Q1 2024 Genasys Inc Earnings Call

Participants

Brian Alger; Senior Vice President Investor Relation and Corporate Development; Genasys Inc

Dennis Klahn; CFO; Genasys Inc

Scott Searle; Analyst; Roth MKM

Brian Colley; Analyst; Stephens Inc.

Mike Latimore; Analyst; Northland Securities

Ed Woo; Analyst; Ascendiant Capital Markets LLC

Martin Yang; Analyst; Oppenheimer & Co. Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Genesis Fiscal First Quarter 2024 conference call. All lines have been placed on a listen-only mode. The floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero to reach a live operator at this time, it is my pleasure to turn the floor over to you, Brian Alger, SVP of Investor Relations and Corporate Development. Welcome, Brian. The floor is yours.

Brian Alger

Thank you, Karen, and good afternoon, everyone. Welcome to Genesis as First Quarter Fiscal 2024 financial results conference call on Brian Alger, SVP of Investor Relations and Corporate Development for Genesis. Today's earnings release is available up on our corporate website and in the Investors section, and it should be crossing the wires any moment.
Now there's been a delay with our filing service and we apologize for the delay in this call. But for those of you looking for the numbers and looking for our commentary, you can find on the website right now or it should, as I said, cross wires here shortly. With me today on today's call is Richard Danforth, our CEO., and Dennis Cong, the Company's CFO.
During today's call, management will make forward-looking statements regarding the company's plans, expectations outlook and future financial performance that involve certain risks and uncertainties. See the company's results may differ materially from the projections described in these forward-looking statements.
Factors that might cause such differences and other potential risks and uncertainties can be found in the Risk Factors section of the Company's Form 10 K for the fiscal year ended September 30, 2023, other than statements of historical facts.
Forward looking statements made on this call are based only on the information and management's expectations as of today, February 13, 2024, we explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated, we will also discuss non-GAAP financial measures and the operational metrics, including adjusted EBITDA, bookings, backlog and adjusted net loss, which we believe are provide helpful information to investors with respect to evaluating the Company's performance for reconciliation of adjusted EBITDA to GAAP financial metrics, please see the table in the press release issued by the company at the close of market today.
As I said, it should be coming across any moment. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning. It gives us an internal operational metric that measures the total dollar value of customer purchase orders executed in a given period regardless of the timing of the related revenue recognition backlog is a measure of purchase orders received that are scheduled to ship in the next 12 months.
Finally, a replay of this call will be available in approximately four hours through the Investor Relations page on the company's website.
Now at this time, it's my pleasure to turn the call over to Genesis as CEO. Richard Danforth. Richard?

Thank you, Brian, and welcome, everyone. The strategic vision of Genesis protect is being realized. Yesterday's announcement describing the integrated use of Genesis is cloud-based software and hardware for 37 dams and Puerto Rico is only the first of those is only the most recent example of our differentiated approach to Protective communications.
To recap, Genesis has been selected through a competitive solicitation to engineer, procure and install a comprehensive Emergency Warning System for 37 dams on the island of Puerto Rico, Genesis had the highest score of beating the competition in all evaluation categories.
This project has been fully funded by Seema and is expected to generate $60 million to $70 million of revenue for Genesis, more than $50 million of hardware. As expected, hardware revenue is expected to be installed over the planned 18 month project line.
Importantly, all of the census data streams and communication channels will be managed with the Genesis protect software in addition to approximately $1.9 million, a 43 year software license, it is expected that we will also provide hardware maintenance services that could generate between $3 million and $10 million depending on the length of the maintenance agreement.
Our investments in developing the Genesis protect software drove the selection for the Puerto Rico project. As a result not only we would generate recurring revenues, but we will also be delivering more than eight full years of incremental hardware revenue by this project selection of Genesis protects platform, including both hardware and software for the Puerto Rico dam Emergency Warning System is yet another example of one of the differentiation of our approach to Protective communication already in fiscal 2024.
We have been selected for a multiyear engagement with Los Angeles County accounting with more residents than most states in the union, the Department of Corrections for the entire state of Utah and most significantly the project I just outlined for the island of Puerto Rico.
Our engagements are getting larger, but they are also becoming more comprehensive as the advantages of our platform approach became more evident. Our transition to a more balanced hardware software company is well underway by software business continues to gain momentum and build scale synergies from the acquisition of Eyretel are beginning to be realized.
And as a result, ARR for our Connect business grew nearly 18% sequentially in the first quarter as part of Genesis protect. Similarly, we are getting significant leverage from our partnership with Lazarus, which provides our traffic AI solution. Recurring software revenue grew 85% year over year.
Total realized ARR exiting the fiscal first quarter was $5 million, and we expect to exit our second fiscal quarter with nearly $7 million of ARR coming into this year, we had exceptionally low hardware backlog and as we communicated in early December, we expected financial results to be heavily weighted towards the second half of the fiscal year, though quarterly revenues was substantially lower than prior year.
Hardware bookings were in line with Q1 historical averages and up nearly 90% versus the prior year's quarter. Dennis will provide more detail on the hydro revenues momentarily. As we look out over the remainder of our fiscal 2024, we see a growing need for protective communications in communities, enterprises and critical infrastructure across the globe to many events, including natural disasters, civil unrest and geopolitical tension requiring more complete solution to protect the various constituents.
Mass Notification messages and 60 year old sirens are not adequate more as expected and frankly deserve internationally. We are finally beginning to see a hardware business recover. And we are also seeing new and growing interest for our software solutions as well.
Recent wins and the continuing deal activity and pipeline expansion give us greater confidence in our second half of '24 in our fiscal 2025 outlook, unchanged from our December outlook in December. We are confident that the software revenues for fiscal 2024 will at least double over fiscal 2023.
We continue to see a very back-end loaded year for our hardware business, though there remains near-term uncertainty around the timing of the US federal budget approval, recent bookings and the Puerto Rico selection bolster our confidence in approaching fiscal 20 project, fiscal 2022 levels of hardware revenue despite the exceptional performance in the first quarter.
Based on our assumptions that the US federal budget is approved in the March timeframe, we expect to be profitable on our adjusted EBITDA basis in the second half of 2024. On a full year, we continue to expect to report a negative adjusted EBITDA, though improved quite a bit from fiscal 2023.
Now I will turn the call over to Dennis to go through the financials and outlook in greater detail then.

Dennis Klahn

Thank you, Richard. And 2023, we successfully grew our recurring software revenues each quarter in the first quarter of fiscal 2024, that growth accelerated to 85% year over year. Revenues for the fiscal first quarter of this fiscal year for $4.4 million, a decrease of 58% over the prior year's record first quarter revenue as compared to the same prior year period.
Total software revenue increased 57% to $1.4 million. And to reiterate, our recurring software revenues were up 34% sequentially and nearly 85% year over year. More than offsetting that growth. Hardware revenue decreased 72% to $2.9 million.
As Richard mentioned, Genesis started fiscal 2024 with exceptionally low hardware backlog. In addition to a low backlog entering the quarter. We also had nearly $1.5 million of revenue that was booked and built during the December quarter. But the US government was unable to pick up the orders until the first week of January.
Gross profit margin was 34% in the fiscal first quarter, a decline of 12 percentage points or $3.4 million from the prior year period. The drop in gross profit was attributable to lower hardware revenue in this year's quarter and the related reduction in overhead absorption on a more positive note, software gross margins improved nearly 15 percentage points year over year.
Quarterly operating expenses, including the first quarter of Embratel expenses for $8.7 million, up 5% from $8.3 million in the first quarter of fiscal 2023. The increase was primarily tied to the acquisition. On a GAAP basis, our first fiscal quarter operating loss was $7.2 million compared to a loss of $3.5 million in the year ago quarter.
Adjusted EBITDA, which excludes noncash stock compensation, was a negative $6.1 million compared to last year's negative $2.4 million over year-over-year decline in adjusted EBITDA was due to the lower hardware revenues and subsequent reduced overhead absorption, cash, cash equivalents and marketable securities totaled $13.6 million as of December 31, 2023, compared with $10.1 million as of the prior year end.
Cash used in operating activities in the first fiscal quarter was $5.7 million. Other working capital increased $1.5 million. As Richard mentioned, we continue to expect software revenues to at least double in fiscal 2024, and hardware revenue should rebound close to fiscal 2022 levels. We continue to expect adjusted EBITDA loss to improve in fiscal 2024 in fiscal 2023.
And now I'd like to open the call to Q&A. Operator?

Question and Answer Session

Operator

Ladies and gentlemen, the floor is now open for questions. If you have a question, please press star one on your telephone keypad at this time. Again, that's star one if you do have a question or comment And we'll take our first question from Brian Colley from Stephens. Please go ahead.
And it looks like we lost, Brian.
So we will move to Scott Searle from Roth MKM. Please go ahead.

Scott Searle

Hey, good afternoon and thanks for taking the questions. Maybe just to quickly diving in the comfort level for the hardware ramp in the second half of this year, I just want to clarify when you're talking about a recovery to past historic levels, it really implies that back-end loaded ramp starting in June and September. I think you you gave the caveat of U.S. budgetary approval.
I think for the continuing resolution, which is now targeted at March. I was wondering if you could provide a little bit more color around that, the timing of the budgetary on potential resolution and how much of the pipeline in backlog is actually tied?

Scott, did the March date I think is the third data we've given so far and with the extension. So we'll see, but we have it's Army program, but it is a new Army program that we have expectations for revenue in this fiscal year. I don't think we've put out we put out anything about what we thought it would be not yet, but it's a significant pharma number far for us.
So we'll see that's the most significant thing. There will be other ancillary issues where there can be no new starts under OCR and we get lots of hardware and software business through grants. No budget will have an effect on that. So it's there. It can be a significant hit to us if it doesn't pass.

Scott Searle

Got you. And then maybe just to follow up on that, Rick, in terms of the overall opportunity pipeline. It seems like the funnel had been growing. You've given some metrics, I think on the on the past call. I'm wondering if you could just indicate what you're seeing sequentially have things been growing even though they haven't been coming out the bottom of the funnel? Is that getting larger?
And in your opening remarks, you talked a little bit more about civil unrest and geopolitical tensions, which has not necessarily been like, I'd say, the core staple of your business and is that becoming a bigger portion of the pipeline going forward?

Civil unrest involves local police. Almost every local police agency in the United States has some shallow rights. So it came from and navies around the world. I can certainly can drive demand particularly for our IT hardware terms of your question on the pipeline, it continues to grow.
When we talk about pipeline, we don't usually include some of the large opportunities like the one we announced with the Puerto Rico and we continue to see the pipeline grow. We continue to increase. I look at our forecast for bookings and some of what had slipped last quarter.
Last year, all year long had started to close. We remain optimistic for the year with an outlook unchanged from our prior outlook conference call.

Scott Searle

So the on the previous pipeline that you guys had talked about, those who did not reflect Puerto Rico, is that correct? The larger opportunities like that or not having that full amount put into them?
And secondly, I wonder if you could just talk a little bit about every hotel and the cross-selling opportunities, how that's being received and kind of what your outlook is for the second half of this year?

Yes, you are correct. The large opportunities are usually kept separate from our pipeline in terms of average hotel and retail is in one quarter has grown their ARR, as I said, by 18%. The cross-selling opportunities have begun. We've recently re-upped.
I think it was Marin County as a number for what for jewelry upfront you back and sold them at retail. So the re-up, Dennis, correct me if I'm wrong, but somewhere and I know it was a one-time event yes, we have, but it was re-upped for Evac and 250 K. and then add a Ladbrokes on top of it for 390 k. It's that kind of a thing. So we're selling to the same people, Scott.

Scott Searle

Great. Thanks. I'll get back in the queue.

Operator

Thank you.
And next we'll go to Brian Colley from Stephens. Please go ahead, Brian.

Brian Colley

Hey, guys. Thanks for taking my question. So it seems like the Puerto Rico contract should kind of get you close to hitting your FY26 targets next year. I'm curious if you view that as a new base off of which you can grow or if we should see a decline in the hardware revenue once Puerto Rico, Puerto Rico rolls off?

Puerto Rico will will provide substantial revenues in our fiscal 2025. For sure. We'll have to win something like that or build the other the pipeline, even larger with the normal railroad stuff. So I tied to replace a $60 million to $70 million one-time order. However, and this puts us in a different position in the critical infrastructure protection marketplace that there are dam projects all around the world.
There are a dam project here in San Diego. There are down prices in South America and Europe that we chasing a not to the size of Puerto Rico, but it will certainly give us great credentials in a calling card to further the CIP kind vertical.

Brian Colley

Got it. And then in terms of kind of the cadence of revenue for Puerto Rico, how should we think about the split between FY25 and this year? I mean, maybe that should be you know, 80% next year, 20% this year or more heavily?

It'll largely be next year. So the current schedule of Brian, is there's a there's a six month process and to get approval on all of the dam designs that will put us at the end of our fiscal 2024. And then the vast majority of the revenue will occur in the fiscal 2025.

Brian Colley

Okay. Got it. That's helpful. And then also, I was curious if you could provide an update on the CROWS order and your confidence level in getting that award?

It's pending a DoD budget. So as soon as that goes, Brian, the CROWS will go as well.

Brian Colley

Got it. Okay. And then last question for me is I was hoping you could maybe just talk about the software pipeline, how that's trending relative to your expectations and what the composition of that pipeline looks like between Connect alert and E back get to where you're seeing them the most demand today?

Alert Nevanac represents the biggest dollar volume of our software offerings that connect with just getting started on. And those are a lower for a lower dollar value software sale.
On the latter US piece, as I mentioned a moment ago, we can have a pretty good uptick in both ARR and revenue from that. As I mentioned, the trended 90 k. just for one county. So the pipeline is dominated by alert and feedback from many.

Dennis Klahn

And just as a follow on to that Brian, and this was in Richard's prepared remarks, the value of the entire platform is becoming more and more real. So where we've already sold Ivax, we are seeing increasing accelerated et cetera, interest in our other offerings, whether that's Connect alert, traffic, AI, et cetera.
And all by the way, also, acoustics, it really should be apparent to everyone that the Genesis protect platform that includes both software and hardware as an enormous potential. Puerto Rico is a Genesis protect win without the software. We would not have won that FP. opportunity. It's a software that got us in there. And as a result, you're seeing over $50 million of hardware from one order from the software differentiation.

Brian Colley

Got it. Thank you for the time.

Operator

Gentlemen.
And we'll take our next call from Mike Latimore from Northland Capital.
Okay.

Mike Latimore

All right, great. Thanks. Yes, on the hardware bookings in the first quarter, can you did you give a number there. I'm not sure I heard that or you said I think you said it got back to normal, but can you give a little more detail on the hardware bookings in the first quarter?

Sure. Historically, hardware bookings in Q1 is the lowest quarter. What we achieved in this first quarter. It's consistent with other first quarters, albeit substantially higher than what we booked in fiscal 24st quarter. So it's a small win and in fact, it's almost double what we booked in Q1 of 23 versus 24.

Mike Latimore

On on the CROWS deal, if that's approved this budget passes, how much of that business, what do you see this year versus, I mean, over multiple years.

Well, if you assume a budget gets passed by March 8. As soon as we probably would see any money flow would be not on our end of June. So there would only be a couple of months left in our fiscal year at that point. And it is a new program, which means there'll be a start up phase that we haven't had to deal with for the U.S. Army in many years. So it will be a little slower at the start and a strong finish.

Brian Alger

Yes, Mike, I remember like like our previous program of record each year. There's a new purchase order placed against the program of record. The same is expected to be true for cross.

Mike Latimore

Yes, and kind of come into NCR's SAP software fast pipeline has how much of the pipeline is a prospect wanting one part of the stack versus sort of the whole software stack?

It's a significant mix. And as Brian mentioned, we often get to competitive RFPs for alert. And we will always answer those introducing events. And as I mentioned in prior calls, is couple of large counties where we did that and after the award of a where it came, we went into a negotiation with the banks and I subsequently booked those orders. So the cross-selling opportunity is clearly there and we have achieved it, and it's continued with that Embratel's piece as well.

Mike Latimore

Great. And then just last on the Puerto Rico deal, Tom, you said $50 million hardware was so overall, what are you considering gross margin to be and do you have to add much OpEx to sort of deployment?

We'll have OpEx for. Well, we don't have a significant increase in OpEx expected for the island of Puerto Rico. What was the other question?

Mike Latimore

The gross margin.

Our gross margin gross margin on the hardware coming out of the factory in San Diego will be consistent with historical actuals and the equipment that is the equipment and services will typically be a lower gross margin than our hardware gross margin, but still a significant contributor to the Company, I guess.

Mike Latimore

Yes.

Operator

Thank you.
And next we'll go to Ed Woo from Ascendiant Capital. Please go ahead.

Ed Woo

Yes, just a clarification on the gross margin that you mentioned on these bigger deals, why wouldn't you have much higher or better leverage considering the contracts aren't that much bigger? Was pricing a big determinant for winning contracts?

Yes, a multiple award criteria price was worth 35%, but don't mistake this this order will you have significant contribution margin to the company.
Great. And the $3 million, that's that at $50 million at approximately that's bigger than most years of hardware. So if you have that plus our normal business, you're going to have significant absorption and gross margins on the balance of the business of balance at the base of the factory will enjoy the improvement, the improvement of the contribution margin from normal activities.

Ed Woo

Great. And this win and obviously last year's win with Arbor Matco, should we anticipate much bigger type of deals going forward or you're specifically targeting much bigger deals?

What was the genesis for Protech platform approaches introducing larger deals to us in the case of Puerto Rico. If you look at the traditional competitors we face in hardware and software, they weren't in the picture. So Genesis as a company, what's the most qualified to respond to that RFP, and it was reflective in the scores that the customer gave us.
So I think, yes, we will continue to pursue larger opportunities to exploit the Genesis protect platform capabilities around the world.

Ed Woo

Very well, thank you and congratulations again.

Thank you.

Operator

A reminder, that's star one. If you have a question or comment, and we'll take our next question from Martin Yang from Oppenheimer. Please go ahead.

Martin Yang

In particular question. I think you are part of my first question I have regarding OpEx associated with Puerto Rico on I know there's not a lot of increase, but if anything, our Change for OpEx for Puerto Rico project, what would it be and done is should we assume a major operating leverage coming from the Puerto Rico project.

For the second question first. Yes, of course. That's what I just I think I just talked about that the contribution margin that it that it will AVAIL will be significant. And as I said, the base business will also benefit from that increased absorption.
From an OpEx perspective, if travel will go up, we will hire more people on the island, but it's the single digit kind of number. I don't see us adding anybody in the factory. I don't see us adding anybody in purchasing or sales or marketing. So I think it's nominal from a headcount perspective.

Martin Yang

Got it. Thank you. And the second question is about on your enterprise customers. Can you maybe give us an update on how are you seeing customer engagement and pipeline regarding our sales into the enterprise market?

Yes. For us, it's led first and enterprise to be opportunistic of Ramco fell into that and there's been several others. I don't think we've released anything on it on a win BoS yet, but you'll see some coming shortly.

Martin Yang

And that's it for me.

Okay.

Operator

O nce again, start if you do have a question or comment and there appear to be no further questions at this time, I'd like to turn the floor back over to Brian Alger for closing remarks.

Brian Alger

Great. Thank you, everyone, for participating in today's call. You should see the press release. It did cross the wire in the middle of our commentary on also you can find it on our website. A replay of the call will be available on our website here shortly for additional information and up-to-date news and activity regarding Genesis, our products and customers we serve.
Again, I strongly recommend that you follow us on our various social platforms, whether that's linked in or X, we actively posts and comment and a number of our customers do the same. So to stay on top of things, I strongly encourage you all to follow us on social networks and otherwise have a great night. We look forward to speaking with you again next quarter when we report fiscal second quarter 2024 results. Thank you.

Operator

Thank you.