Route1 Inc. (ROI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Route1's Q4 and Fiscal Year 2020 Investor Update Conference Call and Webcast. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, April 29, 2021. I would now like to turn the call over to Mr. Tony Busseri, Route1's Chief Executive Officer. Thank you sir, you may begin.

Thanks, Laura. Good morning, everybody, and a very good early morning from the West Coast. Before we get going on to today's presentations, there is just some formal comments I need to make. So bear with me. 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. Our business model continues to become tighter and tighter. And in today's world, where there is many things that are changing, a very dynamic environment, it's good to know where Route1 is going. We continue to work towards building smarter, more secure communities. Those communities can take the form of a city, a town, a subset of a town like a homeowners' association, enterprises in a number of verticals and government. And government often is a subset of the term government, thinking about the Department of Defense or a smaller community like that. But we continue to want to work with our clients to use their data to make better decisions that ultimately deliver smart, secure communities. Our pillars of strength to deliver those outcomes rely upon our data security bona fides, our advanced analytics capabilities, the data visualization technology that we resell, and our ability to bring engineering services to the table to create unique outcomes for our clients. So let's take a quick look here at the 2020 performance for us. It was a record-setting year. We will talk about a couple of the distracting items that are below the line, in a second. But for us, this year was a lot of about COVID, it was a lot about our communities changing and morphing, and it was about getting more and more value extracted from the acquisition of PCS Mobile we did in 2019. As can be noted here, we have record revenue and gross profit and EBITDA. Talking quickly about the items below the line, I don't -- I'm not trying to duck them, so let's talk about them. The AirWatch litigation, as we announced towards the end of calendar 2020, was resolved between the parties. As had been prior discussed, we have lost the initial ruling in the U.S. and ultimately had to come to terms on the settlement there. As part of that settlement, we are paid a little bit of money for the Canadian litigation and all of that was bundled up and put to bed. So the numbers that you see for the 2020 year around the AirWatch litigation will be the last numbers about this. So in the 2021 year, or the current year, there will be no further expenses around the AirWatch litigation. Around the item that we called Fraud, as disclosed during the third quarter, we had some unscrupulous behavior from a group of "businesspeople" out of Europe that were able to extract some hardware of the company through a pretty professional scheme. That was written off and dealt with during the third quarter. As I talked about at that time, we are working with our insurance company. We do feel comfortable or optimistic that that will be resolved going forward. So over the next 90 days, I would believe that we'd be able to discuss that. And if we're successful on what we hope to accomplish here, some or all of that amount will be repaid to the company and then that would show up on the P&L as income or something coming in. There has been no further evidence of this. Further actions taken by the company would render it, I think, basically impossible to happen again. But we needed to talk about it because it is there on the P&L. So let's take a -- let's summarize for us what we think are things to take away from the 2020 year. Again exceptional growth, exceptional growth around revenue and GP and EBITDA as well as adjusted net income when removing the fraud, when removing the AirWatch litigation. We're talking about business that's creating towards $1 million of net income. We're very excited about that. And I think, ultimately, that was one of the reasons we were approached and we raised $3 million at a price of $0.85 per unit. It's because the business model is starting to take real root here and deliver some exceptional results for our shareholders. So looking at it from a operating performance basis by quarter, You can see with what happened through each of the 4 quarters of 2020. You will say, well, why did the revenue drop from Q3 to Q4. It's important to remember that our focus is ultimately around the gross profit of the company and that to me is the driver. So the mix in the fourth quarter was more weighted towards the video and analytics development of our business versus the visualization of onetime transaction element in our business. Ultimately in the fourth quarter, you play with around 2 and 1/2 months versus a full 3 months in that quarter. We're very pleased with how the fourth quarter came in. The $700,000-plus of EBITDA again reflects the strength of the business. The net income obviously is impacted by the final entries related to the settlement of the AirWatch litigation. Talking about little more detail around what we call the recurring revenue or the subscription revenue and services, it has slightly decreased from Q3 to Q4. That was not in the MobiKEY or other application software arena. Our technology-as-a-service business is, wound down is the wrong term, but the current client that we have has moved as they're coming off technology-as-a-service, is buying things direct versus having us finance them for them. And other services reflect the lumpiness of other activities we do on the video side when we're on-site during service-type work. I would expect this number to be in this range going forward and then grow aggressively as we see continued MobiKEY growth. Talking about our operating expenses; we're on Page 11 now. I think the thing I'd take away from this is our ability to continue to control our costs and to allocate monies towards activities that are sensible and drive what we're ultimately looking for and that is more gross profit that leads to more free cash flow for the business. Selling and marketing expenses I would expect to increase during the 2021 year, as people can travel again and states open up. Here in the U.S., it provides the opportunity to get out and see our clients and to get on site. So I would expect that number of $880,000 that we realized during the fourth quarter to be a higher number, not dramatically higher, but higher number during each of the quarters in 2021. As I've described many times before, our gross profit through sales and marketing cost ratio is an important one for the company. We were very fortunate over the last 5 quarters it's been a simple, straight-line north where we've gone from 2.66x or 2.66 gross profit dollars for every 1 sales and marketing dollar in Q4 of '19 up to the 3.31 we realized during the fourth quarter. It is not always going to be this way. As you invest in new talent, at times it takes them a little bit of time to ramp up and deliver the same type of return on their costs as you have for someone that's been with you for multiple years. So getting into the 3s was an important target for us as we started the 2020 year. We've realized on that. We would hope that we would finish the '21 year at a better ratio than we finished the '20 year and keep on driving great profitability from operations basis for the company. Taking a look at the balance sheet now. I think the thing that jumps out of me is obviously the financing at the end of the year was a helpful thing. We had cash in the till. We did have some bank debt and sellers notes that are related to past acquisitions, and then from time to time when checks clear, those types of things. But we're in a very strong position. We were able to use this balance sheet, as you know, to do an acquisition in March, buying DataSource Mobility that again strengthens the business with Public Safety accounts and improved sales team as well as a stronger relationship with Getac, one of our OEMs related to the rugged device marketplace. Not a lot else to say, except that we would think we believe the balance sheet in 2021 will continue to get stronger. Real quickly, again as a reminder for new shareholders, we did do a financing, the first one in a decade. We raised a little bit of equity or unit for company, about CAD 3 million. That was a unit offering that had 1 common share with it and 1 common share purchase warrant attached to it. The strike price on the warrant is $1, is a 18-month term or takes us to June 16, '22. It was a productive opportunity for the company and ultimately supported the acquisition that we did during the first quarter. You've seen this slide before, heard me talk about open questions we had, as we started the 2020 year, principally it was on our last call. I'd like to frame it that there is 3 buckets that were uncertain for us as we started this year. What is the impact of COVID ultimately? It's funny at the time of it, we think about directly our communities shutting down or isolating themselves and that's going to have an impact at some level on enterprise, sales or could have an impact on sales with our community college or university communities. The one thing that we've all seen so far this year is a strengthening in the U.S., probably a little quicker in some states than others, particularly in the south, that has allowed us to see our business stabilize and start growing again, which is exciting. We also had obviously a shift in the White House. And there is quite dramatically different policies coming out of the current White House than the last one. We've heard things about Buy American and funding for the military, and there's different public policy initiatives. I think it's early to suggest how it's all going to play itself out, but there is a different direction in tone in how money is being spent. And then obviously the third element, because this group law enforcement is important to us, particularly in our advanced analytics area of interest and strength, how our communities feel about law enforcement and the way law enforcement is going to be funded going forward were then the 3 open questions for us. Here's what we know after the first, call it, 100 days or thereabouts of this current fiscal year, what trends are forming for us. License plate recognition is high as an offering. The usage of video is robust for parking and law enforcement and probably a little stronger than we actually thought. Saving except for being able to get onto campuses in California during the first quarter of this year, we've seen good activity in this area. I think our assumption around video being very important to our business model was right and should continue to be for the quarters -- I think a number of years to come. The second one is that local government funding for public safety agencies has been moderate to robust. It's been a little stronger than we thought. I guess there is some concern coming over the 2020 year that we'd see dramatic budget cutbacks that could impact the areas of offering that we work in. To date, it hasn't been, but that could still happen based off of budget cycles, i.e. if you have a fiscal year-end as a community of June 30th, potentially the year starting July 1 could look a little rockier than the prior year. So we're monitoring that. College and universities, as I just mentioned, have had a checkered start to reopening, which means that in certain license plate recognition installation with certain of those opportunities, they had to be deferred until we could get back on to campus in early Q2. Federal government funding for IT and cybersecurity initiatives has been reduced. We are seeing different ways of spending money. I think it would be safe to say that the prior administration was more aggressive around investing in IT, particularly as it pertains to, from our perspective, certain cybersecurity initiatives. The DoD also has focused on rolling out Office 365 and we're seeing that across a lot of government agencies. So how MobiKEY works in a virtualized environment becomes an important communication piece for us. And simply put, we work very well in the Office 365 environment. Just to simplify on this, Office 365 is the application layer that then those applications are accessed by a virtual machine. Our role in this, quite often, is user-authentication and creating that connectivity between the mobile device and the virtualized machine or the host. So Office 365 or that cloud-based PC approach, it doesn't say that our MobiKEY doesn't have a role; quite candidly, quite the opposite. There's a very important role with it. But it's the way we communicate the role of MobiKEY going forward and helping those that see MobiKEY as something supporting a physical machine as the host is an important part of our communication. You've read a lot about the global chip shortage. It has started to impact the rugged device marketplace. In late February, we started to get notice of this being delayed by a couple extra weeks, et cetera. We would think it will continue on at least until the fourth quarter. So on average, I think what we're seeing is 4 to 6 weeks lead time on certain rugged devices are being extended to 6 to 10 weeks, maybe 12 weeks at times. So we're monitoring this. Again, the data visualization pillar, our capability, is nice to have and clearly it creates cash flow, but it doesn't take away from the core elements of our data security and data analytics businesses. The last comment I'd make is early trend is that rugged device OEM market is taking note of our cradle-to-grave business model. Particularly with the DataSource Mobility acquisition, there has been more interest about the things we bring to the table above and beyond being a reseller of rugged devices. I think there is now a more formal recognition of our coast-to-coast capability for field services, installation, post-sales support, servicing, and that's going to put us in a better position to strike a deeper, more mature relationship with one or more OEMs in the rugged device arena. So we're pretty excited about how '21 has started. I think by the time we finish the year, we're going to be all pretty happy with the way operationally this came together. So talking a little bit more about '21 expectations and then we'll open this up to questions. There is 8 points I want to bring out here, and I'm glad to be held accountable to these. The first one is that we will continue to invest in license plate recognition. Whether that's sales or engineering, our field services team and support, this is a worthwhile investment and is really embedding us with our community stakeholders. ALPR pricing is another area. We obviously inherited the business model from PCS Mobile back in June of 2019. And we're working to perfect it or improve it. And one of those areas is for the best-in-class sales and service support that we do give our clients is to make sure there is fair and equitable pricing related to that. The third element is EBITDA. And it's not going to be a straight-line in 2021 all the way up to $1 million or so of EBITDA per quarter. We will continue to invest in people. And at times we may have to take a step back in a month as we invest in people and aspire to the bigger number. Look, clearly, the last couple of quarters, we've done about $700,000 of EBITDA, a little more than that -- $750,000, excuse me. Our goal is to take what we have today after the DataSource Mobility acquisition and get a lot more out of it through organic growth. We will acquire, and we'll talk about that in a second. But we want to see more from what we currently have. And by way of doing that, it's equitable pricing, it's investment and services that generate additional free cash flow and EBITDA, and it's investing in additional talent that can deal with advanced analytics offerings. The fourth point is that we will be launching new applications. We hope to have one in the next 100 days or less related to the LPR business. And that's a core part of what we're able to bring to the table. As you probably know, we won for the fifth consecutive year as being Genetec's Premier Partner here in North America. Their ALPR technology called AutoVu is a world leader. We're proud of that relationship with Genetec. And we want to continue to invest not just in the softer elements, the services and the support, but we want to use their software development kit to develop applications to meet needs of our clients. I would see that this relationship with Pierre Racz's team at Genetec getting stronger and stronger in the quarters to come. The fifth point is that we are not done acquiring. You know I've been focused on, or we've been focused on as a company acquiring people, talent in public safety accounts. That theme will continue at different times. But we also are looking to expand our skill-set or deepen it, and therefore buying engineering services or talent to support that in our data analytics business makes a lot of sense. And as I've said before, will we buy early-stage technology to augment our IP and the needs of our clients that create better and more sustainable outcomes? Absolutely. Talent is an interesting buzzword and it's one that I am bringing up today because COVID's had an impact that certain people are talking about. I guess to be very pointed about it, in the new world we live in, talent can move easily. And the acquisition and retention of talent becomes a more important theme, especially for a company of our size; we're not a billion-dollar company yet. Therefore, each person that's with us has a level of importance to us. And talent can be in Seattle now supporting things in Atlanta, simply because COVID has created the comfort level with working from home. It means talent can move around a lot easier. It also means using a or borrowing from the entertainment industry, we are into a bit of a gig economy and people are taking on gigs versus taking career opportunities. So something to be aware of whether you invest in us or other companies, what is the strategy of the company to acquire, to develop and retain talent to make sure there is stability in the business model. Seventh thing, MobiKEY, as I've talked about, works within the cloud and it works in the Microsoft world. I described that earlier about Office 365. I think that was an important point to bring up, because from time to time I get questions around that theme. And it's important for us to tell our stakeholders, clients included, how we fit into that structure or architecture when they are delivering their desktops in the cloud. Last point, again, is that the dollar has moved from a high of $1.45 about 13 months ago now down to $1.24. That obviously has an impact on our Canadian dollar reporting, especially when we have contracts that renew at the end of March or in early April or in August and they're sizable. That does eat into our EBITDA and we need to be aware of that. So that's a quick update on where we are. Again, we're pretty happy with the numbers for 2020. We would have preferred not to have the outcome with the AirWatch litigation that did happen. But I think you would expect the management team not to have their head in the clouds, and deal with the current market facts and address them. And that all being said, I think the '21 year from an operating segment basis is going to be a lot cleaner and easier to understand. So we're pretty excited as we head into the '21 year around what we can be. Laura, at this time, I think we should turn this over to questions from those on the phone if there are any.

[Operator Instructions] Our first question comes from the line of [ Ed Silver with Spark ].

If I look at your results over time, is there -- is it general to say Q4, Q1 are weaker because of seasonal considerations?

Yes.

Okay. I think you were hinting at that, too. So okay. And then, so your acquisition of DSM, so it grew revenue from 4 to 5, I think, it was in '20?

DSM was closed in March of this year. So it was not part of our '20 numbers.

No. But you disclosed the revenues of DSM separately, right, 4 million or 5 million, right.

Yes. Yes, sir.

USD 5 million. So that would be maybe CAD 6-and-something million. So if we're modeling out this company, should we just add the DSM to basically what you did in '20 as kind of a base case for '21 how Route1 looks?

Yes, I don't think -- look, I think the way the business started operating in the second half of '20 versus the first half, which we had the oddities with the world shutting down, and then adding on top of that DSM is a good way of looking at it for sure.

Okay. And then, and lastly, so in terms of the MobiKEY, you had a big bump with the COVID. So what's the outlook for that going forward for that business?

I think there's 2 parts to it. We've talked a bit about this historically. One, you had the immediate crisis and people saying, my VPN's not working, whatever, and we need to buy MobiKEY. And so we had that pop for sure. And I think what you can expect from us now is all those agencies that went through a postmortem or a post-audit on what transpired for them is there's a better way of delivering mobility or working from home. And those discussions are the ones that we hope to close on during the '21 year, with a number of different elements within the U.S. Department of Defense. That all is -- obviously the layover on that is the budgeting that comes from the new direction of the current administration. So it's our hope to see MobiKEY grow. There could be some bumpiness along the way. But I think overall I would expect MobiKEY to end the year in a stronger position in '21, i.e. number of users, the amount of recurring revenue we create on a monthly or quarterly basis. I expect that to grow by the time we finish '21 compared to where we were at the end of '20.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Tony for closing remarks.

Thanks, Laura. Thank you for taking the time today. We'll be speaking again in a little less than 30 days as we announce our first quarter results for the 2021 year. So you get to hear my voice pretty quickly again, and there will be a lot less dead time, as you might call it, from a release standpoint. So if you want to hear a replay from today, those who joined a little late, after 4 o'clock today you can toll-free 1-877-481-4010 or international 1-919-882-2331. The passcode is #41087 and that will all be available as a replay until 9:00 AM on Thursday, May 13, 2021. Thanks again, folks. Have a great day.

That will conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation and enjoy the rest of your day.