Genasys Inc. (GNSS) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Genasys Inc. Fiscal First Quarter 2025 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Brian Alger, SVP, Investor Relations and Corporate Development. Welcome, Brian, the floor is yours.

Good afternoon. Welcome to Genasys' Fiscal 2025 First Quarter Results Conference Call. I am Brian Alger, SVP, Investor Relations and Corporate Development for Genasys. With me on the call today are Richard Danforth, our CEO; and Dennis Klahn, the company's CFO. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook and future financial performance and 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 can be found in the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2024. Other than statements of historical facts, forward-looking statements made on this call are based on the information and management's expectations as of today, February 11, 2025. We explicitly disclaim any intent or obligation to update those forward-looking statements except specifically stated. We will also discuss non-GAAP financial measures and operational metrics, including adjusted EBITDA, bookings, backlog and adjusted net loss, 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 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 a customer's 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 the company's website. Now at this time, it's my pleasure to turn the call over to Genasys' Chief Executive Officer, Richard Danforth. Richard?

Thank you, Brian, and welcome, everyone. We are pleased to report that fiscal 2025 is off to a good start, substantially better than the prior year's quarter. Before we get into the results of the quarter, I want to spend some time discussing Genasys' involvement enrolled during January's historic fires in Southern California. These fires made national and international news. I am sure that all of you are aware that in the second week of January, Los Angeles County experienced a dangerous but not uncommon weather event, creating very high winds combined with extremely low humidity. Days before anything occurred, notices were issued by various weather services, and as a result, we and our customers were ready. What did happen, however, was far greater than anything previously experienced. 7 different fires ignited across the country, requiring an unprecedented amount of coordination and communication across a plethora of agencies. The shift scale of the response was unprecedented. Emergency streams across the Western United States to send it upon Los Angeles as part of a comprehensive mutual aid engagement to fight the fires and keep people safe. What stood out wasn't just a scale of the fires, but the technological advancements that enabled first responders from across Southern California and beyond to work together. Unfortunately, fast-moving and devastating wildfires are not uncommon. We can all recall the images from the Paradise Tubs and Lahaina fires, all driven by very high winds, devastating communities near urban interface areas. The lesson learned from those prior tragedies led to Genasys developing an L.A. County to purchase our Genasys Protect Solution. So the images of the devastation to the homes and properties of the communities across Los Angeles County are eerily similar to Paradise, Glen Ellen and Lahaina. What is demonstrably different is the toll on human life. Utilizing Genasys Protect, L.A. County and its partners successfully safely evacuated hundreds of thousands of citizens. Without question, countless lives were saved through the timely use of the Genasys Protect platform. As we all know, the fire events of Los Angeles lasted for several days. And over the course of that time, emergency managers and first responders were in continuous communication with the community. Over 400 zone status changes were communicated over just 2 weeks. Throughout the country -- county-wide event, Genasys personnel were on site, sitting side-by-side with county, state and federal emergency management. Lessons learned from this extreme experience of being implemented in the Genasys Protect development and customer success protocols. From a platform standpoint, Genasys Protect proved to be incredibly resilient, scaling up capacity orders of magnitude during peak traffic. At 1 point, Genasys services were processing over 183,000 requests per second. And Genasys website drew more than 2 million active users in the month of January and the number of Genasys app users jumped 5x during that month. Not only did Genasys enable emergency managers to get the word out, but Genasys also continuously informed the hundreds of thousands of impacted residents, families and loved ones around the country with the official and most accurate information on the fires in the impacted zones. It is impossible to overstate how proud we are of the team and the performance of Genasys Protect in such a critical and high-profile event. Recently, at the California Fire Chief Operational Technology Summit, where fire operations chiefs from across the state joined emerging technology partners servicing fire and EMS industries with the goal of improving operations and firefighter safety. Genasys presented a minute-by-minute account of the response and communication by San Diego County for the Bernardo Fire 2 weeks ago. We were able to show the logs from our software that confirmed an incredibly fast response. Residents received evacuations warnings and orders in less than 8 minutes after first responders arrived on scene. In rapidly changing emergencies where time of response equates to lives at risk, the speed and accuracy of the notifications that the Genasys Protect platform provides enables first responders to accomplish their primary mission of protecting the community and saving lives. While Genasys was supporting customers in Southern California in January, we were also making meaningful headway with the project in Puerto Rico. When we last spoke, we had received the first deposit of approximately $8 million. And recently, we have received a second deposit of $2 million and we have received written approval of the design on the third group of dams. Procurement of hardware is well underway, and our engineers are working with local teams to coordinate the installation of various components on the first 2 groups. Importantly, we recently completed the first major milestone to provisioning of a 50-kilowatt generator. As a result, our first revenues for Puerto Rico will be recorded in our second fiscal quarter. The December quarter results largely reflect the year-on-year improvement on hardware backlog and software ARR. Importantly, both gross margins and operating expenses improved sequentially. In the quarter, we realized an increase in gross profit of $400,000 and a decrease in operating expenses of $770,000. Looking forward over the balance of this fiscal year, we expect to see continued improvement in both our hardware and software business. While the Puerto Rico projects are certainly going to drive the greatest impact, international law enforcement demand for our traditional LRAD products continues to rebound towards pre-COVID levels. Additionally, the value proposition of acoustics for critical infrastructure protection and public safety is becoming increasingly more apparent and is significantly expanding our pipeline for opportunities. Finally, our work with the U.S. DoD across the branches continues to be robust. Recently, we received a follow-on order for 2 mobile communication trailers for the United States Army and we are regularly supporting the United States Navy with spares and equipment. We continue to see progress with the AHD CROWS program. As most of you are aware, funding was put in place for this in FY '24 and is yet to be put under contract. I am certain the program will get underway and expect the timing of the award to become more clear in the coming months. In summary, fiscal 2025 is steadily ramping up, and we are eager to realize the acceleration in our business over the next several months. Beyond 2025, the outlook continues to improve with a broadening pipeline and increased visibility and predictability coming from our software offerings. Now, I'll turn the call over to Dennis to go through the financial in greater -- and an outlook in greater detail. Dennis?

Thank you, Richard. In the first quarter of fiscal 2025, we generated significant revenue growth over the prior year quarter. In the first quarter of fiscal '25, recurring software revenue increased 69% year-over-year. Total software revenue in the quarter grew 64% year-over-year, including from an additional Genasys Alert order in Los Angeles County. Hardware revenue grew 57% year-over-year. Gross profit margin was 45.8% in the December quarter, up nearly 12 points versus the year ago period. This quarter's results reflect the benefit of higher revenue in both the hardware and software segments and a favorable mix of revenue this quarter. Software margins continue to increase as a percentage of sales as recurring software revenue increases, whilst hardware this quarter reflects a 2-point benefit from the sale through a favorable sales channel. Conversely, last year's quarter included an order that was a 2-point drag on the margin. Quarterly operating expenses were $9.1 million this quarter, versus $8.7 million in last year's first quarter. The primary increase was in SG&A for professional services, including planning-related costs related to the Puerto Rico project. We anticipate quarterly operating expenses will be similar or slightly higher throughout the remainder of this fiscal year. On a GAAP basis, our first fiscal quarter operating loss was $5.9 million, compared to an operating loss of $7.2 million in the year ago quarter. Adjusted EBITDA, which excludes noncash stock compensation was a negative $4.8 million, a significant improvement from the negative $6 million in the first quarter of fiscal 2024. GAAP net loss in this fiscal year's first quarter was $4.1 million, including $2.2 million of other income related to the quarterly adjustment to the fair value of warrants, issued with the term loan last May. This compares to the net loss of $6.7 million in fiscal 2024's first quarter. Cash, cash equivalents and marketable securities totaled $13.9 million as of December 31, 2024, compared with $13.1 million as of the prior fiscal year-end. Cash provided by operating activities in the first quarter of this fiscal year was $900,000, including an $8 million deposit received for the first group of dams in Puerto Rico. Subsequent to the end of the quarter, we received a second deposit for $2.1 million. Recently, we received written approval for the designs on the third group of dams. The expected deposit for the third group is nearly $11 million. We will receive the remaining 40% of the purchase price upon customer acceptance of each of the 19 dams in these 3 groups. Now, I'd like to update everyone on our current expectations for how the project in Puerto Rico flow through the financials. As we have seen, the cash for the group, deposits are being received in advance of work on each group of dams. This is allowing us to procure the necessary inventory in materials to deliver against the installation and the implementation plans of each group. Our current expectation is that we will utilize the percentage of completion methodology for revenue recognition on the most significant elements of the Puerto Rico project. As Richard indicated, we've achieved our first milestones with the project and initial revenues will be recorded this quarter with more significant revenue recognition coming in the June quarter when deliveries of hardware and implementation of the first group gets underway. While the details of the POC accounting are still being finalized, we don't expect to recognize significant revenues until the second half of this fiscal year. Once revenue recognition begins, anticipate a relatively steady contribution through project completion. With the backlog that has grown to $40 million, including ARR of $8.8 million and expanding pipeline of opportunities, Genasys' financial turnaround is well underway.

Thank you, Dennis. Now operator, we are ready to open up the call for Q&A.

[Operator Instructions] We'll take our first question from Mike Latimore from Northland Capital.

Yes, maybe just a little bit more clarity on the deployment time frames in Puerto Rico. You said a little bit more revenue, I think, in the June quarter and then bigger in the second half. I guess how many dams do you expect to get to be deployed? Or maybe there's some other metrics that are important from a rev rec standpoint, but a little more detail on kind of the pattern of dam deployments this year would be great.

Mike, the process has begun on the island. The first group will be the most challenging, of course, like every new thing. But the second and third group will begin in parallel with the first one, just staggered a little bit. So I think the lion's share of the revenue from the work being done on the island, we expect to substantially get through those 3 groups. Now, there's less, Mike, but that's what we're running to at this point.

That makes sense. You talked about getting cash on the third group that could be $11 million eventually. Do you think you would see a cash receipt on the fourth group by fiscal year end?

Unlikely. It's not that we won't try, but that's a ways off, Mike. So let's answer that as we close.

Got it. And then you talked -- you touched a little bit on the acoustic opportunity sort of generally. I guess, can you elaborate on that a little bit? Is there even opportunities for that in the L.A. area of Southern California?

There is. The inbound since the fires occurred, the inbound traffic we're getting on our website through e-mails, TV and all is huge. So is -- I think we'll see much more opportunities from LRAD and a software perspective as a consequence of what's going on in the L.A. fires.

[Operator Instructions] And we'll take our next question from Ed Woo from Ascendiant Capital.

Yes. Congratulations on all the progress, do you disclose what the backlog was after the first quarter?

Dennis did, Dennis?

It's $40 million in hardware.

Okay. Then my question is as you're getting a lot more visibility and obviously, congratulations on the success that you had in [indiscernible] was a very chaotic time. Have you noticed any increase in potential competition of people who are seeing this as a potential market to enter?

No. No, we haven't. It's a little -- if that happens, that it's probably a little too soon to see it. But No, we haven't.

[Operator Instructions] And we'll take our next question from Scott Searle from ROTH Capital.

Nice to finally start to see PREPA rolling out. Richard, maybe to start from a high level, could you kind of help us understand the supply chain issues. There had been constraints initially with PREPA? How you guys are prepared for that now if that is still a gating factor going forward? And then just in terms of the change of administrations -- is that having a positive negative impact or no impact in terms of not only the ability to secure business, but the ability to have funds released against those projects.

Scott, the answer to the first question, the supply chain. There are issues in the supply chain. We're managing through them. Frankly, the gate are beginning, but then catch up very quickly. From a change of administration, well, it will affect us. I think it's going to affect everybody. But I think the business we're in from a public safety perspective, is something -- an increase in defense spending is something we're more likely to see from this administration than perhaps the past.

Okay. And maybe if I could follow up on the California wildfires. I guess 2 questions. First is, did you quantify at all the inbound opportunity in terms of what you're seeing? I'd be curious in terms of the number of counties or the number of PoPs that might be represented in terms of the activity that that's created. But also despite the very strong performance, the Genasys Protect system, if we look at past incidents, whether it was -- there's a high-profile false alerts that occurred in Florida. Same thing in the Carolinas when there were events. There was some press out about some, I guess faulty alerts that were provided. I'm wondering if you could provide some context in terms of what happened or in terms of the magnitude of it as well because unlike some other events that were relatively well contained for a shortened period of time, this went on -- it's gone on for multiple weeks, right? So I wonder if you could give us some thoughts and updates on how to view those comments.

There's been a lot of negative press, Scott, on the LA County's response to the fires, and I'll get back to that in a moment. But there was an alert that went out on the Genasys system, we are alert that we are alert as part of the national iPoS system. So an alert across multiple channels went out. All of them were received in the geography that was intended except the Weir channel, and that's defaulted to the entire county. In less than -- and it was a warning. It wasn't an evacuation. In less than 3 minutes, it was canceled. So that's what happened with Genasys. We've subsequently put a couple of software changes in place to help alleviate that from ever happening again. So that was the issue that we experienced here at Genasys. There have been thousands of messages that have been received, in some cases, days after they were sent. And all of that noise centers around the cellular infrastructure, which like most major catastrophic events, the networks are going to be overwhelmed, and they certainly were in L.A. As to the performance of the Genasys Protect System, from a perspective of saving lives, Scott, if you look at this fire that lasted 2 weeks, there was 7 fires over tens of thousands of acres over tens of thousands of homes burned to the ground. We have seen 28 or 29 loss of life. And if you compare that to other fires that are much smaller and much shorter in duration and just parametrically measured, what would potentially happen in L.A. County, it would likely be in the 1,000. So the LA first responders and Office of Emergency Management did a terrific job of keeping people safe and out of time's way. I'll remind everybody images of people passed away and burnt in their car in recent fires and past fires. Nobody died in their car in these LA fires. So the performance was terrific on both -- on the behalf of L.A. County and the Genasys Protect platform.

Great. Very helpful. And Richard, you sort of -- is there a way to quantify the opportunity or I'll call it, intermediate opportunity that's arising as a result of the performance of the Genasys Protect System in terms of inbounds and otherwise, what that potentially represents as we start to think about '26 and '27?

There is, Scott. I don't have that in front of me, but we -- including in L.A. counties, even cities and communities wanted their own platform. So when the smoke clears, so to speak, I think we'll be in a better position to quantify that as we move into the next quarter.

Got you. And lastly, if I could, just I wanted to go back to CROWS in terms of the current expected time line of when you could start to see resolution on that front, and it's starting to impact the P&L?

That's 2 questions. I think there is -- as I mentioned in my remarks, there are some very positive signs. And the exact timing, I think will become more evident in the coming months. Yes, in the coming months. That's all I can really say about that for now.

[Operator Instructions] There appears to be no further questions at this time. I'd like to turn the floor back to Brian Alger for closing remarks.

Great. Thank you, everyone, for participating in today's call. A replay of the call will be available on the company's website here shortly. I want to give you all a heads up that throughout the day tomorrow, February 12, Genasys will be participating in one-on-ones with the AGP Virtual Tech Conference. And in March, on March 17 and 18, we'll also be participating in the annual loss conference in Dana Point. Additional information and update news and activity regarding Genasys, our products and the customers we serve, we strongly recommend that you follow the company and Genasys Protect on your social networks, particularly LinkedIn, and X where we actively post and comment on events as they are happening. We look forward to speaking with you again next quarter when we report fiscal second quarter 2025 results. Good night.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect at this time, and have a great day.