Genasys Inc. (GNSS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Genasys Inc, Zonehaven Acquisition Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Dennis Klahn, CEO of Genasys. Sir, the floor is yours.

Thank you, Degma Good morning, everyone, and welcome to Genasys Inc.'s, Zonehaven Acquisition Conference Call. I'm Dennis Klahn, Chief Financial Officer for Genasys. With me on the call today are Richard Danforth, Chief Executive Officer; and Charlie Crocker, Chief Executive Officer of Zonehaven. Before we begin, I would like to take this opportunity to remind you that during the course of this call, management will make forward-looking statements. Other than statements of historical facts, statements made during this call that are forward-looking statements are based on our current expectations. During this call, we may discuss the company's plans, expectations, outlook or forecast for future performance. These forward-looking statements are subject to a number of risks and uncertainties, including, without limitation, our ability to recognize the expected synergies and other benefits of the Zonehaven acquisition, difficulties in integrating Zonehaven post-closing, diversion of management time addressing post-closing transaction-related issues, uncertainties related to litigation involving the acquisition of Zonehaven, uncertainties related to unanticipated integration costs or undisclosed liabilities assumed, uncertainties related to the acceptance of the Zonehaven's acquisition and its products by third parties, and other risks and uncertainties, many of which involve factors or circumstances that are beyond the company's control. These forward-looking statements are based on information and management's expectations as of today. Future results may differ materially from our current expectations. For more information regarding potential risks and uncertainties, please refer to the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2020. Genasys disclaims any intent or obligation to update those forward-looking statements except as otherwise specifically stated. A replay of this call will be available in approximately 4 hours through the Events & Presentations page on our website. At this time, it's my pleasure to turn the floor over to Genasys CEO, Richard Danforth.

Thank you, Dennis, and welcome, everybody, to the call. I will open this morning's call with a brief overview of the acquisition and then turn the call over to Charlie Crocker, Co-Founder and CEO of Zonehaven. After Charlie's remarks, we will open the call for questions. Started only 2 years ago, Zonehaven is a fast-growing provider of SaaS solutions for emergency evacuations. Zonehaven delivers planning, training and resources to first responders, public safety agencies and communities to manage evacuations and repopulations successfully. The Genasys unified emergency notification platform includes mass notification software and industry-leading acoustic technology. By adding Zonehaven, government agencies and private companies will have an integrated evacuation and emergency notification solution. This one-click platform means reducing the reflex time to order, notify and execute evacuations for any emergency, saving lives. Zonehaven has experienced explosive growth. Their software has been purchased to be used by 175 districts, 140 law enforcement agencies in 200 cities with more than 3,300 evacuation zones covering 3.2 million people in Northern California and Southern Oregon. With that, I'll turn the call over for remarks from Charlie.

Thank you, Richard. I'm very happy to be here. Very happy to be joining the Genasys team. Zonehaven was born out of the last 5 years of mega fires, mostly in California, and we built the product from the ground up with support of our law enforcement and fire partners. We've had the support from the very beginning, and we're really born from the relationships that we've had with these folks before the company was even started. After trial by fire in some of the biggest wildfires last year, we were able to start understanding how to support multiple hazards. So this application for evacuations, while born from wildfires, is really about evacuations on small, medium and large scale, regardless of the type of disaster. The challenge that we're seeing in California recently and really worldwide with respect to many of the things happening around the climate change and people moving into the areas of flooding and forestry, that firefighting is no longer effective in the initial attack and that evacuations are being required earlier and over larger areas. And these evacuations require regional coordination, multi-agency coordination. Of the fires that happened in Northern California just last year, each of the fires -- we had our first mega fire of over 1 million acres, and that fire had 6 counties, 4 incident command teams, federal and -- 2 federal, 2 states and tens of cities and multiple office of emergency services. Each of those teams has different types of communication tools, different types of methodologies, and it can be very difficult to get a consistent message out to the public. So doing preplanning, doing training with the teams, building out integrations with their existing notification systems, bringing on new integrations, like our integration with [ WAYS ] allows us to effect evacuations much more quickly. We've seen 2 uses of the product just in the last 1.5 weeks with this -- in the county of Yuba, where they've had 2 fires. They were able to communicate their evacuations with -- in around a minute. When in the past, it would have taken them up to 30 minutes to an hour to get the evacuation language, structure and communication out. So partnering and joining with the Genasys team is a dream come true for us. It allows us to expand our footprint globally, and it allows us to integrate more deeply with a variety of notification and learning platforms. I'm happy to take any questions.

[Operator Instructions] Our first question comes from Martin Yang with Oppenheimer.

I have a couple of questions regarding the application of the software to other natural disasters. And is there a lot of modification required? And has the software being tested for disasters or hazards other than fire?

Thanks for the question. It's a great question. I'll take this one, Richard. The -- so the platform scales very easily to support active shooter flooding, wildfire, debris-flow hazard. Just this season, the -- where the burn scar was for the CZU Complex fire, they had a large-scale set of evacuations that were related to debris-flow hazard. Post evacuation, large rain can cause large-scale mud flows, like the ones we saw in Montecito, California several years back. So the platform has already been used for multi-hazard. The other big hazard that's been recently integrated into the platform with coordination with the California Department of Water Resources is the tsunamis. So tsunami hazard zones have become a very critical part of the conversation we're having with the coastal cities, especially with some of the concepts happening around sea level rise.

So my next question is about adoption of similar tools at -- in other regions, states or even at federal level. Are similar tools used today? Or are you seeing more adoption or more similar start-ups providing similar services in other states or cities?

At this time, we are lucky to have a space to have identified a category that seems to be very new. And so we have found that we had a lot of interest all the way from the federal level down to the state level in some of the Western states in the U.S. We have conversations across the U.S. and in several other countries as well. So the product and the story is resonating incredibly well. And we're seeing local agencies, in some cases, use their local teams to create zones and deliver websites to help their local communities. However, they're starting to understand that there's a need to be part of a regional solution as well.

Can you maybe help us understand how your solution compares to existing reactions or solutions by the local fire department? And where are you providing the time savings in emergency evacuation scenarios?

So over the last 100 years, law enforcement and fire departments have done a great job doing evacuations. And they tend to be done in an ad hoc fashion after an incident or a disaster has happened. So we -- a fire is burning, an incident command team has put together. Often, those are people that are coming for mutual aid from many different areas and meeting each other for the first time. They are putting a map on the side of the truck or they're laying the map on a table, they're pulling out sharpies, and they're starting to draw and design how they would do an evacuation. In some cases, they have a lot of time to do that. They know that there's a wind event coming in 24 hours, and so they have 24 hours to put that plan together. But as we've seen with these fast-moving mega fires, time is really of the essence. And if we can save time, we can save lives. And so by doing a level of preplanning, using the tool to train across agencies and then having direct integration with multiple alerting platforms and applications, we're able to reduce the time to call for an evacuation from hours to minutes.

Perfect. My final question is for Richard and Dennis. Can you talk about how this acquisition impacts your financial outlook for this fiscal year in longer term? And any numbers or comments around the deals would be helpful.

For current fiscal year of '21, it will be negligible. As I mentioned in my remarks, Zonehaven's growth is expected to be explosive. So I think it will have a favorable impact as we move into our FY '22.

Our next question comes from Aman Gulani with B. Riley Securities.

Congratulations on the acquisition. My first question is, can you maybe comment on the growth trajectory and margin profile of Zonehaven relative to Genasys?

So from a margin perspective, the gross margins for the current Zonehaven book of business is probably in the 70% range. As we move forward and the revenue grows and the base grows, we expect that to be in the 70% to 80% range. From a revenue perspective, again, 2 years ago, the company started, so it was pretty small. But they have had some significant growth in my remarks. The adoption rate in California and Oregon has been terrific. Together with Genasys, I think we -- and I think we will take this thing nationally and then internationally as well. So we hope to improve the growth rate of Zonehaven.

Helpful. And can you maybe talk about integration time line? How long do you expect that to take to be fully integrated into your existing sort of software solutions?

Sure. Just as a way of explanation, Zonehaven's product will continue to be sold as Zonehaven. It will also be integrated into the GEM platform. And thirdly, it will be wrapped around the GEM software only. One of the beauties of the combination of Zonehaven and Genasys is Genasys does provide all of the various communication channels for the Zonehaven software to communicate with residents. So there's really 3 channels that will bring the product to market. And so it will continue to market as a stand-alone. The integration will begin next week. And it's expected to initially take probably 6 months, but as all software products would probably be ongoing for a long time.

Okay. Just last question for me. Just looking at the website, they had 2 products, EVAC and AWARE. What's the revenue mix? And then are both products largely reoccurring in nature?

I can answer that question. Would you like to Robert -- Richard?

No. Go ahead, Charlie.

Yes. So our primary goal from the beginning was building -- ARR building, recurring revenue. And so the -- that is the preponderance of our revenue. The EVAC platform is the platform used by agencies. And ultimately, that is the platform that, at this point, the agencies are paying for. The AWARE is the public facing application. And it's -- there's a great opportunity for us in the long run to look at ways to monetize that platform as well. But at this point, that's the platform that anybody in the community, media and others, without a log in, are able to get access to the most current information. So there is no specific cost. It's in the sense considered a feature for the agencies.

Our next question comes from Ken Herbert with Canaccord.

I just wanted to follow-up on the timing questions, Charlie. It sounds like you've had a pretty quick ramp in adoption in California and Oregon. How do we think about -- or what would you expect timing adoption to be now? Would you look at expanding geographically, at least in the United States? And should the uptake be maybe as quick as you've seen in the current markets?

So are you asking for a -- like a growth rate or kind of adoption rate? I'm not sure I understand the question.

More of an adoption rate. I mean, is it something that you could be working in most sort of -- because the geographic expansion in United States happen as quickly as it's happened in California and Oregon? Or is it going to be more dependent on external factors? And does this combination with Genasys perhaps now significantly accelerate that opportunity?

Oh, I mean...

I'll take a pass at that.

Okay. Great.

Charlie's activity has been largely localized to California and Oregon. Again, the company is a start-up. They don't have a lot of business development and sales resources. Genasys does. Further, Genasys has an international footprint that we will begin to exploit the Zonehaven capabilities. If you look at what we do in Australia, for example, this is a natural fit for that country. In fact, it -- with the location-based SMS and Zonehaven, you can specifically send emergency evacuation orders and directions without anybody opting in. And I think that potential is terrific for us, not only in Australia, but throughout the EU, as they adopt the location-based SMS emergency notification. So I think it has the potential to be a significant slope, but obviously, things take time. But we're looking forward not only for further expansion in the United States but throughout the world.

Our next question comes from Will Hamilton with Manatuck Hill.

Charlie -- I mean, Richard just touched on this a little bit, but how many people work at Zonehaven? How is it broken down between engineers, salespeople, other positions?

So at this point, we are 13 people that are full time. Plus we have a contracting workforce that we can expand and contract as we need to, depending on our specific goals. We are primarily engineering and design focused. It has all been about, for us, getting customers onboard and making the experience as simple and seamless as possible. We're working with first responders and emergency services professionals. These are not necessarily highly technical folks. And so we put a very, very strong focus also on the design, the user experience.

Okay. That's helpful. And then just a follow-up there. What is the time line for onboarding a customer? I mean, how quickly can you onboard somebody?

Well, there's a bit of a scale, right? It really ultimately depends on the population and the number of agencies that we're working with, but we see anywhere from 2 to 8 weeks maybe.

Okay. And do you envision maybe that shortening with integration?

Oh, it's incredible. We're -- not only with integration, but with continued automation.

Okay. Maybe this for Richard or Charlie. But in terms of how this is priced, is it on a population basis or on a miles basis or some sort of per city, town pricing? Can you maybe tell...

At this point, our pricing has been at a -- based on population.

Okay. And I read an article that suggested it might be in the $50,000 to $100,000 per city range, but that wouldn't be on the population basis. So any color in terms of how -- well, just the cities you're in now would be, on average, what type of population, I guess, your 200 cities or so, right?

Well, it covers over 3 million people. So...

Yes. I mean, we're covering some of the largest counties in the Bay Area. So we're dealing with cities. We have cities that are as small as 3,000 or 4,000 people up to cities that are over 200,000 people. When you look at it at a county level, counties from 80,000 people to 2 million people. So the range is broader.

And then lastly, Richard, does this help at all potentially with anything in Europe? I mean, you mentioned it being integrated into other services in international. But could this be an additional...

I think it's -- as I mentioned, Will, I think it's an absolute upsell to both Europe and Australia. Right now, the Zonehaven -- they put together -- if you look at a particular county, they will break it down into various zones. And the zones will be determined based on the number of people in there, the evacuation routes, number of roads. It will be -- it's also during an evacuation that can change on the fly based on traffic patterns and things like that. Having precise location data on where people are is a natural extension of the emergency management notification that Genasys does. So I think we haven't begun to tap that well, but I think it's absolutely a significant opportunity for us.

Our next question comes from Frank Barresi with Ameriprise.

Well, nobody said how much you guys -- how much you paid. I don't know why. And also -- I mean, because this -- the transaction is done, isn't it? I mean, didn't it say you closed on June 7?

We did. The pricing, Frank, will come out in the 8-K later today.

Okay. And then I looked at some of the things that -- at the website. And you talked about finding routes that weren't even on the map and all. I mean, do they -- does the user, the agency or city just go put in extra -- they can put extra data and add new -- I guess, they can modify the math? Besides showing routes and all, existing roads, they can add in different trails and things that aren't on their own. Someone has authority from somebody at the customer, correct?

Yes. Ultimately, the agencies have different roles. So there are -- most people have the ability to view and download the application data and to run simulations. Others have the capability to be what we call editors. And those people can modify, update, change information in the system, which automatically propagates to anyone in their agency or outside of their agency to see that. And so -- and then some group can also be alerters. And those are the people that are able to actually affect the change in a zone and establish the protocols and language for a specific alert.

Okay. All right. And so -- and you guys have already had a large number of customers. What kind of revenue are you doing now? I guess you're saying it's all recurring revenue. But with 13 people, how much revenue -- what kind of run rate have you achieved already? And then the last part of that question is you penetrated these areas in Northern California and Oregon, where there's fires now. How much of that area is still a prospect? I mean, do you believe you'll get close to 100% adoption?

Charlie, you take the second one. I'll take the first one.

Okay. Perfect.

So first to talk about the finances. Anything to do with the transaction you'll find in the 8-K later today. Charlie, on adoption?

Yes. So on adoption, we are -- we see this growing statewide in California, potentially in Oregon as well in the next while. There's a huge amount of opportunity still all across the state as well as conversations in many other states at this point. There's a lot of interest really across the U.S. at this point.

Okay. So you'd say you're like less than 10% adopt. The people who are like -- where fire is front of mind is probably less than 10% you've penetrated so far in California. Or...

I would say from an area standpoint -- from an acreage standpoint, we're definitely less than 10%. From a population standpoint, we're probably up to maybe 15 -- 18%.

Okay, okay. And yes. I mean -- and it would all -- and Richard, you also think that -- I mean, they've already made their -- I guess, they've already put out their requirements in Europe. But I guess, are we still at the stage where they might expand their requirements? Or would this help you get the initial adoption, make you more competitive with whoever you have to compete with over there?

Not at this time, Frank. The requirements are out. They are published, and RFIs, RFPs are being answered. But as I said, I think when you look at not only the United States but Australia and the rest of the world, Europe included, there's very little, if any, awareness of this tool. So we will begin to campaign around the world with that. And as I said, it's a particular utility if we can integrate this with the location-based SMS. So I think first responders will get that immediately. So we're on track to win what we can win in Europe. We already won in Australia. So we'll probably start in Australia and move to Europe from there as well as in parallel with the United States.

And on these European, it's not covered by this. How fast do you expect to see -- know what you won or lost and all in Europe? I mean, when are decisions going to be made?

I think initial decisions will come out this month.

Across the whole continent?

No, country by country.

Our next question comes from Rick Neaton with Rivershore Investment.

Richard, you're up early. Are you done with M&A for the year?

I'm not going to say yes to that. I mean if we continue to look and something makes sense like Zonehaven, then we'll continue to pursue.

Okay. In understanding Zonehaven's products, does it work better in a kind of an ad hoc situation where you need to establish with short lead time evacuation routes? Or does it work equally well in areas where you might have long lead times such as a hurricane or a typhoon where you're looking to evacuate people over large preset evacuation routes?

I think both. Charlie, I'll let you take that.

Yes, it's a great question. So we actually see it very clearly in both. We kind of define the product in the way we think about it with both. The language we use in the wildfire context is initial attack and this extended attack. And so initial attack is discovery and having to respond and make the fast decisions immediately. And then extended attack is often when you have an incident command structure in place, and you have multiple teams and people are on the roads, manning traffic control points and that kind of thing. And so we've seen it used in both, and we definitely focus on both as part of the product.

And how it's used. Does that depend on the entity that's using it? In other words, a fire district could authorize a fire marshal to change an evacuation route, wherein a different district may require a different person in the chain of command to authorize the same thing. Is that what you're saying?

Well, I mean, the -- so we really see this as a collaboration platform. It's a tool that allows -- so for the CZU Complex fire during initial attack, they had a person in -- they had the OES manager, the emergency services manager, in one city. They had the sheriff in another city, and they had the head of the fire department in another location. They were all logged on to the platform. They were able to make a quick decision based on a lot of the preplanning that they were able to look at in the current setting, and then they were able to effect and start the evacuation. So it's -- ultimately, it's a collaboration tool. And in most cases, law enforcement is the one that is a responsible and legally allowed to call for an evacuation, but they get their input from the emergency services folks, from the people who are dealing with the floods, the people that are dealing with the fires like the fire department. So it's inherently a collaborative process. And so the tools that we've created are enhancing that and making that collaboration 1,000 times easier.

So in other words, Rick, you could have multiple counties in a pre-Zonehaven world. They operate from an evacuation and even in large case as a firefighting perspective in silos. What the Zonehaven software does is it allows, as Charlie said, a collaborative tool. So one county can work next to another county and see what routes are being used to evacuate each county and know that they're going to have to change on the fly as it can't handle that much traffic going through there. And live updates are given to the platform. So all county officials can see it.

Our next question comes from [ Paul O'Keefe with AS ].

Congratulations. My question -- I have 2 questions. Do we already share clients with Zonehaven?

Yes. We do. Interestingly, it was a community in California that introduced Zonehaven and Genasys. They wanted to take both. And we are collaborating. We have proposals together for various counties and Genasys has brought Zonehaven. Zonehaven has brought Genasys. It's sort of a no-brainer.

Yes, I was hoping so. My next question is, this is integrated with [ WAYS ] right? Is that what I picked up earlier with the...

Yes.

Okay. Does that license automatically transfer?

That partnership contract...

Through the acquisition. Yes, that's the question.

Our next question comes from Tucker Andersen with Above All Advisors.

Yes. My first question, and I will have a follow-up, is could you talk a little bit about, Richard, once you got to know them, how this process proceeded and how long it took to the acquisition? And was there any potential competition? And on Charlie's point, why was this the right time to do it from your standpoint?

I'll take the first one, Charlie. As I mentioned, a community -- a county brought us together. And from my perspective, it was just a natural fit. We don't compete. We offer different pieces. And together, we offer a software product that can handle all of the communications in all of the evacuation routing. Genasys is -- on its own platform can take care of all of the various communication channels, be it to your phone, to acoustic devices, to social media and all that. And the Zonehaven software -- we can use the evacuation routing and the live updates and then use the Genasys communication channels. Charlie? Oh and the other one. It was about 6 months approximately, yes, for the whole...

Yes. Charlie, why now from your standpoint?

From my standpoint, we were surprised by how quickly we were accepted and adopted by the community. And we have a road map to build a lot of what Genasys has already built. And so for us, this is all about scale and time to market.

And then my follow-up for you, Charlie, although you can chime in, Richard, if you think it's appropriate. Could you talk a little bit about the barriers to entry for different counties and cities adopting this? Is it -- just a question of the bureaucratic maze or might the cost, in some cases, be greater than just your software costs? Are there other things they may have to do to their systems to make adoption possible? And second, as part of that, do you at any time -- are you or could you have a service where you provide real-time support to them -- we're in the middle -- where they're in the middle of these things if they need any sort of support on the systems?

Yes. So the adoption piece, the procurement is often the piece that takes a little bit of time, but we're finding that, especially as wildfire season is ramping up, people are shortening that time frame drastically in order to get themselves up and running much more quickly. And then in terms of real-time support, at this point, we know -- my background is in Big Data. And so we are monitoring at all times what our customers are doing. We have a team that's able to support 24/7. And so during an actual event, we can make ourselves available. We see a lot of ancillary potential product add-ons and packages that can include things like higher level incident support, focused training programs and that kind of thing as well. So we can support both. Our goal is that we are building a SaaS platform and not a service. So the main thing we're focused on is automation and design to make it easy for the customers to do this work themselves.

That was our final question. Would you like to give any closing remarks before I close out the call, sir?

Thank you for joining us this morning. We look forward to speaking with you again on our next conference call.

Thank you. This concludes the Genasys Zonehaven Acquisition Conference Call. You may disconnect your lines at this time.