Genasys Inc. (GNSS) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Genasys, Inc. Fourth Quarter Fiscal 2019 Financial Results Call. All lines have been placed in a listen-only mode and the floor will be opened for questions following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Satya Chillara, Investor Relations for Genasys. Sir, the floor is yours.

Thank you, Christie. Good afternoon everyone, and welcome to Genasys' Fourth Quarter and Fiscal 2019 Financial Results Conference Call. I'm Satya Chillara, Investor Relations for Genasys. With me on the call are Richard Danforth, Chief Executive Officer; and Dennis Klahn, Chief Financial Officer of Genasys. Before we begin, I would like to take this opportunity to remind you that during the course of this call, management will make forward-looking statements. Other than statements of historical facts, statements made during this call that are forward looking statements are based on our current expectations. During this call, we may discuss the company's plans, expectations, outlook or forecast for future performance. These forward looking statements are subject to risks and uncertainties, and the actual results could differ materially from the views expressed today. For more information regarding potential risks and uncertainties, please refer to the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2019. Genasys disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We may also discuss non-GAAP operational metrics of bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance. 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. At this time, it's my pleasure to turn over the floor to Genasys' Chief Financial Officer, Dennis Klahn. Dennis?

Thank you, Satya. I'll open today's call with a recap of our fiscal fourth quarter and fiscal year 2019 financial results. Mr. Danforth will then provide an update on the business. Afterwards, we will open the call for just questions. Genasys revenues for the fourth quarter of fiscal year 2019 were $7.7 million, an increase of 135% compared with $3.3 million in the prior year fourth quarter. Gross profit was $3.6 million, or 46% of revenue in this year's quarter. This is a 241% increase over the gross profit in the prior year quarter. Operating expenses in the fiscal fourth quarter of 2019 were $3.9 million, it's mostly unchanged compared to the same period in the prior year. The company reported a small net loss of $78,000 or $0.00 per share in the fiscal fourth quarter of this year compared with a net loss of $2.4 million or $0.07 per share in the prior year's fiscal fourth quarter. We'll move now to fiscal year 2019 results. Genasys revenue for fiscal year 2019 was a record $37 million, a 41% increase over the $23.6 million in the prior year. Gross profit for fiscal year 2019 was $18.5 million, or 50% of revenue, an increase of $5.7 million or 45% over the prior fiscal year. Operating expenses for fiscal year 2019 increased 8% to $15.3 million, from $14.2 million in 2018. This was largely due to increased investment in software development this year. Fiscal 2019 had $572,000 of income tax expense. Fiscal 2018 had income tax expense of $2.4 million, due to a change in the deferred tax asset resulting from the reduction to U.S. Corporation income tax rates. For fiscal year 2019, the company reported net income of $2.8 million or $0.09 per share, $0.08 per diluted share, compared with a net loss of $3.7 million, or $0.12 per share in fiscal year 2018. Cash flow provided by operating activities in fiscal 2019 was $9.9 million, a record for any year in our history. In fiscal year 2018, cash flow provided by operating activities was $1.3 million. This year's increase was a result of a higher level of customer advances, net income, and non-cash charges. Our balance sheet remained strong. Cash and cash equivalents at September 30, 2019 were $18.8 million, compared with $11.1 million at the end of the prior fiscal year. The $7.7 million increase in cash and cash equivalents was primarily due to the $9.9 million of cash provided by operating activities, offset by $2.2 million of stock repurchases. Working capital increased by $3.7 million to $24.8 million at September 30, 2019, compared with $21.1 million at the end of the prior fiscal year. This is primarily the result of the fiscal year '19 net income. In fiscal 2019, we used $2.2 million to repurchase 788,425 shares of our stock. Last year, the Board authorized a $5 million repurchase program beginning January 1 of 2019 through December 31, 2020. Of this, $4.5 million is still available. With that, I'd like to turn the call over to Richard.

Thank you, Dennis, and good afternoon to everybody on the call. In fiscal 2019, we returned to profitability, achieved record performance across nearly all of our financial metrics, and made extensive progress in establishing Genasys as a leading global player in the emergency warning and public safety mass notification industries. Just to briefly summarize our financial performance in fiscal 2019 compared with fiscal 2018, revenues increased 41%, profit was up 45%, operating income increased 345%, and net income was up 175%. Backlog at September 30, 2019 was $27 million, a new record, and up 14% from the previous fiscal Year. Fiscal year bookings were a record $45.9 million, an increase of 26% over fiscal 2018. I want to thank the entire Genasys team for their efforts in delivering these results. Now, I want to turn to recent business developments and some of the strategies we are implementing to create additional values for our shareholders. On October 23, we rebranded the company as Genasys to reflect our broader commitment to critical communication and address larger markets with our expanded portfolio of hardware and software solution. The Genesis platform includes our industry-leading LRAD voice broadcast systems, our critical communication as a service, which compromises mobile device mass notification, and integrated solutions, which combines our hardware, command and control software, and critical communications as a service. Genasys is the only provider of a unified hardware and software platform, delivering emergency alerts and public safety mass notification. This approach can substantially increase the number of people who receive critical information before, during, and after a crisis situation. The rise in the number and intensity of critical events such as last year's deadly campfire in Northern California, and the increasing severity of the annual brushfires in Australia had state, regional, and national governments taking action to upgrade and modernize their emergency warning and public safety mass notification systems. The European Union has mandated that all member states have a nationwide mobile messaging in place by June of 2022. We expect the member states to begin issuing requests for quotes this fiscal year. Other jurisdictions in Asia and Latin America are expected to pass similar mandates in the coming years, significantly increasing our addressable market. Genasys is well-positioned to compete for these business opportunities. Our experience in Australia, where we have partnered with the large telecom providers to deliver more than 150 million SMS warning messages over the last six years gives us an advantage over our competition. The information contained in the Australian SMS warning messages has been integral to saving lives during the major brushfires both recently and in previous years. The coverage and response to our October press release calling on the California legislature and Governor Newsom to fund safety technology and fill the state's emergency warning notification coverage gap has been positive, and is leading to more awareness of our solution. Last week, California state auditors called out state and county emergency management officials for inadequate disaster and evacuation planning, and called on changes in state law to protect vulnerable residents. Last month, The Washington Post published an article comparing and contrasting how Australia and California prepare residents for wildfires and warn them during the act of blazes. In Australia, for example, no opt-in is required for mobile device uses to receive geo-specific local, regional, or national emergency notifications from their wireless carrier. This allows emergency managements to deliver critical and potentially lifesaving information to all mobile devices in crisis affected areas, and provide specific direction on what to do and where to go when evacuations are ordered. The system also determines how many people are in harm's way, and monitors their evacuation progress. In the United States, it's estimated that less than 20% of mobile device users opt-in to emergency mass messaging services. In Australia, this year over 2.5 million acres have been burned. Six lives have been lost. Since 2018, California wildfires have claimed more than 120 lives. We are working with California legislators and emergency management officials on measures that fund and implement advanced public safety mass notification systems and practices. While we see many opportunities in California, the timing and the outcome of our work with legislators and officials is dependent on funding and the political process. The successful installations and utilization of the Mill Valley and Laguna Beach systems should lead to additional orders from community or county-funded initiative this fiscal year. On a federal level, we continue to work with FEMA-funded emergency warning opportunities like the previously announced Puerto Rico order, where our system will provide warning and life saving instructions to residents living in elevated disaster risk areas. With disasters and critical events becoming increasingly widespread and endangering larger populations, the necessity of delivering critical communications containing clear concise warnings and actionable information is more important than ever. The expanded Genasys products and service portfolios address the unified critical communication market, a market that is expected to grow globally to more than $14.8 billion by the end of calendar year 2020. Increasing geopolitical unrest in many areas of the world and the 2020 U.S. election are creating a surge of acoustic hailing device interest and inquiries. We anticipate increasing law enforcement, homeland security, defense, and public safety mass notification orders this fiscal year, including strong sales to the army and other branches of the U.S. military. In summary, the efforts we have made to-date, developing our unified critical communication platform and expanding our addressable markets as Genasys position for further business and revenue growth in fiscal 2020 and subsequent fiscal years. We look forward to sharing our progress on these calls and at investor-oriented events. With that, I will turn it back to the operator for Q&A.

Thank you. [Operator Instructions] And our first question comes from Aman Gulani with B. Riley FBR. Please go ahead.

Hey guys, thanks for taking my question. This is my first question. I just wanted to get a bit more color on the backlog. It's up quite a bit. I just wanted to get sort of a breakdown of what that consists of. Maybe if you could dive into hardware versus software, yes, that would be helpful.

Yes, we started the year with $27 million of backlog, all addressable in the next 12 months, vastly hardware-centered, so I'm sort of estimating this amount, but probably $2 million, $3 million of softwares in that 27.

Got it. Okay, that's helpful. And just looking at the fourth quarter gross margin, it looks like it's up year-over-year, but sequentially it's down, just want to get a bit more color with that.

It's a new product that we designed for the Japanese market, and it's -- initially the margins are lower than what we would expect, but they will improve.

Okay, so maybe back to over 50%…

Yes, 50% is still the right target for our business for hardware.

Okay. Okay, thank you. And then, you made some new hires, specifically, you hired a new VP of software sales, you know, at a high level, can you talk about what the strategy is there with the new VP?

Sure. We have now hired three people here in the U.S. to pursue software opportunities. So that's communities that currently have a call out safety system, a lot of those are coming up for re-bid, and our software can provide that functionality. So, we're putting a team together, have began putting a team together to go capture as much of that as we can. In the coming year, Aman, we will also begin to augment sales and marketing, particularly in the EU to pursue that EU directive. So, we see growth in sales and marketing in both the United States and in the EU as we go forward here in 2020.

Okay, and then, on that EU directive, when do you think those like RFPs will start to come in?

It's like the first one will be in the first calendar quarter of '20.

Okay, all right. That's helpful. And then, last question for me, obviously, you're seeing success in Laguna and Newport with your acoustic hailing devices. Are you seeing other cities showing some interest, where you can sort of -- in California, where you can sort of showcase Newport and Laguna and show them the system, and that sort of stuff sort of get some more cities on board?

Yes. It's unfortunate that in California, there is no statewide mandate or standards for the cities and towns to follow. So, it has to go down to the cities and towns themselves. So, that's the bad news. The good news is it's a fairly small community of safety personnel in the state. So, we've gotten an awful lot of attention in Mill Valley that led to Laguna Beach and Newport Beach, and there's others in the pipeline behind that.

Okay, thank you. I'll pass it on.

Thank you, Aman.

And our next question comes from Ed Woo with Ascendiant Capital. Please go ahead.

Yes, congratulations on the year. My question is have you seen any change in competition, as you guys are growing this addressable market?

I haven't seen any change. I'm not sure that's the answer you're looking for. So, if you look at acoustic hailing devices, there's not a lot of players left doing that. So, we have a fairly dominant presence there. When you look at just the software only solutions for emergency notification, there are several players both here in the United States and around the globe. If you look at a combined hardware software public safety system solution, I believe we are the only ones that are doing that right now.

Great. And then, my next question is on the rebranding from LRAD to Genasys. I know Genasys was much stronger internationally. Have you guys seen a relatively smooth transition, and do you envision spending any significant amount on marketing to rebrand the company?

I think we will spent through -- we're going to spend on the rebranding it, and a certain amount of level activity for marketing and brand awareness, but the expense was 2019 for us, for sure.

Great. And have you had any confusion at all with you know, the LRAD Genasys brand in the U.S. market, or has it gone through pretty seamlessly?

In the U.S., it has been quite seamless I think. In the Asia Pacific region, I think we confused people, they thought that Genasys bought LRAD, which is opposite of what actually happened, but whatever initial confusion that was out there has been resolved.

Great. Well, thank you for answering my questions, and good luck.

Thank you.

Thank you. And our next question comes from Rick Neaton with Rivershore Investments. Please go ahead.

Thank you. Hi, Richard.

Hi, there.

Of the bookings that you called out in your press release, is the percentage of that associated with comprehensive software and hardware sales about the same as the percentage in your backlog, or is it higher or lower? Can you provide some additional color on that?

Dennis, correct me if I'm wrong, but just the nature of the software bookings, it's probably higher percentage in our backlog than it is in our revenue.

Revenue for the year was probably in the neighborhood of $2 million out of the $37 million. So that's probably the right ratio.

Okay. Thanks. That's all I have though, all my questions have been answered by the prior analysts. Thank you.

Sure.

Thank you, Rick.

Next call please.

And our next question comes from Lloyd Korten with Unique Investments.

Hi, guys, hello, Richard. Congratulations on the nice numbers.

Thank you.

Yes, I guess just to go over this. I think we have military grade hardware along with our software, which is a great calling card. So, I think being that, we're the only one that has both. I think we really have a hands-up on the market. You're the catcher over there, and really like to know how many different people we're talking to now in cities and states, and how much interest we're really generating out there.

I can't give you a specific number, Lloyd, butin my remarks, I think I stated that we see demand here in the United States, and Europe, and Asia Pacific region. We see that growing. We see our pipeline getting bigger. See what's happened with world events and weather-related events and those kinds of catastrophic events that are systems can be used to help keep people's lives safe. So, I think for reasons I just mentioned that demand is growing, and we're in a good position to capture that growth and demand.

So, you're getting a lot of activity for people who want to know more about it are considering our system?

Yes, across the globe, Lloyd.

Great. Also, we have been to shows I guess with the Genasys product, would you now have kind of reaction of getting it the tradeshows?

We went to our first one in Savannah, Georgia about three or four weeks ago. It was very well-received, very well-received.

Do we have the manpower and all that?

You broke up there, Lloyd.

I am sorry. Do we have the manpower to follow-up? I know with these shows bunches of people give their cards and I'm curious and want to have contacts later. Do we have the manpower to go after everybody?

We do. And as I mentioned a moment ago, we will be adding to our sales team, continue to add to the sales team here in the United States and in Europe in this fiscal year.

Right. One concern is, I know we have some really robust military orders, one of those things, when will -- those orders it was like $25 million, when will be -- have shipped them all?

We had an order in FY'19 of $20.2 million for the United States Army. We will ship that ratably over the four quarters of 2020.

Okay. So, there will be some nice revenue from that. Well, great, I look forward to your bulletins and notices, and thank you for all you do, sir.

Thank you.

Thank you, Lloyd. Next call please.

Our next question comes from [John Groover with Groover McBain] [ph]. Please go ahead.

Hi, good afternoon. Yes, what's the outlook for repeat of the -- you know, big portion of the orders was at $20.2 million in military you just mentioned, is there any follow on or other military orders you expect to book this year to give you an up, good up order year?

, :

How big award would you expect after the budget is passed?

I think we don't really know until the budget is passed, but I believe it will be slightly less than an FY'19, FY'19 had some pent-up demand that we felt will fulfill. There will be similar size perhaps slightly less than what we did in FY'20.

And the second question…

And we will go on for many years, I mean, it's several years ahead of us.

Got you. You did $37 million revenue, only two software, what with the acquisition of Genasys, what is your goal for software revenue in the new year and what kind of growth top line do you expect for the total company?

I won't answer the absolute number, but we expect significant growth here in the U.S. The EU initiative is going to get off to a slow start, I expect the first [indiscernible] show up as I said in the first quarter of this calendar year '20, but it will really happen in earnest in '20, the following year, I believe. The initiatives in Australia, they could add to an uptick in our revenues for FY'20, but we need to wait and see how the competition brings out. So, I'm hopeful that '20 will show some significant growth, but more likely, we'll see it in the following year.

Got you. My final question here, your gross margin, this is dealt with why, but your gross margin sell five points from Q3 to Q4, and you said we expect 50, but with that -- would 50% be if you need to get a lot of software on -- you need a lot of software to get the 50 for the full-year, this year and new year.

No.

No. Okay, thank you very much.

You're welcome.

Thank you, John. Next…

And next we move to Alex Silverman with AWM Investments. Please go ahead.

Hi, guys. Can you give us a quick sense of what this new Japanese or this new product is for the Japanese market?

Yes, it's a liner, right. It's intended for congested cities.

Okay. And it's a modification of existing product or it's a new…

No, it's a new product.

Okay.

New product we designed and developed for that marketplace.

Got it. In terms of the EU 110, how are you thinking about allocating resources rather than -- I mean, is it sales people, is it going through distributors, how are you bidding on some of this?

It depends by country, because it's a different strategy for each country, but it will largely be done with Genasys people. We will leverage where we can, but expect that we're going to largely do it ourselves.

Okay. Has anyone put out there an estimate of what the opportunity is be for a Europe-wide deployment?

I haven't read anything that's publicly available about that.

Okay.

We have obviously our own internal metrics, but we are not going to share that.

Fair enough. Thanks a lot.

Thanks, Alex.

And next we'll go to Will Hamilton with Manatuck Hill Partners.

Good afternoon, Richard. Just question on 2020, so the last couple of years, if we go back to look at what you booked in terms of revenue relative to what you ended the year with backlog, has been around 150% to 200%. So, one-and-a-half to two times the revenue versus the backlog. Is that a good range for 2020, given where the backlog stood at the end of this year?

Not sure I understood the question well.

So, it's sort of like, you deliver the backlog and then there's an element of book and ship.

Book and bill?

So, if I look at '19, $37 million of revenue versus you entered the year with around less than $24 million of backlog a year before that?

Yes, so if you are doing your math, you are correct, I think there's probably more revenue upside than that calculation will predict.

Okay.

Yes, I mean, 1.5 to 2 is a reasonable range there.

Okay. And can you give us any color on in terms of the cadence through the year; it was a little lumpy obviously this year, but…

That's terribly lumpy this year. Correct me, if I'm wrong, but we did ten, nine, and almost eight, yes. So that was better than our typical performance, Will, and I show back or refer back to the gentleman's question regarding the army order, one of the reasons it's going out ratably in all four quarters is to provide that stability and predictability. So, if you look at it, we will have 10 more million dollars of revenue in our second-half for the U.S. Army order above what was in the FY '18 actually. Sorry, '19.

So, it might be like a 60-40 or 40-60 split between first-half, second-half?

Yes, something like that 40-60, yes.

40-60, okay. Lastly, in the past, you talked about a handful, if not six or seven, countrywide mass notification opportunities you're trying to pursue, any sort of update you can provide us there?

All still very active.

Outside of Europe.

Yes. All still very active, but we haven't lost or been awarded yet. It's still in the pursuit phase.

Okay. Thanks.

You're welcome.

Thank you, Will. Next caller please.

Our next question comes from William Bremer with Vanquish Capital. Please go ahead.

Hi, good afternoon, Richard, and Dennis.

Hi, there.

Just for this fourth quarter, can give me an update on the split between domestic revenue and international for this fourth quarter of 7.7?

Probably not fitting here.

Yes, I don't have that…

What we can do, Will, is look it up and just send you a note.

That's fine. Okay. Going back to this European mandate, if I remember correctly from your PowerPoint, 15 countries were receiving some European funds, and there will be early adopters. Can you give me a little more clarity on that statement?

Sure. So, the EU is going to fund this initiative and some of the smaller budget constraint countries in Europe, and those are in my opinion will be the ones that will likely come out first because the funding is being made available by the EU.

Okay, all right, and then finally…

It's just smaller countries, for sure, smaller poor [ph] countries.

All right, great. Do we feel that we have the teaming [ph] order at this point, or do we -- should we expect some additional hires in some of those regions?

There will be more hires. There will be more hires again in the sales group, business development, and some more in engineering.

So, Dennis, here's one for you, should I be tweaking my SG&A here, or pretty much keep it status quo, the revenue as a percentage?

Operating expenses, we would expect will increase next year, probably in line with our growth of revenues. So, when -- but we still expect to have the 50% margins.

Okay, got it. And then finally, gentlemen, where does the stocks buybacks stand at this point? Are we active or we just -- and what has been done maybe in this last fourth quarter, if any?

We didn't do any in the Q4. I don't think we did any in Q3 either.

Great.

So, as Dennis mentioned in his remarks, there's still $4.5 million that the Board has authorized for stock repurchase. Again, we did not do any in Q3 or Q4.

Okay, great. Thank you. Good quarter.

Thank you.

Thank you.

And there appears to be no further questions at this time. Would you like to give any closing remarks before I close out the call?

Sure. As a reminder, Richard and I are scheduled to present tomorrow at the LD Micro Main Event conference in Los Angeles. A webcast of our presentation will be available through the Events and Presentation section of the Web site. Thank you for participating and listening in on our call. A replay of this call will be available in approximately four hours through the Investor Relations page on our Web site.

Thank you. This does conclude the Genasys fourth quarter and fiscal 2019 financial results conference call. You may disconnect your lines at this time.