Earnings Labs

Genasys Inc. (GNSS)

Q3 2023 Earnings Call· Thu, Aug 10, 2023

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Transcript

Operator

Operator

Good day, ladies and gentlemen, and welcome to the Genasys Incorporated Fiscal Third Quarter 2023 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. Sir, the floor is yours.

Brian Alger

Analyst

Thank you, Karen. Good afternoon. Welcome to Genasys’ fiscal 2023 third quarter financial results conference call. I am Brian Alger, SVP, Investor Relations and Corporate Development 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, 2022. Other than the statements of historical facts, forward-looking statements made on this call are based only on the information and management’s expectations as of today, August 10, 2023. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We will also discuss non-GAAP financial measures and operational metrics, including adjusted EBITDA bookings 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 to be leading indicators of future revenues and use those metrics to support production planning. Bookings is an internal operational metric that measures the total dollar value of customer purchase orders executed in a given period regardless of the timing of the related revenue recognition. Backlog is a measure of purchase orders received that are scheduled to ship in the next 12 months. Finally, a replay of this call will be available in approximately 4 hours through the Investor Relations page on the Company’s website. Now, at this time, it’s my pleasure to turn the call over to Genasys’ CEO, Richard Danforth. Richard?

Richard Danforth

Analyst

Thank you, Brian, and welcome, everyone. As expected, financial results for the fiscal third quarter improved significantly sequentially, and revenues were in line with the prior year’s quarter. Software bookings and revenue were in line with expectation, while hardware bookings once again saw delays. Our hardware pipeline, including approximately $25 million of bookings that have shifted from fiscal 2023 to 2024 continues to expand. Third quarter recurring revenue was up 47% year-over-year, and year-to-date software bookings are up 180%. While hardware revenues have been difficult to forecast, the steady growth and expansion of our software recurring revenue is gaining momentum. Recent competitive wins in Colorado, Texas and the East Coast of the United States, further demonstrate the value we are delivering with Genasys Protect. Based on existing orders and orders currently in contracting, we have secured over $5 million of ARR in less than 8 quarters. Earlier this week, we launched our new corporate identity in the Genasys Protect platform. Genasys Protect combines the most comprehensive preparedness, response and analytical solution to keep people, assets and operations, protected against the impacts of natural and man-made disasters. We expect the efforts made to date, combined with the rollout of the new Genasys Protect sales and marketing initiatives to further accelerate software revenue growth next fiscal year. Genasys is the leader in protective communication. We are the only provider with the complete solution of emergency planning, notification and management offerings. Genasys Protect enables our customers to be ready for any what-if scenario. Ready means organizations and enterprises have the confidence that comes from knowing their response plans have been fully tested. Ready means aggregating a wealth of trusted data sources that give our customers unmatched real-time visibility into their people, their assets and their environment. Ready means tapping robust modeling and simulation…

Dennis Klahn

Analyst

Thank you, Richard. Revenues for the fiscal 2023 third quarter were $14.2 million, an increase of 1% over the prior year quarter. As compared to the same prior year period, software revenue increased 28% to $938,000 and hardware revenue decreased 1% to $13.3 million. Recurring revenue grew 47% compared to last year’s quarter. In the June quarter, we recognized our first month of revenues associated with the Aramco contract announced earlier this year. As previously noted, there is a period of time between booking and software win and when ARR begins that is associated with configuration and implementation. That said, our visibility and predictability of revenues after booking the orders is very high. Given the contracting discussions currently underway, and the bookings recorded to date, we expect to surpass our internal fiscal 2023 software bookings target, driving us past our $5 million in ARR target by the end of this calendar year. Gross profit margin was 46.9% this quarter compared to 48.5% in the prior year quarter. As has been the case for a full year now, the gross margin percentage was negatively impacted by inflationary pressures on material costs against pricing and backlog established before inflationary impacts as well as installation costs. This has been partially offset by the increasing software revenues that carry higher gross margins. With component inflation now fully reflected in our bookings and backlog pricing, we expect hardware gross margins to continue to improve towards a historical 50% range. Operating expenses were $8.1 million, up from $7.5 million and down from $8.3 million in the third quarter of fiscal 2022 and second quarter of fiscal 2023, respectively. The year-over-year increase is directly tied to the planned investment to grow and accelerate our software business. On a GAAP basis, our third fiscal quarter operating loss was…

Operator

Operator

[Operator Instructions] And we’ll take our first question from Brian Colley from Stephens. Please go ahead, Brian.

Brian Colley

Analyst

Hey guys. Thanks for taking my question. So I wanted to ask about your business with the U.S. Army. Can you just kind of talk about what’s in the pipeline there? And how do you expect revenue -- hardware revenues from the Army to kind of play out next year and maybe even longer than that in terms of future growth opportunities there?

Richard Danforth

Analyst

Sure, Brian. In my remarks, I mentioned that there are additional Army opportunities -- U.S. Army opportunities. One of those opportunities is a program to expand the use of LRADs with CROWS units. So earlier this year, we took a small, I think, it was 150,000 contract to do some research work of getting the LRAD integrated with the CROWS unit. We’ve completed that activity and are now expecting another contract very shortly of several hundred thousand dollars to get through the prototyping stage. And subsequent to that, in FY24, we expect production to begin. The potential, Brian, for the size of this contract is very similar to the other program of record that we won back in 2018. And in addition to that there are other things that are percolating around the Army beyond the CROWS unit that we expect to yield additional bookings for those items in our fiscal ‘24.

Brian Colley

Analyst

Got it. That’s helpful. Thank you. And then I also wanted to ask about the commentary from your press release just that you’re realigning your resources appropriately. If you could just talk about kind of what you’re doing on the cost front to kind of held out on profitability. That would be helpful.

Richard Danforth

Analyst

Yes. We’ve taken some actions and cost reductions to reflect where we are, where we think we’re going to end the year. There’s been some reductions in force and tightening of the belt from an expense perspective, which will continue the balance of this year.

Brian Colley

Analyst

Got it. And Dennis, one for you. Just from a cash perspective, do you think -- I mean, just looking out to next year, not necessarily looking for guidance, but do you think you guys will need to take on debt, or do you think you can be cash flow positive over the next 12 months?

Dennis Klahn

Analyst

Based upon the pipeline and our -- the recurring revenues that we discussed, we believe we have adequate resources to manage the business and achieve profitability moving forward. The cash, as I noted was -- balance was down. But if you take a look at cash plus the accounts receivable balance at the end of June compared to the end of March, that’s actually increased by $1 million. So, the reality of things is that we’ve had a number of orders that came in at the end of the quarter. But once we’ve collected up -- collected those, which we have mostly been where we are, we should be adequately financed.

Operator

Operator

We’ll take our next question from Ed Woo from Ascendiant Capital. Please go ahead, Ed.

Ed Woo

Analyst

Yes. Congratulations on the quarter. My question is, with all these high-profile fires, have you seen any new competition in the market or new entrants?

Richard Danforth

Analyst

No. The Genasys Protect platform combines all of what Genasys had from a mass notification, evacuation planning and execution and repopulation, even the acoustic devices. There’s nobody else out there, Ed, that can offer that comprehensive of a safety solution for both SLED customers, state and local governments as well as enterprises. In my remarks, I mentioned we see acceleration in orders and pipeline reflective of that.

Operator

Operator

[Operator Instructions] And we’ll take our next question from Mike Latimore from Northland Securities. Please go ahead, Mike.

Unidentified Analyst

Analyst

Hi. This is Logan on for Mike. Thanks for taking our question. Can you guys talk a little bit about any macro effects you’re seeing on your software business, like smaller deal sizes or longer sales cycles? Thanks.

Richard Danforth

Analyst

No, I’d say it’s quite the opposite. It’s not smaller deals, it’s larger deals. I mentioned a whole state, and I mentioned the state of Florida. Those are both significantly sized deals. Yes, the cycle time, that is always frustratingly long, Logan, particularly with the state and local governments. I haven’t seen a change in that dynamic but it takes longer than anybody would like from time of contract win to contract award, can sometimes take months.

Unidentified Analyst

Analyst

Thank you. That’s helpful. And then could you guys give any updates on the Aramco deployment or any like customer feedback you’ve received so far?

Richard Danforth

Analyst

Up and running, and extraordinarily happy customer base. We have begun the discussion with them about expansion inside of Aramco in Saudi Arabia and other countries.

Operator

Operator

[Operator Instructions] And we’ll take our next question from Lloyd Horton from Unique Investments. Please go ahead, Lloyd.

Unidentified Analyst

Analyst

Hey guys. Hello. Nice to get on with you again. I got a few questions. I’m just curious, the disaster in Hawaii, [Technical Difficulty] benefited them and how?

Richard Danforth

Analyst

Yes. I mean I should quantify that, Lloyd. I’m not an expert on what exactly is happening in Maui. Obviously, I’ve seen the same news reports you have. Our platform would have made a difference. And that’s about all I can say, without getting into the details of what’s actually going on -- happening on the ground.

Unidentified Analyst

Analyst

Okay. In the past, you’ve had some corporate wins, whether BMW, et cetera, et cetera. Any more of those come through or expecting any?

Richard Danforth

Analyst

Yes. We have, as I mentioned in my remarks, a growing pipeline that includes both enterprise and state and local governments.

Unidentified Analyst

Analyst

Okay. You say there was a -- we won a state contract or full state?

Richard Danforth

Analyst

That’s correct.

Unidentified Analyst

Analyst

Can you say what state it is?

Richard Danforth

Analyst

Can’t yet. We’ve been awarded the contract and waiting for the administration of that contract at that state capital.

Unidentified Analyst

Analyst

Oh, you can’t mention it yet?

Richard Danforth

Analyst

Not yet.

Unidentified Analyst

Analyst

Is it sizable?

Richard Danforth

Analyst

It is.

Unidentified Analyst

Analyst

Well, that’s good news. Nice to hear. Also, is it East Coast city, is that also a secret?

Richard Danforth

Analyst

Yes. We can’t talk about it, but we have won it. And we’re up and live and hopefully here shortly, you can be more open about it.

Unidentified Analyst

Analyst

Are those numbers in our revenue in this past quarter?

Richard Danforth

Analyst

No.

Unidentified Analyst

Analyst

That’s good news, too.

Richard Danforth

Analyst

They will began to show up in fiscal Q4.

Unidentified Analyst

Analyst

Okay. Also, did you mention backlog yet?

Richard Danforth

Analyst

I have not.

Unidentified Analyst

Analyst

Do we have a backlog?

Richard Danforth

Analyst

Dennis?

Dennis Klahn

Analyst

Yes. I mean, so the backlog -- 12-month backlog at September 30 is $10.3 million.

Richard Danforth

Analyst

The total?

Dennis Klahn

Analyst

And total backlog is $19.9 million, so $20 million.

Unidentified Analyst

Analyst

How’s that compared to the past?

Dennis Klahn

Analyst

So, 10 months or 12 months or rather a year ago was $30 million. So, that difference is - we talked about the $25 million in pipeline of in particular 4 orders that has just been pushed out, that makes up the delta there.

Unidentified Analyst

Analyst

The $25 million -- I’m a little confused with that. Could you go into a little bit what that means, the $25 million has been pushed out?

Richard Danforth

Analyst

I’ll take that, Dennis. Yes, there’s 4 opportunities, 2 of which are the majority of the dollars that were in our pipeline in our forecast to be awarded and then generate revenue this fiscal year. They have slipped, slipped out of fiscal ‘23 to ‘24, so they’re not in backlog yet. But we -- as Dennis mentioned, we expect to book those in our fiscal 2024, increasing our backlog, reflective of that $25 million.

Unidentified Analyst

Analyst

I got it. Okay. And also, can you give an estimate as to when you feel that -- I understand that we’ve been burning money on building the software and on man count. Any estimate as to when we’re going to start to make profits per quarter?

Richard Danforth

Analyst

Yes, we do. We have a detailed schedule, as you might expect, Lloyd, with forecast for hardware and software and improvements in gross margins and EBITDA. You can see that in our investor presentation.

Unidentified Analyst

Analyst

Okay. I think, that’s all I have. Well, anyway, thank you. It sounds like some great news is coming. And thanks for your efforts.

Richard Danforth

Analyst

Thank you.

Operator

Operator

Thank you. And there are no further questions at this time. I’ll turn the floor back over to Brian Alger for closing remarks.

Brian Alger

Analyst

Thank you, everyone, for participating in today’s call. Look forward to speaking with you in a couple of months when we report our fiscal fourth quarter and full year 2023 results. And with that, have a good night. Thank you.

Operator

Operator

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