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

Hello, and welcome to Rekor's Investor Update Conference Call and Webcast. [Operator Instructions]. It's now my pleasure to turn the call over to Robert Berman. Please go ahead.

Good afternoon, everyone. Welcome, and thank you for joining us. Joining me today are Eyal Hen, our CFO; as well as David Desharnais, our President. During today's presentation, we'll be referring to slides that have been posted to our Investor Relations website. This presentation includes forward-looking statements. And as we all know, outcomes can differ from expectations. So please see our disclosure statement in the presentation. The purpose of the conference call is to provide additional details about STS and explain the strategic rationale for the acquisition. But these are turbulent times. And before we get into the details on STS, I just want to address briefly the larger challenges that technology companies have been dealing with recently, particularly those that like us, have been depending on the equity markets to fuel their growth. I'm pleased to say that Rekor has seen extraordinary growth during the last few years. The support of our shareholders has allowed us to explore the full reach of our technology in this fast and rapidly growing intelligent infrastructure market. In a few short years, we've been able to move from simply providing best-in-class license plate capture technology to offering an impressive suite of roadway intelligence products, all of which are integrated to work off a single unified platform. With that platform, we're able to ingest data from mobile sources and deliver the actionable insights needed by multiple consumers, all while maintaining and exceeding compliance with rapidly developing privacy standards. Despite the challenges of ongoing pandemic, we've been able to make hay while the sun shines. Like most technology companies, we understood and understand that it's important not only to have a first-mover position but to take advantage of it. So we concentrated our efforts on growth and expansion. And while we've seen the benefit of that and expect to continue to see significant benefit from that. There are loose ends that come with extraordinary growth, however, and there are times when it's necessary to trim the loose ends and concentrate on efficiency and profitability. This is where we are now. With a healthier system to market, the task before us now is to reach a point of self-sustained profitability next year. This will require us to ease off the growth driver for a while and concentrate on efficiency and margins. We don't expect this to cause a dramatic decline in our revenue growth in the near term. We've had a lot of irons in the fire and expect to have some exciting announcements for you beginning next week. But we'll be scaling back longer-range projects and concentrating on near-term profitability. I think you'll find that STS directly fits into the effort to meet these challenges. We're very pleased to welcome the STS team to the Rekor family. It's a big step for both STS and Rekor. This is a very important time for Rekor. And as we focus intently on the first projects to benefit from the federal infrastructure bill, we couldn't be more excited about the opportunities that Rekor and STS and explore together as America begins the digitization of its roadways. With the acquisition of STS, Rekor is well positioned to become the leading provider of Artificial Intelligence and Machine Learning-driven solutions for traffic management, urban mobility and public safety. With that, I'd like to turn the call now over to David, who is going to walk you through a few slides, and then we'll open it up for some Q&A. David, thank you.

Thank you, Robert. Good afternoon, everybody. To echo Robert's comments, we believe the acquisition of STS is an important milestone for our company and accelerates our mission to drive the world to be safer, smarter and more efficient. As we build the future of public safety, urban mobility and transportation management, our core pillars of success remain unmatched combination of world-class technology and innovation, particularly around AI and Machine Learning, advanced edge IoT devices and software platforms, plus deep industry expertise and real-world hands-on road side experience and an ever-growing breadth and depth of customers across private and public sectors. Today, I will provide details on our acquisition of STS and how and why it brings acceleration to the Rekor growth flywheel. As we all know, a strong connected and efficient infrastructure is the backbone of a healthy, growing and competitive economy. I think we can agree looking at recent events that our economy could use as much help as they can get. And infrastructure is more front and center than ever before. Due to years of neglect and under investment, America's infrastructure is in need of significant repair. For example, in the most recent report card of America's infrastructure, nearly 60% of our 4 million miles of roadway were rated in fair or poor condition. It doesn't stop there. Roadway fatalities are also up at a 16-year high, congestion is costing U.S. cities, billions in economic losses each year. And transportation contributes more than 40% of to all of the carbon emissions out there. It is reaching on a critical moment, and swift actions are being taken. Now the deterioration of legacy infrastructure may be nothing new. But what is new is that an additional -- in addition to the $250 billion that states and local governments already spend each year to build and maintain their existing infrastructure, a new once-in-a-generation investment of $1.2 trillion will be spent over the next 5 years to transform it, to digitize it and to make our infrastructure smarter, safer, greener and more equitable. This is already starting to happen, and we're seeing the initial stages of this money starting to flow into this market. What is important to know is that to be able to drive change in public safety, urban mobility and transportation management and to help create a safer, smarter and more efficient world, it requires serious analysis. And to do this kind of analysis, it starts with being able to extract and evaluate an enormous amount of real-time and historic data from the roadway. However, data alone is not sufficient. There is no shortage of data out there, and it is being generated by everyone and everything today. You, me, our vehicles, our phones, Waze, Google, TomTom, connected vehicles, electric vehicles, social media, weather, et cetera, et cetera. So getting data is definitely not the problem. Everyone has access to it. The problem is being able to capture and analyze the data properly, turn it into knowledge and then provide that knowledge in a way that decision-makers can use these insights to make timely decisions and take action. So the problem to solve here is that most government agencies and commercial entities are swimming in data from many disconnected disparate sources and are unable to transform that data into actionable insights. This is where Rekor's unique advantage comes in. As a reminder, our unique advantage is that we continuously consume hundreds of billions of data points daily from thousands of data sources, including physical infrastructure, third-party data sources and our own advanced digital infrastructure devices. All of this comes into the Rekor One Roadway Intelligence engine. We call this our brain. The Rekor One brain consumes, combines and transforms all of this data to provide critical insights to our customers about everything that is happening on and around the roadways in real time as well as with AI-driven predictions about what will happen in the future. We call this Roadway Intelligence. It is our competitive advantage. We provide this intelligence to our customers across 3 distinct but connected markets. Number one, public safety; number two, Urban Mobility and number three, transportation management. If you know Rekor then you know we have deep roots in public safety. This segment is centered around digital vehicle signatures, license plate recognition, law enforcement and security across public and private entities. It is in our DNA, and we have been serving this market since day 1. Also, if you've been following Rekor, then you know that we have deep expertise in transportation management as well, including our award-winning traffic management technology that is widely used by DOTs and traffic management centers across the U.S. and in multiple countries for predictive planning, situational awareness, operations, incident management, emergency and first responder management, transit and more. We continue to see significant growth and opportunity in both of these markets. However, as we've been aggressively pursuing the public safety and transportation management domains and working with our customers in these markets, we have seen a significant demand for data collection and traffic analytics for cities and communities as they look to better understand and optimize how people, bicycles and vehicles of all shapes and types are traversing and interacting on the roadways at intersections and in urban settings. We call this segment, Urban Mobility. There is an enormous shift of the population moving into urban areas now and predictions are that it will go from 64% to 83% in the next several years. As such, cities, municipalities, communities are facing unprecedented challenges to ensure that their aging infrastructure can support this massive influx of people and are seeking to redesign, build and manage mobility in these urban areas. And they're investing accordingly. We see this traffic analytics component as a critical link and imperative for all of our Rekor business lines and one that we need to quickly increase our technology, expertise and geographic footprint. Step 1 is always a traffic study. Any change that is planned for infrastructure anytime, anywhere, anyhow, always requires a traffic study. This is a basic principle. It is where it all begins. And traffic engineering and traffic study services is where STS is a known industry leader. STS is the traffic engineering and data collection company that does business and operates across the U.S. with a strong footprint in the Southeast. The company was founded in 1988. It is headquartered in Gulf Breeze, Florida and has about 90 employees. STS provides deep traffic study and collection services for customers across both the government and private sector. They collect data as more than 30,000 sites across the U.S. with more than 60,000 traffic lanes covered and hundreds of thousands of square miles. This is a significant footprint. In the next few slides, we will dive deeper into the strategic rationale for acquiring STS. But to summarize, STS immediately expands our geographic footprint and customer base, which is a key pillar for Rekor. It positions us well to further capitalize in the pools of revenue available to state and local governments as they invest to transform infrastructure. It helps us accelerate the digitization of legacy infrastructures for our customers. It provides significant value creation opportunities through upsell and cross-sell solutions. And last but not least, STS adds immediate deep intangible competitive advantages to the technology and expertise pillars of our strategy. As I mentioned, STS operates across the U.S. with a strong footprint in the Southeast. The company provides its services for both government and private customers and has an ever-expanding footprint. The company has been in business since 1988, over 30 years, and they have been able to foster deep and trusted relationships with key Department of Transportation customers and commercial entities in that time. It would take Rekor's significant amount of time to cultivate that same level of penetration. Clearly, we immediately benefit from this expanded geographic and customer footprint as we plot a path forward together. In addition, STS pioneered pay for data contracts with its DOT customers, which is quite unique and aligns well with the existing Rekor business model. Overall, STS creates an opportunity for us to add immediate revenue and build upon our ARR and performance obligation metrics as we work together to target new cross-sell and upsell opportunities. As I mentioned earlier, the one thing that is clear is that traffic studies and the data that is generated from those studies is the first step for any and all improvements in our existing infrastructure. It is also important to know that traffic data collection is mandated at the federal level in order for DOTs to be able to access funds. This means that these studies are a must have, not a nice to have, and it happens every single time. As we look to further capitalize on existing annual infrastructure investments, plus tap into new investments coming from the new $1.2 trillion infrastructure investments happening at the state and local level, we feel that we are well positioned together with STS in this area. When you think about how data collection and analysis is done today, it uses legacy approaches. It is manual, error-prone and woefully inefficient and expensive. Think about what you're seeing out there right now on the roadways, tubes across the streets, inductive loops buried in pavement, heavy construction and manpower requirements, people standing on corners with clipboards, et cetera, all just to collect a small sample of data and trying to project it out years based on that limited data set. This process can take weeks and months and is very inefficient and costly. It has not changed in decades, and it is ripe for disruption by technology. While that technology is here and now, and it's called Rekor. It is why the combination of STS and Rekor makes good sense. All of this legacy expensive labor-intensive tech can be replaced with a few AI-driven edge devices and using our Rekor One Roadway Intelligence engine to provide real-time, anytime traffic analytics and predictive insights to these customers with unprecedented performance and accuracy. We see the desire from customers today to implement next-generation technology to digitize infrastructure and create new -- a new fabric of connectivity. This is where the combination of STS and their expertise in urban mobility and Rekor's expertise with technology really creates the opportunity to generate significant value. Speaking of value, we see many opportunities to power and expand the STS footprint and grow the existing customer base with Rekor Technology solutions. The acquisition of STS helped accelerate Rekor's business plan and path to profitability. STS has built a solid and growing business over the years with a strong financial profile. For full year '22, STS is expected to generate $15 million of revenue, of which approximately 50% is recurring. Using technology, we're also already seeing margin and EBITDA improvements as well. This is just the beginning, though. We believe we will be able to expand the services provided within STS' existing markets by upselling additional solutions such as ALPR or license plate recognition from our public safety domain as well as incident management from our transportation management domain, among other things. There are also many other opportunities to expand the footprint, and we believe the implementation of our technology will supply traditional and legacy approaches and further drive margin improvements. So we are thrilled about the opportunities we have to better serve customers in the current STS pipeline, and we are already working on capitalizing on them with a new product launch this fall. You will be hearing more about our progress, ambition, solutions and results in the coming days, weeks and months. As we look at the sheer volume and variety of data that we extract and process from the roadways today for thousands of data sources, we are able to transform this data into mission-critical knowledge and actionable insights for our customers. This is value. The more knowledge we can provide, the more value it is for our customers and the more customers will adopt and use our solutions, which in turn generates more data that provides more insights and attracts more customers and so on and so on. This is the Rekor flywheel. This is what we're already doing today and momentum is building. As I mentioned earlier, in addition to technology and data advantages, STS also provides tremendous additional expertise and customer footprint to our existing Rekor profile. This further accelerates the Rekor growth flywheel and the best is yet to come. Again, stay tuned in the coming days, weeks and months where you'll see how this is being put into action with new solutions, new customers and new contracts. To conclude and summarize, we are not only about technology. We believe technology plus expertise and the breadth and depth of our customers we serve is really what makes us unique and well positioned for growth. Why? We are in a massive market that's about to explode. Where we continue to develop award-winning AI and technology that is our strategic advantage. And this feeds mission-critical solutions for public safety, urban mobility and transportation where we use modular, scalable industry-specific vertical platforms to serve both government, agencies as well as private entities. As they look to digitize infrastructure by building a bridge between existing and new technologies, we are the choice. We operate from a highly privileged position of trust and access and are recognized and utilized across multiple industries and geographies. The acquisition of STS brings a lot to the table, given their 30-plus years of experience and further compounds our competitive advantages, which positions us very well to capture a growing share of a rapidly growing industry. If we think about Rekor's market position and technology solutions and the STS footprint and expertise, I hope this gives you a sense of the massive opportunity ahead for Rekor and why we feel so strongly about the accretive value of our acquisition of STS. Again, we believe the best is yet to come for Rekor and I look forward to updating you on our progress. At this point, I'd like to turn the call back to Robert Berman for closing remarks.

David, thank you. We're now going to turn it back to the operator for some Q&A. Operator?

[Operator Instructions] Our first question today is coming from Zach Cummins from B. Riley Securities.

Thank you for doing this presentation and appreciate all the additional insight into the STS acquisition. I guess just starting off, I mean, can you give us a little bit more of a sense of the opportunity that Rekor has to sell cameras just within the existing STS customer base? It seems like should be a relatively easy sale as most of these DOTs are looking to modernize a lot of the use of this technology?

Zach, it actually started to happen before we even closed the transaction. So the opportunity is -- it's there. It's quite obvious, and it's very straightforward. David, do you want to add to that?

Yes. We do see that being able to replace a significant amount of what would typically be hardware, construction-based manpower, digging up things. being able to replace that with honestly a single optical device on the edge. It's a no-brainer. And it's something that STS, I'd say, was extremely compelled by when we first started getting to know them. It was more of like, wow, you guys can do that with your tech and we have a deep need for that and from being able to implement at speed and scale and with the reduced cost, it became pretty obvious. As Robert said, even before the -- finalizing our acquisition, we were already in progress with deals. And those just continue to come up. It's just a perfect bit, honestly.

Understood. That's helpful. And Robert, in your introductory remarks, you talked about kind of maybe dialing back expenses in certain areas and shifting more of a focus towards profitability in the near term. I mean can you give us a sense of maybe some of the areas that you're cutting back expenses? And I mean, where really a lot of the focus is for Rekor in terms of near-term revenue opportunities?

Well, I think the near-term revenue opportunity are in all 3 of the verticals that David outlined, traffic management, urban mobility and, obviously, public safety. We're going to continue at all of those. And I think part of the cutback has to do more with things that were longer term, things that were more considered perhaps R&D. We're going to focus on things that we can sell and deliver today. And it looks like anything else, when you have access to capital, you throw money at the growth, you need to because you've got other people out there, you don't know who's around the corner. The market has said, you got to do better, right? You can't keep doing this, and it makes you look in words and that's exactly what we're going to do. We're going to look at our P&L. We are going to get ourselves profitable earlier next year than we expected. And I think when you look at the history of Rekor going from ideation to scale adoption and then profitability within 5 years for a technology company and a huge market. I think that's quite an accomplishment, and we believe we're going to get there.

Understood. And then final question for me is, after closing the STS acquisition, I think you paid about $6.5 million in cash. And just looking at kind of the burn rate from the last couple of quarters, can you give us any sort of update or insight in the current liquidity situation? And I guess, how your comfort level with having enough cash on the balance sheet to really execute against your plan here over the next couple of quarters?

I think that the answer is our Q is right around the corner. So we're not going to have to wait that long to see our balance sheet. And I think we're comfortable that we can manage our way through this. There are a number of things that we're doing. Some relate to revenue opportunities. Others relate to -- just a whole bunch of different things that we're doing here. And we're going to manage our way through it. This company was in worse condition a couple of years ago by far. We don't have any debt. We don't have any derivative securities on our balance sheet, and we think we can manage our way through it. It changes depending on the actions that we take. So I can't tell you we have enough cash to make it to this day or that day because we don't see it that way. We just see being able to manage through this, right? And that's what we're intent on doing.

Understood. And best of luck and looking forward to the Q2 results.

Yes, appreciate it.

Next question is coming from Jaeson Schmidt from Lake Street Capital.

Just looking at the sales force, I mean, just given the STS acquisition following the Waycare acquisition following kind of just the core business, do you envision having one kind of unified sales force out there? Or how should we think about you managing these 3 separate business lines?

David, would you like to take that?

Yes, happy to. Thanks for the question. The approach that we're taking to sales is a unified approach today. When you think about an industry focus around these 3 segments, that's -- it's a different sales motion. And so with that, there's different approaches that we would take to the market. But the sales force itself, we have one sales force. And that one sales force is already covering these 3 domains today. So I don't expect that we'll change that certainly in the near term that I can see that it would bring any additional value. We're focused. These are the markets we're going after, and again, it's already unified.

I just – I'd like to also add to that that in traffic management, some of the revenue and future revenue comes from partnering and teaming with very large infrastructure companies and other companies that folks would certainly know the name of that that are inviting us in to participate and things that they're working on with various governments around the U.S. and around the globe. So it's nice to have people out there that believe in your technology as well that are out there selling it for you and inviting you into it.

Okay. That makes sense. And then just following up on sort of the cost cutting initiatives. I mean it does sound like you highlighted, it's going to be in the R&D line. I mean following up on the sales force question, I mean, do you think the sales force is fully capable of addressing all the opportunities out there? Do you think that needs to be rightsized as well just given market conditions?