XTI Aerospace, Inc. (XTIA) Q1 2016 Earnings Report, Transcript and Summary

Welcome to the Sysorex Global Earnings Conference Call for quarter ended March 31st, 2016. [Operator Instructions]. I would now like to turn the conference over to Scott Arnold, Managing Director of CorProminence, the Company's Investor Relations firm. Please go ahead, sir.

Thank you, Erickson. Thank you for joining today's conference call to discuss Sysorex Global's corporate developments and financial results for the quarter ended March 31st, 2016. 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 March 31st, 2016. 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 first quarter 2016 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 quarter ended March 31, 2016 after my opening remarks. And I will return to conclude our prepared remarks and field your questions. Sysorex helps customers derive real time value by combining data from both the physical and digital world through a series of acquisitions and the integration of these companies in technology we’ve built a company that empowers data driven customers with an innovative approach to data analytics, security and the internet of things. Sysorex stands at the forefront of a broad, high demand market space where data is everything, to drive the decisions that impact our customers in every aspect of their business. There is a paradigm shift in the way clients are using our products to capture and analyze data that will provide them a competitive advantage and increase their ROI, from clearing classified rooms of any WiFi or cellular activity to real time changes in digital displays based on the profile of the customer passing by to alerting first responders where people are located throughout a building during an emergency. The type and granularity of the data we can provide our customers through our AirPatrol sensors was never available before. Actionable sensor data processed in real time through our LightMiner analytics platform is truly a game changer providing our customers an opportunity to leapfrog past our competitors that are still relying on obsolete technologies and metrics. We're excited to see first-hand how our customers are personalizing and radically improving their customer experience significantly increasing safety and security in their premises from new types of threats and better protecting and managing their physical and digital assets in ways never seen before. In 2016 we see ourselves at an inflection point of transitioning from early adopters to mainstream customers and making the transformation to a technology company that we have talked about. Our pipeline is stronger than ever for AirPatrol, LightMiner is off to a great start with pilot customers and key partners like Tableau, our storage and computing business continues to be our steady base where our professional services continue to grow. I know we have been telling you about this transformation and the growth we expect to see AirPatrol for some time. Granted the integration effort and sales process did take longer than we expected but here is why we are still confident that it is happening. AirPatrol customers that we have previously announced are expanding their footprint. This applies to government agencies but also other non-government customers as well. This is not only validates our technology but also improves our confidence level in our forecasting models. New customers are moving forward as they complete their vetting of our technology and understand the differences between us and our competitors who can only provide them an incomplete picture of their data because they only capture WiFi or Bluetooth devices and don't have the accuracy that we do. This vetting takes time because we are primarily dealing with big companies or government agencies that have many stakeholders, are deploying multiple technologies that we need to integrate and test with and during multiple geographies so there is more complexity in deployment, but we are close to the finish line with several of these customers, key customers now. Another reason I'm confident is that we are seeing the cross selling that we told you about just starting to pay off. We have multiple deals in our pipeline this quarter there were a result of our amazing sales reps and engineers, educating customers about our new products and cross selling AirPatrol or LightMiner to those that previously only purchased third party storage and computing products from us. We have 700 plus customers that trust and rely on us and our employees that we can continue to mine for those opportunities. We are also expanding into new verticals as evidenced by the launch of our AirPatrol for healthcare. We encourage by the response to the debut of AirPatrol for health care, a unified real time location system that brings multiple assets, staff and equipment tracking technology into a single vendor neutral administrative platform. With AirPatrol for healthcare hospitals can now simultaneously locate and monitor assets and people equipped with three of the most popular wireless location technologies, WiFi, Bluetooth and cellular in real time with sub-room level location accuracy from one dashboard. Our analytics give hospitals deep insight into operations, staffing, foot traffic, equipment staging etcetera that other RTLS system simply can't because they don't see the entire environment and they don't have the analytic power and speed we offer in LightMiner. This market is valued between 3 billion and 5 billion this year and is growing at 18%. Having launched AirPatrol into this new vertical we remain highly optimistic about its appeal. Another vertical we are well positioned in is security. We recently announced opening a live AirPatrol for security demonstration center at the headquarters of corporate security and counterespionage firm Whiterock outside of London, England. The creation of the demonstration center was a joint project between Whiterock and another Sysorex global security partner, Key Options which is based in Sydney and provides us solid foothold for Sysorex in the growing security solutions market space. As we discussed in our announcement in mid-March Whiterock which pioneered technical surveillance countermeasures has protected global clients including a number of Fortune 1000 companies against unauthorized surveillance, information leaks and other forms of commercial espionage for more than two decades. The company protects highly sensitive corporate meetings and provides technical privacy audits as well as policy reviews and crisis management services. The live AirPatrol system deployment installed in the head offices at Whiterock is accessible remotely which enables prospective clients to see this highly compelling solution out work in real time. AirPatrol for security as a platform for real time detection, location and monitoring of all WiFi cellular and Bluetooth devices operating within a building. AirPatrol can distinguish between known and unknown devices, accurately identify their location on a live floor plan and trigger security alerts when authorized devices enter secured zones. Our product has a growing footprint in government, military and commercial high security installations worldwide. Finally I want to add that we do expect to see the sales cycle shortened as we announce wins in various verticals. Having a credible reference allows us to avoid the time and resources associated with proof of concept and test cases. We have been building reference clients in various verticals and to we'll see the fact the sales cycle in the latter part of 2016 and beyond. In addition to the progress in conference around the AirPatrol sales process we are seeing improvement in other parts of the business as well. Our services are growing and becoming a larger part of our sales mix. These services generate gross margins of 50% to 80% and will be a larger contribution to our cash flow in the future. Our announcement earlier this year Sysorex was awarded a $461 million five year government IDIQ contracts in the first quarter of 2016 along with 11 other companies. This U.S. army PMSS3 contract began this past quarter and we received our first house quarter under this contract and we look forward to capturing more SaaS orders in the near future. With the launch of LightMiner last quarter we are moving from pilot customers to live customers and of course finding opportunities for LightMiner and AirPatrol together. We're also aligning ourselves with key strategic partners. We recently announced the integration between LightMiner and Tableau software a global leader in rapid fire business analytics software. Users of the connected LightMiner Tableau solution will have the ability to ingest, analyze and visualize large complex data sets with supercomputer like speeds. We are very proud that Tableau choose to partner with Sysorex and very excited about the potential revenues this partnership will create for both Sysorex and Tableau. As we announced at the end of the quarter our LightMiner is an in-memory sequel database and analytics platform purpose built to provide supercomputing performance at a fraction of the typical cost. With the LightMiner Tableau connected solution large data sets and highly complex analysis can be performed in LightMiner and viewed seamlessly in Tableau cutting wait times from hours to mere seconds. This solution will allow Tableau customers to extend and expand their data analytics services simply and cost effectively. For example CFOs in companies look at dashboards to track the health of the company. If they identify an issue like unexpected gross margin fluctuations and once you drill down to see what caused it, they may need to drill down and run reports on business segment, customers, salespersons, product segments, that are to find what is causing the fluctuation. They could be running 20 to 30 reports to find the cause. Traditional databases can take up to several minutes to run each report depending on the size of the database. Using LightMiner which is optimized for speed we can reduce these times to seconds and help the CFO or other executives take immediate action based on the information he or she finds. So yes, for all of these reasons I am very confident that our vision is coming to realization and it will begin to show up in the numbers more consistently as we move from earlier adopters to mainstream customers. Finally one comment on our cash position before I hand off to Kevin as I know many of you have questions about this. Currently we expect that our cash needs will be satisfied by amount received in connection with our operations including anticipated prepayment arrangements we have negotiated with the customer and from increasing our debt facility as needed Our internal plan suggest that we don't have to go to the equity capital markets at this, the things change in our plan we will reevaluate. With that I will now turn the call over to Kevin to discuss our financial results for the quarter ended March 31, 2016.

Thanks, Nadir. Total revenues for the quarter ended March 31, 2016 were 14.1 million compared to 14.1 million for the comparable period in the prior year. For the three months ended March 31, 2016. Mobile. IoT and big data products revenue was 195,000 compared to 143,000 for the prior year period. Storage and computing revenue was 10.2 million for the three months ended March 31, 2016 and 10.3 million for the prior year period. SaaS revenue with 829,000 during the three months ended March 31, 2016 and 973,000 during the prior year period. Professional services revenue was 2.9 million during the three months ended March 31, 2016 and 2.7 million during the prior period. Total gross profit for the quarter ended March 31, 2016 was 3.9 million compared to 4 million for the comparable period in the prior year. Gross margin. for the quarter ended March 31, 2016 was with approximately 28% compared to approximately 29% for the comparable period in the prior year. This slight difference in margin is based on sale mix. GAAP net loss attributable to stock holders for the quarter ended March 31, 2016 was 4.3 million compared to 2.9 million for the prior year period. This increase in loss of 1.4 million was primarily attributable to an increase in amortization of intangibles, depreciation and cost of expanding our engineering, sales and marketing operations including the hiring of more resources and those departments to support the growth expected for our AirPatrol and LightMiner solutions. For the quarter ended March 31, 2016 pro forma non-GAAP net loss was 2.9 million compared to a non-GAAP net loss of 1.6 million for the prior year period, for the quarter ended March 31, 2016 non-GAAP net loss per share was $0.11 compared to a non-GAAP net loss per share of $0.08 for the prior year period. Non-GAAP net loss per share is defined as net loss per basic and diluted share adjusted for noncash items including stock based compensation, amortization of intangibles and one time charges including the gain or loss of the settlement of obligations, severance cost, change in the fair value of shares to be issued, acquisition cost and the cost associated with the public offering. Total adjusted EBITDA for the quarter ended March 31, 2016 was a loss of 2.5 million compared to a loss of 1.3 million in the prior year period. Non-GAAP adjusted EBITDA is defined as net income or loss before interest, provision for or benefit from income taxes and depreciation and amortization plus adjustment for other income or expense items, non-recurring items and non-cash stock based compensation. On the balance sheet we ended the quarter with cash and cash equivalent of approximately 2.9 million and total current assets of 25.8 million. Our net cash used in operation was approximately $4000 for the quarter ended March 31, 2016. I would now like to turn the call back over to Nadir. Nadir?

Thanks, Kevin. Our vision for the future is one of robust, diversified growth across our products and services especially with the launch of our integrated LightMiner platform solutions and the progress we've made with AirPatrol. Our path to profitability will be driven by growth in these products and we expect to achieve significant progress on that front this year. With that Erickson, I think we're ready to open up the call to questions.

[Operator Instructions]. And our first question comes from Josh Nichols of B. Riley & Co. Please go ahead.

I just want to know if you could elaborate a little bit more on the LightMiner, Tableau partnership seems like it's a big company with a large base to potentially dwarf on, how is the offering being sold right now and are you leveraging Tableau sales force at all and what's the plan?

Yes, it's a really exciting and partnership for Sysorex, Tableau obviously is a much larger company, has a huge installed base of customers that we’re going to market together to go after. You know Sysorex and LightMiner provide deeper analytics for those Tableau customers and I think Tableau seeks the value that the LightMiner product can add and help them grow there, revenue base and customer base but we certainly have identified opportunities and customers. We are training their sales force and then vice versa to be able to go pursue customers together and that process has started already.

And when do you expect the sales force will be trained and ready to start actually selling the product?

So you know they've got a pretty large sales force and so we've already completed one training with a group of sales force and we've got more scheduled as we go. So it's in process and lots of their folks have already been brought to speed on the product and we will continue to progress on that.

And then the AirPatrol revenue for the quarter wasn't too high, it's little bit under $200,000. Any more details about what's going to drive some of the growth in the coming quarters for AirPatrol and any information you can provide about the government customer the $1 million AirPatrol awarded, how that might expand?

Sure. Yes I mean as we have said before AirPatrol revenue will continue to be lumpy for some time until we build a more solid pipeline of customers that we can invoice regularly but that doesn't mean that we’re not going to see significant growth year over year for AirPatrol revenues. We have as I mentioned a really solid pipeline, we're close to the finish line with several other large opportunities multi-million dollar opportunities that will be recognized this year. So that's what's going to be driving this and that's both across government and non-government type customers. In particular you asked about the government agencies we announced last year that’s one of the agencies we're talking to and working with on their expansion plans but as you know government agencies take a long time to work through their processes, right, to be able to procure equipment and deploy it and allow folks to get on site to be able to install. So we're working through that but there are definitely a lot of interest from existing customers to expand the footprint.

Our next question comes from David Riedel of Riedel Research. Please go ahead.

A quick question on one of your last comments Nadir you mentioned about a prepayment arrangements, this sounded sort of intriguing, can you elaborate on that?

Yes, I'll share what I can share with you at this time on. So this is a larger patrol opportunity that we've negotiated the advance payment, a multimillion dollar opportunity and because the customer would like to ensure inventory availability and in the time frames they are looking at we are able to negotiate prepayment on that order and that's something that we're expecting here in the next couple of months.

Our next question comes from Ross Silver of Vista Partners. Please go ahead.

I want to just to try to gain more color on this transition that you're making here where it's gone from kind of here's a series of acquisitions that we've made and here's the concept of what we intend to create from these acquisitions to now you see and are achieving some large contract win and partnerships with recognizable companies and groups and is this something -- I know Tableau has been brought up a bunch on the healthcare side, there's been something -- are we going to continue to see these types of partnership agreements? Is this something where you feel like this is just the beginning? You're just kind of like tip of the iceberg or -- like where are we in this and how quickly can we assume you're going to move with some of these kind of opportunities that you have in your sales pipeline? And I guess and how large is that sales pipeline? Just trying to get some definitive color on how this transformation kind of occurs to cash flow positive.

This is why I'm saying we’re at this inflection point because we are on the verge of leveraging these customer references, these partnerships, industry experts. We got our first mention of AirPatrol in Gartner report and you know the visibility is starting to get there, more and more strategic partners are realizing the value and the differentiation that we bring to the table with AirPatrol and LightMiner. So we'll see more of these announcements and that's how we expect to really grow the company, right. We will not be increasing our operating expenses by hiring hundreds of sales guys to grow the revenue, we will be leveraging strategic partners like key options, like Tableau, like Whiterock and others that we've talked about in the past that that can really take our solution to customers and so we have been diligently working on that over the past year or two and now it's starting to show the results and so you know without getting into specifics we have a really strong pipeline that I feel better about than I did in April 2014 when we bought AirPatrol, we understand the sales process better, we understand the value we can bring to our customers much better and I think we're close to the finish line with a lot of names that I think will get attention in these verticals that we've targeted either directly or through partners and that should open the floodgates and really drive the revenues that we expect in 2016 and then really have a meaningful impact or more of an impact in 2017. But just in 2016 yes we are saying by the end the year we expect to get to cash flow profitability and a lot of that's driven by the sales mix, right. AirPatrol LightMiner have 70% gross margins, we expect that to drive the bottom line and allow us to get to cash flow profitability.

Our next question comes from Joe Maxa of Dougherty & Company. Please go ahead.

Nadir, I noticed the deferred revenue ticked up nicely in the quarter, if you can give us a little color on what's in that deferred revenue and when that would be expected to be turning to revenue?

We have deferred revenue across a couple of our business segments. It's been tradition of our side but we are starting to see that in some of our other products especially as we shift to a SaaS model but we expect most of that revenue to occur this year, second half of the year. There's some maintenance contracts in there that will spread out over a few years but I think a bulk of that will hit this year.

Our next question comes from Mike Crawford of B.Riley & Co. Please go ahead.

Can you just explain a little bit how you envision the data visualization partnership at Tableau to work, is this a case where they bring LightMiner, into a deal and how long of a sales cycle is that per engagement, any numbers on like number of potential targets and leads associated with this effort so far?

So Mike I would say it's early but it both ways, they are definitely bringing us into customers and opportunities and vice versa and we've already had conversations around specific customers on both sides having it go both ways, right, so we've already brought them into some accounts and vice versa but this is just the beginning. It's starting, as I said earlier we're training more and more of their sales force and so as that continues I think we'll see you know results from that and obviously they have a much larger install base than we do so we're looking forward to growing business with them.

And then on vertical, so we know you're doing well in government and also with [indiscernible] healthcare sounds good. In the past you've also focused on verticals including retail corrections and gaming, any update on any of those three or any other for that matter?

Sure. Yes absolutely retail is one of our top verticals that we’re focused on and for AirPatrol and as well as we think there is a great opportunity there for LightMiner because the deep analytics that we can provide and we're making great progress there, we have more customers in the pipeline in that retail sector and as I mentioned earlier we're close to the finish line with some key announcements there, so we’re eager to get that information out to you guys as soon as we can. Correctional facilities, you know we will confess it has been our harder challenge just because of budgets and cycles that they deal with. So we spend less time focusing on that effort although we still have some interesting deals in the pipeline that are moving but they just are moving at a slower rate, but we have you know several other vertical that we're looking at that we’re trying to leverage through partners given our resources. So gaming is one of those where we're really just -- we've handed that to a partner that's working with an installed base of customers that they have in the gaming industry. So we'll see results in some of these others but we're trying to stay focused on the ones that we think there's the largest opportunities for providing AirPatrol and the analytics.

And then last question is as you pursue these deals is it just a case of potential customers not making decisions or are some of them making decisions to go a different directions say with beacons or something like that?

We've actually heard the opposite. So what's taking time and what I kind of alluded to earlier in my remarks was that these big companies, large companies are testing various technologies so they'll test beacons, they will test the WiFi solutions, they will test that and then we're you know working through that process. So that's why the sales cycle has been longer but we're finding that we're winning the game there because they realize that they can't get or capture all of the devices using the other solutions and they don't have the accuracy. So it's not that they're choosing to go to WiFi or beacons and we have lost deals, it's just that the process takes time. This is new territory, we've done a lot of educating with these customers but as I said sales cycles are shortening and as we have references in these particular verticals, as soon as I can announce you know a big name in one of these verticals like retail for example then we believe the sales cycle shortens pretty quickly thereafter because then you don't have to keep doing TOCs for others and so that's what we -- that's part of the inflection point where we’re at, that’s part of what I expect to happen in the second half of this year is that we'll have those reference points to be able to build off of.

Our next question comes from John Heerdink of Vista Partners. Please go ahead.

I wanted to and also for confirming that there will be no need for being in the market any time soon with based on your improving metrics and direction towards cash flow positive and a couple that with your current cash levels in correct facility. The quick question I have for you is can you drill down a little bit more into the actual applications that are driving that you see it driving in the individual sectors for your LightMiner and AirPatrol, just gives a little more color on those type of applications and why they would be adopted in the near term.

Sure. So you know we were just talking about retail so an example there is is really for the brick and mortar world to have the analytics for the first time to understand what is really happening with the customer journey as people are going through them a mall, right, and again this is anonymous information and we're not -- doesn't have any privacy concerns but that data is very rich and useful to our customers to understand the affinity between stores or what are the dwell times in front of certain displays, how can they better serve their customers, what are optimal staffing levels? Based on the traffic in the facility or in the mall right? So you go from that kind of perspective to the security type clients and the applications there again. I mentioned Whiterock and other secured facilities where they may want to clear a room and say that it's clear to any WiFi or cellular or Bluetooth activity before they hold a classified meeting or they want to be able to detect and monitor any type of RF activity, radio frequency activity in their facility 24/7, right just to make sure that they understand and know where people are. We've talked about applications in smart communities for example [indiscernible], right, so part of that is around safety and security to be able to address, let's say there's a fire or natural disaster on the compound right, where are our people? How do -- where do first responders need to go? Where do people need help? It can be a variety of use cases and any public space security is always an application, even with our retail customers, security is something that they're thinking about right. We hear about incidences in retail outlets and places like that and so security is an application that covers a lot of verticals but some of the other use cases I mentioned there are truly optical health care, another one we have talked about before in terms of asset management and tracking the assets throughout a facility, being able to look at them in real time and find out the device that you may need. So I could go on and on the just probably a lot of use cases and many of these as you can see led to the analytics and time to what we're doing with LightMiner as well.

Right. And it's important to note that these use cases are developed by having real conversations with clients and customers within these verticals and addressing the problems that they're identifying to us in the hospital and the waste that goes in their inability to track equipment and devices because the hospital tens of thousands of dollars because of the disparate systems and the inability to effectively track these assets. So we’re talking about an ROI that is significant based on implementing a solution, utilizing our AirPatrol LightMiner.

And could you just take it one step further, when you were having the conversation do you’ve the visibility into what the competitive landscape looks like to address these issues in these various sectors?

Sure. Yes, I mean in most cases we do and we know that the players that a customer may be looking at or the types of technologies at least if not the specific players and you know as we've stated before for example that government client that's selected us in Q4 last year did so after going through an exhaustive process, putting out an RFI, collecting information and found that we were the only ones that could deliver a solution that incorporated selling their WiFi and Bluetooth technologies, right. So absolutely we understand what the competition can and can't do, but we have been able to convince our customers that we have a better value proposition for them because we can provide them the complete picture. They don't have to make decisions based on half the information.

This concludes our question and answer session. I would now like to turn the conference back over to Nadir Ali for any closing remarks.

Thank you, Erickson. Thank you everyone again for your time today. I want to reiterate the enthusiasm and confidence we bring to this call regarding our future. Sysorex strives to be a leading provider of real time data analytics, IoT and security solutions. We are driving the realization out in the market that our AirPatrol and LightMiner analytics platform solutions are in comparable and drive real long term value. We’re or highly encouraged by the market response we are experiencing from both clients and prospective customers alike who see to drive ever more ROI from their data. We will be presenting at the B. Riley Conference in May and the Marcum NLD Micro Conferences in June. We hope to see you at one of these events and appreciate your time and continued support in Sysorex. Thank you.

Thank you.

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