Genasys Inc. (GNSS) Earnings Call Transcript & Summary

Good day, and welcome to the Second Annual Winter Wonderland Best Ideas Conference. The next presenting company is Genasys Inc. [Operator Instructions] I'd now like to turn the floor over to today's host, Richard Danforth, CEO of Genasys. Sir, the floor is yours.

Thank you. With me today is Dennis Klahn, the CFO of Genasys, and we'll take you through the investor presentation. All the usual disclosures. Next slide. So Genasys is a global provider of critical communication systems and software solutions that help keep people safe. Over the last several years, we've managed to put up a revenue growth, a CAGR of 23%. We have a diverse customer base in over 100 countries and we operate in various markets that are part of a $12 billion TAM and growing. We have 7 global offices, 160 employees. Our software and hardware systems are used by federal agencies, state and local governments and enterprise. Right now, our software solutions are being used by over 30 million people worldwide. We finished our fiscal year '21 at the end of September. We delivered a 9% EBITDA margin. We generated $6.2 million of cash flow from operations. And over the last 3 years, we've generated nearly $23 million of cash flow from operations, and the company has no debt. Natural disasters, pandemics, terrorism, active shooters, civil unrest and other hazards threatened millions of people every day, and that's rising. Genasys' hardware and software solutions allow governments and enterprise to communicate potentially life-saving information to their constituencies and times of crisis. As I mentioned, the $12 billion TAM and growing, it falls into 3 areas: Acoustic Hailing Devices; Integrated Mass Notification Systems; and our SaaS offerings. LRAD stands for Long Range Acoustic Device. It's a market that this company developed back in the early 2000s. Integrated Mass Notification System use cloud-based command and control, and we'll talk more about that in a minute. NEWS is National Emergency Warning Systems, and then SaaS offerings come in really 3 flavors: Zonehaven; GEM, which is Genasys Emergency Management, and it is the command and control section of our Mass Notification Systems; and then NEWS, National Emergency Warning Systems. From an LRAD perspective, we are the de facto supplier of the LRAD devices around the world. We invented the market and find ourselves in a nearly sole-sourced position across the world. The revenue growth I've showed you on the earlier chart is principally driven by Long Range Acoustic Devices. And it has a plethora of different use cases with homeland and border security, law enforcement, fire and rescue critical infrastructure protection defense and wildlife preservation and asset protection. Genasys' Emergency Management SaaS solutions, our cloud-based solution used by counties, cities, governments and large enterprises to keep their citizens or employees informed in times of crisis. We entered this market 2 years ago, had a substantial uptick in bookings in this last year. This is a market that serves about $500 million in revenue annually in the United States alone. There are a couple of big players out there that we compete with, but we've made a great deal of progress in this marketplace over the last year. Zonehaven is an acquisition we closed on in June of last year. The Zonehaven software platforms provides what had historically been a manual ad hoc process for emergency management people to evacuate in times of crisis here in California typically has been buyers. It was a start-up company. And since they came to us, we now -- our software is now used by 305 fire districts. We've developed over 4,400 evacuation zones cover over 5.9 million people now in 200 cities and 205 law enforcement agencies. We have invented this market as well. We don't see competition. We're uniquely positioned and have taken a great deal of the state of California already covering -- that says 5.9 million, I think it's more like 8.7 million people now, and expanding through sales around this country and others. Our Integrated Mass Notification System allows for external digital data be taken with a cloud-based command and control system, notification delivery methods, as you can see on the satellite Wi-Fi fiber radio and then multiple alerting channels, which you can see on the right. The theory is that the more alerting channels you use, the more likely people will receive potentially life-saving information. National Emergency Warning Systems, Genasys is the provider of the National Emergency Warning Systems, the 2-way location-based SMS in the country of Australia. We've been operating in that country since 2013, and the system has sent nearly 200 million location-based SMSs since going live. The EU has a mandate that all EU countries have a similar kind of system, the 2-way SMS or cell broadcast in place by June of 2022. That data is not going to be met. Four countries have selected system providers. Last week, we announced that Genasys had one Slovenia. Three others have been awarded to competitors, which leaves about 21 countries to go. I expect that we currently are seeing a significant uptick in activity for EU National Emergency Warning Systems, and I think we'll see a significant uptick this year and next year. You can see on this chart the significant bookings, we've gone from $14 million to $64 million last year, leading to a record backlog of $36 million entering our fiscal year 2022. Similarly, that backlog and those bookings have led to the $47 million in revenue for fiscal 2021. I have said that we expect yet again, another record revenue year in our fiscal 2022. If you look at the adjusted EBITDA, FY '21 was down on higher revenue as a consequence of expanding sales and marketing internationally. We opened up offices in Singapore, in Dubai and in Puerto Rico. And staff those office with business development personnel. So on a foundation that's got a company that has no debt, has over $17 million in cash on hand, has a $10 million line of credit with 0 drawn down on through acquisition and other internal development through FY '20 through '22, we've made significant investments, particularly in the SaaS world from internal development and acquisition. We've substantially added software development personnel as well as sales and marketing people around the world. We're increasing our SaaS bookings and revenue. We're starting to see EU Public Warning System awards and we look to the not-too-distant future to see a dramatic shift in our revenue mix, which has historically been hardware to one that's hardware and SaaS-related software. Zonehaven, I mentioned, it's unique. It's -- we don't have to compete. There's an urgency to get this here in California and around this country. And clearly, Zonehaven is a big growth lever for us. GEMS, Genasys Emergency Management Software, is also another growth lever. As I mentioned, there's $500 million spent on this kind of a product annually in the United States alone. And we're just getting into it now. Our third growth lever is the IMNS, the Integrated Mass Notification System. It's a large market. You can see the TAM of $5-plus billion. We believe we're the only company that has an integrated system for both hardware and software, and we've recently announced a $2 million award in the city of Berkeley. The EU mandate is big for us. The -- as I mentioned, the Slovenia award, there's 2 other countries with active RFPs, there's 5 right behind it and there's 8 behind that group. So we see a big uptick in the EU activity for our software solution. That software solution, by the way, has a professional services element and a SaaS-related element, too. And this is the way we see the company in the near -- not-too-distant future that -- with very little software revenue in our past, we see a significant uptick in the next 3 to 5 years. And that uptick will allow for a significant change in the valuation of our company. In this particular case, you see $30 million of SaaS-related revenue on top of $50 million of hardware-related revenue. While on normal multiples, that SaaS-related revenue will represent about $300 million of market cap on top of the $150-or-so million market cap on the hardware. And that's it, we're available for questions.

So the question -- the first question is how have the new officers and increased sales force developed over the last year? Are they contributing to bookings at this point? Yes, they are. If you look at international bookings, international bookings were only $7 million last year. We have a forecast this year to be about $17 million. So yes, they are contributing. There's still challenges in the world with COVID. Things take longer than they would otherwise take. But the pipeline is filling up and the opportunities look very good. Next question is, should the backlog continue to increase? Well, the backlog actually decreased a bit from the end of December to the -- from the end of September to the end of December. We entered the year with a $30 million -- $36 million backlog. We ended the first quarter with $30 million of backlog. And that's just the difference between $7 million of bookings in the quarter and nearly $11 million in revenue. The $36 million backlog was a record for the company. The $30 million backlog is substantially higher than what we would normally have. If you want to contrast our fiscal 2021, we entered that year with $16.6 million of backlog and delivered $47 million of revenue. We won't do that this year. But you can see we can turn -- I mean that's generally driven by hardware, and we can turn the hardware almost in all cases within 12 months. Next question is, talk about the pipeline. Regions, products, customer type. We'll -- I'll answer in reverse order. The customer type is across the gamut. It's federal governments in the case of the EU. It's federal governments here in the United States, the DOD is one of our larger customers. It's state and local governments, county governments and its large enterprise. We've announced large North American automobile manufacturer that has some 25,000 people in North America and in 11 states and 2 countries because they're also in Canada. They selected Genasys for their workforce, replacing an incumbent which happened to be Everbridge. Our pipeline continues to grow, particularly when it comes to SaaS as we continue to hire more salespeople and answer more RFPs. There's just a ton of that work happening right now here in North America. The Integrated Systems is also growing. We saw a significant drop in fiscal 2021 during the pandemic. But so far this year, I think we've announced $3-plus million in awards and have a pipeline that's significantly higher than that. Next question is what is the approximate current variable EBITDA margin on SaaS revenue? And when can it go -- reach $30 million in annual sales revenue? I think the $30 million annual sales revenue is 3 years from now. And I think when we get there, we will be delivering 60% to 80% gross margins. Next question. What was the year-over-year growth rate of SaaS revenue and bookings only this quarter. Only this quarter, I'm not sure what that means.

Q1 only.

Revenue, as compared to the prior first quarter, I guess that's what you're asking.

Year-over-year.

Yes. So the prior first quarter versus this quarter, total software sales dropped about $90,000. The absolute number was $500,000. That drop was in professional services only. Our SaaS revenue, we did not publicly state what it was, but it's up substantially from what it was a year ago. We also don't -- we haven't announced specific bookings numbers, but we had a record SaaS booking number in Q4 and then beat that record in Q1. So the pipeline is growing and becoming a bigger part of our backlogs. Next question, how has the competitive landscape changed in Emergency Management Solutions, considering leadership changes at Everbridge, R&D investments at competitors or other factors? Well, if you look at the markets we operate in the GEM, Genasys Emergency Management Software, there are several players in the marketplace. The 2 big dogs are Everbridge and OnSolve, OnSolve is a Veritas company. That -- Veritas grew together a bunch of smaller software companies that came out in the marketplace as OnSolve. Everbridge has -- you've got to give them a lot of credit in some respects. They are one of the principal reasons this market has developed into $500 million a year, revenue potential. They are going through some turmoil now with management changes from directors to CEOs and others. So it's -- I'm not quite sure what's happening there. I'm not sure that will necessarily translate to additional opportunities for us, but we're keeping a close watch on them. The other markets we operate in, whether it's Zonehaven SaaS, there's no competition. LRAD, there's virtually no competition. The Integrated Mass Notification Systems -- to compete against us a coalition of companies would have to come together. And we do see that, but we offer what we believe is the most complete and robust system. Next question is, do you expect the EBITDA to remain positive? Should we expect to see you burn money? What we've said for this fiscal year is we're aiming at a neutral adjusted EBITDA, which says we would be neutral to cash. In the first quarter, we used approximately $2.7 million of cash, and that was reflected in a $2.8 million increase in inventory. That was a strategic decision to help [ blew ] off some of the challenges the current worldwide supply chain issue has in order to manage through that better and have the material we need to deliver our expected record revenues in FY '22.

And adjusted EBITDA in the first quarter was a negative $400,000, which was comparable to the prior year when it was $220,000 negative. So we're right in that threshold.

I'm not seeing any additional questions. All right. Well, I'd like to thank you all. Wait a second, one more came in. Next question, do you expect revenue growth to outpace operating expense growth in FY '23? Yes. A big change in OpEx was clearly the year we're in now. Our forecast that we put out there is about $10 million higher than what our spend was last year. So that's not going to continue at that growth rate certainly in FY '23 and beyond. Well, it doesn't look like there's any additional questions. So with that, I thank everybody for attending and look forward to any follow-up questions you may have. Thank you very much.

Thank you, ladies and gentlemen. That does conclude the Genasys presentation. The next session will begin in 5 minutes. Please consult the conference agenda for the next presenting company. Remember, one-on-one meeting requests are still open, so be sure to log in to the conference platform and request more meetings. You may now disconnect.