Tantalus Systems Holding Inc. (GRID) Earnings Call Transcript & Summary

Good afternoon, everyone. Thanks for joining us today. We have an update webinar with Tantalus, which is listed on the TSX under the ticker GRID. As many of you know, they reported Q2 results record Q2 results last week, and we had an official earnings call. So if you'd like to check that out, is on Tantalus' website. This is more of an unofficial call. So investors are able to ask questions. I am having a little bit of technical issues. Pete and I are both attending the Canaccord Growth Conference and we have some WiFi connectivity issues. So I am trying to get him into the panelist room. So if you can just give me a couple of minutes while I deal with the tech issue, I'll maybe just introduce Azim Lalani, CFO, and while I sort this out, maybe you can start an overview of the quarter, Azim, if you don't mind. And apologies, everyone. I hope to get this sorted quickly.

Thanks, Deborah. Good afternoon, everyone. Just a quick overview of the quarter. As Deborah mentioned, Tantalus delivered a record second quarter. And more than any single number -- this quarter really demonstrates the durability and operating leverage of our business model and 4 key results that I wanted to highlight include record revenue of $15.4 million, up 18% year-over-year, gross profit margin of approximately 55%, well above our target of 50%. And -- we delivered positive adjusted EBITDA of $690,000, up 35%. And we have the strongest balance sheet in our history with total liquidity of $41.9 million -- or excuse me, $41.3 million. And when you look at our results on a trailing 6-month basis, we delivered first half revenue of $30 million and trailing 12-month revenue of approximately $60 million.

Okay. Great. I think that we've got Pete on his phone connected in. Peter, are you able to talk?

I can definitely talk the questions. Can you hear?

I can hear you.

Great. I think good to go. And apologies, again, Pete and to the audience. Technology, you just got to roll with it. For sure. And everybody knows that they don't need to see my ugly mug anyway. I would just add, seem thanks for providing the summary on the financial performance, I think, incremental to the financial highlights that Azim just walked everybody through. From a commercial perspective, I would just add that we have couple of good data points. In the aggregate, we added another 8 utilities to our user community, good indication that we continue to be able to identify new utilities to join the broader user community and convert new logos out of our pipeline. And then where I know a lot of attention is consistently and appropriately paid to is the progress that we've made on the TRUSense Gateway, we were extremely excited to share the increase in the number of utilities that are placing orders for the TruSense gateway and commencing field trials and pilots and tests, that number is now 77 utilities in our first 18 months of commercialization. And more importantly than the 77 is the progress that we've made with utilities that have cleared through pilots and trials into deployment of the 77 utilities, we've had 40 complete their analysis. Of those 40, 37 have moved forward with deployments of the technology that varies in size and scale and use case, but 37 are moving forward. And the remaining 3 that have completed their analysis are all keeping the devices in the field, they just don't yet have funding to support a deployment. So from our team's perspective, we're batting 1,000 on the first 40 utilities that have been playing with and evaluating the technology. Incremental to that, every new utility that we've added of late is putting the TRUSense gateway into the field as part of their broader TRUConnect AMI system and is part of their longer-term grid modernization efforts. So we continue to validate the differentiation of the technology, continue to identify opportunity both with new utilities as well as our existing customer base. And so far have, I think, really surpassed our expectations in what this technology means for our company moving forward. So overall, really pleased with the quarter. And Deb, more than happy to make sure we maximize everybody's time with any questions and answers that folks have.

Sounds great. And congrats, I mean it was a fantastic quarter. The progress you've made across the board has been phenomenal. [Operator Instructions] And while we're waiting for that to get started, I guess I can take a couple of questions or ask a couple of questions myself.

So you talked about the 37 at the 77 utilities that have ordered 2 have progressed beyond the pilot stage. What are you learning about how utilities move from testing to broader deployment and like what use cases are driving that? Or what tends to drive that decision?

Yes. Let me talk about the use cases. I'll start there, Deb. There are at the highest level, 3 primary use cases that we are focused on, one of which is supporting the broader AMI or Smart metering TRUConnect AMI systems that we're deploying. And that breaks down into 2 different scenarios, but it's applicable to all utilities that have put the technology into the field. Scenario 1 under that broader, I'll put it the communications network behind rig modernization. Scenario 1 is with an increasing number of our long-standing customers that are actively using the TRUSense Gateway to upgrade their existing system. And the 1 that's the easiest to explain and codify is for long-standing utilities that are members of our user community that leveraged a communications networking technology in the radio frequency or RF band for the 220 megahertz 220 megahertz band, which 15-plus years ago was an incredibly effective technology from a cost and from a coverage perspective, particularly in footprints where cellular networking or cellular access was not readily available or very expensive. And what we're seeing is with the advancements in either deployment of fiber or the advancements in LTE and 5G networks and the corresponding coverage across the U.S., many of those utilities now have prolific access to higher bandwidth communications technology, either fiber or cellular. And so we're seeing a very clear path for long-standing customers to begin making that migration and upgrading existing systems. And it gets to the mantra, if you don't have to rip and replace metering any longer. There are better ways and more effective ways to access capital, put capital to work and modernize the grid. And so we're seeing an increasing number of utilities begin that journey with us to adopt, embrace and deploy our latest innovations. The second scenario around the communications networking infrastructure, use case 1 is for new utilities. The TRUSense Gateway is a collector as part of its design, multifunctional purpose. And in that context, it is the only collector in the industry that simultaneously tracks power quality. And so we position it as a network with purpose. It's not just about moving data from a meter or from a sensor in the field. It is about more importantly, tracking power quality throughout the system. And what we're finding is where it really is further differentiated is in the implementation and installation. Most collectors, I should say, pretty much all collectors in the broader smart metering world today require height, and they are deployed with bucket trucks, put up on utility poles, put up on buildings, put up on water towers. Height is might in the world of communications technology that's different when you start to leverage fiber at the ground level or cellular. And so we are seeing utilities look to the TRUSense gateway as a means of proliferating a very robust communications network right at the meter socket. -- meaning eliminating bucket trucks and truck rolls, which saves immediate dollars for the utility and simplifies the installation process to activate the network. So on the communications networking side, we are gaining traction and getting this technology into the field with corresponding upgrades and/or enhancements and deployments of the core competencies of Tantalus. So it's a pull-through. The second use case is around power quality measurement, and I say, depending on the utility of the 77, some much more progressive in utilizing data and looking to harness the power of that data through power quality. Some utilities just not there yet. And that's okay because as long as the TruSense gateway is deployed, it meets at least 1 use case. I think I just conveyed that the communications networking side of our equation or portion of our equation, that power quality measurement is there. it's accessible, whether the utility wants it today or not ready for that type of data and that type of analysis in their system. But we are certainly seeing power quality measurement capabilities of the TRUSense Gateway also as a point of differentiation for our company and seeing an increasing number of the 77 utilities to activate our power quality alarms and from power quality, alarms comes our analytics tools around reliability, transformer monitoring and now Turid Verify, which we launched in May at our users conference. The third use case and the 1 that I think will take the longest time to really materialize, but 1 that arguably has the largest opportunity for Tantalus is the behind-the-meter control. And to that end, for those who have been tracking us and we've talked about the project up in Connecticut with an investor-owned utility called United eliminating. As of the third week of July, we have, through public hearings with the regulators up in the state of Connecticut, have now a stamped and validated project that has demonstrated the ability of the TRUSense gateway to be deployed in the field and communicate directly to water heaters, thermostats and smart circuit breakers that were deployed at locations and having that load under control and under management for the utility to use at its disposal. As I think about and as we think about the broader capacity constraints that are unfolding across the United States and Canada as we think about affordability issues. And as we think about protecting transformers and other assets, the ability to shave -- the ability to aggregate and then either shave or shift peak load is becoming increasingly important. And when we broadly think about the rise of data centers, and I get this question quite a bit, how does Tantalus play in the world of data centers. I see an increasing dynamic where data center is entering into a rural footprint and electric co-op or public power. That's where about 67% of all permit applications for data centers are in the United States today. I see immediate opportunity that's building for us around helping utilities prepare the onslaught of that industrial large load. And we're starting to see some semblance of partnership between data center and utility to leverage and aggregate a combination of distributed energy resources such as batteries at the substation and load management behind the meter that can be aggregated to deal with frequency and imbalance that unfolds when that influx of power is consumed by the data center's compute spikes. So I think the behind-the-meter capabilities continue to surface for us over time. the 1 that's moving the needle for us, immediate-term power quality and the communications networking side. It's fairly robust, Deb, and then the disaggregation of utilities based on use case kind of spreads through to 77, but we are validating each 1 of those use cases as we go.

Okay. Great. Well, we've got a bunch of audience questions now. So let's get rolling. And someone suggested I turn off my camera to improve connectivity, but maybe they're second my mug to, Pete. So let's start with book-to-bill. So your H1 book-to-bill of 0.97x implies Q1 conversions of roughly $19.6 million and Q2 conversions of $9.9 million, about 64% for the quarter. Is that timing of a specific large awards slipping out of Q2 or is that -- is the utility approval cycle you referenced pushing a broader set of decisions into the second half of the year?

Yes. Well, I appreciate the question being asked. From our perspective, we track book-to-bill for those of you that have been following us for some time, and internally as well as externally, we report a rolling book-to-bill ratio through a calendar year starting January 1 and then building through December 31. And I think it's a misunderstood data point for us. I very much appreciate it's become a focus for some of our partners on the metering side and how they present their financials and visibility. For us, it's -- we -- first and foremost, from a size perspective, we're still a relatively small company. Secondarily, we're focused on public powered electric cooperative utilities that, by nature, are smaller utilities and order size based on utility can vary pretty widely. And so within a 90-day period, we can see quite a bit of variability in what that book-to-bill ratio looks like. And so if you look back at the last 14 reported quarters, our book-to-bill, obviously, we go further than that, bidding back to 2021, but 2021 and 2022, we reported annual orders. We started to migrate to more detailed reporting on a quarterly basis for our orders number starting in 2023. So over the past 14 quarters, where an investor can disaggregate or shareholders can disaggregate orders on a quarterly basis. The book-to-bill ratio over a 90-day window has ranged for this company from a 0.4x to 2.3x. And so while we always want to try to convert as many orders as possible as quickly as possible in a calendar year to increase visibility that variability is not a reflection in our opinion of demand and its durability with our customer base, converting utilities out of our pipeline and building our user community, as an example, is 1 that we pay more attention to. So on the first 6 months of the year, 0.97 sort of not too far outside of the realm of where we can be in a 6-month period. I'm focused more on that. than I am 3 months. With that said, a couple of other data points that we've shared through the Q&A process on earnings call last week and certainly in our materials. As of June 30 of this year, we have 8 utilities that have selected Tantalus and are in contracting. That compares to 4 utilities same time last year. And the timing of those conversions from selection to contract and contract to actual order it varies. And sometimes, there's an influx of signature at the end of a quarter and sometimes signatures gets pushed into the next quarter or reporting time frame. So we still have very robust activity and where we have been selected in the grand scheme of things, I would say, through the first 6 months of the year. Tantalus has been selected by 16 utilities. On average, we convert 20 utilities in a calendar year. So I think that's pretty strong. The other data point that we shared is pipeline. We don't quantify our pipeline because it can be extrapolated in so many different ways. But we do track not only aggregate pipeline, we track qualified pipeline. And as a data point for investors, our qualified pipeline has increased by 35% year-over-year as of June 30. When the durability of demand is there, the opportunity continues to present itself. It's just 1 of those metrics that it is a data point. I'm conscious of it. I'm not trying to be defensive around it. but it's a data point for us that can swing so dramatically within a 90-day period. There's nothing that gives us pause or can raise is concern for the company as we think 12 months, 18 months, 24 months.

Got it. Okay. I think that sufficiently deals with what could bill. How do you expect R&D expenses to scale from the 2026 Q2 level as your top line grows in the coming years?

Yes. I'll take a high level, and then I would ask Azim to jump in, in a little bit more detail. But when you extrapolate the R&D spend, I'd say there are a couple of nonrecurring items, onetime expense items from a restructuring perspective that hit the R&D line. in Q2, so that overstates the actual dollar spend on a go-forward basis. And so I think that's something to extrapolate out. With that said, we plan on continuing to invest in R&D, especially as it relates to our cloud computing expertise and our data analytics that those are 2 areas where we can drive significant opportunity, both for True Grid Advantage, which is our new managed service offering and certainly on the analytics side to drive more recurring revenue. But Azim, do you want to dive deeper there?

Yes, absolutely. Certainly, I think the expectation is that R&D dollars will increase over the next few quarters. as we invest in the analytics and other product road maps. I think over time, the expectation is that as revenue crystallizes, we'll see R&D as a percentage of revenue decline.

Yes, I think that's a valid point there, Deb, and we're a technology company that's driving innovation in order to innovate, we'll continue to invest in R&D. So we're tracking as a percent of aggregate revenue, and it's something that we obviously can control. It ties to head count and investment in that headcount.

Got it. Okay. So of the 37 utilities that have started deploying the TruSense Gateway, how many are paying for VERIFI and/or Advantage and can you broadly discuss the cost of each.

We're not, I think, comfortable sharing costs and making that type of information publicly available where it would be in the hands of other utilities in our space or competition. the activation of those 2 new services from our users conference in May, order of magnitude. We have 6 utilities that have activated TruGridVerify through June 30 -- and we had, I think, 7 utilities that have opted into our True Grid Advantage, which is the managed service offering that we've activated to help some of the smaller utilities that just don't have the staff or the resources to really take advantage of the analytics tool. And I think it's a great way for us to put our toe in the water on a more comprehensive managed service offering as we think more broadly around the entire grid modernization solution that we're bringing to market.

On your Tantalus call, you mentioned that you've signed up an IOU from the Northwest region. -- going through the rate case process must have been very informative. Can you expand on lessons learned and what it portends for your ability to tap this IOU market?

Yes. And for a point of clarification, the utility is actually up in Northern California. I think it's note California. It's small IOU that is equivalent size of what you'd see in the public power and electric cooperative space, it's an investor in utility that is responsible for order of magnitude 50,000 homes, 50,000 meters. I'd say that the attributes around that opportunity -- and I think -- I don't know if it's a great case study or data point for us as it relates to expanding our core competencies in pursuing IOUs and going through that rate case procedure. I think probably the United Illuminating project in Connecticut has been a bit more informative for us as we think about attacking that market longer term. particularly through the TRUSense gateway. But okay, we certainly got some great insights as to the decision-making at the IOU, it is different than that of public power and electric cooperative utilities. With that said, the rationale for selecting Tantalus remain the same. It ties to the flexibility of our capabilities, the increasing breadth of what we're able to do -- help utilities do. It's helping protect and extend the life of some existing assets that, that utility had in particular? -- and it's very much geared towards the lytic capabilities and the service offering that's wrapped around it. So I wouldn't necessarily say that's the barometer for us in a broader regulatory rate case scenario, but we are and have just recently made some further investments in the sales and marketing team with individuals that have personal experience from a career perspective of selling into IOUs, so it's an area of continued focus for us.

And then 1 clarifying question. So from an investor, I saw a quote that there's 150 million meters deployed in the U.S. between co-ops and munis. I believe that's the total meter number though. But the question is how many more meters are there, including IOUs?

Yes. So there are approximately 150 million electric meters in the United States in total. 2/3 of those approximately so rounding purposes, about 100 million of those meters fall under the perfviewand responsibility of investor-owned utilities. Roughly 50 million meters fall within the 2,850 public power and electric cooperative utilities. So as we think about TruConnect AMI, the landscape we are pursuing is this 50 million end points of which today we're at over 4 million with about another million not yet deployed at our existing customer base. So call it about 10% of our target market. There's roughly this percent kind of swings a little bit based on different data points and research, but 17.5% to 20% of all utilities across -- excuse me, all meters across the United States are still read manually. There is still a pretty significant percent of meters that need any form of automation -- there is also a pretty substantial percent of meters that tie back to what some in our industry calls referred to as AMI 1.0 and we see an increasing number of utilities coming back into market to think about their next generation of metering and broader grid modernization. And that's where our retention rate of our customer base becomes so important as well as, I think, our mantra of really being able to help utilities extend the life of existing assets. it just provides another path for us to be competitive as those utilities come back into market and start to think about the next partner that they're going to rely on for the future. So I think within our IR deck, I shouldn't say I think, within our IR deck, there is a chart that we include from Northeast Group, which is a third-party research organization that does a very good job of tracking the smart metering industry. It's on, I think it's Slide 6 of our investor deck, and it reflects a combination of the number of call it AMI 1.0 meters that are still in the process of being deployed in the United States and then comparing that to the increasing number of next-generation metering capabilities that are coming into the market, and that's where the refresh and/or automation of the balance of meters that haven't yet been migrated to a smart system. So I'd refer folks to Slide 6 in our IR deck and the Northeast Group's research.

I've got that slide up for you, Pete, too. Hopefully, people can see you.

Thank you. And I'm sorry, just to be a voice over the phone here without any participation in the video today.

It's all good. And I can't full screen it because it's impossible to then read the questions. So just bear with me, everyone. So a couple for Azim. So on a like-for-like basis with Q2 2025 before the new restructuring exclusion, adjusted EBITDA was approximately $338,000, down from 510,000 why changed the definition in the same quarter, the charge appears -- and should investors expect restructuring to occur in the second half of the year?

The restructuring charge was a onetime expenditure that flow through operating expense impacted operating profit and net income. It's a one-off item that we don't -- that doesn't reflect the recurring operating cost profile of the company, and that's why we disclosed it separately.

Okay. Great. I was trying to find a correlating slide, but at least we're in the financial section. Okay. Q2 was your highest revenue quarter ever and your largest operating loss in 2 years. what revenue level does the current cost structure provide IFRS operating income? And is that a second half of the year goal or a 2027 event?

So if we look at our results for Q2, we generated an operating loss of $864,000 on revenue of $15 million. And that reflects the addition of a significant number of individuals, new individuals, both on the R&D side as well as the sales and marketing side. And so from our perspective, those investments are expected to generate revenue. And so we expect operating loss to reduce over the coming quarters.