Route1 Inc. (ROI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Route1 Q1 2021 Investor Update Conference Call and Webcast. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, May 20, 2021. I would now like to turn the conference call over to Mr. Tony Busseri, Route1 Chief Executive Officer. Please proceed, sir.

Thank you very much, and good morning, everyone. It's been a few weeks since we spoke last, and I'm glad to be with you here again today. As you know, I start off with a performance statement, so just bear with me for a few seconds. As described on the company's slide, I would like to inform all 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 reporting documents filed by the company earlier this morning. 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 obligations 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 use names are either registered trademarks or trademarks of Route1 in the United States and/or Canada. Route1 is an advanced North American technology company that empowers our clients with data-centric solutions, necessary to drive greater profitability, improved operational efficiency and gain sustainable competitive advantage, while always emphasizing a strong cybersecurity and information assurance posture. We are building smart and secure communities. As you've heard from me before, we have 4 pillars of strength. One is our data security area, which is defined most prominently by MobiNET and the MobiKEY remote access solution. Our second pillar is data acquisition and analytics or advanced analytics is another catch phrase today. That is led by, obviously, our LPR technology and action plan. Data visualization is a third pillar, which is where we resell rugged devices that help those clients use or reflect upon the analytics that we are securely providing to them. And then our fourth pillar deals with our unique engineering services and software development capabilities. So let's move forward with the questions that we're -- that we presented to you a couple of weeks ago when we spoke at the end -- while we spoke about our year-end financial results. Those questions at that time dealt with what are the lingering impacts -- are the -- of the second round or second phase of COVID-19, what will be the impact of the new administration on public policy and spend and what we'll see in local police safety agencies' budgets look like in '21 as a result of the pivot in certain states or communities around how law enforcement is delivered. Well, what we talked about a few weeks ago and continues to be consistent is this. License plate recognition is hot as an offering. The usage of video is real and robust in the communities we service. Local government funding for public safety agencies has been modest or robust and not completely cut back, as some had speculated. Colleges and universities across our nation have had a checkered restart, let's call it, or reopening. From California, that's been slower than other states, to more aggressive states like Texas and Arizona. We've seen different universities engage and move forward with their LPR projects, and so I would say that this continues to be still a strong growth driver for the company as all states reopen and become much more active on campus. The other point I would like to specifically pull out is related to the global chip shortage. We talked a little bit about this on our call a few weeks ago. And again, I wanted to reiterate, it is having an impact in the rugged device vertical, and its impact is to delay traditional 3 to 4-week delivery cycles to somewhere between 6 and 12 weeks. So there has been deferment of shipments that have moved from Q1 into Q2, and we'll talk a little bit about that later today. The offset, again, is to the very strong LPR marketplace that where we've been able to take advantage of, and we see continuing for a number of quarters. So speaking about that, let's dive in now to our results for the first quarter of 2021. They're presented -- or we filed them in the last hour. We had a good Q1. Punchline is we made money. Our EBITDA was consistent with the last couple of quarters. The mix of revenue was more trending towards projects and recurring revenue than it was onetime transaction. And overall, what that meant is a gross margin that was slightly greater than -- our gross profit, excuse me, in nominal dollars, slightly greater than the fourth quarter last year and enhanced margin and EBITDA of $764,000. So let's dig into that a little bit, and let's look at the trends that are related to key areas of the P&L for us. So on the initial blush, you would say, well, revenue wasn't as strong as Q4. You're right. But again, it deals with a mix issue, less onetime transactions and much more in the project area. And you could see the result of that with gross profit that's up from Q4, much higher gross margin as a result, and very consistent EBITDA. So that would be the third straight quarter of being around greater than CAD 750,000 of EBITDA, and we would expect this to start growing because as you'll remember, the acquisition of DataSource Mobility didn't happen until May 29. So right at the end of the first quarter. Drilling into the revenue mix a little bit. What you could see around the services revenue number is application software revenue came down a little bit versus Q4. That's all FX-related. Again, there's been a material erosion in the strength of the U.S. dollar versus the Canadian dollar. And as we report in Canadian, most of our revenue is generated here in the U.S., there will be an impact to that. Technology-as-a-service was a little more robust than expected. We had one client where we negotiated with them to buy them out of their TaaS contract. So we had a small pickup in the first quarter. And then you see other services that are principally related to our LPR offerings, and that's growing. And we're pleased with that, and we should see that continue to grow in the quarters ahead. As we move forward to quickly comment on our indirect costs or those costs below gross profit, fairly consistent quarter-over-quarter, no surprises, again, controlling our indirect cost structure and growing our gross profit. That comes through, I think, optimally, in the metric we'll talk about in a little bit, but we continue to be highly efficient with the use of sales and marketing dollars. Couple of other notes related to the first quarter I would like to point out. Again, the DSM acquisition happened right at the end of March. So its impact is that you get no EBITDA or net income related to it, basically, but you are showing the cost or that investment on your balance sheet. As an example, when you shift away from cash and you increase long-term assets or intangible assets, impacting your working capital numbers. It is what it is, and we look forward to great contributions from DSM over the balance of the quarters for this year and obviously in the next year. Talk briefly about the FX impact. It's been quite dramatic, and we will see even more of that relative to the second quarter of this year when we have a large renewal with The Pentagon. And the impact is real, it's about $21,000 a month starting in April related to the lower Canadian dollar. As I said on our last call, it's ultimately our job to manage that. And so in aggregate, if the FX impact is negative for us, we got to be stronger in other areas of the business in driving incremental EBITDA. So my message to you is not to guide your expectations lower. But just to tell you, and we'd be very blunt in this, the impact of the foreign exchange impact. The last point I'll bring up is that the, towards the end of the quarter, we also had an increase in the number of common shares outstanding. That dealt with original seller of the GroupMobile international business being XpresSpa, cashing in their warrants on a cashless exercise basis, those 3 million warrants and converting them into about 1.36 million common shares. So if there is a small increase in our common shares outstanding at the end of the quarter. So the trailing 12-month performance for the company, I think, is an important metric. When we look at the EBITDA in the quarter, we don't always get a feel for how the business has evolved and changed. And what this particular slide hopes to identify is, what's the growth. And you can see it's the trailing 12 months, or TTM, and from the fourth quarter where the 4 months -- or the 4 quarters prior generated and EBITDA of about $2.46 million a year, you can see based off of the results after the end of Q1, we're off to about $2.87 million a year. of EBITDA. So the company gets stronger and stronger on an annual basis, and we obviously expect that Q2 will continue to be strong for us and will help us continue to grow this metric. Again, one of those operational metrics that I target and we worked very hard to improve on is the number of gross profit dollars we drive as a result of $1 of sales and marketing expense. And you can see in the first quarter of this year, again, there is a step-up. There's $3.4 gross profit dollars to every $1 of sales and marketing expense versus the $3.3 in the prior quarters. I think, I also mentioned on our last call, everything will always be a straight line up to the right. But we're quite pleased about what we were able to accomplish during the first quarter, and as we continue to grow through acquisition and layer on organic growth opportunities into the investment we already have, we expect this metric to get better and better. The balance sheet, I guess, we've touched on real quickly here. Again, the working capital number adjusted itself principally as a result of the acquisition at the end of the quarter. We continue to be in a strong position where on a net cash basis, we have about $1.2 million of debt, and that number gets lower and a little higher, depending upon the week we're in. But there's no need to raise capital, we generate cash flow on a monthly basis from operations. And so to be crystal clear, to move forward, we do not need to generate any -- or raise any capital. If we were to acquire, our next move would be related to looking to layer on debt. We are not in the marketplace to raise new equity. One of the metrics that's used at times to look at how a management team is working with the dollars they've been empowered to use by their shareholders is a return on average assets. In this case, it's EBITDA adjusted by foreign exchange costs, divided by average assets used. During the period, what you see here is the rate of return has gone from 18% now into north of 20% over the last 5 quarters. And again, that number for Q1 is impacted by the $1.3 million purchase price for data source mobility without any numerator growth because, again, the timing of when we did the acquisition. So we're pleased with where the direction is headed on a return basis, and we would expect this metric to get into the mid-20s as we go through the quarters during the course of this year. Touching real briefly then on what you can expect from us during the second quarter and beyond, quite candidly, is that we continue to invest in ALPR or license plate recognition technology, whether it be through people and support, but it's also through the pricing model and how we're actively treated by our clients. If we're going to deliver a continually improved service and support that delivers to them a better outcome, we want pricing to reflect that. So we are working to continue to deliver a better pricing model or value proposition to our clients. The third point is important for us. We've been working since we announced the California Department of General Services contract for license plate recognition as an offering with the appropriate body with the state to ensure that the Genetec AutoVu technology is approved for law enforcement, we're on the cusp of that, and we expect the first order very shortly. And when we do get that first order, we will communicate it publicly. We're excited about that. We're also excited about the fourth point, and that's a new video offering that we expect to come out with this quarter or early in Q3, calendar Q3, that leverages the Genetec AutoVu technology and delivers it on a mobile operating system, which currently is not available. And in today's environment, where law enforcement and Security is delivered on foot or on bicycle. It makes a lot of sense to be able to use the camera that's embedded on a smartphone that do plate scans and searches and get important information. So we think we've taken a positive step with our partner there, Genetec. And we'll talk more about that over the coming couple of weeks as we look to launch that new technology. Five shouldn't be a surprise to you, merger and acquisitions. We are not done growing by M&A this year. Our focus continues to be to look at businesses that deliver public safety accounts where we can bring additional value-add and drive additional revenue items with that account. We're also looking to acquire companies with strong engineering capabilities and/or IP that will augment our current offerings. So expect this to grow again this year. The last one I would comment on is that with the Department of Navy, as they move from one prime being prospective to a new one, Leidos, all public and disclosed. We're waiting for that handoff. We -- it was originally supposed to be June 1 of this year, it's now August 1. Once that happens, we'll be working with Leidos to grow our MobiKEY user base off of that new DON DEFIMNET that we worked so hard to get it credited and installed, and grow the users there. And we're excited about the opportunity to work with Leidos and see what fruit that will bear in the months and quarters to come. So that would be my quick update. At this particular time, I'm glad to take questions from those that have joined us today. So operator, I'll turn it over to you, please.

[Operator Instructions] Our first question comes from Ed Soba, a Private Investor.

How much of your revenue is denominated in U.S. dollars?

So about 97% to 99%.

Okay. Well, if that's the case, I mean, because -- this FX is going to hit you again going forward, right? And why don't you just report in U.S. dollars, so it's -- because obviously, the revenue hit, when you change it over, is pretty significant. When you change it over to Canadian.

Well, it is considered by our Audit Committee and the Board continuously. We have a significant amount of costs in Canadian dollars that are denominated Canadian dollars. So one way or the other, there will be some form of translation that happens and have an impact as the dollar goes up and down. So it's just a data point that's out there and continues to be considered by the Audit committee about what's right to do for the company.

Yes. Well, I think from my point of view, I think the right thing, if you're 99% U.S., is to -- because for investors, the -- one of the main metrics is revenue. Like are you growing company or not? And what is the revenue growth and all the sub businesses too? And now we can't really see it anymore, right, with...

Well no, we...

The dollar goes up and down 5%, right, we can't -- we got to -- well I mean, we can work it out, but it's certainly buried.

Ed, this has been a consistent theme for most of the history of the company. And quite candidly, revenue is not that important a metric to us. We've been very outspoken around the fact that gross profit is the metric we work on. And that is the one we look to grow because that ultimately drives free cash flow for the business. I do understand your point. And again, we'll make sure that the Board considers that as we move forward. But it's an issue. Look, there's been windows where the foreign exchange is working for us, and then there's other windows where it doesn't work for us. I hear your point, though.

Yes. I mean the other point would be that there are -- I'm sure you have a few investors or hopefully more, growing, that are U.S. investors, and they -- so it would be easier for them too, to see it in their own currency rates. So given it's really a U.S. business that does a lot of business with the U.S. government, et cetera, right? So one other question. A couple of years ago, you used to talk quite a bit about your factory software, I think it was called Spotlight. Where is that in the line items now? And how is that doing?

The name of that action plan, and it's under application software. It continues to evolve as a technology with 1 principal account that's providing a lot of input into the design of the offering. Without naming their name, they're a multibillion-dollar Tier 1 automotive parts manufacturer. And I think, over the course of the quarters this year, in particular, you'll see significant growth in that area. Our advanced analytics technology, again, action plan is one that we think adds a lot of value. The way we originally went to marketplace with it was good, but it's clear from the feedback from a number of different paying clients that there's a better way of delivering the information they're looking for. And we continue to evolve the technology to meet that.

Okay. So it's -- you're mainly -- it's mainly with that one auto parts manufacturing now.

Yes. There is a lot -- we made the decision that until that technology was refined and met the market requirements that aggressively push that is somewhat counterproductive.

Sure. Sure. I mean you got to be careful with your dollars, right? But -- so is there a plan -- is that -- do you think that will be ready for -- to roll out in a broader way? And what's the timeline for that?

Q3.

Q3? Okay. Well, we'll look for that. And it sounds like you have a few other things coming up this summer, so that should be exciting.

[Operator Instructions] There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Thank you. For any of you who may have joined partway through the call, let me go through the replay numbers real quickly. After 4:00 p.m. today, it'll be available toll-free 1 (877) 481-4010 or toll International 1 (919) 882-2331. In both cases, use pass code 41276, and that replay will be available until 9:00 a.m. Eastern on Thursday, June 3, 21. Thank you for joining us today. We will be formally talking, I would expect, in August to review our Q2 results, but we'll have, I expect also, communication into the marketplace on interesting execution, over the next 100 days. Thanks again for your time. Have a great day, folks. Cheers.

This does conclude today's teleconference. You may disconnect your lines at this time. And Thank you for your participation.