuminating on the TRUSense Gateway. So, we haven't yet seen incremental conversions there, but I think our team is getting smarter on how we make those approaches.

[Nicholas Boychuk, analyst]

Okay. That's great color. And sticking with the same theme, at least this is from our vantage point, so correct me if I'm wrong. But it seems as if a lot of the utilities that you currently have in the total addressable market for the TRUSync product suite seems to be navigating into that qualified bucket. The velocity of that shift is happening a lot faster than I think I would have anticipated. Can you kind of walk us through a little bit of the dynamics at play there of why you're seeing more of these utilities who were not part of the advisory committee place initial orders and what that means for you guys over the next couple of years?

[Peter Londa, executive]

Yes. So, I think you're referring to the TRUSense Gateway as opposed to TRUSync. Did I understand your question correctly, Nick?

[Nicholas Boychuk, analyst]

Yes, that's right.

[Peter Londa, executive]

Yes. Okay. Okay. Just want to make sure I'm focused on the right topic for you. Yes, we remain confident with the visibility that we have in our advisory committee. I'd reference a few of those utilities, unfortunately, were heavily impacted by the hurricane that swept up through the Southeast; through Georgia, Tennessee and into Western North Carolina. So, not surprisingly that those utilities have had to turn their attention to disaster recovery.

But I'd say the advisory committee continues to provide us with excellent insight and support as we finalize everything on our end. And so we still expect to see great adoption there. The acceleration of opportunities beyond the advisory committee, I'd say, is a -- humbling is the best way to put it. The team has been working on this, as you know, for several years. And so, what we see some corresponding acceleration or increased velocity than what we sort of anticipated, Nick, is around some of our existing utilities that deployed systems 7, 8, 10 years ago and are looking for the cellular version of the Gateway or the fiber version to the extent that they are deploying fiber now for the first time to really enhance that networking communications for the existing assets they already have in the field from Tantalus.

And so, we're still trying to work through ratios and what that means in terms of revenue contribution as we migrate networking communications and certainly leverage the power quality sensing capabilities of the device. But I think that's where we're seeing some advancements faster than we probably would have modeled ourselves. With that said, we're so early here within the commercialization process. It's hard to know whether we'll see that quarter-to-quarter, Nick, does the number increase the way it just did in Q3? I don't know, but I think fundamentally, we are increasing visibility and I think our confidence in what we've been presenting for the past year on the aggregate opportunity, and frankly, the value that this device is bringing to the market. I hope that answers your question.

[Nicholas Boychuk, analyst]

No. Yes. Absolutely it does, Pete. Last for me. George, you kind of mentioned that there was $5.4 million spent this year on the commercialization of TRUSense. I'm curious for next year, once all these final certifications are in hand, how much of that cost is going to fall off? And how much of it could potentially be kind of kept in place for that sales and marketing push to really get it into more utilities hands a little bit faster? I'm just thinking through the margin profile for the coming year.

[George Reznik, executive]

Yes. Maybe I'll start with that Pete, and throw it over to you. So that was -- just for clarity, Nick, it was for the trailing 12 months, it was $5.4 million. Of that, we had external costs of approximately $1.5 million. And those are costs of certification, specialized contractors, consultants that really accelerated and required to launch.

The core investment will probably be realigned for additional features, future features as we continue to advance the functionality of the TRUSense Gateway and our other components we're offering, including the TRUSync software. So -- but the external costs, those are variable primarily, and they'll go away.

And so part of that will be saved. But as Pete highlighted, and we will be investing to accelerate and capitalize on this window of opportunity. On the sales and marketing side, you've seen the 21 customers purchase and that's really a good early indication of the market opportunity we want to accelerate. So part of that will certainly be savings, but we want to play offense here and foster our growth.

[Peter Londa, executive]

Yes. Nick, we can't give you a precise number on what percentage of that $1.5 billion would be allocated to sales and marketing. That is something that we're continuing to evaluate as an exec team and certainly with our Board of Directors as we plan for 2025. But I think it's fair to assume a good chunk of that would be reinvested in certainly the sales and marketing in 2025 moving forward. The opportunity is there. So, taking advantage of that opportunity is now paramount.

[Operator]

That concludes our question-and-answer session. I would like to turn the conference back over to Peter Londa for any closing remarks.

[Peter Londa, executive]

Thank you, operator. Gianluca, Daniel, Nick, thanks for the questions. Appreciate everybody joining us today for the update on the progress that we've made. I'd just close with a thank you to our team that's working incredibly hard on behalf of our shareholders to really drive our business forward. We remain enthusiastic and optimistic about the trajectory of the business and I think we're in a very good spot. We'll look forward to providing updates as we get into 2025. I hope you all have a great balance of the day. Thank you for your time.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.