Route1 Inc. (ROI) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Route1 Q3 2021 Investor Update Conference Call and Webcast. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, November 23, 2021. I would now like to turn the call over to Tony Busseri, Route1's Chief Executive Officer.

Good morning, everyone, and thank you for the introduction there. Let's go through the performance stuff real quickly. As described on company's slide, I'd 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 process, 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 include risks and uncertainties including, but not limited to, the risk factors described in reporting documents filed by our 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 statements. 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, Inc. in the United States or Canada. So today's update has a couple of key messages that ultimately go with it. One is, as we described in the news release a couple of weeks ago, some of the broader market factors have had an impact in the third quarter for us related to supply chain or microchip availability. And we'll spend some time talking about that. But for us as a company, we feel at this juncture, that both disruptions had the impact on timing in Q3. And as we're moving through Q4 to date, we are -- our pipeline, our backlog of the related inventory that's required has been able to meet customer contracts and expectations. So we're expecting as a wholesome commentary, the Q4 to be back on track to what we would expect our business to be able to generate from the classic pillars that we have as a business from our data security, data acquisition, data visualization and other services and technological offerings. So as we slide directly into the results for the quarter. Sorry, the slides just taking a little longer to update. Let's go through the operating performance. So for the quarter, we actually had revenue that was better than the second quarter, better than the first quarter of this year. Part of that was related to encouraging clients to make orders earlier than they meet otherwise to because of the concern around the supply chain. So back in Q1 and Q2, we were talking to our clients that would be more transactional oriented about buying their Getac tablets or their Panasonic Toughbooks and put those orders in earlier because there is going to be no guarantee around the timing for that hardware in the back half of this year. So some of those things led to sales that we were able to pull forward in the quarter. And on the other side of that, as we've talked about pretty openly, when a Chevy Volt, a car is delayed for a parking enforcement officer, we can't control that. But where it does impact us is our inability to potentially install the Genetec AutoVu technology to be able to do the install work, the training, the servicing, et cetera. So we've had a couple of things that are going on in this quarter. One, we were able to encourage onetime transactional buying to happen a little quicker and that was preplanned earlier this year. On the other hand, we're being impacted by availability of cars, technology for LPR, and that had an impact. Overall, revenue is up. We'll talk about the recurring revenue line item. But mostly, that deals with technology as a service and the ending of certain contracts as we move away from that. Gross margin was slightly down from the second quarter, had an impact on the EBITDA, and we had a slight loss for the quarter. Disappointing for sure, but we're no different than many other players that are impacted by the timing of hard goods and technology when it gets delivered. So as we drill down into our numbers a little bit. Obviously, we often talk about the 4 key metrics for us, revenue, GP, gross margin, EBITDA. We would again expect third quarter to normalize fully or somewhat. And we look forward to be able to giving you indicators as we move towards the end of this quarter how we're doing relative to some of these metrics. So right now, the quarter, we think it will look more like Q1 and Q2 than necessarily the third quarter because we've worked through the delays in the timing for certain projects. But there always could be further disruptions. But as we stand here in the seventh, eighth week of the fourth quarter, right now, we're not feeling that the quarter is going to look like the third quarter. So as we slide into this further, some general note, it's important to keep in mind, we talked about the delays in hardware and LPR hardware in particular. We did have the SPYRUS acquisition closed. We had a couple of weeks of that. And in some ways, it's providing a hedge for us. The SPYRUS had their own inventory for their authentication product and then a bunch of what they do is related to software offerings. So that's a positive hedge as we close that deal. We'll talk a little bit more about it as we go through it. We continue to have the Canadian dollar erosion this year versus last year. We're starting to see some good movement of the U.S. dollar in the last couple of weeks. And again, today, it's strengthening and that ultimately will help us. But the timing of the 2 bigger orders and those renewals happen in March as well as August. So assuming the U.S. dollar strengthens as we go into the first quarter of next year, that could be a very positive outcome for us related to the renewal with the joint service provider of the Department of Defense or as we like to call it the Pentagon. We're going to talk a little bit about this, that we've had -- we talked about in the second quarter. There has been some pulling back of dollars that were put out there for the COVID or the pandemic and that has seen some of the uptick in MobiKEY subscriptions that were procured during 2020 pulled back in '21. As you're probably well aware of the U.S. federal government is spending money at a record pace here, but not a lot of that in technology or data security, the focus is obviously on other issues. And for us, what we do -- we're still at a level that's much higher than where we were pre-pandemic. But we -- some of those dollars that were put out there for one time or bridge work from home investments have been pulled back. From a Navy perspective, we continue to be stuck, let's call it that. The new prime contractor for the Navy being Leidos is working through the early months in servicing the Navy. I mean the number of items in the catalog where Navy personnel can procure, including us, hasn't been laid up yet. So we're at a similar level in DON users as we were about 5, 6 months ago. We're hoping during the fourth quarter that finally gets resolved. Frustrating as it is, we are one of a couple of hundred different offerings for the Navy. So they have a bigger issue than just whether they can buy MobiKEY. The broader issue is their ability to procure different technology through that Leidos relationship. I should point out also that we had greater than traditional costs in the accounting and finance team as we went through some turnover and change, we don't believe those costs will happen again. But there was some investment in new people, headhunter fees and those types of things. So when you look at our fixed costs, just note that. Talking more about the services revenue or that recurring line, again, as we talked a little bit about the MobiKEY application software revenue eroded a little bit from the second quarter. Again, that's primarily related to come COVID dollars being pulled away. And again, why it looks so stark from Q3 2020 has everything to do about exchange rate. So there is 2 impacts here again when application software revenue drops from $1.9 million in Q3 2020 to $1.6 million in Q3 '21. It's primarily related to FX. It's also related to a lower number of MobiKEY subscribers. Technology as a service, we talked about that this was inherited when we did the GroupMobile acquisition, back some 3.5-plus years ago. We've continued to have a relationship with a couple of accounts in this area. As we move forward here, we're not going to be investing aggressively in technology as a service or effectively leasing hardware with some services to it under a longer-term model. We think there's a better way to connect with the client. And one of those ways is our other services line item, and that's 12- to 60-month contracts where we're providing extended services and training and other features to them, again, under a defied contract where they're paying us monthly. This number will continue to grow. And with a lot bigger same quarter year-over-year, again, if not for FX, but this is an area that we think we can do quite well in as we move forward. When we bought PCS Mobile is more of a transactional business in the data, well, in the LPR space. We've pivoted it to being an outcome or a services-based approach. And we are taking a higher standard of service than is available on the industry. And today, we're seeing a really good uptick from clients about wanting to renew their support contracts at greater dollars for us, but there's greater things we're providing. As we've talked about in the past, we've made a real investment in high-quality talent that engineer like people, design other people and in making that investment, you need to get a proper rate of return for it. But once they're invested in these people, they're not a variable cost. They're a fixed cost for you. And so we are just starting to see that revenue grow related to that initiative, and that's creating better packages, better bundles for wholesale support and training and then having our clients obviously walk in for 1 to 5 years. As we continue on here, again, as we talked a little bit, G&A costs were a little higher. We expect those to come back to the levels of prior quarters. R&D has been uptick. That's primarily related to the SPYRUS acquisition, 2 weeks of employees acquired from SPYRUS and then selling and marketing is clearly under control and reflects the fact that Canadian dollar that strengthened so that the U.S. dollar impact of sales and marketing initiatives, one, are out of hand, but they're worth a little less in Canadian dollars, again, because of the strength in Canadian dollar during Q3 '21 versus Q3 '20. One of those metrics I often like talking about is the quality or the return we're getting from a sales and marketing expenditure dollar that we invest in. As you can see from the slide in front of you, that's continued to get better and better, which is really a simple equation. It's gross profit over sales and marketing expense. We as a business continue to expect ourselves to get greater gross profit for every $1 we're investing and for this to continue to improve as we move forward. I should touch on it, I know I flipped slides here, but one of the ways you're able to do that is internal promotion. And what does that mean? It means you're bringing people in through your business at a reasonable rate of pay or career salary. And as they learn and get better, if they take on greater and greater responsibilities and you're able to get a better return out of $1 that you're investing. So we're very strong about first promoting and giving people that are a part of our family an opportunity to grow and take on bigger responsibility before we go into the marketplace and look to bring in new talent. That will have an impact on that gross profit divided by sales and marketing expense metric. EBITDA less foreign exchange costs dropped. And that's clearly because that we had a weaker third quarter EBITDA wise than we wanted it to be. We know what our goal here is that continue to grow that far to be bigger and bigger numbers, particularly bigger than Q2 '21. From a balance sheet perspective, it's healthy. It's gotten healthier. I guess if you want to call it that, we obviously spent some money buying a company at the end of the quarter, which you have greater assets than you would have normalized without the same level of a full quarter of operating cash flow from that investment. Not a whole lot directly to point out, except that this particular point in time, when you look at net working capital, adjusted for noncash items like deferred revenue or contract liabilities, it has gotten better, and we think the balance sheet over time will continue to strengthen. So to be very, very clear about this. We're not in the market right now looking to raise money for the business that we have. From time to time, we explore acquisitions, that could require some data or some form of quasi equity. And so that's my caveat. But at this juncture, there's no capital raise requirement to support the business as it's currently constituted. The other metric we really look at and pride ourself on is the return we're getting for $1 invested. Two things here. Again, we jumped the denominator assets invested by closing a deal right at the end of the third quarter. And with the decreased EBITDA in the quarter that impacted this. So still slightly better than a year ago at this time, less than Q1 and Q2. Our goal in Q1, Q2 this year, excuse me, our goal is to get that back and beyond where we were in the second quarter of this year. And look forward to updating you as we move forward, obviously. Well, let's talk a little bit then from what's ahead. I'm going to be a little more specific. I guess you might say some of this was already put out in the news release from a couple of weeks ago. But I just can't stress enough that over the last 6 to 8 weeks or particularly starting early in September of this year, there is a change for us relative to accessing the hard goods, microchips, storage memory. As it relates to the items we need for our clients, we have done just about everything that we could do. We couldn't build massive inventories because there is not one piece of something that that's only needed by our client base. So there were some selective prebuys where we felt a PO was coming. We did those type of things. We encourage clients as we talked about earlier, to get ahead of their traditional procurement cycles so that they could see the goods come in the third quarter or fourth quarter. But ultimately, right now, we are having a more difficult time forecasting simply because we keep -- there's never a guarantee at this juncture about when a good is going to arrive. And again, that could be a client's parking enforcement vehicle, it could be a cruiser for law enforcement. It could be a tablet, it could be a camera. But there's many different hard goods, let's call it, that do impact us. We are working to -- with our key OEMs to get what, let's call it, stronger and better timing when they're able to deliver. We are an important dealer and partner with players like Genetec and Getac. And so we keep on working with those partnerships so that collectively, we meet our clients' expectations. One of those that was a little disappointing was California Highway Patrol and the large order we announced at the end of the second quarter, we had hoped most of that would have been shipped during Q3. It wasn't. And I'm not at all criticizing our partner in this case, Genetec. Some things are beyond their control, too. But it was -- we've not seen anywhere near the full benefit of that larger LPR oriented order. And we do expect that fully or very close to fully to show up during the fourth quarter. But what can we do? How do we respond to the marketplace when there's variables that -- where you have limited gears that you can pull on. One is an obvious statement. You need to reduce your fixed costs and are always considered a mix of them to ensure that you're getting the value you want. And that could mean from time to time, you adjust headcount and we have done some of that, and that was -- will be reflected in the fourth quarter. We've looked for certain partners when we're on fixed-price contracts, to tweak those a little bit down for the next 3 to 4 months as we work through the macro global supply chain challenges. Partners have been good about this. And as I've said to our board of directors recently, adjusting headcount is something you can do in a shorter window. But ultimately, in the medium term, is not a long-term solution for us to grow EBITDA. So we've made some adjustments, and we expect that as we move through 2022, we will grow again from a headcount perspective as the GP jumps. The second thing you can do, and again, cost is one area that you can pull levers on is to build out those activities that do not require additional human or third-party cost investment. We talked about our engineering and services revenue line item. We have 5 strategic markets or 4 really that should impact us during the fourth quarter of this year and Q1 of next year. Northern California, Seattle through the Portland, Oregon corridor, Greater Denver and Milwaukee, Wisconsin where we have a number of key accounts that are colleges or public safety-oriented clients or commercial enterprises. I think in Northern California that where I can't necessarily talk of the [indiscernible] by area of sacramental and that Northern California, we have some important technology companies that use their technology for their campus parking. And what this basically is, is a hub-and-spoke concept where we have a talent that's in a geography and that talent will be used to deal with 3, 4, 5 strategic accounts, whether that's going on site a fixed number of times a week or a month and some very tailored services to that particular client. That will grow our revenue, our gross profit and EBITDA being much more rifle shot focused and as we deliver our services. So we're looking forward to that. We think it's the right on model. It's leveraging the investment you've made without generating really any new costs. We can continue to acquire businesses and assets that meet our specific business model. And so it's funny to say, well, you want to grow when things are tougher, and yes, we do. It is an opportunity, we think the area of services. And I probably should step back earlier on. I think all of us have experienced moments over the last 12 months, where we're just shocked with the poor quality of service or timing we're getting from whether it's a window manufacturer or maybe it's buying a new car. Things are different than they were 18 months ago. And we -- if we can separate ourselves off a service, we think there's a chance to get enhanced margins. and that's an area we want to invest in. We have very strong engineering capabilities. It would make sense as we go with this hub and spoke services model to expand upon that. If we buy an engineering services company, they will have to come with contracts and clients and talent. And so we think that's an area we should invest in. B, is an interesting one, and I'm not about to say we're going to close on a drone acquisition. And I'm not saying that we're going to go into the -- being an OEM for drones. But that area of a data set that comes from a different source. And so you think of data sets around what a public safety officer is wearing, a body-worn camera. You think of fixed and mobile cameras, LPR activities, in particular, that's a data set and a number of large urban communities use drones. Above major arteries or highways way up, you want to hear the buzz or see them. And it's bringing those different data sets together so that you can make a more intelligent, real-time decision, if not, how to artificially creative action delivered to you based off of those data sets. So we think this continues to be an area to invest in. We have seen ourselves with our client base starting to move beyond LPR and work with them on some of their cameras on campus in particular, where those cameras have nothing to do with LPR. The motion cameras, cameras in front of a book store and their software applications that are used where the camera will react to an environmental factor and trigger a response. So that could be if they hear a loud thud at 3 a.m. in the morning within 100 feet of the front door of a bookstore, that may trigger a warning signal to on-campus police that do a drive-by review because that sounds shouldn't be happening. More and more, we're working with our clients. They integrate again their data sets. It sounds like a sexy technical term. But simply put, you're trying to garner as much information in on a real-time basis, react to that before the negative event happens or as quickly as the negative event happens, you're addressing it. So -- and then the third type of business we're looking to acquire is much like the SPYRUS Solutions acquisition. I guess, nicely, I would call that unfinished business model, not a broken company. And we're able to go in and because we have a little bit of capital, but more importantly, we have a sales and marketing team, and we have a software engineering, network engineering capabilities, we're able to add value to that company, help finish off the technology, deliver it to the prospective client base and hopefully make abnormal returns as a result of bringing our capabilities to the table. Look, you can't buy 5 businesses like that at once or you'll -- I'm using that as an example, you'll swamp our current talent. But these are the areas that we're looking at. We think they're a good fit for us, and acquiring during periods of challenge if done properly is a good thing to do. The fourth response that we have is not related to acquisition, but it's related to what we bring to the table from our own software engineering capability. And so we recently announced MobiLPR. That's our own mobile license plate recognition technology app that works on an Android OS-based device. It's currently available on the Google Play store. What's unique about that is now you're using your phone as the camera to be able to capture a plate image and respond to it using that same hot list or database that you would use for the Genetec AutoVu mobile and fixed technology. We think this is a great additional offering for our current client base. It's a reason that new clients will look at switching from alternate technologies to the Genetec AutoVu technology and ourselves, and it's a reason that people will start investing in LPR where they haven't otherwise. So we -- this was a smart, smart development. It was initiated by listening to our clients, particularly in the law enforcement arena. But again, MobiLPR isn't just for public safety or law enforcement, it's also for parking. And we often think of parking just as a garage with the automated booth and I enter. Parking is a lot more. It's generally on campus. And these -- in this type of technology is good for a manager or a party that's responsible for overseeing parking garages or parking, not necessarily in the garage, but it's on a space that's out on flat top. You can see the use cases with a Saturday afternoon, SEC football game in the where you have 100,000 additional vehicles on campus and not every one of them are going through a parking garage where you have your investment already made and cameras in place. So this extends or as we like to call it out, it's a force multiplier, whether it's again parking or whether it's for law enforcement. Technology we're coming out with, hopefully, in Q4, but it could run into early Q1 is a technology called [ MobiKEY X ]. It will probably be one of the largest advancements, if not the largest one in our MobiKEY technology over the last decade. We're -- so the line is everything what you currently have with MobiKEY, but what it does is we're partnering up with a player where we're going to deliver desktop as a service on demand and it will be in the cloud. And why this is important to us is that as the Department of Defense moves more and more to adopting Microsoft 365. And what that is, is the applications a user would want to use, we now can deliver the virtualized desktop, at the same time, MobiKEY for the secured protocol and user authentication. So we'll be delivering a turnkey solution directly to the government not having to leverage VMware or Microsoft Hyper-V or Citrix. But with our partner, we'll be delivering desktop -- DaaS, desktop-as-a-service for certain DoD clients and then eventually roll that out civilian wise. This is an important movement for us as more and more things go to the cloud, obvious statement, but desktops being delivered on demand is really important from a government perspective. So we're going to talk more about this. This is me teasing the marketplace a little bit early, but it goes to the creativity and the ingenuity of the talent we have that build our technology and think about the applications our users will require 1, 3, 5 years from now. We also announced a couple of weeks ago, a shift in our Chief Technology Officer office -- or an office of the CTO, excuse me. Yamian Quintero, who's been a good partner, a good business leader for us has moved on. And Alex Shpurov, who used to be with us a number of years ago in a development role and then went on to great heights with his career in the banking and finance vertical, has stepped in, stepped in a few weeks ago as our new CTO, and he brings a fresh set of ideas. And those fresh ideas, we're excited to adopt some or all of them. I won't read what's on -- fully read what's on the page here, but we are exploring where and I often get access, how we can plan the broader blockchain arena we think about PKI or user authentication, in particular when it comes to blockchain. We think about securing information in the cloud for banking clients. We also think about AI as it relates to our manufacturing or IIoT offering called ActionPLAN. So stay tuned is the message here, but you respond to a changing marketplace by responding yourself. It's not a full company pivot, but what it is, is us evolving our technology or come out with new technologies that meet the client needs. So this is Alex. We think we have an organization that will support him well, and there's a lot that's going to come out of this over the coming quarters. So the 5 ways to respond: Control the cost, use your current cost structure to generate better or more profitable revenue streams, invest in companies that meet your needs that you can get a normal returns on based off of the volatility in the marketplace and best in talent like Alex Shpurov come up with new ideas. That's the right way for us at least. We're going to be active in the market, and we think we're going to be a winner here over the coming quarters. So here it is again. So you say, what's the forecast for the fourth quarter. Look, historically, we've not put out forward-looking numbers specifically. I have hit to that with you today very clearly. Our goal is to get Q4 rightsized again as a result of both COVID that hit us in late Q3 to work through them and then have a pattern and a cadence where we understand the longer timing and are able then to have appropriate revenue, GP and EBITDA for that. I would expect that the change when it collects in our favor and reduces from a large number of weeks to delivery to back to 2 to 3, we're going to see an uptick in a particular quarter for that. Might that be the first quarter, I would be aggressive. I know there is no media reports yesterday saying the docks in LA are starting to free up and things will get better. I'm not a believer in that. I think with further supply chain disruptions to come as the vaccine rules roll out for the logistics and transportation shipping industry, both bottlenecks going away anytime soon. We also know that usage in Asia got unstuck, let's call it, cleared up so that the parts or the tools that will ultimately build the plants that deliver more ships get manufactured. I live here in the greater Phoenix area, as you're probably aware, Intel has a massive investment in Chandler, Arizona, in a new plant to create new capacity or new supply. But you need the components to be able to build the plant to build out the supply and that doesn't turn on, that's not going to happen in 1 or 2 quarters. It takes 2 to 5 years. So not trying to be negative. But if you consider where we are, and the greater investment in the green technology and the pivot in the way we move goods in the new economy that require a lot of microprocessors. So just keep in mind that there's smarter people than me that will forecast on the global supply chain microprocessors will free up. It's our view that's not coming in the next couple of quarters. And when I say that is, I'm not building a business off a host and just praying that something doesn't bite us in the bump. Our approach here is to expect best then we're all going to be massive winners. So we think at this juncture, we've taken prudent steps to control costs and have a plan in place that will deliver returns that are more reflective of Q1 and Q2 in the fourth quarter of this year and Q1 and so on next year. So at this juncture, expect to hear from us late December, early January where we'll give you an idea of how the fourth quarter relative to revenue and gross margin. And we won't be able to communicate with you the EBITDA for obvious reasons [indiscernible] final quarter of our year, and there's a lot that will happen, et cetera. But we do want to give guidance, and we want you to understand where we are with the execution of our model. So at this point, I would be happy to take questions. Operator, I'll turn it back over to you.

[Operator Instructions] There are no questions in queue.

Excellent. I'm going to take that I give the right amount of information to say, look, if there -- I know from time to time people prefer to e-mail, only glad to have that discussion. I just wanted to thank you for those that continue to support us. I appreciate it. If you joined midway through this call, there is a replay and let me just give you those numbers. I think it will be available today after 4:00 p.m. Eastern. at 1 (877) 481-4010 or internationally 1 (919) 882-2331. Please use pass code 43782. And that replay will be available until the end of this month on November 30 at 9:00 a.m. A copy of the slide presentation will go up on our website. And again, if you want to check do so. To our American sisters and brothers, a very happy Thanksgiving. during this holiday season and enjoy with family and friends. God bless. Have a good day.

Thank you, ladies and gentlemen. That will conclude today's conference call.