Route1 Inc. (ROI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Route1 Q2 2021 Investor Update Conference Call and Webcast. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, August 26, 2021. I would now like to turn the call over to Tony Busseri, Route1's Chief Executive Officer.

Thank you, and good morning, everyone. I appreciate you attending the call. Last night, we put out our results, as you know. But before we get into them, there's a pro forma couple of statements I need to make, so bear with me. As described on the company's 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 those 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 use names that are either registered trademarks or trademarks of Route1 in the United States and/or Canada. Let's get going now. Before we jump headlong into the results, again, just want to touch on the business model of the company for some of our new listeners. Our focus is on building smarter, more secure communities. Communities can be defined as anything from a traditional community to an enterprise to government. We've had a lot of success over the last year in investing in these 3 verticals. In particular, government continues to be an important stakeholder for us as it pertains to data security. Enterprise has been growing as it relates to bringing more of an outcome-based selling approach to the table, not just selling rugged devices but bringing more of an integrated outcome. I think of a client, without mentioning the name specifically, where they've historically bought rugged devices from us and they recently had a ransomware attack, and we assisted them in rebuilding their network. And from there, now they've become a MobiKEY user. Just a great set of experiences. And as a result of being able to provide a number of different outcomes for our client in this particular case, we've gone deeper and we're stickier and more entangled with them. Community is obviously not being the last leg, but I think what we're doing with law enforcement, we have a lot to talk about today related to that. I would also say that the coming 6 months, we'll see us invest and deliver new products and services for this vertical, our communities directly that we live in. So quite excited about how this business model will play as we move forward. When we talk about outcomes, it's not just increased profitability or efficiencies, it could be greater market share, it could be sustainable positioning or it could be a more or greater transparency in our communities. We think all of these outcomes make a lot of sense for our clients and deliver what they're looking for, and that's transparency and sustainability for these outcomes. We have 4 main pillars, as you know, or themes to our business. Data security, which is where we cut our teeth as an independent software vendor with MobiKEY. We've added to that, with data acquisition and analytics, where license plate recognition technology and ActionPLAN, our manufacturing operating efficiency software application with. Data visualization, which is where we resell rugged devices. And then new technology and services, an area that's growing for us as we add to our engineering strength. But in all cases, when we're delivering software applications, our private cloud infrastructure, MobiNET, is critical to us delivering them. And again, it's a bit of a game changer for us. It allows us to have confidence in the security, everything that we do as it pertains to data. We will not compromise on security. And the way we deliver that functionality is just critical and goes to who we are. MobiNET is how we deliver ActionPLAN, it's how we deliver MobiKEY, it's key to who we are as we move forward with additional software applications. MobiKEY is worth touching on again. It's our technology. It's our flagship property. Quite often, I get asked around the subject of while you're investing in a lot of other things, does that mean MobiKEY is less important to you? Absolutely not. MobiKEY at a minimum gives us the ability to speak at a certain level of credibility. The client -- type of client base we deal with are some of the most secure organizations in the world. It's multifactor authentication, coupled with our own proprietary protocol and delivering remote access. It's a strong, unique way to deliver mobility for our clients' users in a way that doesn't increase risk factors for that enterprise. Classy technology that continues to be in demand. Without going too deep in it, there is a slide in this deck. It's now in front of you. And I added it to today's presentation because, again, I keep on being asked what's unique about MobiKEY. And as we know in today's marketplace, especially with the pandemic over the last year, enterprises and government have invested in VPN-based technologies. We think there's a substantive risk difference as it pertains to MobiKEY versus VPN. We think the functionality and ease of deployment is better. We continue to believe this technology will drive revenues and cash flow for us for the foreseeable future. Data acquisition and analytics is the other area of our business which has grown quite a bit. And again, before we get into the numbers where those metrics become a little more obvious, license plate recognition technology is a technology just not for police officers, it's a way of understanding what's going on in our communities. It's a way for parking operators to maximize their investment in infrastructure and what they've built. And it also deals with delivering greater transparency and information for public safety. And the way we go after public safety today is a little different than we did a year ago. This technology continues to evolve, and we think it's a key part of who we are going forward. The partnership with Genetec is excellent. As you know, they're the ones that own the artificial intelligence. They've developed the algorithms that the cameras assess and ultimately track plates. We're the party that assists in interpreting the data that's setting up the technology, understanding with our client how it's best used and deployed, and continue to work with them to drive better and better outcomes from the investment. So on this slide, on Page 11, it talks to what it can do for parking. We often think about LPR from the context of what it can do for us relative to law enforcement. But parking is a critical part to this. We work with system integrators like Passport and T2 and Flowbird and a number of parties who have invested in technology or infrastructure relating to the parking vertical. Again, law enforcement is critical. Keep an eye out because as we move forward here, law enforcement continues to evolve. Historically, we think of cameras that are affixed to light poles or street lights, or maybe the cameras are affixed to patrol car. And in those situations, we call that fixed or mobile LPR. But I think more and more today, we're seeing law enforcement or public safety officers on horseback, on scooter and moped or whatever, and we are working right now to deliver an outcome where we can create greater mobility for the officer potentially by using their mobile device to deliver the LPR functionality. So keep your eyes out here because in the not-too-distant future, we'll have an announcement on that specifically. I touched on this a few minutes ago about the fact that our fourth pillar is related to new technology and services. Engineering and installation sounds a little bit like, oh, we're a car mechanic that fixes a car and we have wrenches and drills and screwdrivers. I think that severely understates what we do. Our organization starts the process quite often working with the client from understanding their issue, which could be network engineering requirements. But for sure, it eventually will lead to project management skills, it could lead to software engineering capabilities and using them. So what we bring to the table is so much more than just the physical aspect of installation. We go cradle to grave with our clients. Most of our relationships will last upwards of 3 to 5 years. This area of our business continues to grow and we invest in it with professional project managers, again, network engineers, system engineers. The on-field service technicians we use are also trained professionals that, again, do more than just turn a screwdriver. Now I know you got on the call to listen and talk about our financial results today. So maybe after 10 minutes, we'll jump into those. We're pretty excited about the third quarter. We just delivered significant net income. Look, if we -- if you look at this, the top line of $6.3 million is slightly less than Q1. Know again that foreign exchange rates had a material impact on our business. They are down about 20% year-over-year. And quarter-over-quarter, we had about a 10% impact. So as we look at this, our job, as I've said before, is to manage the business in a volatile marketplace. And that means that foreign exchange rates will go up and down, and our job is to deliver cash flow as a result. And so we really, really focus on gross margin, which has been very consistent over the last 4 quarters, and our job is also to manage expenses. Overall, delivering about $760,000 of EBITDA and net income of over $460,000, we're really pleased with. Again, the mix of our revenue, some of its recurring revenue related to subscriptions or service contracts, some of it's transactional, and the mix of that on a quarter-to-quarter basis will change. As an example, I would expect Q3 to be stronger around revenue. Does that mean that just by saying stronger around revenue, that means there's going to be dramatic improvement in EBITDA? Not necessarily. That being said, I do believe the company is set up to outperform against the last 4 quarters. So we're excited about where we're moving the business. Again, for us, revenue is only valuable if it generates free cash flow to the business. Our proxies, when we look at our P&L, are 2 things: gross margin and EBITDA when we're considering the power of the revenue dollar. Let's drill in a little more detail then related to the P&L and the metrics overall. I've touched on a lot of these things. The one thing is when you have steady or growing gross profit and the revenue comes down a bit, your gross margin is going to go up. So that metric looks good. Again, there's I think a few more important variables or metrics to consider and we should discuss those. So let's keep on going into that. I touched about FX, here's a little more quantification. Off of our 2 biggest MobiKEY accounts, you can understand the impact then and it's driving real change. So just off of these 2 accounts, if there have been steady FX, we're talking then a business that had EBITDA north of $900,000, not $750,000. So again, not explaining about it, it's the environment we live in. The other thing I'd point out, we announced a fairly large contract right at the end of the third quarter related to a $1.3 million award for LPR technology from California Highway Patrol. We're excited about that opportunity. That relates to the large contract that we signed with the state of California in June of 2020, and we would expect to see additional orders in the upcoming quarters related to that contract vehicle. Talking about some further specifics, you can see the breakdown. This is all described in our MD&A that was filed last night. Other services quite often relate to LPR. So that continues to grow. When we have more contacts, more projects, we should have growth with more recurring revenue around services for our LPR client base. From a cost control perspective, not a lot to say for it except there's no drama here. It's very steady. Yes, when FX works the way it has of late, it means the U.S. dollar costs converting to Canadian aren't as big. So we have that benefit. So you would expect that the revenue is down with this, because of FX, you would see that also with your cost structure. One of those metrics I just talked to but wanting to drill into a little deeper because it takes away the noise around foreign exchange, is our -- the performance related to the gross profit dollars generated per $1 of sales and marketing expense. Like 6 quarters ago, when I started talking about this metric with you and we were in the mid-2s, I -- or the higher 2s, I wasn't sure we would just quickly climb to where we are today. I think we have more late still to go in this. I would expect us to continue to grow. I'm pleased with this because, ultimately, we're generating more cash flow for the same amount of costs related to sales efforts. This is a good outcome for us. The other element that we keep an eye on, and there will be a third one we'll talk about in the second, is the trailing performance of the company. We used to talk about the company being now, on a run rate basis over the last 4 trailing quarters, at $2 million, $2.5 million. Now it's clear when we look at EBITDA less foreign exchange translation or costs associated with that, we're bumping into $3 million. This is a good place to be. Obviously, as we grow each quarter going forward, this metric should get better and better. Turning to the balance sheet of the company. Again, not a ton of drama here. Overall assets deployed have decreased quarter-over-quarter. We've now seen that effectively over the last year from a high of about $15.7 million invested in total assets, down to about $13.7 million. Shareholders' equity has grown stronger. Working capital, again, is a bit of an odd metric for us because there's so much noncash items related to current liabilities, whether that's deferred revenue or now what we call them contract liabilities, or whether that's how we account for operating leases, we have to put them on the books. So as we look at this, I sometimes get asked the question, do you need to raise cash? The answer is no. Just as a reminder, there is a big renewal for us that happens in late August of this year related to the contract we announced a year ago at this time for 4,000 users. That's been put in place. Towards end of this month, that was about a week ago, we received partial payment on it and the balance will be in September. So the balance sheet will get healthier during the third quarter. That ultimately leads to saying what is the return when we look at the cash flow generation capability of the business against the total assets we've invested in. If one is going up another is going down. Numerators going up, denominator is going down, you're going to get a better return. And this is, as a shareholder, I think you would expect from us to deliver, and that is better and better returns for each dollar we invest in. So we're pleased with this. Again, we aspire again to the mid to high 20s. We think the path we've set out should be able to get us there. So now talking about what's ahead as we hit the 20-minute mark today, there's 5 items I want to talk to you. And you're going to say, "Well, Tony, you're not giving me enough detail about this." Suffice to say, anything material that we execute on over the coming quarter, we will do a follow-up call and a news release and we will talk about it. The California LPR initiatives, as we call it internally, is really important. That leverages the California Department of General Services contract. Hope to have more contracts from -- similar to the first order we announced at the end of June this year. We're also investing with an advocacy group in the state that has deep relationships to get us in front of decision-makers to discuss this contract vehicle. Again, the value of the contract vehicles is as simple as this: agency of the state government does not have to go out for bid, they can buy directly from us, the LPR technology and accessories. We're excited about having that vehicle, and we think -- no pun intended there, and we think as we move forward, we'll have a lot of growth related to the California initiative. Supporting that is we expect to come out with one or more new products over the course of the next 100 days that will leverage the data we continue to capture in the LPR marketplace and help public safety better use the technology. So stay tuned for #2. We think it's one of the biggest things we've done over the last decade, and we're excited to get this out in the marketplace and talk to you about it. But I've probably said too much. My Vice President of Marketing will probably tell me that I'm not supposed to be talking as much about it. But this will be a really exciting announcement here upcoming. Growth from acquisition, we talked about it, that we hope every 6 months or so to continue to add on to the business, whether that's clients and sales reps and more of the transactional area, or whether it's buying a technology company. And just based off of the size we are, we're not going to be buying a company that is bigger than us that is click [indiscernible]. It will be a company that requires something from us to really untrap their value, whether that's our sales force, our engineering bona fides, but look for us to acquire a business in the technology space that is very similar to who we are, where we're bringing what we've invested in to help them realize on their opportunity. So I look forward to talking about that more, too, as we move forward. The renewal, again, of August 20, 4,000 MobiKEY user sale, that's been done. There's a checkmark beside it. And I know often the shareholders who have been with us for a while like knowing that the larger renewals are in place. So I've listened to you, I have it on today's slide. Lastly and not least, for sure MobiKEY will continue to be a key part. I've said this now multiple times today. The Department of the Navy has switched prime contractors. They've now moved from Perspecta to Leidos. Leidos has been working with us for no more than 50 days, which means they put in place their contract vehicle. It's a massive shift for the Navy. But I'd love to tell you we're the very first priority of all the thousands of technologies in their catalog that they bring to the Navy, but we're not. We will see growth in this quarter and next quarter -- this quarter being Q3, excuse me, related to that new relationship, where maybe the Perspecta, prior to that HP relationship with us, wasn't always the best because they had their own offering that would -- selling a rugged device or a device and using a VPN. We had some competition then. Leidos, there's a better fit right now. We also are starting to see some traction with the National Guard Bureau, and we look forward to that being an important catalyst for growth for us over the next year. So we think we're set up to take this business that's doing, what we generated this quarter, around $3 million of gross profit, $750,000 or more of gross EBITDA, and driving that forward with those metrics, creating continued positive net income. We think the business is in a really good spot. And we look forward to speaking with you before the next 90-day mark to share with you some new announcements, whether it's a product launch, whether it's an acquisition. But we're now teed up for the next round of growth. So thank you for listening today. And I would turn it back over to the operator here to invite any questions.

[Operator Instructions] Our first question comes from Olivier Gasse Giguere.

You talked about, during the last conference call, about maybe taking some momentum with ActionPLAN during Q3. Do you have some comments about that?

In and of itself, ActionPLAN is -- like we don't have a new material contract. We have seen the clients we're working with adopting the technology in a little deeper way. I would like to say to you that it's been easy working with these clients. These clients are principally based in Ontario, Canada. The pandemic and the rules in that particular area of the world don't make it so easy to get on site and work with our client and evolve things on an expedited level. So I don't have something material to share today.

[Operator Instructions] We have another question from Olivier Gasse Giguere.

Maybe -- it seems like maybe XpresSpa capped their stock price. Did you talk with them? Or do you have any idea what your strategy as a shareholder?

We have an open dialogue with the Chairman, Bruce Bernstein. I made it clear that if they're interested in moving their shares as a block or they're going to move them into the marketplace, that I would look to introduce them potentially to parties that may or may not be interested in buying that position. But above and beyond that, we don't get directly involved with any one shareholder's trading activities. Do I think they're dumping the stock right now? I don't know. But there's been some level of selling activity for sure over the last 100 days that feels like it's holding us back a little bit. So my view of this is we continue to work with or communicate to parties that might be new shareholders or current smaller institutional investors and hope that they'll see the quality of the business model and invest a greater amount of money in our stock. I -- like most shareholders, I'm surprised and a little taken aback as the business has grown stronger and stronger that we've had difficulty breaking out at these levels. I believe the things that were coming over the second half of this calendar year will again reinforce our ability to grow the cash flow, to grow the top line. And ultimately, that will make us more valuable. So it's a moment in time. Olivier, I understand the frustration, if I use an emotional commentary. I don't like it. I don't believe it's the end point, and this reflects the value of the company.

[Operator Instructions] We have another question from Olivier.

Yes, this is the last one for me, Tony. It's in addition to your last comments, with the growth coming in, do you think we can see some support with a small buyback commitment in August or September?

Yes. We -- our NCIB or normal course issuer bid, or quite often called a stock buyback, we have been buying the stock in June and July. We're careful, obviously, how we deploy our cash resources if there might be other uses for them, of those resources, that would deal with growth. So we do agree with the thesis that using our cash to buy back our stock when there's weakness is not a bad investment by any stretch. We have been doing it, and we will continue to do it and look for that cash to be used in multiple ways, though, as we move forward here. And I thank you, Olivier Giguere, for your questions today.

And that was our final question. I'll turn it back over to you for closing remarks.

Thank you. And look, many of our shareholders prefer one-on-one calls. I know we already have a couple set up after this. Look forward to speaking with you directly, whether it's through this group form or one-on-one. I appreciate your questions and your sentiments. And as the operator says, if there's no further questions, I'd like to thank you all for joining us today. For any of you who have joined during the middle of this call and you want to get a replay of this, it'll be available today after 4:00 Eastern. Let me go through the numbers, 1 (877) 481-4010 or 1 (919) 882-2331. Please use pass code 42520. The replay will be available for about a month or a couple of weeks until 9:00 a.m. on Thursday, September 2. Again, a copy of this presentation will be placed on our website here today. And if you have any questions, get in touch with me. Otherwise, I look forward to speaking with you real soon. Have a good day, folks. Thank you.

That will conclude today's conference call.