Rekor Systems, Inc. (REKR) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. And welcome to today's Rekor Systems, Inc. Conference Call. My name is Diego, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. Before we get started, I would like to read you the company's abbreviated safe harbor statement. I would like to remind you that statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, products and product releases, partnerships and any other statements that may be construed as a prediction of future performance or events are forward-looking statements. Such statements can involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. We ask that you refer to the full disclaimers in our earnings release. You should also review a description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will be discussed on the call. The company believes the presentation of non-GAAP information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. I would now like to turn the presentation over to Eyal Hen, CFO of Rekor Systems.

Good afternoon, and thank you for joining us. Today, we'll discuss Rekor's results for the quarter ended March 31, 2022, and provide you with an update on key business topics. On the call with me today is Robert Berman, CEO; and he will speak briefly on the exciting news we announced just this morning regarding our acquisition of STS and be giving you additional color on our business, after I go over our relevant metrics. In the first quarter of 2022, we continued to show growth in recurring revenue under our new sales model compared to the fourth quarter of 2021. We shifted our emphasis from point-in-time revenue to recurring revenue in the third quarter of 2021. While we will continue to engage in point-in-time hardware sales in appropriate circumstances, our new sales model provides for retaining ownership of hardware and providing software and data services on a subscription basis. This has had a near-term impact on our overall revenue. But with the strong growth we are seeing in recurring revenue, we are confident that the emphasis on developing subscription revenues will have a positive impact on our overall growth for the long term. With that, let me get into some of the details in the financial results for the quarter ended March 31, 2022 compared to the first quarter of 2021. Revenues for the quarter ended March 31, 2022, was $3.6 million compared to $4.2 million in the same period last year, a decrease of 14%. Recurring revenue was $1.7 million for the quarter ended March 31, 2022, which represented an increase of $0.8 million or 96% compared to $0.9 million for the quarter ended March 31, 2021. The quarter-over-quarter decrease in total revenue reflects a 43% decrease in product and services revenues, primarily due to a quarter-over-quarter reduction in point-in-time hardware sales which was only partially offset during the quarter by the 26% increase in recurring revenue. As I just mentioned, we expect to continue point-in-time hardware sales in appropriate circumstances, and this may result in strong increases in product revenue in future quarters, like the increase we saw in the first quarter of 2021. But with our current insight on building cash-based revenue for subscription sales, we expect to generate a stable base for long-term growth well beyond what we could have achieved under the previous model. Total operating expenses for the quarter ended March 31, 2022, were $14.2 million compared to $7.6 million during the same period in 2021. We recorded a significant increase in payroll and payroll-related expenses. The addition of headcount due to the Waycare acquisition played a part in this increase, and we continue to add important new hires to our engineering and sales and marketing teams, where we expanded and will continue to expand our sales and marketing efforts as we add additional resources to promote our growth of growing suite of product and service offerings. Finally, we continue to make strategic investments in research and development to develop new solutions and improve our line of products. This investment will enhance our competitive edge as we continue developing additional state-of-the-art solutions that address our customers' growing needs. Our adjusted gross margin for the quarter ended March 31, 2022, was 45%, a decline from the 54.4% reported on March 31, 2021. The decline in margin for the quarter ended March 31, 2022, is primarily attributable to increased investment in winning and implementing new projects as we make efforts to quickly expand our presence in key areas. You should expect to see an improvement in our adjusted gross margin as our land and expand strategy continues to evolve in the future. Adjusted EBITDA for the quarter ended March 31, 2022, was a loss of $9.3 million as compared to a loss of $3.9 million in the same period last year. This increase in loss was due to the investment to position Rekor for future growth that I've just discussed. Since we changed the revenue model we have released enhanced key performance indicators to help provide visibility and more concise view into our success in progress. We hope that over time, these KPIs will provide our shareholders a better insight into our business. As explained before, recurring revenue for the first quarter of 2022 increased by 96% to $1.7 million from $0.9 million in the same period 2021. In the first quarter of 2022, we won $1.5 million of new contracts. This is a decrease of 40% compared to $2.5 million of total contract value won during the quarter ended March 31, 2021, related primarily to the decrease in point-in-time hardware sales discussed earlier. As of March 31, 2022, remaining contract performance obligations were $21.3 million. We expect to recognize approximately 41% of this amount over the succeeding 12 months. This represents a decrease of $1.6 million or 6% compared $22.6 million of performance obligations as of December 31, 2021. The decrease in total contract value and performance obligations is partially related to our go-to-market strategy. This includes our willingness based on our experience within Europe to accommodate customers whose budget constraints require shorter term subscriptions than we have previously used. Also, as we continue to focus on building relationships and expanding our public safety network, we aim to bring customers in through pilot programs which are typically short in nature. As we continue to convert and expand our pilot program to large-scale contracts, we expect to see these KPIs improve. Moving to our financial condition liquidity. Our cash balance on March 31, 2022 was $14.6 million, down from $25.8 million as of December 31, 2021. Working capital on March 31, 2022, was $9.3 million, down from $17 million as of December 31, 2021. The decrease in cash and cash equivalents was primarily due to the increase in our loss from operations as we build the company for future growth. This decrease in cash was partially offset by a net cash inflow of $3.1 million as part of our 2022 aftermarket sales agreement. The decrease in working capital was primarily due to the decrease in our cash position described above. In summary, we are enthusiastic about our growth prospects. The enhanced sales team has been extremely busy winning new client relationships, deepening existing ones and forming new partnerships. We continue to feel a strong momentum in our market. While the investments we are making now to rapidly increase our market share will restrain our margins in the near term, we fully expect our margins to improve significantly as we reap the benefits of these investments. There is significant operating leverage embedded in our business model and will remain focused on creating shareholder value and making decisions that will benefit our long-term shareholders. With that, I will now turn the call over to Robert. Robert?

Thank you, Eyal. Good afternoon, everyone, and welcome. I will first briefly speak about the exciting news we issued this morning regarding Southern Traffic Services, STS. The addition of STS accelerates the company's urban mobility strategy while adding high-growth, highly recurring revenue that combined with Rekor solutions offers tremendous value for its clients and the communities they serve. STS is a company that shares our vision of enabling an entire transportation industry that is just beginning to undergo a once-in-a-lifetime transformation. We have always said the company is and remains opportunistic when it comes to potential acquisitions, and STS is an absolutely perfect fit for Rekor. Southern Traffic Systems is a trusted traffic engineering firm specializing in data collection. Founded in 1988, STS is a leading traffic data collection company that pioneered pay-for-data contracts with departments of transportation. In addition to the traffic data collection, STS provides traffic engineering services that include design, planning and traffic study services primarily to government agencies across the United States with a strong footprint in the Southeast. A key growth accelerator for Rekor centers around acquisitions, precisely like STS. Companies that are aligned to high-growth markets with increasing margin profiles. STS' existing customer base across an impressive geographic footprint will be exposed to our urban mobility technology to create expanded market penetration, growth opportunities and solutions. We are absolutely over the moon with this acquisition. That follows our acquisition of the company, formerly known as Waycare, last fall. I know you have many questions, and the company will set a date in the near future for a special conference call to discuss STS and our overall vision when it comes to acquisitions. Now allow me to change gears here and talk to you about Q1. During this quarter, we made significant investments to accelerate the advancement of our AI ML models, algorithms and other proprietary IP. It is our algos that extract, transform recognized patterns, identify objects. Nobody sees it, but we are constantly evolving our algorithms and training our Rekor One platform to simultaneously accomplish multiple missions. We take information from multiple sources, triangulate the data to draw better and better insights that create new and better solutions and applications for our customers. Our platform is designed to continuously improve as we apply what we are learning from new data. Rekor One delivers knowledge in the form of insights, actions and recommendations to our users. It's a constant feedback loop that increases roadway intelligence. Simply put, Rekor One is our brain, the intelligence engine that powers our products. It takes incomprehensive data, processes it and serves 3 key markets: public safety, urban mobility and transportation management. Rekor is an early-stage technology company and a massive, massive market. Our rapid growth demonstrates proof of concept and shows that we are poised to expand exponentially. We develop mission-critical solutions, services and devices that have different capabilities. We deliver vertical analytics and insights through our specialized platform. We generate dynamic and intelligent infrastructure through trusted relationships that help us acquire valuable real estate. And finally, our intelligent infrastructure solutions have provided us with a significant go-to-market operating and strategic advantages, which at the end of the day, leads to a significant market advantage. So now I'd like to turn the call back to our operator, who will moderate the Q&A session.

[Operator Instructions] Our first question comes from Zach Cummins with B. Riley Securities.

Robert, starting off with the STS acquisition. It seems to make a lot of strategic sense for Rekor, just given the ability to sell into that existing customer base. So I mean, can you talk a little bit more about the strategic rationale for STS? And then part 2 of that question is really more on the financing side, just under $15 million acquisition price. So any sort of sense you can give us around the mix of cash, stock and notes that will be used to fund the acquisition?

Yes, sure. Thanks. First on the industrial logic behind the acquisition. STS has been around since the mid-80s. And not too long ago, they pioneered contracts where they sell data to their DOT customers, keeping ownership of the equipment that they install roadside, which includes if you were to look on their website, you'd see installations that look much like master edge that [ recording stalls ] where we put up camera systems and things like inductive loops and other things that are technology that no longer needs to be used, it can be replaced by video analytics. So they've got over 30,000 sites. They've got thousands of permanent collection sites. And this is real estate that, by adding video analytics to those existing sites, simple as installing a camera and maybe some additional solar power. We can feed all the traffic intelligence that we get from the algorithms to their customers and then to others as well. So same system, multiple missions. That's the concept. I mean they've spent 30 years building this company and aggregating 60,000 lanes of coverage and over several hundred thousand square miles. So we've always said, 3 pillars to our business. The first is technology, which is a combination of AI, machine learning, cloud, edge processing, cellular and so forth and then real estate, right? This is giving us tremendous real estate where we're a trusted partner through STS with their customers, which are primarily DOTs. And the third leg is the expertise, okay? They bring a level of engineering expertise and traffic management expertise that Rekor is pleased to have. So look, this is an acquisition that makes a lot of sense. They were top of the list of companies that we were looking at and absolutely thrilled after engaging with them and meeting with them and seeing that they shared the same values, the same visions. And basically, the same understanding of where the market is headed. So just tremendous leverage. Zach, look, I can tell you from our perspective, we think that the STS acquisition is going to propel Rekor the profitability next year. Okay? And that's going to accelerate everything that we're doing here by quite a considerable period of time. So again, I mean just right acquisition, right time, right place. With respect to the mix of cash stock, seller notes, I can't get into the detail until we finalize definitive agreements and release those. But I will tell you that the principles of STS are excited about the combination. These are very smart people that know the industry. They've been out there for decades and they understand the transition the industry is going through. And I think we're pleased to decide to let us continue to be the stewards of their company into the future because it would be easy to sell it to a competitor, it's better to sell to somebody that's going to carry your company forward into the next generation of what technology is going to bring to infrastructure. And they've been leaders in their space, and they've been very forward thinking and ahead of the curve with respect to the business that they've built, right? So it's just -- we feel fortunate that they've chosen us to join forces with. So it's a great thing for us.

Understood. That's helpful. And Robert, any sort of update you can provide on many of these Rekor One pilots in terms of them actually converting to contracts? I know some of these have been going on now going on 6 to 9 months. So just curious, any sort of update you can give us there?

Well, we've had a number of some of the smaller pilots convert. Some of the larger pilots or implementations are just being completed and just up and running. But I will tell you that every place that we are, we're having success with our customers and I think that you're going to see over the next month or 2, maybe some expansions with some of the existing customer base that we have. So Look, I think that it's a really interesting time because this is not a very exciting business when you're talking about infrastructure on bridges and roads and tunnels and whatnot. But when you're moving from a static stage to the digital world, it is exciting. And what we're seeing is just amazing and it's transformational. And if you think about the infrastructure bill on top of it, it's just all good. So we've got a bunch of happy customers. We've got a bunch of new happy customers and we think this is just a great time for Rekor.

Understood. And final question for me is just related to the new partnership you announced with AWS. I mean can you speak to how that partnership works between Rekor and AWS and what that could mean in terms expanding the potential adoption for Rekor One?

Yes. I think David is on the call with us. So David, are you here if you want to.

I sure am. Can you hear me?

Yes.

Yes, very good question. So AWS represents a really strong partnership on the technology as well as distribution front. The Amazon Partner Network is a -- really a gateway into multiple distribution points with large opportunities, market opportunities as well as the overall sales to open up those opportunities for us. What's really important is that not anybody is just allowed into the gate there. You have to hit a very high bar of technical competence as well as solution in order to trigger that kind of activity. And so our admittance into and the selection into APN is a very important milestone in our technology development as well as the opportunity for us to expand into the market with a very strong endorsement and a very motivated sales organization, ours and theirs. The other aspect of this is that from a public sector perspective, on Amazon's side, there's a commercial sector and a public sector, very different in terms of go-to-market and motions and even technology that underpins that. Being selected for the public sector program is also another big distinction for us. Again, there's a lot of credibility in the space for public sector, eases the procurement process for public sector customers looking to buy technology and really automates the adoption of that. So really, in summary, I'd say it really is a milestone for the technology. We have multiple solutions that are part of that camp and we'll continue to turn on more and more in that channel. That's very exciting for our technology and customers collectively.

Yes. David, thank you, Zach. Just one additional thing. I was just reminded that the larger pilots that are underway in Chattanooga, Winchester, Virginia and Philadelphia were all brought to us by AWS. The introductions were made through AWS, and they continue to work with us with all 3 of those clients.

Our next question comes from Jaeson Schmidt with Lake Street.

Just following up on sort of the questioning on STS. Just curious if you could help us think about what type of growth rate they were seeing. I know in the release, you mentioned you expect it to contribute $15 million in revenue, but how should we think about sort of that growth run rate they were on? And I guess relatedly, were they all constrained given their size to kind of growing? And do you think you'll be able to accelerate that growth rate under the broader Rekor umbrella?

That's a really good question. And the answer is yes. Private company owned by a family that made what I think was a brilliant decision years ago to make the investment to own these sites and then sell data, which is Rekor's model. And we transitioned ourselves to that model. But given their size and their years at this, it's a little bit scary when you expand because they have to do it with debt, with personal guarantees on bonding installation systems, et cetera. So I think they were being very careful with regard to how they grew. So clearly, the answer is yes, they were probably constrained and by working capital and by available capital to install systems. And b, the second thing is when you get to a certain point, having built the business over 3 decades, you start thinking about securing the value of what you created as opposed to going in deeper frankly, to grow the business further. So there's no question that their growth rate is going to accelerate under Rekor's ownership because it's a lot easier for us as a public company to take on that burden than it is for them to take it on as a private owner.

Okay. That's helpful. And then just as a follow-up, I know you mentioned in the prepared remarks, continuing to make investment, implementing your strategy, sales and marketing, et cetera. So should we think about the OpEx or underwriting building upon kind of the Q1 level throughout this year?

Yes. As I said, we continue to grow. We continue to expand our headcount. So I would say Q1 we'll see some growth during the year, but not a significant one. And you saw this will hire a little bit more than our headcount. So we'll see the growth there. But other than that, the OpEx that was in Q1 should represent [ what we think will take 2 quarters ] into some growth.

[Operator Instructions] Our next question comes from Mike Latimore from Northland Capital.

This is Aditya on behalf of Mike Latimore. Could you tell me how many miles among state and local governments do you have under contract now?

How many square miles?

Yes, that's right.

I'm not sure that we have that number off the top of our head, but I don't know that I can answer that question today. And that includes -- and including pilots, including contracts and other things, certainly well above -- it's in the 5 figures.

All right. Fine. And when could we expect to see federal infrastructure builds to start flowing to your customers?

That's a good question. What we're hearing is likely Q4 of this year. I think everyone is getting the sense that money is starting to flow this year, later in probably Q3, Q4. And I think that we would expect that by 2023, There'll be a lot of money flowing into certain components of the industry. Not all of it is going to flow in equal installments over a period of 5 years. But -- and that's because a lot of these things are large projects that require multi-year environmental studies and other things. The good news is on our side, which is really more related to soft end infrastructure, I think you'll see that money flowing a lot sooner, a lot faster, especially on the public safety side and on the traffic analytics side because that stuff can be implemented much quicker, and it doesn't require the same study in the same time frame that the hard infrastructure requires. So I think by the end of this year, you're going to see a considerable amount of money coming into the market here in the U.S. and that will continue into next year and then beyond.

There are no further questions at this time. I'll turn the floor back to management for closing remarks.

Well, listen, everyone, thanks for your time, and we look forward to seeing you on our Q2 conference call. We're really excited about the news today. I think everyone here is focused on the markets, and I know these are tough times, but we do believe that this acquisition today is going to propel Rekor towards profitability much earlier than we expected. And we're just really excited about it because it was something that we didn't expect to happen. And we're glad we're here and we're looking forward to good things to come. So thanks, everybody, and appreciate it, and we'll be speaking to you soon. Thank you.

Thank you. This concludes today's conference. All parties may disconnect. Have a great evening.