Route1 Inc. (ROI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Route1 business update conference call and webcast. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded Tuesday, February 28, 2023. I would now like to turn the call over to Tony Busseri, Route1's President and Chief Executive Officer.

Good afternoon, everyone, and thank you for attending the call today. Before I get into the legal notices I need to go through, I apologize about having to cancel I think it was Thursday's call and make it today. Like a lot of other people, I got hit with a pretty good bug on Wednesday and just couldn't get myself up for it. I was in bed for most of the weekend. Grinding it out right now and doing better, and hopefully, today will be a productive call. So let's go through the legal preamble, and then we'll get into today's presentation. As described on the company's slides, 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 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 as filed by the company from time to time. 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 use names that are either registered trademarks or trademarks of Route1 Inc. in the United States and/or Canada. Now let me flip ahead. We've been solid for a little bit, obviously, with our Q3 results and then Q4 is coming up, call it, about 6 weeks from now. And it shouldn't be, I guess in some ways, a surprise. The 2022 year for us was one of much change and sales-focused pivot and streamlining the company to better meet the organization we want to be as we move into '23 and beyond. And today, my hope is to share with you again a little bit about where we are as a company, what we're -- how we did over the last 100 days against predetermined metrics I'd shared with the marketplace, and what we see coming down for the rest of 24%. It's not a ton of information. It's not heavy on financial metrics, but it is strategy and direction and sets the table for when we produce full year audited financials, and then shortly after that, the first quarter of this year. So let's jump into it by again reminding ourselves of who we are today. I hate being repetitive, but there's been change. And again, I think it's important to understand where we feel the business opportunity is. We are using data in a usable format that's captured or that's produced by video capture-based technologies. In doing so, we're working with clients that we have strong and longer-term relationships with to help them with their outcome and in certain cases, help them understand with the data that they're collecting, what type of outcomes they can expect. The technology focus has moved from principally being MobiKEY to, now, our focus is centered around ALPR or license plate recognition technology and growing around video surveillance and access control. All technologies are IP that our partner Genetec brings to the table that we can add value with in working with the end user. It's worth noting that we are a Genetec Unified Elite partner, which is the highest standing. No longer do they look us just as an ALPR partner, but we're a whole partner with Genetec, a technology partner and an outcomes-based partner for the end users deploying one or more of Genetec's technologies. When we think about what brings -- what's unique about us versus other turnkey engineering services company, is the fact that we've been a software manufacturer. We still do software development and design work. We also have expertise in system and network engineering. So what we say to our clients, not only do we scope out the use of a technology, install it and train you, we truly understand how to use that technology to create the outcome, whether it's in public safety or for commercial reasons. And we think that's a major differentiator. There's no client that we're aware of that buys their technology, wants it installed and then doesn't want to see you again. The configurations, training, turnover within organization, leveraging the data towards different outcomes, towards different abilities to be on a real-time basis, create actionable intelligence. It's a key part of who we are and why we think we're quite unique as a technology partner of Genetec's. So how are we going to know is the business model, and we go to the punch line here, as I like to say, the change or the pivot or the adjustment was successful? And as or more importantly, is it scalable? Because no one wants to invest in or run their career in something that's a $20 million to $25 million company that grinds out 2% to 5% profitability improvements each year. Our '22 year was one of, unfortunately, losing some MobiKEY accounts, seeing the marketplace evolve in that area, understanding what today's supply chain now looks like for rugged devices and building a services model that could, with time. create new recurring revenue streams and build out a book of business that was scalable. So our definition that we'll share with you here of 2 metrics to follow with us through the '23 year is, how quickly do we get our quarterly non-MobiKEY activities generate more than $1.15 million a quarter in gross profit? And that's an important metric for us because when we sustainably do that, it tells us that we're beyond our cost structure being covered, and we're starting to move between $1 million, $1.5 million, $1.75 million annually of EBITDA in Canadian dollars. So that's an important metric. And when we share with you our results going forward, we'll package them in a way that you can track to that. The second one is not a new metric necessarily for the last couple of quarters, but it's getting ourselves to $1 million a year in annualized support contracts coming out of our video capture or LPR-based clients. We're getting very close to that, and we're excited, when we get above that, what that means to us. We think that's a key part of generating $1.15 million quarterly in GP from non-MobiKEY sources. These metrics will obviously evolve and change based off of where we are in our life cycle development. And as we move into the second half of this year, I'm sure we'll share additional ones with you. But in saying all that, meeting these metrics is not success as in we have $1 or $2 stock again, but what it does is validate the business model and say to us, we believe that this model is scalable and we can go from $25 million a year back to looking to grow organically and through acquisition to $40 million, $50 million, $100 million a year. So really important for us the first half of this year, in some ways, is the validation statement. Our numbers are cleaner from the perspective of [ good bet or ] otherwise. There's less MobiKEY with them, so you can really see what the video capture turnkey engineering services business can generate for us. So let's talk about the last 120 days. We put -- so we have some metrics out there after we delivered third quarter results talking about the next 120 days. And so specifically, working capital management. When a business no longer has those lumpy, productive, annually recurring contracts that get renewed MobiKEY, there is generally one in March and one in August, each of them being around USD 1.5 million to USD 2 million a year. Those are big nuggets that come out of your cash flow, and so important for us to have success in that area, to pivot the business away from being reliant upon singularly MobiKEY renewals. And so where are we right now? Well, growing the ALPR business and the recurring support contracts is somewhat offsetting our losses, and we believe as we continue to have success providing a high-end service to our clients, $1 million is -- will be a number we look back on in the not-too-distant future. The second part I would say is, is that Q4 around cash flow management was lighter than Q3 and not the type of robust quarter that we had hoped, partly because the PocketVault devices we acquired from SPYRUS didn't get into manufacturing until recently, and that had impact on sales orders that went unfulfilled in the fourth quarter but will be fulfilled in this quarter. So it's a movement between periods, but it means Q4 is a little thinner than we wanted to be, and we did have a large rugged device transaction with a community in the south of -- Southern U.S. who -- what that got bumped into, the sales order being delivered to us in January from December. So it's really hard to look at a business or a revenue model pivot in the context of quarter 1 quarter. Our third quarter was very strong or stronger than we expected it to be. We shared that with you. We said, hold on now. Just careful here, because Q4 is not going to be quite as strong. And that's accurate. Q1, on the other hand, has the benefit of some of those things sliding into it. So you'll need to look at us over 4, 5, 6 quarters to understand how the business model adjustment is working out for us. But we've made it through Q4, we're almost through Q1, and we're excited about the second quarter as we move towards that. Note in debt repayment. I've made this comment when people said, "Well, what are you doing with your cash flow that you are making?" Yes, we're cash flow positive. We're addressing working capital balances. We're addressing paying down notes and other obligations. And so net-net is by the time we get to the second quarter of this year and definitely into the third, we should see our overall debt levels come down quite a bit. And we're excited about that because when debt levels come down, that frees up cash flow in our lines to acquire or to support the stock or however we think is best to create shareholder value. The second update here should be the fact, again, what I highlighted, that Q1 is stronger than Q4, and therefore, we'll see the debt levels come down from the fourth quarter. I should talk about the cost-cutting measures that we took in Q3 and Q4 last year. The large additional measure was wrapped up in November, December. It's always an important thing to consider. You cannot cut your cost to growth. You can -- you definitely cut your cost to balance or rightsize the fixed cost structure, a semi-fixed cost structure, to the new revenue model, and we've done that. We've also hired a salesperson in January, name's [ N. Cooper ] in Colorado, and he's on the ground supporting that state as well as other ones on the LPR side. But we have reduced the overall workforce or the talent level here down to about 31. From time to time, there will be growth and adjustments, but we're at that level that I think we've been successful in cutting costs to a level that we can support. The other part to this, we shared this in communication the second half of the year. Our Board of Directors has gone from 5 independent directors to 3. The overall compensation per director is down 2%, and so I recognize and I tip the cap to those professionals that understood that the business had adjusted and there only can be a certain level of investment in independent directorships. So that's happened, too. Moving forward away from debt repayment and wanting to talk about pipeline of sales or the more attractive things, a few updates to go through, if I may. We were recently the low bidder responding to a State of New Mexico RFP for the use of fixed and mobile LPR technology by state public safety agencies. So to be specific here, it wasn't a "$1 million or $10 million or $1" award. What it means is we are the low-priced proponent or provider for the state, and their first move if they want to buy -- fix their mobile LPR is to contact us to see if we can support them. We think there are state agencies because we're in dialogues with them now, they'll be buying under this contract vehicle and will have a strong positive impact for us through the course of '23. I want to acknowledge the work here that Genetec did with us. We came up with a very creative approach to supporting the state government and local governments so that they can invest in progressive technology to improve safety in their communities. And I'm excited to talk more about this as we move through '23 and the results associated with this contract win, just grabbing a [ turnkey ]. Again, I mentioned early on the relationship with Genetec. I don't want to overstate it. They have many, many other strong partners that have different backgrounds. Some of them are more access control-oriented or video surveillance on the cloud Stratocast-based technologies. But we fit into the mix. And if I trust the words of our partner, they've been thrilled with the work we've done over the last year as we've become a stronger service provider and a partner to the end users, and there's a lot of positive days going forward here. It's important to stress we are building more than an LPR business. We are building a video capture-based technology business. We are now accredited. A number of our technologists and salespeople can sell from Genetec more than LPR. We've done campaigns here in the first quarter of this year to create awareness with certain agencies around our competencies, our capabilities. We will not ever move away from LPR because we're pretty darn good in that area with mobile LPR in particular, but there are technologies that Genetec brings to the table that we are going to sell and build deeper and robust pipelines. When talking about, lastly, relationships, with [indiscernible] it's often too many cliches and it sounds like textbook stuff. But the truth with this in today's world, and I was just talking with a rugged device manufacturer team who visit me today and their CEO that to me, the most profound implication on a business level that's come out of COVID is we forgot how to service people. They don't buy hardware. They don't buy technology. Our clients, again, public safety through the commercial entities, procure and acquired technology for an outcome. There's something they're looking to accomplish with it. And too often, we'll get on the phone, we're sending e-mail or a video call and think that's helping our clients create the best outcome, and it isn't. And so we made a decision, we'll see if I'm right with this, about getting out on our feet and meeting with the clients frequently, whether it's sales, whether it's the field service team, whether it's our head of operations out in Crawford. There's a lot of people meeting with our clients and talking with them, continuing to understand where they think they need to go, sharing with them what we've experienced and how we can help them with that, but more importantly, create better outcomes. And we've had a lot of success, particularly on the West Coast. I want to highlight 3 market areas: Northern California, the whole state of Washington as well as Milwaukee, Wisconsin, where we've had growing relationships with public safety and parking operators, and we've entered into what you'll call the most robust type of support plan. And so we're very active in Seattle and Milwaukee and Berkeley with our clients on a daily, if not weekly, basis around meeting their needs as it pertains to using LPR technology. We think it's a great return for the client. The feedback has been good. We're almost a year through starting the new support plan push, and we're seeing more parties interested today than even 6 months ago around our middle program called comprehensive and more people are looking at the select plans. Because they understand that ultimately, they on their own teams will all turn over, they'll need regular training, regular support and what they want today will change for tomorrow based off of understanding the technology and about what they can do with it. So we're excited about how we're building our pipeline. It's new opportunities, it's deeper, stronger partnerships and bringing better services to the table and outcomes for our clients. I want to talk about PocketVault little bit. I gave a bit of a disappointing update that the manufacturing of the next batch, let's call it, the PocketVault P-3X devices, won't be done until it starts tomorrow, them coming off of the line, or maybe it's Friday, and we start delivering against sales orders. We have a large sales order with an arm of the Ontario provincial government for PocketVault's devices with the State Department and a number of other clients. So this round of manufacturing new PocketVault devices, almost 1,000 units. It's almost all called for. And we'll -- once this is done in March, we'll start in April manufacturing the next batch. And so we've started to create a cadence. Our manufacturing partners, PNY in Jersey, and we -- you say, well, what does that really mean, Tony? Well, there's different components you have to source, whether it's flash memory or whether it's controllers, whether it's other subcomponents, and then you need a manufacturing partner that knows how to use the design and put it all together in a professional and secure way in that secure device for people to be putting data onto it. So look for us to continue to be successful with PocketVault P-3X sales through the course of 2023. Touching on R&D, and I still get these questions, I'm thrilled to have the discussion. MobiKEY, and I'm not being redundant here, never became the big pot. We had some nice wins during COVID, and we just weren't as well capitalized as Microsoft or certain other cloud providers that are working with the DoD on more integrated solutions. Now in saying that, there continues to be a small niche role for us, and we are looking at a new cloud-based technology. I've hinted at that before. We hope to announce shortly a demo client with the U.S. Department of Defense, and in doing so, I'll better explain the way that our new MobiKEY different but same but cloud-based technology works. And this could be an interesting pivot for us. We have very low expectations. We've had some interest. Under our new CTO, Alex Shpurov, we've designed another solution that's unnamed right now. And based off of market feedback, as we've said before, this could lead to a rejuvenation around our cybersecurity and our secure remote access fit in the broader industry. So that's as far as I'll go today on that subject. But it's not lots. We've been investing development cycles, and we're [indiscernible] to be able to talk about that in more concrete terms. I do want to touch on a couple of things. One is, I get asked, well, do you have enough cash to go forward? Yes, we do. All that being with all the proper caveats that go with that. We did increase the size of our RBC facility in the month of February, and you'll note that when you read the Q4 results, that we have a note payable that has been on the books in the last couple of years for around CAD 600,000, and that we've agreed when we refinanced it on the payment plan over roughly 18 months. And so that will get paid off by April 2024. And aside from that, not a lot to talk around funding. Working capital up and down, and we continue to address the imbalances. And then that's where we're at relative to the funding side of it. Today's update was to really let you know we're still here. We are building with success the new business model. It's hard for me just to give you platitudes. You'll want to see the numbers. Q1 is going to be interesting after Q4. Q2 and 3 really should make a statement about, again, the factors that we consider important when you think about how you define success and is this model going to be scalable. So at this time, I'm going to leave the call here. You want to have a private 1 on 1, glad to do it. We'll do another call with the Q1 results. I want to get Q4 and Q1 out, and so mid-late May, we'll have a discussion. That's only a couple of months out. To those that have stuck around with us as shareholders or deepened their positions, I'm appreciative. Because we're not buying back our stock, it's not because we don't believe in it. The cash is being used to pay down debt. In light of the broader global macroeconomic conditions, the Board and I think that's the right thing to do. You know in the middle of last year, a number of us took our salaries or our Board fees and stock compensation -- stock consideration, excuse me, instead, and that reflects the fact that we are willing to write checks, that's our money, and double down that stock. That stock at that time for me was, I think, about CAD 0.12, so I'm under [indiscernible], believe it or not, a little bit. Do I believe in this company? Yes. Do I believe in this business fall? Yes. The team that we have here, I'm excited by. I'm not going to get ahead of myself where I think some of the darkest nights on what you call a sales model turnaround have been -- we've gotten through. But we're not at that point yet, and that's because we just haven't gotten there. And we will get there, where the Q1 and Q2 shows up and you say, "Oh, I get it. I get what Tony has been talking about. This is how it's going to work." So that's my update for today. Operator, there will be no Q&A today. And let me just say that, again, thank you for joining us for today's call. If you're joining late and you want to listen to the full replay, please do so at 1 (877) 481-4010, pass code 47752. That can be heard until 4:30 on March 2. Today, slide deck will go up on our website here fairly shortly. Again, thank you, folks. Operator, thank you. Have a great day. Cheers.

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