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

Good morning, ladies and gentlemen, and welcome to the Rekor Systems Special Investor Conference Call. My name is Kevin, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. Before we start, I want to read you the company's abbreviated safe harbor statement. I want 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 constructed 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 you to refer to the full disclaimers in our earnings release. You should also review a description of the risks -- the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be discussed on this 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. It's now my pleasure to turn the call over to Rekor President and COO, David Desharnais. Please go ahead, David.

All right. Thank you very much. Hello, everyone and thank you for being here with us today. My name is David Desharnais; President and Chief Operating Officer of Rekor, and I'm pleased to be joined today by our Chief Financial Officer, Mr. Eyal Hen. Our Chairman and CEO, Robert Berman, had an unavoidable conflict today and send his regrets for not being able to join us this morning. The purpose of today's call is to provide additional details into our recent acquisition of All Traffic Data, or ATD. That we announced on January 2, 2024. This acquisition is not just a milestone. It's a leap forward in the evolution of Rekor Systems and a major catalyst for growth in our Urban Mobility market segment. You will recall that a little over a year ago, we acquired Southern Traffic Services, or STS. The acquisition of STS was more than a strategic expansion, it laid the groundwork for what we now proudly refer to as our Urban Mobility market segment and our Discover platform for AI-based traffic, data collection and analytics. STS with its extensive network of data collection sites across hundreds of thousands of miles of roadway, significantly enhanced our AI technologies and distribution capabilities. The combination of STS's 30-plus years of roadside experience and traffic data expertise with Rekor's cutting-edge AI and machine learning technologies, marked a key step in our mission to collect and connect the world's mobility data and provide unparalleled roadway intelligence and insights to our customers. Following the STS acquisition in the past year, we've seen our Urban Mobility business grow, not just in the Southeast, but also expanding interest and adoption across the U.S. This expansion, as evidenced by multiple proof of capability studies and deployments highlighted the urgent need to grow our local resources and presence in these locations, extending beyond our footprint in the South and Southeast and into the central and western states. The addition of ATD strategically aligns with this need and equips us with the right resources in the right places geographically, enabling us to meet the increasing demand from our customers and accelerate our growth nationwide. We believe the ATD acquisition is poised to be a game changer for Rekor. In addition to STS's 30-year foundation, ATD brings an additional nearly 25 years of relationships and expertise in advanced traffic data collection and analytics across a diverse client base, including commercial entities, government and DOT agencies as well as hundreds of architecture and engineering firms. This combination of more than 50 years of roadside experience gives us a strong edge in the market and positions us well to drive the adoption of our Urban Mobility offerings more effectively and efficiently, meeting the local demands across the country while also providing additional pull-through, cross-sell and upsell opportunities for other product lines, including transportation management and public safety. With both STS and ATD now part of Rekor, we have a powerful combination at our disposal. This synergy enhances our technological capabilities, fast tracks our deployment processes and extends our geographic reach. We are not just growing, we're reshaping the landscape of traffic data collection and analytics in the U.S., and advancing our vision to enable smarter, safer and more efficient roadways and communities. Regarding operational integration and growth, ATD will continue as a wholly owned subsidiary of Rekor ensuring we retain their invaluable expertise and key employees. This integration is expected to accelerate our business strategy, broaden our customer base and further our traffic data collection and analytics capabilities and more. Financially, the ATD purchase required an investment of $19 million, comprised of approximately $9 million in cash and 3.5 million unregistered shares of our common stock. For fiscal year 2023, ATD is projected to contribute approximately $9.5 million in revenue and $3 million in EBITDA. In closing, the strategic acquisition of Southern Traffic Services and now most recently, All Traffic Data Services represent a pivotal chapter in Rekor's journey. These acquisitions do more than just expand our operational footprint, they deepen our expertise and capabilities in digital infrastructure and roadway intelligence. We are uniquely positioned to accelerate growth, harness the power of AI and machine learning technologies and lead the revolution in Urban Mobility and traffic data management. We at Rekor are grateful for your ongoing support and belief in our vision. The future is bright, and we eagerly anticipate sharing our continued progress with you in the coming months. Once again, thank you for joining us today. And operator, we're now ready to take any questions that might be on the line. Thank you.

[Operator Instructions] Our first question is coming from Michael Latimore from Northland Capital Markets.

Congrats on the acquisition here, it looks great. So I think ATD spent a lot of time with engineering firms and retail development. And one, is that right? And two, can you leverage that for your Rekor Discover statewide deals, do they have much kind of touch points with the Department of Transportation?

So Mike, that's a very good question. And the answer is, in terms of relationships with architecture and engineering firms. ATD has many, many years, almost 2 decades of relationships with literally hundreds of the largest and midsized architecture and engineering firms. Two, do a lot of work for commercial entities, but also do a lot of work or they tee up a lot of work for Departments of Transportation. So ATD's got a very strong relationship in that business stream. But also have direct relationships with DOTs as well at a statewide level. And so it's a mix of both. And both of those opportunities are well positioned for our growth.

Got it. And what sort of technology does ATD use today? And I assume you can upsell your technology there, but maybe talk a little bit about that.

Yes. Just like many, I would say, traditional companies in the traffic data collection space through traditional sort of rubber tubes across the road and sensors, technology, video camera technology on the side of the road that is a recording device is very typical. And ATD has a -- definitely a large set of capabilities in that space. When we think of the upsell of our technology or the use of our technology it's an exact fit. That whole world, Mike, as you know, are learning more and more about is transitioning rapidly to an AI-based approach. And that is where we come in. So it's a direct fit and a direct pull-through and will be used extensively in that ATD and growing footprint from there on.

Got it. And then just last one for me on the data sources that ATD collects, it looks like it talks about vehicle class, count and speed like Rekor generate but it also mentioned 5 or 6 other ones, I think. So what is the main data source that ATD has been generating?

Well, it is class, count and speed, and there's a number of technologies, I would say, legacy technologies that can collect that. It's just a lot more dangerous and a lot less accurate than an AI-based approach. So they do that for sure. Areas of concentration would be class, count and speed would be bicycles and pedestrians, would be like turning movements, which is very common in intersections, for example. And so the equipment that's being used and the types of studies and services provided, it's -- there's probably 12 to 15 different types of studies that a firm like ATD will conduct on a regular basis. And so that's, again, a great expansion opportunity for us.

And just last, just to be clear, these folks will have -- will provide you with more resources to help deploy Rekor Discover as well in these Western states.

Yes. ATD is headquartered in Colorado and has 16 offices across the Central as well as Western state even bridging into Southeast to some extent as well. So very, very good footprint. So it's people, it's equipment, it's vehicles, it's expertise, it's relationships, it's all of the above that ATD brings to Rekor that helps us accelerate.

Next question is coming from Zach Cummins from B. Riley.

I guess just piggybacking a little bit on Mike's question. Is there any overlap in resources between STS and ATD, it sounds like they have a little bit of a presence in the Southeast. So just curious if there's any sort of overlap prior to this acquisition.

Yes, that's a good question. So ATD does business across the U.S., a different type of business when it comes to engaging in states through architecture and engineering firms, which is a substantial book of business for ATD today. And that line of business in the Southeast region in some overlapping areas is not in competition, it's actually complementary to the state-wide activities that are being performed by STS. The ones that don't happen through STS are the ones that go through other firms or A&E firms. So that what would be thought as an overlap is actually not an overlap. It's a complement to what we do and then also expands our resources in that region too, to actually bridge and move faster. So it's not an overlap, it's a complement. And in terms of people working on different types of contracts with different types of sources of business development.

Understood. And it sounds like with your technology, you were starting to expand on your own to the Western United States, but it felt like really the gating factor was having the amount of head count or appropriate resources to really roll that out. I mean can you speak to the ability of potentially accelerating some of those opportunities? Or how are you thinking about that as you go into 2024.

Well, Zach, that's exactly a really great synergy here with ATD is that we do have substantial activities happening in the Western states. And our ability to reach them is requiring us to send folks and trucks and equipment out to the states where we don't have an office. We don't have a presence. We don't have frankly, years and years of a history. So ATD brings all of that for us. So our ability to execute even more quickly on that with the right people, with the right skill set, with the right equipment and be able to use that to expand aggressively in the Western states is there. I mean, otherwise, we'd be looking to put in offices and hire people and go through that, and this really becomes a step-function opportunity to address that gap and move very quickly.

Understood. And final question for me, maybe more of a financial question. But just with ATD already being profitable and providing a nice footprint out in the Western United States. I mean how should we think about maybe recourse time line of profitability. It seems like we are tracking towards that on a stand-alone business, but just thinking how could that be impacted just by the acquisition here -- of ATD, excuse me.

So our time line has not changed on that. We're still tracking to our commitments there, and I'll have Eyal kind of talk to that in a moment. But in terms of the operational efficiency for -- we actually gained some synergies in the process as well that aren't just captured on EBITDA, for example, in the way that ATD has come to us. But our guidance really has not changed on that at all, Zach, and we look forward to updating that in our upcoming earnings call as well. But Eyal, did you want to comment on that?

No. David, I agree with you, Zach. So we are still on track. And as we announced before, to be profitable this quarter, and we will talk more about it in our earnings call in March.

Next question is a follow-up from Mike Latimore from Northland Capital Markets.

Yes. Great. Just two other ones here. So the revenue from ATD, will that go in the -- would that be a separate like services line? Or will that go in product or occurring with which -- what -- how will you report that?

Yes, the ATD revenues will be under our Urban Mobility segment. That's where we are going to allocate it. It's related to the studies that they do. So it falls under Urban Mobility in our financial statements.

What about product versus -- or yes, product versus recurring? Will it be one of those two? Or which category will that be?

It will be mainly product at this point. The recurring revenue is not high, as David mentioned, they have a good relationship, a lot of their studies that they do a little bit different than the contracts that STS has with DOTs. So a lot of their revenues were under the products and services.

Got it. And then Rekor Discover, there's kind of the healthy public agency budget supported by the Federal Infrastructure Act. Can you talk a little bit about just what are the secular drivers for ATD's traditional business, supporting engineering firms and kind of retail development?

Yes. The commercial studies business is pretty extensive. Any time a new development happens, Mike, from a shopping center to an apartment building, you need traffic impact. So that's a very, very strong market. In addition to what happens at a state agency or Department of Transportation. So the commercial market is robust in retail establishments and also even, for example, take a retail -- take a mall, for example, that exists, they need to be able to understand what's coming in and out of those parking lots is often the domain of a commercial study, an entity like an A&E firm and/or a shopping mall developer will have that technology available and use. So that's definitely a market segment. It's clear. It's not the Department of Transportation, but it is in the commercial segment, and it's quite varied. The A&E or architecture and engineering firms, they also do extensive amount of work with the Departments of Transportation nationwide. The likes of a Kimley-Horn or an [ AECOM ], HNTB and there's massive companies that do this all day long. They actually don't do the studies themselves. They actually use contractors to do that and ATD does a substantial amount of work and for many, many years with these architecture and engineering firms for states, directly and indirectly with the states. And so when it comes to ATD, the secular drivers are going to be growth population movements, I would say, the expansion of cities and roadways clearly from the Department of Transportation, but also in the commercial sector as well.

Your next question is coming from KC Ambrecht from Shay Capital.

Okay. Great. A couple of questions, please. First question for Eyal. Eyal, you updated us on kind of breakeven for profitability, can you kind of help us think about how to think about revenues for the first quarter with this new acquisition?

KC. Yes, we do not -- this is not public information at this point, and we do not provide guidance for this. So unfortunately, we'll not be able to update you with revenues for Q1. But obviously, ATD, as you saw, has expect $9.5 million during 2023. And we anticipate growth in 2024. And this obviously will contribute to our top line start in Q1.

Okay. And then a couple of questions for David, please. Yesterday, Rekor announced a partnership with Kistler. Can you kind of talk about that, the strategic kind of thought behind that?

I'm happy to do that. I think -- I'll give you just sort of a teaser, but we'll cover that more in the upcoming earnings call because it's really not the scope of today's call. But to give you sort of a hint -- just a sense of that, we have a problem in the nation here, 99% of the roadway wear and tear that happens on a roadway is due to trucks. And it's not my status. It's the association of trucking that produces that. And so when you deal with trucks, they contribute to about 11% of the -- all the roadway traffic but they make 99% of the problems that happen in roadways from deterioration in potholes and failures. And so the weight of vehicles and particular trucks traditionally gone through a weighing station that you would have seen on the side of the road, the static weight station, a truck pullover, they get weighed. And hopefully, they're not overweight. And if they are not overweight, they continue, if they are overweight, then it kicks up a whole process. Well, those stations are becoming obsolete. They're very expensive for states to maintain -- build and maintain them. So new technologies such as weigh-in-motion or WIM for short. WIM technology is sensor technology that's embedded in the roadway and it's designed to be able to measure the weight of vehicles while they're traveling on the roadway without having them move over. So that's just a little bit of context. The second part in the Kistler relationship that we have becomes really critical when you think about our nation's 650,000 bridges of which 35% of them are earmarked as in desperate need of repair, 8%. So 45,000 are designated to be rebuilt and failing with a F grade. So if you think of the impact of trucks and overweight trucks, about 30% of all trucks on a roadway at any given time, statistically are over the regulated rate -- or weight, excuse me. The ability to identify that easily in particular, ahead of bridges or roadways that are in bad shape, which is very common across the U.S. That relationship with Kistler, we don't intend to be as Rekor in the sensor business for WIM. So that's something that a partnership with a Tier 1 player like Kistler who is exceptional at this, very accurate. That marriage of WIM technology plus our technology of origin destination and the ability to track and trace and identify vehicles becomes really relevant to Departments of Transportation that are trying to manage not only the roadways but the bridges that are in a tough situation. So KC, hopefully, that's sort of a sense -- wider sense, but it's a big deal.

Okay. And then just lastly, on the -- I was reading the transcript from the third quarter conference call and Rekor kind of outlined three initiatives. One was the setting up a new funding vehicle to execute and accelerate growth. The second one was a potential new acquisition to increase the footprint, both physically and into new states. And then all this to lead up to cross-selling, enlarging new and existing state-wide contracts. The first and second one you guys have executed on with the December announcement and this announcement with ADT (sic) [ ATD ]. How should we think about new state contracts, the cadence of announcements if they're getting enlarge? Like how do we think about that?

I think you should feel good about that. And I think you should continue to watch the news that comes out. We have a lot of good stuff going on. So both -- say, one, two and three, we're moving ahead aggressively.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

All right. Well, thank you very much, everybody, for attending today. You can see that we're very aggressively growing and accelerating our Urban Mobility position in the market, bringing really great technology and really great partnerships to bear. That we're excited to be able to continue to update you in the coming months and throughout the year. So a very exciting path forward for us. And again, thank you for your support, and we look forward to updating you in the upcoming earnings call. Thank you.

That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.