Genasys Inc. (GNSS) Q4 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Genasys Inc. Fiscal Year 2022 Conference Call. All lines have been placed on a listen-only mode and the floor will be opened for questions and comments following the presentation. [Operator instructions] At this time, it is my pleasure to turn the floor over to your host Kim Rogers of Hayden IR. Ma'am, the floor is yours.

Thank you, Dagma. Good afternoon and welcome to Genasys Incorporated fourth quarter and fiscal year 2022 financial results conference call. I'm Kim Rogers with Hayden IR, the Investor Relations firm for Genasys. With me on the call today are Richard Danforth, Chief Executive Officer; and Dennis Klahn, Chief Financial Officer. 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 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, 2021 and 2022. 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. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We 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 purchases 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 four hours through the Investor Relations page on the company's website. At this time, it's my pleasure to turn the call over to Genasys' Chief Executive Officer, Richard Danforth. Please go ahead, Richard.

Thank you, Kim, and welcome to everybody. Fiscal 2022 was an exceptional year for Genasys. We delivered 15% growth in revenue and a positive adjusted EBITDA while accelerating our strategic shift towards a higher margin recurring revenue model. Our investments in software sales and support led to key contract wins, fueled expansion in existing markets, and paved the way for entry into new markets and geographies. We expanded our SaaS platform into seven countries, 19 states and 21 California counties. We self-funded more than $9 million in SaaS platform investments and still generated $1 million in cash from operations in the quarter and $468,000 for the year. These investments are creating a strong economic engine that will meet the growing demands for our SaaS solutions. After repurchasing approximately $1 million in company's stock, we ended the year with no debt and $19.9 million in cash, cash equivalents and marketable securities. The cash generating power of our core business and the strength of our balance sheets continue to provide us with the resources and flexibility to execute our long-term growth strategy. Fiscal 2022 we delivered 15% growth in revenue and positive adjusted EBITDA, in spite of the numerous global supply chain challenges we faced this year. We want to thank the team for their hard work and dedication in achieving these notable accomplishments. They work relentlessly to meet customer commitments by engineering products, second, sourcing or building critical components inventory to avoid unforeseen changes or shortages. At an executive level, we continued making strategic investments to accelerate our SaaS revenue. We added new enterprise SLED and utility customers and significantly increased our SaaS coverage in the United States beyond our strong foothold in California by expanding into 19 other states. These gains are directly related to our investment in sales, software development, and customer success teams. We also hired a Chief Revenue Officer Dennis Walsh, who brings extensive enterprise SaaS experience and relationships. We offer SaaS solutions for numerous verticals, including utilities, enterprise, stadiums and campuses, as well as the Private sector. In the fourth quarter, we closed three new SaaS contracts in the Utility sector, which included Golden State Water Company, Florida Municipal Power Agency and NW Natural in Washington State. In addition to providing accurate real-time safety alerts and notification throughout multiple channels, Golden State Water and Florida Municipal Power Agency will use GEM, our mass notification platform, to inform utility customers of service outages, system maintenance, and other customer-related communication. To give you an idea of that potential of this vertical, the Golden State Water Company contracts cover more than 260,000 customers. The Florida Municipal Power Agency GEM or mass notification co-op agreement covers over 2.7 million home and business customers throughout Florida. NW Natural is deploying GEM to deliver alerts and internal communication to workers, staff, and contractors. An enterprise success to highlight which closed at the end of our fourth quarter is a multi-year enterprise SaaS contract win with Volvo, the second global automaker to select GEM to replace a competitor system in better safeguard their domestic and international workforce. The GEM platform features real-time situational awareness in a single dashboard, offers duress buttons, field check-ins, and recipient locations to help keep employees and everyone on site informed and safe in a crisis. Healthy pipeline activity in our SaaS products is increasingly converting to wins across end markets and geographies, including recent key wins in the enterprise utilities in state and local sector. GEM and Zonehaven can be purchased separately as a comprehensive offering and/or bundled with IMNS, our integrated emergency warning system. Investments throughout fiscal year 2022 have improved our sales productivity, lead generation as we continue to grow our SaaS pipeline. Increasingly, customers who purchase one SaaS or hardware product are adding our other offerings to maximize the benefit of our emergency notification, crisis management and evacuation solutions. To date, 13 California counties have purchased multiple Genasys software and hardware offerings, five of which have purchased all Genasys offerings, IMNS, Integrated Mass Notification System, Mass Communication software and Evacuation software, another four counties have purchased our Mass Communication software and our Integrated Mass Notification Systems and another four purchased our Mass Notification and Evacuation software. As the only company offering a unified communication platform, upselling and cross-selling within our growing customer base are further key growth initiatives for our SaaS platform. Turning to our international business. With the EU, Middle East, Africa and Asia-Pacific regions reopened at the COVID, we expect stronger sales and revenue contributions from all of our international sales regions in fiscal 2023. We anticipate continued revenue growth in our fiscal 2023. Our hardware business will start from a lower backlog than the previous year due to timing of orders carrying over from fiscal 2022 to fiscal 2023. Fiscal fourth quarter bookings was $6 million, bringing total bookings for fiscal 2022 to $38.2 million, $18 million in previously expected fiscal 2022 bookings are now anticipated to close in fiscal 2023. Our fiscal 2022 bookings result in a backlog of $22 million that we expect to deliver in the fiscal 2023. The carryover of orders stronger international sales, continued Acoustic Hailing device deliveries and increased software service sales are anticipated to augment fiscal 2023 bookings and backlog. Further, we are building a strong base of annual recurring revenue from our software business, and it will represent a larger portion of our revenue in fiscal 2023. Last year, we discussed a $9 million to $11 million increase in operating expenses to support our SaaS business growth. The increase in fiscal 2022 was $6.4 million, and we anticipate operating expenses to increase by approximately $5 million in fiscal 2023, reflecting our continued confidence and excitement in our SaaS business. Through our investments to-date, we have proven our SaaS business model by replacing competitors and landing contracts with global automobile manufacturing, professional sports organizations, SLED utility and enterprise customers. Our strategic shift towards a higher margin recurring revenue model is gaining momentum, as evidenced by the strong performance of our SaaS offerings. Our fiscal 2022 strategic investments led to key wins in fueled expansion in existing markets and entry into new markets and geography. That momentum has continued in the first quarter of fiscal 2023, with the previously mentioned Volvo and the three utility contracts as well as major GEM awards in San Diego County and further expansion of Zonehaven into Riverside and four additional California counties. Further orders are expected this quarter. Our SaaS platform investments are creating a strong economic engine that will meet the growing demand for critical communication systems that help keep people safe. The cash generating power of our core business and the strength of our balance sheet continue to provide us with the resources and flexibility to execute our long-term growth strategy. With a robust pipeline, current bookings and backlogs, the carryover of anticipated orders, stronger international sales continued Acoustic Hailing deliveries and increasing SaaS sales, we expect continued revenue growth in fiscal 2023. The entire Genasys team looks forward to an exciting FY2023. And with that, I'll turn it over to Dennis.

Thank you, Richard. Revenues for the fiscal 2022 fourth quarter were $16 million, up 7% from the prior year quarter, as compared to the same prior year period, AHD revenue was $11.8 million, down 15%. IMNS revenue was $3 million, 5 times greater than last year, and software revenue was $1.1 million, up 63%. Within that software, recurring SaaS revenue from the Americas increased 231% over the prior year quarter. Gross profit margin was 47.8% compared with 51.2% in the fourth quarter of fiscal 2021. Gross profit is a percentage of revenue was lower due to an increase in software cost and higher product costs. Operating expenses were $20.4 million, up from $7 million in the same period a year ago, largely due to a non-cash $13.2 million goodwill impairment charge associated with the software reporting unit. The non-cash impairment charge was taken to reduce the company’s goodwill asset due to sustained declines in major stock market indices since the beginning of the year, resulting in a decrease in SaaS market multiples from 15.5 to 5.5 times annual revenues. We evaluate goodwill for impairment on an annual basis in our fiscal fourth quarter. As a result of the impairment analysis, the company recorded the impairment loss on goodwill at $13.2 million associated with the software reporting unit for the 3 and 12 months ended September 30, 2022. Excluding the impairment charge, operating expenses in the quarter were $7.3 million, a 4% increase compared to the prior year period. Net loss for the quarter was $13.8 million or $0.38 per share compared with net income of $8.8 million in the fiscal 2021 fourth quarter. The decrease was largely due to the non-cash $13.2 million goodwill impairment charge, lower gross profit margin on higher sales and a non-cash income tax expense of $1 million related to evaluation allowance against deferred tax assets. Revenues for the full fiscal year 2022 were $54 million, a 15% increase over the prior year, as compared to the same prior year period IMNS revenue grew 457% to $11.4 million and software revenue grew 11% to $3.1 million. These increases were partially offset by 6% decrease in AHD revenue to $39.5 million. The increase in software revenue was largely due to growth in Software-as-a-Service revenue, which increased 427% over the prior year, partially offset by a 38% decrease in professional services revenue. Gross profit margin was 48.7% for the full year compared with 49.8% in fiscal 2021. Gross profit as a percentage of revenue was lower compared to the prior year, primarily due to increased cost associated with continued investment in personnel support the growth of our software revenue and higher product cost in the second half of fiscal 2022. Operating expenses for the total year were $41.9 million, up from $22.3 million in fiscal 2021, largely due to the non-cash $13.2 million goodwill impairment charge that I mentioned in the discussion that the fourth quarter results. Excluding the goodwill impairment, total year operating expenses were $28.7 million. The increase in operating expenses was also driven by the planned increases in SG&A and research and development over the prior year to support SaaS revenue growth. These increases in SG&A and R&D were largely driven by additional employee related costs associated with increases in sales, administration, engineering and software development personnel over the prior year to support software revenue growth opportunities. In addition, amortization expense and marketing related expenses increased over the prior year. Net loss for fiscal year 2022 was $16.2 million or $0.44 per share compared with net income of $0.7 million or $0.02 per diluted share in fiscal 2021. This decrease was primarily due to the – as we discussed, the non-cash $13.2 million impairment charge, non-cash income tax expense of $1 million related to evaluation allowance against deferred tax assets and an increase in operating expenses of $6.4 million. Adjusted EBITDA for fiscal 2022 was a positive $2.4 million compared with $4.1 million in the prior fiscal year. We believe this information in comparisons of adjusted EBITDA enhances the overall understanding and visibility of our business performance. To that effect, a reconciliation of our GAAP results to non-GAAP figures has been included in our earnings release. Our balance sheet remains strong and our business continues to generate strong cash from operations that’s enabling reinvestment for future growth. Cash, cash equivalents and marketable securities totaled $19.9 million on September 30, 2022 compared with $20.7 million on September 30, 2021. The $800,000 decrease is the net result of repurchasing approximately $1 million of common stock in open market transactions. Working capital totaled $20.3 million on September 30, 2022 compared with $18 million a year ago. We generated $486,000 of cash from operating activities in fiscal year 2022, after reinvesting approximately $9 million into the software business to support the growth opportunities we foresee. We are diligently managing the allocation of our capital to remain debt free, while also advancing the strategic shift in our business towards higher margin software services. With that, we’d like to open the call to Q&A. Operator, could you start the Q&A session?

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Ed Woo with Ascendiant Capital. Please state your question.

Congratulations on the quarter. My question is, have you noticed any change with either the macro environment in terms of these government willing to sign contracts?

No. The – what we’re seeing on a macro level, Ed, as I mentioned in my remarks, the international is opening up finally. The APAC region was probably the slowest to come back open as a result of the COVID plague. But they are fully opened right now as well as other international markets. So no, I haven’t, it’s the direct answer to your question.

Great. And any issues with supply chain? Has it improved got back to normal, you having a lot of high inflation? How’s that impacting your business, especially your hardware business?

Yes. The team here has managed that throughout the pandemic and they will continue to manage it. Inflation’s a real thing and that is impacting our gross margins. Our gross margins for the year of 2022 was down 1.1 percentage points actually improved in Q4 over Q3, so we do have the opportunity to reprice our products, which we’ve done two or three times during fiscal 2022. Now of course backlog doesn’t get the impact of that, but new bookings do. So yes, we are challenged a bit with the inflation growth that the world is seeing.

Great. Well, thanks for answering my questions and I wish you guys good luck. Thank you.

Thank you.

Our next question comes from Mike Latimore with Northland Capital. Please state your question.

Thanks. Yes, and congrats on the great year here. In the – I think you talked about $6 million of bookings in the fourth quarter. How much of that was in the software category?

Do we disclose that? We don’t disclose that, Mike. You’ll see in the reports the total revenues in software, but not the bookings.

Okay. And then can you remind me how many software sales people you have now?

So we have 31 sales and marketing people. In addition to that, we have approximately 69 in the software development group.

Okay. How about a number of like quarter carrying sales people?

It’s in the 31. It’s most of the 31 there are some pre-sales people as well, but…

Got it. Okay. And then over the longer-term as your software business scales, what kind of gross margins have you envision in there?

60% to 80%.

Okay, great. And then Zonehaven seems to be doing really well. Can you give a little update there in terms of, I think you’re trying to map zones in other states, progress there and also just the opportunity maybe on the East Coast as opposed to the West Coast?

Sure. The momentum for SaaS, both GEM and Zonehaven was very, very good in our fiscal 2022. If you’ve been reading our press releases recently you’ll see we’ve added four more California counties to Zonehaven. We added San Diego with our Mass Notification GEM software. We added Riverside County with Zonehaven. We announced utilities in California, Florida, and Washington. All of which has just been released in the last, I don’t know, eight weeks, seven weeks. We have completed the build out of zones in the state of California, near completion in the state of Colorado, and then working on other states to complete now throughout this fiscal year. In terms of the East Coast and South, the Gulf Coast areas we have begun to prosecute states like Florida or states like Massachusetts, Texas, Louisiana for both Zonehaven and GEM. We expect to close awards in our fiscal 2023 in several of those areas.

Okay. Great. Thank you.

Thank you.

Our next question comes from Brian Colley with Stephens. Please state your question.

Hi, this is Hassan on for Brian. Thanks for taking my question. So you mentioned that you guys have a robust pipeline for, healthy pipeline for activity for SaaS products. Wondering if you can discuss your growth outlook for both hardware and software in fiscal year 2023, and when should we expect to see software revenue ramp up more meaningfully?

Hassan, we don’t give guidance yet on that. As you know, the nature of SaaS and three-year kind of contracts, it does take some time before you have a meaningful flow of revenue. I have mentioned in the past that we will likely begin to report on our ARR, and our software – SaaS software bookings when we hit $5 million of ARR, which we have not done yet. And I expect that will happen in our fiscal 2023.

Gotcha. Thanks. And then question on just your long-term or revenue targets. Are you guys still looking at that $80 million? Is that still intact?

We will update that model and increase that.

Okay, thanks. And then I guess just one more question. Can you talk about some of the initiatives and insights that your new Chief Revenue Officer has brought into our organization and what his key priorities are for this upcoming year?

His key priorities are SaaS. SaaS bookings, building out a marketing group for SaaS.

He, just focusing on that.

He brings a lot of experience in this area. And got a lot to accomplish and we all have great confidence in his abilities.

Okay. Thanks. Appreciate it.

Thank you.

Our next question comes from Martin Yang with Oppenheimer. Please state your question.

Hi, good afternoon. Thanks for taking my question. Can you maybe break out or give us more details on the incremental OpEx investment you will make in fiscal 2023? Is it more on sales and marketing? Is more on R&D? Any details, it’s appreciated. Thank you.

It’ll be pretty evenly spread across sales and marketing and R&D. We’ve got a number of – the Chief Revenue, Dennis Walsh has a number of positions that he is looking to fill to fill out both the sales team. Now that I think about it, maybe it is going to be slightly skewed more towards sales and marketing looking for digital marketing folks to be able to help drive lead generation and spread the word and get us a bigger market presence and visibility. Engineering, we will continue to add to our software team, there’s – as we continue to integrate and expand the capabilities of both the Zonehaven and the GEM Software.

Got it. Thank you. My second question is regarding your utility winds. Is there any important takeaways from those Golden State Florida winds and how do you plan to target that vertical more efficiently in the coming years?

The importance of it is, it’s a new vertical for us for our SaaS products. We hadn’t been in the utility market, we now are. And how many utilities there are just here in the United States. So it’s a great opportunity for further expansion of our SaaS products.

Got it. Thank you very much.

Thank you.

Okay. Our next question comes from Chris Tuttle [ph] with Blue Caterpillar. Please state your question.

Yes, I had a couple of questions. Thanks guys for taking them. Just one thing, you talked about sales productivity, and I wanted to ask in the coming fiscal year, do you expect to be able to increase quotas [ph] to be able to get higher yield from your existing sales staff?

Yes. They already have those quotas.

Okay. My next question is just on competition. It’s been a few quarters now that you guys have been kind of on a roll able to replace some competition in your core areas. And I'm wondering, have you seen any kind of reaction from those competitors either in terms of pricing or different tactics, or is it just a case where they're – you're still below the radar and they haven't really felt the need to respond yet?

The sale cycles are typically long, so seeing a reaction is delayed. I would – I would argue that we are definitely on their radar screen for certain. We're definitely winning, winning more, winning a higher percentage and that's all our mass communication software, a GEM product line. In the evacuation SaaS product we enjoy a position that we're the only provider of that right now, and I'll highlight this again but the cross-selling and up-selling of mass communication software integrating the evacuation software and then also into the integrated Mass Notification System. We saw a lot, as I mentioned in our remarks 13 counties in California alone that were able to up-sell and no other company can do that.

Got it. And my last question for now is just a little bit longer term we've seen some interesting things happening in the prediction of some of these natural disasters, particularly in California on the earthquake side, and disaster planning is a well worn area that that people have to engage in. And I'm just wondering what – what kind of thoughts do you have and what expectations might investors have around partnerships that you all might look to forge in kind of a disaster planning, more forward looking kind of area where getting in front of these things can be a major help in saving lives and making things turn out better?

Yes. We have several partnerships in place now. I think you'll see; I know you'll see some additions of significant providers that will also be on our platform. And you'll also see that at least here in the state of California we have an initiative going with the ShakeAlert system. So I think we'll continue to grow on that.

Okay. Well, great. Thanks a lot guys, and congratulations.

Thank you.

Okay. And our next question comes from William Bremer with Vanquish Capital. Please state your question.

Yes. Hi, good evening Richard, Dennis.

Hi there.

First one Richard, can you give us a little color on the initiative on utilities? Nice to see. We signed three. Is this a real focus – course given geographic regions? There are definitely some areas that historically have had massive issues, and I see a tremendous opportunity for you there. Then I have a blocking and tackling question for Dennis thereafter.

Sure. As I mentioned Bill the, it’s always hard to get your first win in a new vertical, and we did that and followed it up quickly with two more. So you can expect, this is one of the verticals along with large-scale manufacturing and others that are a focus of not only me, but our CRO and our entire sales and marketing staff.

Okay, great. Dennis, if my math is correct on this fourth quarter, if I back out the impairment pre-tax seems as though we have about, approximately a 400,000 profit. Do you, is that correct? And would you happen to have a adjusted figure to provide?

That is correct. The – would’ve been about $400,000 about 396.

Okay, great. Okay. That would’ve been appreciative.

And also point out Bill though, that it was a quarter that we generated a million dollars in operating cash.

Absolutely. And I see that as well.

400k in operating income.

No, I completely agree to Richard as a material shareholder. This has been a transformational year. The foundation in my opinion is built and I look forward to 2023 and 2024.

Terrific. Thank you for the kind words.

And that was our final question. I’ll turn it back over to Dennis for closing remarks.

Thank you. We regularly meet with investors at conferences throughout the year. We will be at the Imperial Capital 2022 Security Investor Conference with a presentation and one-on-one meetings on December 15. Please visit the Imperial Securities website to register for the conference and book a meeting. Thank you for participating in today’s call. We look forward to speaking with you again next year when we report fiscal first quarter 2023 results. On behalf of everyone at Genasys, we wish you and your families a happy, healthy holiday season.

Thank you. This concludes today’s conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.