Route1 Inc. (ROI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Route1 Second Quarter 2020 Investor Update Conference Call and Webcast. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Wednesday, August 26, 2020. I would now like to turn the call over to Tony Busseri, Route1's Chief Executive Officer.

Thank you. Good morning, everyone. Thanks for attending the call today. I am joined remotely by Peter Chodos, our Executive Vice President and Chief Financial Officer. Before we get into today's presentation, I have to go through these legal notices, so bear with me for a couple of minutes. As described on the accompanying slide, I would like to inform listeners that this presentation contains statements that are not current or historical factual statements that may constitute forward-looking statements. These statements are based on certain factors and assumptions, including expected financial performance, business prospects, technological developments and development activities and like matters. While Route1 considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. These statements involve risks and uncertainties, including, but not limited to, the risk factors described in the reporting documents filed by the company. Actual results could differ materially from those projected as a result of these risks and should not be relied upon as a prediction of future events. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. Estimates used in this presentation are from company sources. I also need to point out that on today's call, we'll use names that are either registered trademarks or trademarks of Route1 in the United States and/or Canada. So let's get going. It'd be wrong and remiss of me not to again start off today's presentation with a high-level overview on the business model. And as we've pivoted here over the last couple of years, I think what's become really clear is that our focus on working with our clients to use their data, such to create actionable intelligence to deliver exceptional outcomes for them, has been a very productive move in our business strategy. Exceptional outcomes that incorporate increased profitability, improved efficiencies, greater market share and/or sustainable competitive advantage, and that works for those that are in the private sector as well as the public sector. As we all know, we have clients in both types of verticals. Our pillars of strength, as we like to call them, revolve around where we started and that being data security and user authentication. We've advanced to also now be able to analyze data and acquire it. And we sell third-party devices that help our clients visualize the outcomes that we are producing for them. So again, our business model has been consistent over the last quarter and continues to strengthen as we move forward. I think it's appropriate we'll start off today with a summary of our financial results for the second quarter.

Thank you, Tony. It's Peter Chodos. Good morning, everybody. You'll see that Slide 5 just shows our annual operating performance for the last several years up to and including December 31, 2019. These numbers, we have already gone through in past conferences. I just want to point out that -- I just want to point out 2 things on this slide, and it's relative to the upcoming slides that we're going to see. It is that EBITDA of $1.941 million for fiscal 2019, just to reemphasize the point, record results for Route1. The AirWatch litigation, 2019 was a very active year in the litigation and required a lot of investment in both time and capital. And that spilled over obviously into our net income. The next slide shows our Q2 performance. I'd just like to point out a few things there. Number one is revenue increased by about 10%. You'll notice the roughly $500,000 -- $530,000 increase in subscription revenue and services. We'll come to that in another couple of slides. Gross margin increased largely because of the increased impact of subscription revenue versus devices. EBITDA was substantially greater than Q1, not quite as high as we would have liked, largely impacted by delays, not losses. And I'd just like to emphasize that delays but not losses in sales of -- sales and installations in respect of ALPR projects and our normal MDC business. Financial results. The net income was substantially better than Q1. We will show that in the next slide as well. So application software, which is really MobiKEY, MobiNET subscriptions, you'll see a substantial increase by about 30-odd percent, and that is due primarily to the reflected increase of additional subscriptions over the last 3 to 4 months. You'll recall that at the end of the first quarter, in the first quarter investor presentation, we had made -- we had provided information with respect to the impact of additional subscriptions in March of 2020, which were fully reflected in the first quarter of 2020. Those obviously now are reflected in Q2, plus the additional subscriptions that we obtained in Q2. With respect to TaaS, Technology-as-a-Service, that has kept -- that was kept generally constant. We expect some additional TaaS revenue in Q3 as a result of additional purchases in respect of those TaaS clients that we have currently. In terms of other services, as we mentioned in Q1's call and at the end of Q -- and for the year-end call, the other services vary from quarter-to-quarter depending on installation and project activity. With respect to expenses, we have G&A up about $125,000, and the simple reason from -- this is from Q1. And the simple reason is that we've invested additional effort in expanding our personnel capability both in, I guess, just strengthening our team in terms of deliverables and being able to deliver enhanced outcomes. In terms of R&D, we've expanded our personnel and our development capability primarily in the United States and in terms of selling and marketing, expansion of primarily additional travel as travel began to open up towards the middle of Q2 as well as additional commissions reflected in that total. So just to the highlights, I think I mentioned the first couple or the first 3. COVID definitely had an impact on our business as well as the entire economy. One of the interesting impacts of our -- of additional subscription revenue is the large increase in contract liability, which is reflected in our working capital numbers. So if you take the current assets minus current liabilities, excluding the contract liability, our working capital for Q2 is a positive $800,000 against the negative $1.6 million in Q1. And we -- internally, we use that measure because we have -- at the margin, there is no additional cost to the additional -- to that net subscription revenue or piece of contract liability. So that's why we're very pleased with our working capital position at the end of Q2. We also purchased $194,000 of stock back for cancellation in Q2. So that would be a total of $238,000 of purchases for the 6 months ended June 30. Our -- we started to use this metric of sales to -- or gross profit to -- sorry, gross profit to sales and marketing expenses. And the reason we did that is to begin to track productivity against our sales and marketing expenses. And we run our business based on gross profit. So when that number is in excess of 3x, that is a very, very good number, highly productive. We obviously try to maintain that as high as possible. And this quarter, that's a combination, obviously, of increased gross profit to -- based on subs versus devices and lower sales and marketing expenses overall. Our balance sheet. I mentioned working capital. Our cash is -- we had $100,000 of cash. We had $1.2 million of bank debt and seller's notes. That number of $1.2 million is primarily the vendor take-back notes from the PCS acquisition that we did in June of 2019. We had several hundred thousand dollars of bank debt. So net, we had negative approximately $300,000 of bank debt. In terms of shareholders' equity, you can see that, that reflects our financial results, our income for the quarter plus the repurchase of stock for cancellation. And finally, our capital expenditures for the quarter, $240,000. A lot of this was for -- as you can see, a lot of this was for our infrastructure, our MobiNET infrastructure, both for customers at JSP as well as our internal infrastructure. And the balance -- and we had a very small increase in TaaS assets.

Thanks, Pete. Why don't we take a look now and discuss moving forward here? I think we would all agree that Q2 was a better quarter than Q1. I wouldn't consider it as hitting on all cylinders. We had some macro characteristics that were headwinds and, obviously, that being COVID and the results in the broader economy, as you discussed. I think one of the real interesting subjects is what is 2020 all about. And it's very easy to talk about COVID-19 and the fact that working from home is here to stay to some degree for all enterprises and government agencies. I guess, for us, what we're really feeling in the marketplace over the last 60 days is a significant change in communities. And I'm not just talking about cities, and I'm not talking about the BLM movement. I'm not talking about social unrest. What we're seeing is a fundamental change in the way communities are dealing with information, data, the transparency of it. And I think that we will look back on 2020 as a year where the way we interacted amongst ourselves, public safety officers as well as citizens in the community, is fundamentally changing. And again, I'm not making a political statement. We all have our own views around what's going on. And we -- I think we would all agree that everybody deserves safety and confidence in the community. Fundamentally for us, we think that this means that BWC, or body-worn cameras, are actually an investment area that we're going to see significant dollars poured into over the next 1 to 3 years. We think, generally speaking, video, including license plate recognition, will continue to be invested in. As we look at the way of providing responsible policing in our communities, we believe, based off of what we are feeling, seeing and hearing in the marketplace, body-worn cameras as well as license plate recognition, both in video-based technologies, are here to stay and are going to grow in their adoption and usage quite significantly. I think what's interesting about this is where we play, among being a trusted partner for these technologies, is accessing data and the securing of data, whether it's in transit, whether it's at rest or whether it's in use. And I think your company, being Route1, has a real role to play within these communities. And again, a community can be defined as a city, a secondary market, tertiary market, or it can be a subset within each of those. And we, as groups, will better define what a community looks like going forward. But we're very excited about the role we can play. And again, one of the themes we want to continue to push here is that data is not prejudicial. Data is not biased. Data is just facts. And your company doesn't have to take a position on any of these social issues. We feel we can be an active participant helping all people within a community. So let's now take that -- those constructs, talk a little bit in greater detail about sales, marketing as well as operations of the business. I guess the one profound thing we just recently announced, and that being yesterday, was a new group within the U.S. Department of Defense that's decided to start their procurement MobiKEY. They bought 4,000 annual MobiKEY subscriptions. They also have the ability to grow that by -- in increments of 1,000 without having to go back out to bid. That has a real material increase on our overall subscription revenue. I think we talked about it within the press release, and Peter alluded to it. When we think back to February 2020, we were generating, and all this in Canadian dollars, around $400,000 a month in subscription revenue related to MobiKEY. That has now crossed $740,000. That's a significant improvement of around 80% since that period of time. And we don't think it's ended. Now look, clearly, COVID has been a driver for increased MobiKEY usage. What's interesting about this contract, it wasn't specific to COVID. Our discussions with this group had started long before March 1 and February 1. And what I'm pleased about is that what's attractive to our new client is the fundamental technology here. So we have drivers being COVID, for sure, more people working from home, government agencies looking to replace VPN or enhance their other technologies used for working from home. And now we just have the core business drivers that, hey, MobiKEY is a hell of a technology, has great functionality and does things that most others can't do. So that's a good starting point when we talk about where we're headed as a business. That's a Q3 impacter. It'll impact about 6 months -- 6 weeks, excuse me, of the quarter and then will have a full impact in the fourth quarter. So we're quite excited about what the numbers for our business will look like going forward. At a high level, it will take us towards 20,000 net MobiKEY subscribers, which is, again, as I said to you earlier, a significant jump from where we were in February. And then what it means on a subscription basis is, while we broke our high watermark that we've ever had as a company, and we're still growing. Again, we think that there's a lot of room to move here, and we're quite excited around what this technology will mean within the Department of Defense over the quarters to come. I think I'd be remiss if I talked about MobiKEY and I didn't talk about the Department of the Navy and where we stand here. What's exciting is, is that later this week, we are finally shipping the new DEFIMNET for the Department of the Navy. It will get to their network operations center in Norfolk, Virginia within a few weeks, be racked and stacked and scanned and patched and, hopefully by the end of September, with the finalization of the new ATO, authority to operate, will be lit up. And that puts us in a great position to provide better and improved service for the Navy and continue to grow our relationship with them. So that -- this will be another important data point. As I recently said to our Board of Directors, we have a phenomenal engineering team that's led by Yamian Quintero, our CTO; Jerry Iwanski, our Chief Digital Officer; Joseph Olt, Senior Systems Engineer and manager of that group. They worked tirelessly over a year to meet the expectations of the Navy and the Navy's proxy perspective. And again, for those of you that followed this company for some time, this is a real milestone event for us and one we're really excited about. So moving fine. One of the things you'll notice in today's presentation is our new look and feel. We announced a new logo, and really, I think what's important here is the brand. We are no longer multiple names. We are Route1. We have a strong position, and the things we are doing moving forward, whether it be continued website enhancements, it could be business cards, it could be our pivot -- any way we present ourselves is going to have a unified feel to it that we believe is stronger and a little clearer. And the driver of that is our recently hired Vice President, Gresham Hill, and I think he's doing a hell of a job and will continue to do better for us as we move forward. Now one of the things Gresham has been assisting us with is how we communicate our message and with our different type of stakeholder groups, whether it be the community, government or enterprise. And there are others in the marketplace that often talk about as it pertains to data or video they're building smart cities. I think that's a limiting statement. We're not in this just for the urban centers. We're in it for all people, all citizens. And we -- our statement is pretty direct and simple. We like building smart, secure communities. How we use technology always has to be done through the lens or the perspective of not just enforcement and policing, but we have to think about it through the lens of the community, the individuals that live and function within it so that it's greater security for them, equality of that security that the cities and the towns and the townships all become a little smarter so that life becomes a little better and, again, using technology to drive a more secure experience for anybody participating in that community. In many ways, this theme of security, as you know, filters through all things we do, whether it be with our federal government, whether it be with our local governments. And then obviously, from an enterprise perspective, that theme is consistent, too. This is going to be more and more what we talk about going forward, is how do we work with specific stakeholders to create that value-add to them, those outcomes they're looking for. Smart and secure are 2 very key themes for us moving forward. So in advance, Gresham Hill is going to be an influencer for us going forward. I do want to talk a little bit about our engineering and infrastructure teams because, quite often, it's hidden behind the curtains, what we're working on and what's being driven. MobiKEY 7.1 is shortly to be released here, and that will be next week. It should be. And it does a far better job working with unified communications, and we're really excited about it. I mean you could be sitting on your MobiKEY and being in a Microsoft Teams session back on your host computer or through Skype, you could be watching a video, you could be watching a movie. And I think it's pretty unique what we're able to do. We're able to deliver now that same user experience, whether you're doing -- working with Microsoft productivity tools or you're watching a movie or on a Skype call. Very excited about where our engineering team has taken our MobiKEY technology, and we just keep on breaking barriers with it, making it more attractive to be used and easier for our client base. We also are advancing our data analytics technology action plan. I sometimes don't talk enough about it. We have 2 significant clients in Canada that have a big voice in how that action plan platform is working for them. They're both Tier 1 parts manufacturers. We think this technology has a lot of legs on it, and you'll see subscription growth in this arena as we move forward. From a non-client-facing engineering perspective, as we talked about earlier, a lot of investment in the DON DEFIMNET -- we call it the DEFIMNET 3.0 -- working with our Pentagon partner, JSP. We're continuing to improve reporting tools for them and expanding the DEFIMNET to support additional users. It's been a very busy quarter overlaid by COVID and the restrictions that imposed. I'd be remiss if I didn't say I was -- I'm not crazy proud of the team in engineering and the efforts they put forward. I think they represent us extremely well.

So if we talk -- start talking about the AirWatch litigation, 2 sort of key dates, one was Monday, where the court ordered Route1 to pay fees in the amount of roughly $1.7 million. Route1 will appeal this. We're advised by counsel that the award is inappropriate, but clearly, that's up to the court to decide. So Route1 will have to post a bond in the amount of the award, and we have until the 23rd of September to appeal this award. If we follow on, the other part of this is back -- if you -- if everybody recalls last August -- August of 2019, we received an adverse judgment in the summary judgment hearing that AirWatch brought. And we appealed that in October of 2019. Briefing was completed by April of 2020. And we had received notice that the Federal Circuit Court of Appeals was going to hear the appeal, the oral arguments on September 3. Well, as a result of COVID and all the other logistical issues resulting from COVID, the court decided in this case that the briefs were sufficiently explanatory that they did not need to hear anybody's oral arguments. All the arguments were contained in the briefs. And so the court sent a note to counsel for both sides saying that the appeal would be "heard" on the briefs on September 3. So we expect -- based on indications from counsel, we expect that we will hear shortly after April -- September 3, rather, whether or not -- well, what the outcome of the appeal is. If we're successful in the appeal, then it's highly likely that the fee award will be vacated. If we're unsuccessful, we are going to appeal the fee award in any event. So that is the U.S. side of the AirWatch litigation. In Canada, we're continuing on with the litigation, and we expect discoveries to be completed in November of this year. The final aspect to this is we appealed the decision from the patent office on June 27 of this year, and we still have not heard anything as of today's date. That appeal was with respect to certain aspects of the patent, the patent originally granted back in 2010. And so we are just -- we're still awaiting communication from the PTO.

Well, and that is an update on our litigation. We've tried to give you a high-level overview on where we stand with elements of our business from the results to our vision on the market -- our view on the market, to some key drivers coming up here for Q3. So let's just talk about this in aggregate. We are pivoting to strong execution. The strategy is clear. It's working. It's definable. It's communicable. And at this point in time, we're seeing wins with it. We talked about a little while ago the State of California license plate recognition technology bid win. It's a material opportunity for us in the state there. And we would expect some real traction with that as we move into Q4 and then 2021. We talked about MobiKEY and further orders that will come from it, not just on the DoD side but, we think, the enterprise push we're making in financial services, in health care and other professional services being led by Gresham Hill. Our EBITDA. We're continuing to drive operational performance. Peter talked about the key metric for us, which is gross profit divided by sales and marketing expense, where in Q3 -- Q2, excuse me, we are at 3.1%. I would hope that we would see that dramatically improve as we move forward into Q3 and Q4. We continue to invest in tools that allow us immediate insights so we can create better outcomes for ourselves as a company as well as our shareholders. The DON DEFIMNET is going to be a realizable event for us, finally. We think that's exciting. And our relationship with the Navy is as old as they come as -- with our client base, and we look forward to the next decade with them. Lastly, I imparted to you our views on body-worn camera and fixed video, I guess, more holistically, video. And we really believe there's a major role we can play in our communities to create safety and security and the smarts so that people are that. So at this particular point in time, that ends today's presentation. I'd be happy to take questions. So operator, I'll turn it over to you, please.

[Operator Instructions] Our first question is from the line of Hugh Jackson with Brant Securities.

About the body-worn cameras, is that video that's shot, is it stored on a hard drive that's also on a police officer's chest? Or is it being sort of delivered back to a server somewhere that your role would be in securing that data transmission?

There's a couple of aspects to that, is that, BWC, that data, that information is, generally speaking -- and I can't speak for every community the way they implement it, but they're moving that data to the cloud. They would be working with a storage partner to secure that for the period of time that they're allowed to. It is PII, or personally identifiable information, and each State has their own laws about how long that information can be retained and then laws around how it's -- who has access to it, because sometimes, it's used for court proceedings. We play a role -- as we talked about earlier, Hugh, we have an interesting role. We do -- we can work with data in transit and while data is at rest and while data is at -- in use. We see ourselves having a burgeoning role in this area, potentially in the storage of the information and the analytics of that information and in the movement of that information, the securing thereof. I mean our bona fides are pretty clear in the data security and encryption field. And we are in discussions with a number of players right now in this space about not just being a service provider or a reseller of others' technology but the role we can play to bring our best-in-class data security offerings to the table to support BWC initiatives.

[Operator Instructions] Mr. Busseri, there are no additional questions at this time. I'd like to turn it to you for any further or closing remarks.

Super. Look, thank you for your attention and your time today. I look forward to joining again shortly. Maybe that's during the third quarter or maybe that's a little sooner. We'll see. But for those of you who joined midway in our call, there is a replay available after 4:00 p.m. today, Eastern Time, at 1 (877) 481-4010 or internationally at 1 (919) 882-2331. In both cases, use passcode 36892. The replay will be available until 10 a.m. on September 9, 2020. Just as a reminder, a copy of this presentation will shortly, if not already, be available on our website. We look forward to speaking with you again shortly. Thank you. Have a great day.

Thank you. That will conclude today's conference call.