Genasys Inc. (GNSS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Genasys Inc. Fiscal Year 2021 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Kim Rogers from Hayden IR. Ma'am, the floor is yours.

Thank you. Good afternoon, and welcome to Genasys Inc. Fourth Quarter and Fiscal Year 2021 Financial Results Conference Call. I am Kim Rogers with Hayden IR, the Investor Relations firm for Genasys. With me on the call today from Genasys 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 and can be found in the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2021. Other than statements of historical facts, forward-looking statements made on this call are based only on information and management's expectations as of today. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We will also discuss non-GAAP financial measures and operational metrics, including adjusted EBITDA, bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance. For a reconciliation of adjusted EBITDA to GAAP financial metrics please see the table in the press release issued by the company at the close of the market today. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning. Bookings is an internal operational metric that measures the total dollar value of customer purchase orders executed in a given period regardless of the timing of 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 our website. At this time, it's my pleasure to turn the call over to Genasys' Chief Executive Officer, Richard Danforth. Please go ahead, Richard.

Thank you, Kim, and welcome, everybody. Our fiscal 2021 was a year of solid performance, combined with a significant level of investment to position us for future growth in our emerging software-as-a-service business. Our fiscal first -- fourth quarter revenue grew by 8% to $15 million, and full year revenue grew 9% to $47 million, continuing our track record of consistent revenue growth over the last 5 years. Fiscal fourth quarter bookings were $4.1 million, bringing our total bookings for fiscal 2021 to $64 million, which exceeds any prior fiscal year total. From these bookings, we have a record 12-month backlog of $36 million. Backlog grew year-over-year by 217%. The company posted another quarter of positive cash provided by operating activities. Over our last 4 fiscal years, we have generated $24.2 million in positive operating cash, including $6.2 million this fiscal year. This performance is impressive given that we opened up offices in Dubai and Singapore and expanded our software development team as well as software sales and support team globally. Importantly, strong cash generation from our core hardware business supports these investments as well as 2 software acquisitions. At the end of September, we had nearly 160 employees worldwide, 7 global offices and Genasys software now provides critical communication coverage for over 35 million people worldwide. In fiscal year 2021, we achieved our goals for record bookings, backlog and revenue. Genasys is in an excellent position to deliver another year of backlog and revenue growth in 2022. We have seen a resounding positive reaction to our SaaS solutions as evidenced by the announced contract awards in fiscal year 2021. In the past 12 months, the Genasys SaaS platform was launched in the United States, Canada and Mexico, providing life-saving information for over 10 million people. We are now pursuing a wide range of global opportunities across multiple industry sectors and are excited about the growth that lies ahead. With our strategic investments, including the acquisitions of Zonehaven and Amika Mobile, Genasys has created the industry's only unified hardware and software critical communication platform. As a result, we are evolving from a pure hardware business towards an increasingly SaaS model. As we execute our strategy, we will continue to make key upfront investments in staffing and resources that will increase our operating expenses in fiscal 2022. This growth investment is expected to materially shift our revenue mix to a highest SaaS contribution, with SaaS bookings anticipated to grow year-over-year by over 50%. The acquisitions are catalyst for our GEM, SaaS and Integrated Mass Notification hardware and software businesses. Now with Zonehaven, we have 3 paths to selling this platform: continuing to offer Zonehaven software as a stand-alone solution; integrating it in with our GEM enterprise software; and offering as a layer in our IMNS solutions. This combination gives Genasys 3 competitive advantages for securing local, regional and national emergency management and warning contracts. Additionally, other large IMNS projects are expected to finalize and announce this fiscal year. The combination of Zonehaven evacuation management with IMNS is rapidly filling our business pipeline with opportunities from California and elsewhere in the United States. Our Genasys SaaS business is gaining momentum as evidenced by the expansion of our software services contract with a global automaker to its facilities outside North America, and we'll continue to expand internationally. We also landed a GEM award in Riverside County here in California, and this is expected to expand in 2022. Our investments in sales, marketing and software development of building a growing SaaS pipeline. GEM SaaS contracts with other major corporations are in the pipeline for 2022. Additionally, opportunities exist in the United States and internationally with governments, cities, counties and departments are part of a robust and growing SaaS pipeline. We recently announced that countries -- counties, excuse me, in 5 states here in the U.S. entered multiyear GEM contracts, and all but one of these were replaced an incumbent. The investments in sales with new offices in Dubai and Singapore expand our geographic presence and adds experienced sales leaders and sales support personnel in targeted regions. We have begun to see traction in these regions and announced a new distribution partner in Africa and the Middle East. The strategic partnership will focus on government and enterprise opportunities in this region where countries have experienced crisis related to climate events, civil unrest and security incidents. Our team in Europe supports Genasys expectation for contract wins related to the EU-mandated National Emergency Warning Systems. While we remain optimistic about the EU opportunities, the progress has been slower than expected due to the global pandemic. We now expect a mandated deadline of June of 2022 to be extended by at least 1 year. To date, the awards have been dominated by cell broadcasting and low price. Although most awards to date have been cell broadcast public warning systems, location-based SMS system-based RFPs are expected in 2022. With our strategic investments, including acquisitions, Genasys has created the industry's only unified hardware and software critical communication platform. As a result, we are evolving from a pure hardware business towards an increasingly SaaS model. As we execute our strategy, we will make key upfront investments in staffing and resources that will increase our operating expenses in fiscal year 2022. This growth investment is expected to materially shift our revenue mix to a higher SaaS contribution with SaaS bookings anticipated to grow year-over-year by 50%. We expect another year of revenue growth for fiscal year 2022. Operating expenses are forecasted to increase year-over-year by $9 million to $11 million, reflecting the additional strategic growth spending to accelerate SaaS revenues. As our business grows, our model can deliver increasing SaaS revenue and margin expansion, once we are past the front-loaded investments to support our future growth. Having laid the groundwork for an in-demand high-margin SaaS business, we are focused on the execution of our game plan. Genasys addresses a growing global need for our unique products and solutions, putting us on track to achieve our goals. Our team is committed to our strategy of continuing to build on our base of hardware customers, while rapidly increasing the SaaS-based contribution that brings attractive recurring revenues, higher margins and increasing shareholder value. With that, I'll turn the call over to Dennis.

Thank you, Richard. Revenues for the fiscal 2021 fourth quarter were $15 million, up 8% from the prior year quarter. As compared to the same prior year period, LRAD revenue was $42.2 million, up 12%. Software revenue was up $2.8 million, up 71% and IMNS revenue was $2.1 million, down 44%. The increase in software revenue was primarily from the addition of Amika Mobile and Zonehaven plus increased professional services revenue. Gross profit margin was 51.1% compared with 54% in the fourth quarter of fiscal 2020. Gross profit as a percentage of revenue was lower in the fiscal 2021 fourth quarter due to a 58% increase in engineering personnel, primarily software-related. Higher software expenses were due to the recent additions of Amika Mobile to our Canadian subsidiary, Genasys Communications Canada and Zonehaven, and additional employees and resources for the Australia, EU and GEM software initiatives. Operating expenses were $7 million, up from $4.5 million in the same period a year ago, largely due to a 74% increase in sales and marketing personnel over the prior year to support future revenue growth opportunities, including opening sales offices in Singapore, the U.A.E. and Puerto Rico, plus higher amortization expense resulting from acquisitions completed this fiscal year. Net income for the quarter was $771,000 or $0.02 per share, a decrease from $9.4 million in the fiscal 2020 fourth quarter. The decrease was largely due to a noncash income tax benefit in the fiscal 2020 fourth quarter of $7.1 million from the release of a portion of the valuation allowance against deferred tax assets. For the full fiscal year 2021, revenues were $47 million, up 9% from $43 million in fiscal 2020. Gross profit margin was 49.8% for the full year compared with 52.6% in fiscal 2020. Gross profit as a percentage of revenue was lower compared to the prior year, primarily due to continued investment in additional personnel to support the growth of our software products. Operating expenses were $22.3 million, up from $16.6 million in fiscal 2020. The increase was largely due to a 45% increase in sales and marketing expenses from the increase in sales and marketing personnel over the prior year period to support future growth opportunities as well as the new sales offices, plus higher amortization expense resulting from acquisitions completed this fiscal year. Net income for fiscal year 2021 was $704,000 or $0.02 per diluted share compared with $11.9 million or $0.35 per diluted share in fiscal 2020. This decrease was primarily due to an increase in operating expenses of $5.7 million as well as the $7.1 million noncash income tax benefit in fiscal 2020 mentioned in my discussion of the fourth quarter results. Adjusted EBITDA for fiscal 2021 was $4.1 million compared with $7.8 million in the prior fiscal year. We believe this information and comparisons of adjusted EBITDA enhances the overall understanding and visibility of our business performance. To that effect, a reconciliation of our GAAP results to non-GAAP figures has been included in our earnings release. Our balance sheet remains strong. Cash, cash equivalents and marketable securities totaled $20.7 million on September 30, 2021 compared to -- with $31.4 million in the prior year. Working capital totaled $18 million on September 30, 2021 compared with $29.8 million on September 30, 2020. The decrease in working capital was primarily due to the use of cash for the Amika Mobile asset purchase and Zonehaven acquisition in the first and third quarters of fiscal year 2021, respectively. We generated $6.2 million of cash from operating activities in fiscal year 2021. To provide you with some additional context, our business has generated more than $24 million in cash from operating activities over the past 4 years, an important metric that underscores the health of our business and is supporting investments as we strengthen our software profile. With that, we'd like to open the call to Q&A. Operator, could you start the Q&A session?

[Operator Instructions] Our first question comes from Mike Latimore.

Great. So you've hired several people -- salespeople over the last year. I guess, how are they ramping? Are they hitting productivity guidelines along the way here? Again, how is productivity trending for your kind of software sales force?

It's trending up. We had a sales force that we had developed principally for the U.S. and Canada. With the acquisition of Zonehaven, we trained all of those sales folks on the Zonehaven platform. And they're out actively pursuing opportunities for Zonehaven as well as GEM. We saw a record year for GEM and Zonehaven or SaaS bookings and we expect that to continue to grow significantly in 2022 and beyond.

And what is it kind of a normal timeline to get to full productivity, say, 9 to 12 months about that?

Yes. I think, Mike, we started this in fiscal 2020, which was the midst of the COVID year, but we were successful at adding a whole bunch of sales folks. So the first real opportunity to sell was in our fiscal 2021, and they went from a standstill to a significant number. And again, I think it will grow substantially from 2022 and beyond.

I think a substantial number of the additional sales personnel didn't come on board until probably our second fiscal quarter of this year.

Yes, it makes sense. You touched on the demand for cell broadcast in the EU. I guess any sort of high-level thoughts on why some of the countries are leading with that as opposed to something maybe a little more valuable in location-based estimates or both at the same time?

I think speed was part of it, cell broadcast for a country you can bring up in a shorter fashion and that which requires an in-depth integration into the network carriers. But I wouldn't overlook too much -- or put much on what that fact that cell broadcast is more prevalent. It's only been 4 announcements and none have gone live yet in the EU. And as I said in my remarks, Mike, I expect RFPs in our fiscal 2022 would be those that include both the location-based 2-way SMS and cell broadcast.

Got it. And then just last on the OpEx forecast for the year. Is it largely sales and marketing? Or is there a reasonable percent of R&D in there as well?

It's both for sure.

Sort of evenly mix there or?

Do you have a feel for the mix Dennis?

Well, we've seen -- I mean, if you take a look at the quarterly increase in OpEx throughout fiscal year '21. Q4 OpEx was up to about just under $7 million. So a lot of that came in through selling and marketing throughout the year. Therefore, that's -- we didn't have a full year of those costs in fiscal '21. So a lot of that will roll over and be in there for a full year for '22. There's going to be a fair probably increased number of engineering-type folks that we look forward to adding to the team in fiscal '22.

Our next question comes from Brian Colley.

I'm curious if you could just talk about what the mix of bookings were in the quarter between software and hardware. And if you could give us any sense for that same number, maybe for the full year of FY '21, and like what the actual hard number was for software bookings just so we can have a number for FY '22 to go off of?

I don't think we've made that data public, Brian. Dennis was correct me if I'm wrong.

No, we have not.

Got it. That's fine. I was just curious if that was something you guys will be willing to provide. But in terms of software revenue for FY '22. I think last quarter, you may have mentioned you expected it to exceed 10% of total revenue. Is that still the case as we sit here today?

Yes.

Got it. And then as you kind of look at the pipeline of software opportunities today, I'm curious where you're seeing the most traction and most deals between GEM, Zonehaven and NEWS. And which of those 3 do you think will be the biggest driver to bookings growth in FY '22?

It will clearly be Zonehaven and GEM. And those are pure SaaS opportunities, Brian. They go live in a relatively short period once contract has been signed. If you look at the National Emergency Warning Systems, be it cell broadcast or location-based SMS, this is what can be a lengthy nonrecurring activity, which is a revenue-generating professional service, but a lengthy time before you get to the SaaS piece of that. So given that, I believe that the GEM and Zonehaven SaaS will grow at a faster pace.

Okay. That's helpful. And then just thinking about the -- you guys are expecting record revenue in FY '22. Is there any quantification around kind of the magnitude of total growth there that you'd be willing to provide or not at this time?

I think it will be a double-digit kind of number, but we are still facing the perils of this worldwide material shortage issue. We have been able to manage through that without any negative impact on our revenue stream. But lead times have been going up substantially. So it's not just a matter of is the material available. It's when is it available. So that puts a little bit of caution. Coming into the year with a $36 million backlog, we did 47 -- $46 million in all of last -- in fiscal 2022 for revenue -- '21, excuse me. So it should be north of that and notwithstanding any supply chain issues, it would be further north of what you would see here in fiscal 2021.

Our next question comes from Martin Yang.

So my first question is on OpEx increase. Do you expect any catch-up investments for the regional offices for your fiscal '22?

We would look to expand. Parts of the world are still in pretty hard lockdowns. And so they are -- haven't fully opened up yet. But we -- as we get out and have the opportunity to have our sales team meet with more customers, yes, we would expect to provide additional supporting assistance to those sales efforts.

To add to that a bit, Europe has opened up and now in some countries shutting back down again. The Middle East is largely open. The APAC region has been, I think, the region hardest locked down through this pandemic and is slowly beginning to open up. And I expect, notwithstanding a spike in the infection rate, I would expect the APAC region to largely be open at the beginning of our next calendar year, in the month of January, which should facilitate more business as usual in that region that has been locked down for nearly 2 years.

Got it. And when you look at the strength or the demand for GEM, would you be able to say if any size, either the enterprise customers or are the counties and the municipalities are stronger. Do you see more demand coming from the enterprise customers?

Let's see it across the board. So it's not hard to get to a market size of over $0.5 billion here in North America. And that comes up from a recompete every -- it depends on the term, but on average, 3 years. And I think this past year has shown that our strategy and whether the enterprise or governments, a conviction that our strategy worked. Riverside was a terrific example of that and the large automobile manufacturer was also a great testament to that.

Just a follow-on on that. Is there also -- when you think about the average 3 years of a renewal cycle, is there any year where you see a more concentrated contracts that are up for renewal?

There hasn't been yet. I think our name is getting out there much more in all market areas for GEM and Zonehaven. And we're getting more inquiries on an increasing pace every week.

Our next question comes from Ed Woo.

Congratulations on the quarter. I just wanted to clarify, do you say that operating expense will be up $9 million to $11 million from the $22 million this year?

Yes. So if you look at our Q4 spending, which reflects a full quarter of Zonehaven, that was just under $7 million. So annualizing that, it's $28 million, and we believe there will be a couple of million dollars more investment in the year.

Great. And then thanks for answering or giving us information about the inventory shortages. Touching on that, has there been any impact on inflation on any of your components? And will that possibly impact your margins?

We have seen prices increase. We will be reflecting our price changes to reflect our costs going up as well. So yes, we have seen pressure on our pricing that we're paying in the marketplace. I don't think it was a significant or relevant impact on gross margins this past year. So far, we've been able to manage through it through redesign and lots of effort within the operations and the engineering organizations here at Genasys. But that cast a shadow.

Just to clarify a question, when you announce these orders, is it for a set price over delivery of several years? Or do you get some leeway of cost-plus type pricing?

No, we almost never have a cost-plus kind of contract. However, typically, with our -- particularly with our hardware, we deliver from time of order to delivery is typically measured in months, not years. Software is quite a bit different. I mean that's -- that can be -- we took one this past year for 5 years. Now as you know, the delivery of that service, the cost to develop that service is already in the actuals. It's what that upfront cost I mentioned in my remarks. So I don't think inflation or supply chain has much, if any, of an impact in our SaaS business -- in our overall software business.

That was our final question. I'll turn it back over to you for closing remarks.

We regularly discuss our business at investor conferences throughout the year. On December 8, we are participating in the Barclays Technology, Media and Telecom Conference. The following week, we will be at the Imperial Security Conference with a presentation and one-on-one meetings on December 15. Please contact your representative at these firms to book a meeting. Thank you for participating in today's call. We look forward to speaking with you again next year when we report fiscal first quarter 2022 results. On behalf of everyone at Genasys, we wish you and your families a happy, healthy holiday season.

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