XTI Aerospace, Inc. (XTIA) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Sysorex Global Earnings Conference Call for year ended December 31st, 2015. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Participants of this call are advised that the audio of this conference call is being broadcast live over the internet and is also being recorded for playback purposes. A replay of this call will be available approximately one hour after the end of the call through April 11th, 2016. I would now like to turn the conference over to Scott Arnold, Managing Director of CorProminence, the Company's Investor Relations firm. Sir, the floor is yours.

Thank you, Mike. Thank you for joining today's conference call to discuss Sysorex Global, Global's to corporate developments and financial results for the fiscal year end quarter ended December 31st, 2015. With us today are Nadir Ali, the Company's CEO, and Kevin Harris, CFO. At 4:05 PM Eastern time today, Sysorex released financial results for the quarter ended December 31st, 2015. If you have not received Sysorex's earnings release, please visit the investor's page at www.sysorex.com. During the course of this conference call, the Company will be making forward-looking statements. The Company, cautions you that any statement that is not a statement of historical fact is a forward-looking statement. This includes any projections of earnings, revenues, cash or other statements relating to the Company's future financial results, any statements about plans, strategies or objectives of management for future operations, any statements concerning proposed new products, any statements regarding expectations for the success of the Company's products in the U.S. and international markets; any statements regarding future economic conditions or performance, statements of belief and any statements of assumptions, underlying any of the foregoing. These statements are based on expectations and assumptions as of the date of this conference call and are subject to numerous risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements. Some of these risks are described in the section of today's press release titled cautionary note on forward looking statements and in the public periodic reports the Company files with the Securities and Exchange Commission. Investors or potential investors should read these risks. Sysorex assumes no obligation to update these forward-looking statements to reflect future events or actual outcome and does not intend to do so. In addition, to supplement the GAAP numbers the Company has provided non-GAAP adjusted net loss and net loss per share information in addition to Non-GAAP adjusted EBITDA information. The Company believes that these non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance. A table reconciling the GAAP information to the non-GAAP information is included in the Company's financial release. I will now turn the call over to Nadir Ali, Sysorex's CEO.

Thanks, Scott. And Good afternoon everyone. Welcome to our 2015 earnings call, and thank you for joining us. I'm here today with Kevin Harris, our CFO, who will be discussing our financial results for the year and quarter ended December 31st, 2015, after my opening remarks. And I will return to conclude our prepared remarks and hear your questions. Sysorex helps customers to rise real time value but combining data from both the physical and digital world. This simple, yet exceptional statement is a result of what we have been working on so diligently over the past three years. Through a series of acquisitions and a complete integration of key technologies and capabilities, we have built the company that empowers data driven customers with an innovative approach to data analytics, security, and the Internet of Things. Sysorex stands at forefront of a broad based high demand market space that embodies a paradigm shift in the way clients are using our products to capture and analyze data that drive competitive advantage and increased ROI. The type and granularity of the data we can provide our customers through our AirPatrol sensors was never available before. Actual sensor data processed in real-time through our light minor analytics platform is truly a game changer, providing our customers an opportunity to jump the innovation curve in their respective industries and leapfrog past their competitors that are still relying on off lead technologies and matrix. With Sysorex, we believe companies can personalize and radically improve their customer experience, significantly increase safety and security in their premises from new types of threats and better protect and manage their physical and digital assets in ways never seen before. I am very proud of what our team has accomplished over these past few years and especially the integration work in 2015. These efforts have resulted in positioning Sysorex for what we believe is going to be significant growth in our AirPatrol and LightMiner product lines as we get further in 2016 and we gain traction and recognition from customers, analysts, and partners. I believe we are in an inflection point this year of moving from early adopters to mainstream customers in our proprietary products, demonstrating our ability to deliver dramatic ROI to your customers while still capitalizing on the synergies and opportunities provided by our growing legacy business. Along with completing integration we achieved a record revenue quarter for Sysorex in 2015. The fourth quarter ended with total revenues of 20.3 million; a 33% increase over the same period in 2014. Our AirPatrol product line is starting to build momentum. We achieve more revenue for AirPatrol in the fourth quarter than in the past two quarters combined. While we did experience lower gross margins on our Q4 revenue due to the higher than usual mix of our business, we are pleased with our overall adjusted EBITDA performance. We anticipate adjusted EBITDA and our cash flow to improve in the latter part of 2016. We are encouraged with the increasing market recognition of the value of our AirPatrol location based services platform across a growing array of applications in industry sectors. Last week we announced a debut of AirPatrol for Health Care; a unified real-time location system or URTLS that brings multiple assets, staff and equipment tracking technology into a single vendor neutral administrative platform. As we announced on March 1st, with AirPatrol for Health Care, hospitals can now simultaneously locate and monitor assets and people equipped with three of the most popular wireless location technologies; Wi-Fi, Bluetooth, and cellular in real time with sub-rural level location accuracy from one dashboard. Our analytics will give hospital deep insights into operations, staffing, foot traffic, equipment staging etcetera that other RTLS systems simply can't because they don't see the entire environment and they don't have the power and speed we do in LightMiner. We demonstrated AirPatrol for Health Care in the Intelligent Health Pavilion of the HIMSS '16 Health Care IT Conference in Los Vegas last week to much attention from potential customers and strategic partners. This market is valued between 3 billion and 5 billion this year and is growing at an 18% trigger. There are several competitors in this space, such as Intelligence Insight versus [Eco Hal] [ph] but each is a proprietary technology and requires both their sensors and their devices and tags to work. We are vendor neutral on the device side. So, any wireless enabled device can be tracked via our system, not just our own. So, all the mobile things in hospitals like beds, robots, computers on wheels, equipment, phones, etcetera, can be monitored with AirPatrol. While we launched AirPatrol into a new vertical, I am pleased with the solid traction we are experiencing with AirPatrol in the retail government and smart community verticals where we already have customers. We are continuing to expand our footprint with these customers. One example is the million dollar project we announced in the fourth quarter with the U.S. government agency employing our AirPatrol for security system, formally known as Zone Defense to help secure sensitive government installations against mobile threats and data leakage. After extensive trials, this government agency selected Sysorex to help secure its facilities. I am very pleased to report that this project is expanding to this agency's other locations, validating our approach as the sole solutions provider delivering capabilities across Bluetooth, Wi-Fi and cellular. In short, we are emerging as the best indoor locationing solution. Much of our enthusiasm surrounding our performance in 2015 centers on the advancement of client projects that continue to grow with broader and more comprehensive solution deliverable that leverage a robust combination of our core offerings. As our capabilities are core list, so too has the extent to which our client have repeatedly called upon us to provide comprehensive multifaceted solutions which present cross selling opportunities for all of our proprietary products. In November, we announced the latest in the series of critical IT infrastructure systems and services projects for leading Fortune 500 bio-pharmaceutical research and development client to provide critical data infrastructure migration and upgrade services. The $1.2 million project was in addition to IT systems and services projects we had completed for the client, together totaling more than 3 million in 2015. We also want an additional IT systems engagement for the California based Fortune 500 Health Care services provider to deliver IT and structure and consulting services for the company's IT modernization effort. The project scope included designed, deploying and integrating advanced computer systems and software architecture, posting business critical information, migrating from the company's legacy mainframe systems. It was a third such engagement between us in 2015, which totaled over 4 million in combined revenue. The future of Sysorex continues to grow stronger especially with the impending rollout of our integrated LightMiner solutions. As I mentioned on our last call, the LightMiner platform is an in-memory real time data analytics platform designed to perform very large highly complex and extremely difficult calculations using off-the-shelf hardware and memory. It supports traditional sequel base intelligence and analytics application as well as a host of integrated statistical machine learning and artificial intelligence algorithms allowing it to provide super computer like performance at competitive prices. Our pilot LightMiner customers are proceeding with their evaluations and our products are now under consideration in a wide array of industry verticals, including banking, agriculture, retail and services. We are evaluating numerous strategic partners in our solutions to build in effort and look forward to bringing our exceptional analytics offerings to the market with strong appeal. With that, I will now turn the call over to Kevin to discuss our financial results for the year and quarter ended December 31st, 2015.

Thanks, Nadir. Total revenue for the fourth quarter 2015 was 20.3 million. Revenue for the year ended December 2015 was 67 million; an increase of approximately 6.5% over 2014. The increase is primarily associated with growth in the storage and computing and professional services segments. Total 2015 revenue included storage and computing revenue of 50 million. Professional services revenue of 11.6 million. SaaS revenue of 3.7 million and mobile, IoT and big data products revenue of 1.7 million. Gross profit for the fourth quarter 2015 was 5.2 million. Gross profit for the year ended December 2015 was 19.3 compared to 18.7 million for the year ended December 2014. Fourth quarter 2015 growth margin was approximately 26%. Gross margin for the year ended December 2015 was approximately 29% compared to approximately 30% for the year ended December 2014. The slight increase in gross margin is primarily result of sales mix. GAAP net loss attributable to stock holders for the fourth quarter of 2015 was 3.9 million. GAAP net loss attributable to stock holders for the year ended December 2015 was 11.7 million; compared to 7.5 million for the year ended December 2014. GAAP net loss per share for the fourth quarter of 2015 was $0.16 per share. GAAP net loss for share for the year ended December 2015, was $0.55 per share compared to a GAAP net loss per share of $0.42 for the year ended December 2014. This increase in net loss of approximately 4.2 million was primarily attributable to an increase in amortization of the tangible, acquisition and acquisition related cost, provision for doppler counts, depreciation, and cost of expanding our engineering sales and marketing operations to drive future growth. Non-GAAP net loss for the fourth quarter of 2015 was 1.1 million. Non-GAAP net loss for the year ended December 2015 was 4.7 million, compared to non-GAAP net loss of 2.6 million for the year ended 2014. Non-GAAP net loss per share for the fourth quarter of 2015 was $0.04 per share. The year ended December 2015 non-GAAP net loss per share was $0.22 per share compared to a non-GAAP net loss of $0.14 per share for the year ended December 2014. Non-GAAP net loss per share is defined as net loss per basic and diluted share adjusted for non-cash items including stock based compensation, amortization of intangibles and one-time charges, including gain or loss on the settlement of obligation, severance costs, change in the fair value of share to be issued, acquisition cost, position for doppler count, and the cost associated with a public offering. Non-GAAP adjusted EBITDA for the fourth quarter of 2015 was a loss of 800,000. Non-GAAP adjusted EBITDA for the year ended December 2015 was a loss of 3.6 million compared to a loss of 1.9 million for the year ended 2014. We define non-GAAP adjusted EBITDA as GAAP net income or loss before interest, income taxes, depreciation and amortization, first adjustments for other income or expense items non-recurring items and non-cash stock based compensation. On the balance sheet, we ended the year with cash and cash equivalents of 4.1 million and total current assets of 28.6 million. Our net cash used in operation was approximately 8.2 million for the year. This concludes my comments and I'd like to turn the call back over to Nadir. Nadir?

Thanks, Kevin. 2015 was a pivotal year for Sysorex. We completed the integration that now enables us to bring our innovative solutions to market in a number of existing and new verticals that represents strong growth potential going forward. We are truly at the beginning of the next phase in our journey to fulfill the promise of what Sysorex represents as a leading provider of real time data analytics, the Internet of Things and security. We are experiencing momentum for our AirPatrol solutions and response to our LightMiner analytics platform as an encouraging across the wide array of perspective customers who seek to drive even more ROI from their data. With that, Mike, I think we're ready to open up the call to questions.

Thank you, Sir. [Operator Instructions] The first question we have, comes from Joe Maxa of Dougherty & Company. Please go ahead, Sir.

Thank you, good afternoon.

Hi, Joe. How are you?

Hi, Joe.

So, question on just the profitability. You talked about improving EBITDA, adjusted EBITDA, in the second half of the year from current levels, it sounded like. So, my based on that I would assume you will still produce a loss in the first half, do you expect to get to profitability in the second half of the year?

So, Joe we aren't providing guidance, but we are certainly on track to improve profitability as you can see the trend is moving the right direction, our EBITDA is getting better. And I think with the sale mix changing, as we get more traction with AirPatrol and LightMiner, certainly we're on that path.

Okay. And the contribution from AirPatrol, how much was included from that million dollar government project, is that I was just wondering how much that went Q4 and then will be in Q1?

Majority of it was in Q4. There is maintenance in some and some pieces that will be spread out over a period of time, but the majority of that was in Q4.

Okay. And you talked about additional roll out from the same customer, so is that on the same order of magnitude or we seeing a larger opportunity?

It's definitely a larger opportunity, it's as you can imagine it's based on square footage and so the original deal was for a couple of locations and as that is expanding to multiple buildings, multiple locations, the square footage increases. It will be over a period of time in '16 and beyond because this government agency has a lot of locations. But so, in consolidation, yes, it will be much larger than that particular order in Q4.

Okay. I wanted to ask on that Daruna project. Is that on track to begin in the second quarter of this year?

So, yes we're tracking that and we expect it to start in Q2 sometime. That's again on a SaaS model, right. So, it's not upfront revenue necessarily but it's the good recurring revenue backlog they will be building and continue to build as we get more SaaS based clients.

So, after the first year, I mean it was about 91 million over 15 years. So, we are assuming that we previously thought was roughly linear over those 15 years, perhaps not the first year of course, is that how we should still think about it?

That's right.

Okay. And just lastly on these orders, I'm just wondering the opportunities that are coming just what the pipeline looks like maybe compare it right now versus a year ago and then how that may affect the gross margin?

So, definitely feeling much more confident about the pipeline on our proprietary products with AirPatrol and LightMiner and the opportunities that represents and of course that then translates into better consolidated gross margins, right. So, what really drives this is the sales mix quarter-to-quarter, but on an annual basis we expect that trend to go upward as the sale mix continues to increase. And we are definitely much more confident about the pipeline this year then we were last year.

Which could be offset by increases in your lower margin, warm type business?

That's right, but the growth rate on the legacy business is not necessarily going to be the same percentage wise as it is on the AirPatrol and LightMiner pieces, but yes it will offset it because it's a larger dollar value.

So, I know you're not giving guidance but just looking at year-over-year, you expected an improvement on the bottom-line, suggesting an improvement on the topline is that fair?

That's fair.

Okay. All right. Thanks, Nadir. That's all I'll ask for now.

Thank you.

Thanks, Joe.

Next we have Josh Nichols of B. Riley.

Yeah, hi. Real quick, I don't think I heard anything mentioned in the commentary, when is the official launch of LightMiner?

So, we'll be launching this quarter with a pre-launch at the Gartner events next week in Dallas. And then we'll do a formal launch later in the month.

Great. Could you give us any updates on the progression below these pilots that you are doing with casinos and prisons and gaming customers and what not?

Yeah, absolutely. So, we as I said on the earlier question, I mean, we are definitely more confident about the pipeline and the activity that's been happening with AirPatrol and with LightMiner and we expect that to start showing more in our results as we progress in the quarters. We have made further penetration of the vertical that we talked about before retail, smart communities, we are expecting follow-on business in all of those areas with customers as well as the government agency that I touched on. And now with the launch of the Health Care product, we'll be expanding into some new verticals as well.

And I guess in your mind what metrics would make 2016 a successful year?

I think we should be looking at the growth within these operating segments, as you know we report four different segments in our Qs and Ks, and so you'll see the segments related to our proprietary products for AirPatrol and LightMiner and the growth that we see there at the margin that we are seeing there that's what's really going to drive the overall returns for the business, right. And so, I think those are the metrics that we should be looking at.

Okay. Thank you.

Thanks, Josh.

Next we have Ross Silver of Vista Partners.

Hi, Nadir. And congratulations on an excellent quarter and year.

Thanks, Ross.

So, just a question on the sales mix and a way to kind of think about sales mix going forward, I mean, what in terms of contributions from say AirPatrol and LightMiner, I mean, do you would you say that you expect a considerable contribution from them in 2016 or like how would you characterize the contribution from them because that obviously will dictate the margin expansion as well, right. So, I know I'm not trying to ask you to give guidance but how would you describe the sales mix kind of on the go forward basis.

Sure. Yes, we definitely expect significant contribution from the AirPatrol product line in 2016. When I say significant, I think, you know compared to last year we expect 2016 to be much stronger for the AirPatrol product line in terms of percentage or a factor of the revenue. LightMiner obviously were just launching formally in this quarter in March and so there will be some significant amount or a reasonable amount of revenue from LightMiner. And then I think both of them really scale in 2017. But I think AirPatrol have a magnitude better results in terms of revenue. The legacy business of course will still be a majority as a percentage of our revenues in the foreseeable future, right in '16 and possibly '17. And but that grows at a much slower rate. Right, so, the power business, it's typically 5% to 8% growth.

Okay, thanks. And then, just a question about the growth margin, like assuming LightMiner and AirPatrol are scaled up. I mean, what kind of like the target gross margin that you are looking to achieve from both segment?

So, both of those products are 60% to 80% range in terms of gross margins.

Okay. And so just -- you'll see a sort of slow creep up for that. So, it'll be kind of at the low end of the range, it's kind of expect out of the gate and then as you progress in scale three pier, right. So, that's the kind of way to think about it or should we think of it differently?

Yeah, that's right. And part of what we're doing there and expanding that for example with Health Care is working through partners, right. So, Sysorex is not going down the path of hiring 100s and 100s of sales guys or leverage strategic partners and borrowers at size, etcetera. And so that's why we're saying there is little bit broader range on the margin. So, certainly there will be customers that we're dealing directly and others will be through partners.

Okay. And in my last question, I really appreciate your time. And so, what's the way to think when you are going to let's say for AirPatrol as an example, I mean, when you are at the bid for some of these contracts, I mean, who you are up against and how is AirPatrol winning these bids?

That's a great question. So, we are up against defend contractors, when we are in the government space. We are again the Wi-Fi or beacon technology players like CISCO or Aruba or some of these other smaller folks you could. And what happens is that customers quickly realize that with Sysorex and AirPatrol, they can get not just Wi-Fi they get cellular and Bluetooth and not only is our accuracy much better but we can do something even for example in the Wi-Fi space that our competitors can't do, right. And many folks have multiple devices or the devices they are sending out multiple Wi-Fi radio signals. And how do you -- we have unique technology that allows us to identify those four radio frequency signals as one person. A lot of our folks can't do that, do the full case that we can. And so that's separates us as well.

Excellent. Well, congratulations again on a great quarter. And when I joined the floor, I thought 20 million. So, hopefully this trend continues the margin improvement, EBITDA, etcetera. And, you know, great job to you and your team.

Thanks, Ross. We appreciate that.

Well, at this time we are showing no further questions. We'll go and conclude our question-and-answer session. I will now like to turn the conference call back over to Mr. Nadir Ali for any closing remarks. Sir?

All right. Thank you, Mike. I want to thank everyone again for your time today. I would like to reiterate the confidence I have in our growing future; Sysorex. So, now we succeed transforming into a technology company with cutting edge solutions. We have set the bar high for the rest of the market with products and service solution mix that is unlike anything on the market today and for the foreseeable future. I believe that we have accomplished the requisites for our future growth along the path that we'll drive real tangible, quantifiable ROI for our clients across a broadening industry mix with solutions that stand truly high demand markets. We deliver the promise of innovation in serving the needs of clients that are in the midst of paradigm shift and leveraging their data with compelling and value driving analytics. Our path to profitability will be driven by growth and we are expecting to see significant progress on that front this year as a result of AirPatrol and LightMiner solutions take hold. We achieve significant measurable success this year in building a foundation upon which we will thrive in 2016. We will be presenting at the Gartner BI conference in Dallas next week as well as the Roth Conference in Southern California. We hope to see you at one of these events and appreciate your time and continued support in Sysorex. Thank you.

Yeah. Mr. Ali, we thank you, Sir, and also to the rest of Management Team for your time also. The conference call is now concluded. We thank you all for attending today's presentation. At this time you may disconnect your lines. Thank you, take care and have a great day everyone.