Route1 Inc. (ROI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Route1 Fourth Quarter and Full Year 2023 Business Update Conference Call and Webcast. [Operator Instructions] As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, April 25, 2024. I would now like to turn the call over to Tony Busseri, Route1's President and Chief Executive Officer.

Thank you. Good afternoon, folks. It's been a couple of months since I spoke in this format with you. Always as a reminder, if parties want updates or questions, they can e-mail me or reach out to me on my mobile device at (480) 578-0287. That's always on the bottom of our news releases. Before we get going into today's presentation, I have to read the disclaimer. So bear with me. Again, good afternoon, and thank you for attending today's call. 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 inaccurate and incorrect. These statements involve risks and uncertainties, including, but not limited to, the risk factors described in the reporting documents followed by the company on SEDAR excuse me. Actual results could differ materially from those projected as a result of these risks and should not be relied upon as a prediction of future events. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. Estimates used in this presentation are from company sources. I also need to point out that on today's call, we use names that are either registered trademarks or trademarks of Route1 in the United States or Canada. So let's dig in. Always as a reminder, I'd like to just touch on our business model. We've continued to pivot where the sales are principally generated from being a pure play software cybersecurity company to one that's much more of a services company that's outcome-based focusing on delivering usable data for our clients through video capture-based technologies in a secure format to help them with their outcomes, whether that's improved profitability or better safety or the core technology we work with today as we have over the last couple of quarters is automatic license plate recognition technology that's provided by Genetec, and we act as the services provider, the delivery system, the planner, the integrator and most importantly, the party that helps our clients with the outcomes they're looking to achieve. We'll talk more about that as we go through today's presentation. But first, let's speak into the numbers we recently put up. We put on a news release last night. That release reflected a year that ended much stronger in the second half of the year than the first half. In aggregate, the results reflect that pivot or turn that started in 2021, moved through 2023 and '24 should be a year that we see much more progress as some of those larger MobiKEY contracts that are no longer with us leave the results historically, and we see with the benefit of our turnkey engineering services model looks like. Quickly to highlight again, and we'll talk about this in a little more detail. The revenue was impacted in 2023 from a lessening of value-added reseller business, reselling rugged devices like laptops and tablets and a lessening of the MobiKEY subscriber base. In aggregate, it took us down from the prior year by about $4.5 million. The impact on gross margin was around $700,000, which to me is interesting because we lost more in MobiKEY business subscription revenue that basically is at 100% margin than that $700,000. So what that says is the balance of the business grew and was successful. Ultimately, we get judged by the EBITDA and the net income or operating income we generate. So 23 is not what I described as the end state for us with this pivot or adjustment in our sales model. It's a step along the way. We talked about in our news release after our third quarter results stability was the theme for us. And unfortunately, when you look at the full year results, especially the type of year we had, the first half being a little weaker than the second half, it's always hard to see it. But when we do look at the results by quarter as shown here on Page 5. The thing that jumps out of you is the fourth quarter looked a lot like the third quarter, so a little more stability again. Do we want operating income to get above zero, yes. Do we want EBITDA to grow about $300,000, yes. I look forward to showing what the first half of this year can be in 2024, but ultimately, we are taking steps in the right direction. Just, again, the point at this, and we can see the details much better in the coming 2 slides. But we lost about $225,000 in quarterly subscriber revenue from MobiKEY, but GP and more importantly, the EBITDA did not decrease in the same way, which says to us our service plan, our business model around delivering professional services multiyear support contracts, the recurring theme of our business, aside from MobiKEY and software as a service or cybersecurity as a service we're seeing the balance of the business pick up and grow. And I think for me, that's the key theme coming out of this. , it's hard to see it. We're pleased with Q4 in the context of showing another quarter where we're stabilizing and again, the first half of 2024, should really give you that strong feeling. And as we exit the first half of this year, we believe that the trailing 4 quarters will then show EBITDA that's -- if you add the last 2 quarters of '23 with the first 2 quarters of '24 to be in excess of $1 million. So heading the right direction. Let's drill into that revenue model just a little bit further, so it becomes more clear. As I stated a few seconds ago, application software is where MobiKEY used to live as a much more robust piece of our business. for all the reasons we talked about before, basically, Microsoft doing a very good job of integrating this service or this capability into their suite in an enterprise model, have displaced us with a couple of DoD accounts of size that's taken down our application software revenue base. Do we think it will go to zero? No. It's a much smaller number and no longer is the core to Route1 is. What you can see also from the slide that's number page 6 it's the growth in professional services, those services related to delivering video capture-based technologies to supporting our customers more importantly and using that and affecting outcomes they believe they want and new outcomes that we're able to educate as subject matter experts with them or to them and help them grow in the use of the technology, creating a much more sticky position for Genetec and ourselves with that end user. So moving ahead, if I may, again, just highlighting the value of our support agreement, which is a key part of our business, one can see that we're growing and growing and growing. We crossed in Q1, and you'll see more about this for me, at least, the magic of USD 1 million a year in support contracts and that will become very transparent when we go through the Q1 results, but I am hinting out here quite strongly that, that's what we delivered in the first quarter of 2024, more than $250,000 revenue that's related to support contracts. So meeting a metric that's important to us, talking about metrics, let's jump right into then those 3 metrics I keep on pointing in the press releases that describe success or will describe the success or failure for us. And the first one is, as we said, the non-MobiKEY gross profit generation on a quarterly basis, need to get above $150,000 a quarter. We've done that 2, of the last 4. Obviously, the goal is 4 successive quarters in this arena. So we are confident that's now who we are. We talked about the recurring license plate recognition technology support agreements. I've said very clearly, Q1 '24 is now in excess of $1 million in aggregate on an annualized basis. And then obviously, fixed cost control, you want to grow your cash generation and ensure that you're not growing on an equal basis, your direct costs or -- your indirect costs. So those 2 things working together should expand the EBITDA for us. That is growing GP. From this new business model and controlling the fixed costs, so getting greater leverage on the investments that we meet in people, talent and other third-party costs. So again, we think we're moving in the right direction. Stability comes before growth, and we'll talk about that as we move forward. I want -- I've touched on this slide a little bit. The quarterly support contract revenue. I'm going to skip over this and go to slide 9 right away, the indirect costs we touched on not a lot to talk about except that there's a consistency in that fixed cost structure, and we have it well under control. So if we move forward here and talk a little less about the numbers and the outcomes from the last quarter and the last year, in a little more detail, what is Turnkey Engineering services, and I know I'm going to talk in maybe a little bit MBA terms. But it's about working with our clients to use technology to achieve again, things they believe they need now, and we can help them get even more. In a world that's all about artificial intelligence that's about turning things over to a computer or an algorithm or systems what we believe very strongly is we do not live in a world where technology survives on its own. When we work with Higher Learning Center, where it's a university or college or we work with a police force or other public safety group, they believe they need something, and that's why they're investing in LPR. We're able to work with them with some of our talent that has a lot of experience, not just to help them with that immediate need, but something much more so they get greater value out of the technology, again, enhanced profitability, enhance public safety. So it's about outcomes based, not just selling its operations, and it's constantly being in front of our clients. So on the day and age where we're very comfortable on a mobile device or using a video-based app to talk to people. We like going out and working with them and spending the time to talk. They hear there are issues and concerns and deliver a better outcome than they expect. Quite candidly, we have a number of accounts that we've grown quite sizably over the last couple of years because of that, because we get out, because we work with them, because we work relentlessly that there is an issue with the use of the technology ourselves with Genetec, are able to create the engineered outcome. So that it does get fixed and the technology goes further than they expect to meet their objectives. Ultimately, we think this level of service, which might historically have been called a white-glove service package. We're unique in delivering this in the video capture-based technology arena for sure in LPR, we're very proud of the relationship we have with Genetec they would open. I believe they would openly recognize us as a different type of dealer or service provider, and we see a lot of growth still in this area. The use of LPR leads to video surveillance and other technologies, but holistically, we're using cameras and video to capture data on a real-time basis and be able to use that for an outcome. And that to me is what we're at the core all about when using that data, we obviously have an expertise in authenticating users and securing protocols or that data when it's at rest in transit and use -- and so those things coupled together really puts us in a unique position relative to our peers in this arena. Going a little further, if I may, talking about our target audience and customer segments, what are we going after this year is very direct. Our installed base, call it, 130 to 150 current LPR -- unique LPR accounts. Our goal is to work with them and you guys say, why haven't you done that historically? Well, we have, it's the continued investment to get to know the client and grow the relationship. And so we keep on hiring talent that has subject matter expertise has been using a like technology that can work with our client base across the country. Again, that could be college or University. It could be corporate headquarters with parking and it could be a public safety agency. I won't be repetitive, but I also need to drill into the fact that we work with a number of great partners in the parking arena, whether it be a passport, a T2 and LAZ, and I could mention many more. And if I don't mention the names, there's no disrespect or saying one is more important than another. There are a number of players in the parking space that we work with openly to help them, help their end users and their end users become our end users. And collectively, we deliver a really good outcome. The persona of end user we're looking for is someone that wants more than a transaction or a blue collar party to come in and turn a ranch and install a piece of hardware. We're looking for a party that recognizes their limitations in using technology and wants to work with a party like ourselves to get more than what's just described in the instructions on a camera. It helps them expand their investment in LTR technology. That's a little bit of what we're doing. So we do direct selling. We also work through partners. But in all cases, we support that end user in the use of the technology. Now I talked a little bit about or a lot about LPR relative to other meetings, I quite often get asked about what about your cyber security offerings? What about MobiKEY, what is about PocketVault? where do you stand with them? Where are you with the government? Look, I've been communicating that MobiKEY is a technology that has and even more nichey use case today. It's for those that continue to use VPN and want the most secure approach to access and gather when they're on mobile. So we have a much smaller base of revenue today. I don't see us ever exiting that business. But I do see us using that technology in combination with the PocketVault P-3X technology we acquired with SPYRUS a couple of years ago. So 2 different use cases for mobility. SPYRUS is when you're offline or you don't trust the Internet or Wi-Fi, you're going to like one of our clients, the state department for the U.S. government, they use the PocketVault P-3X technology and with their Embassy employees around the world. So I like the idea of ultimately being able to support them when they're in a secure and unsecured environment with our -- with MobiKEY and/or PocketVault. PocketVault definitely has become a more robust revenue generator for us in the world we live in today with a lot of insecurity and distress for networks or if you're on the Internet in specific countries. PocketVault has been a very secure way to leverage and use enterprise data in a very fragile or in secure environments. And so quite candidly, we're seeing greater interest in PocketVault as a cybersecurity tool than MobiKEY X both of them are smart card-based technologies to authenticate users or 2-factor or multifactor authentication. But the PocketVault technology certainly has a better niche and better at this time in our mind, offering because it delivers where they're an environment where Microsoft or others can't because they need a cloud-based or Internet to back up their delivery system. So my guidance to you is MobiKEY is not going away, but MobiKEY is much smaller and it is one of our cybersecurity offerings and also gives us a bonafide our credibility when we act with public safety groups that we are -- we meet certain certification levels. We deal with highly sensitive data, and we're now working in this area. Again, we're not just an installer. We're an outcomes-based player that has a great skill set in the cybersecurity arena. So moving ahead and talking a little bit, again, back to financial metrics, our balance sheet. I think the one thing I really want to talk on here is Tony, I did asked, I said, Tony, "Hey man, when are we going to see that strong improvement in working capital or cash flow or the debt levels you have," it is happening. It is hard to see it but it takes time with the pivot. So the cash flow generation first goes to media principal payments and interest payments, you improve your vendor relationships with a little better trade credit, repayment timing and eventually, you start seeing that improvement in your absolute dollars of debt outstanding or the net working capital position. So this Slide 14 summarizes our current debt position. And so what should you expect from us? Windsor will be paid down by the end of the year. I don't believe our lines of credits will grow above these levels. They will come down in Q1 for sure because I know that. And we should see a decline through the course of 2024, so that we finished the year with less debt and a better working capital position. That's what I expect '24 to be. So ultimately, what the stability means repetitively trading cash flow, using that cash flow to improve your working capital position and reduce your debt load. That for us is the definition of stability. So as a shareholder, I look at this and sometimes I go, "Hey, are you guys going to be around a year from now?" Do you need to raise capital? Well, I think we're going to be around a year from now. And for sure, we will not be raising capital to deliver on the current business model. What do -- again, so growth in capital or if we were to raise more debt or we were to raise equity, would be tied to an initiative where our balance sheet was in a position to carry that load on its own. But today, with where I am and what we're doing for the first half of 2024 is, "Hey, build that pipeline up." Because pipeline will lead to sales orders or purchase orders, which leads to cash flow, organically grow our cybersecurity practice. Four quarters of trailing EBITDA that lead to a total in excess of $1 million, improve working capital and reduce third-party debt levels. So if I get through that in the next 2 quarters, and basically, we're through one, so we obviously have a good feeling how the first quarter of '24 went, I think we'll be in a position in the second half of this year to make a compelling argument why where maybe the stock price should be a little more robust or we should be looking at growth. And the growth, I always hope we're able to do it without diluting our shareholders, but we will be looking at acquisition later this year in early '25. And that's where we're setting up as a company. When we started this pivot, the goal wasn't just to survive. The goal wasn't just to have a nice solid baseline and harvest this. It was to take us into an arena where we can leverage core competencies and software engineering, certain products that create cash flow and drive into a services model more robustly that was leveraging the Genetec LPR technology and/or leveraging other types of video capture-based technology. So we're getting there, and I know it's never fast enough for our shareholder base. But we, as a team of, call it, mid-20s employees are working very hard to continue to build our brand, more robust pipelines, greater cash flow and ultimately, a clear balance sheet where you say, "Hey, man, this stock probably should be worth a little bit more. I wonder what they're going to do next." And scaling the business model is the next for us. So I'm going to leave it there and say, I know I'm leaving and hanging a little bit, but I should be doing that. And I should be talking to you again, not after the first quarter results, but after the second quarter, and we're talking about the trailing 4 quarters, and we're talking about the improvement in work [indiscernible] and we're talking about the reduction in debt. That's what I want to be talking about in our next call. I'll make it more of a Q&A session. I felt today would be appropriate just to lay out information because we're not there yet. And we do have more work to do, and we're very focused on that. So I wind up today with my comments of saying thank you to those that continue to believe that have taken their capital and invested in our stock. We're excited about the next year, the next couple of years for sure. And so I'll turn it back over to the operator and say, look, just before that, thank you for joining us for today's conference call. If you joined halfway through it or want to hear a replay of it, now you can call 1877-481-4010, use passcode 45656 and you should be able to pick up a replay. If at any time you have any difficulty with that, you can contact me. A copy of today's slide deck will get on our website a little later today. And again, to be repetitive, if you want to reach out and chat 480-578-0287, my name is Tony Busseri, I'm the President and CEO of Route1, and we're proudly driving the business forward. Thank you. Operator?

Certainly. Thank you. That will conclude today's conference call. You may disconnect at this time, and have a wonderful day. Thank you for your participation.