Q4 2023 Genasys Inc Earnings Call

Participants

Brian Alger; SVP, IR & Corporate Development; Genasys Inc

Richard Danforth; CEO; Genasys Inc

Dennis Klahn; CFO; Genasys Inc

Brian Colley; Analyst; Stephens Inc.

Mike Latimore; Analyst; Northland Securities

Scott Searle; Analyst; Roth MKM

Ed Woo; Analyst; Ascendiant Capital Markets LLC

Martin Yang; Analyst; Oppenheimer & Co. Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Genasys fiscal year 2023 conference call. (Operator Instructions)
At this time, it is my pleasure to turn the floor over to your host, Brian Alger, SVP of Investor Relations and Corporate Development. Sir, the floor is yours.

Brian Alger

Thank you, Karen. Good afternoon and welcome to Genasys is fiscal 2320 27th Quarter and Full Year Financial Results Conference Call. I'm Brian Alger, SVP, Investor Relations and Corporate Development for Genasys . With me on the call today are Richard Danforth, our CEO, and Dennis Quan, 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. 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, 2022 for the 10 K that's going to be filed later today, 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, December seventh, 2023. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specified specifically stated.
We will also discuss non-GAAP financial measures and operational metrics, including adjusted EBITDA, bookings, backlog and adjusted net loss which we believe provide helpful information to investors. With respect to evaluating the company's performance and reconciliation of adjusted EBITDA to GAAP financial metrics, please see the table in the press release issued by the company at the close of the market today. Can we consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning, bookings is 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 within 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 Genasys CEO, Richard Danforth. Richard?

Richard Danforth

Thank you, Brian, and welcome, everyone. Before we get into discussing the results of last fiscal year and our outlook for fiscal year 2024 and beyond.
I want to take a moment to thank our shareholders that have been incredibly supportive and resilient through our transition to a more balanced hardware and software company. The investments we have made over the past two years are beginning to bear fruit, and I have increasing confidence that these investments will not only well make, but will yield substantial returns in the not-too-distant future using the balance sheet and profits from the hardware business in less than two years, we have incubated a strategic software business that has already generated a recurring revenue stream in excess of $5 million with a clear line of sight to roughly double in 2024. We appreciate your support, and we look forward to delivering the results generate the return of patients deserves.
Moving on as expected, we exited fiscal year 2023 with over $10 million in cash and no debt. However, finishing out the quarter, we correctly assessed that the federal government was likely to once again delay approving a DoD budget. And as such, FY. 24 orders from this US government would be delayed. This is a further complication to the numerous order delays that we've experienced throughout fiscal 2023.
With this in mind for pursuit and closed on a follow-on equity offering of 5.75 million common shares, raising net proceeds of approximately $10.6 million to protect the investments that we have been made to date and to assure that we remain positioned to capture the opportunities before us.
Moving on as it is worth noting that the statewide RFP for Florida that we discussed on last quarter's call, resulting in a no award decision. And earlier this week, the state issued a new RFP that we plan on responding to before the end of this month. As was the case in August, we continue to believe we have the best and most complete offering for the state of Florida and its visitors and residents is now on to the financial discussions.
As we announced in mid-December, financial results for the fiscal fourth quarter were below expectations due to hardware opportunities that slipped out of the quarter and into fiscal 2024. Software bookings and revenue were in line with expectation with recurring revenues achieving a new company record as we discussed in our September announcement, both our hardware and software pipelines are rapidly expanding, not including the 25 million of hardware bookings that slipped from fiscal 2023 today's hardware pipeline is more than 150% higher than it was at the same time last year. For software, in addition to growing our software bookings more than 100% in fiscal 2023, both the number of deals and the dollar value of the software opportunities has never been higher.
Fourth quarter recurring revenue was up 43% year-over-year, and 21% quarter over quarter. As most of you are aware, there's typically a one to two-quarter lag between when we book a software order until initial revenue recognition, which means we have already won recurring revenue beyond what we report in any given period, including those additional contracts. Our ARR has increased roughly 20% since our conference call in August, not including the contributions at our hotel.
In early October. Just after the fiscal year ended, we completed the acquisition of PowerTel hotels fully compliant cross agency communication application in Naples and unparalleled quality of response when paired with Genasys protect. Evertel has been rebranded, Genasys protect Connect, and we have integrated their go to market and positioning with our own when we purchased them itself. Their ARR was approximately $800,000.
In the two months since the acquisition, we have already begun to realize sales synergies between our respective customer bases. Today, we have over 200 customers with nearly 20,000 paying subscriptions of Connect For anyone interested in learning more about Connect and Vertellus co-founded Jeff Hall said we'll be hosting a webinar in December 14 with two of our customers to discuss how they choose the solution today to register for this event. Just go to the Connect section of U.S. solutions, page, genasys.com.
In addition to acquiring Novatel, we recently announced two strategic partnerships that we believe further differentiate our protected communication platform from legacy Mass Notification offerings. The first was with tablet command. They must have software solution found in the front seat of fire trucks across the country and on over 30000 first responders mobile devices by integrating our feedback software with tablet command. First Responders now have the ability to deploy and manage resources on a single pane of glass in concert with emergency managers throughout the critical events.
We also extended the capabilities of Genasys protect with a newly announced relationship with Ladbrokes AIV. addresses, software brings a proven near real-time traffic modeling to the Genasys protect platform to determine the most efficient way to get large populations out of a given area. Further differentiating Genasys protect is our acoustic systems as the disaster. In my mind, a Hawaii catastrophically demonstrated so radio and Internet based communications are not adequate and rapidly changing and fast-moving emergencies. Moreover, the inherent limitations of Cyren's technology actually inhibited Emergency Management manages communications efforts in line as many of you know, Genasys is voice quality.
Acoustic systems are not reliant on the power grid and are equipped with satellite communication channels that enable emergency managers to clearly and concisely communicate for those in harm's way, even when the power and traditional communication lines have been compromised in the wake of the global attention created in Hawaii and received a number of inbound inquiries from customers looking to augment this software offerings with Genasys protect acoustics combined.
We believe that Genasys protect platform both the additional capabilities of Connect tablet command and ladders as the most complete and technologically advanced protective communication offering available in its study released earlier this week, Forrester ranked Genasys as a strong performer and it's broad based Critical Event Management wave analysis net.
Based on current orders, contracting activity and pipeline, we are confident that SaaS software revenues for fiscal 2024 will at least double over fiscal 2023. As we have discussed on last quarter's call, 2023 hardware bookings and revenue were abnormally difficult to register. Since I arrived at this company, we have seen steady growth in our hardware revenues, six out of the last seven fiscal years with a [CAGR] from fiscal 2020 to over 20%.
2023 was a one year low multiple opportunities pushed out of the revenue declining year over year, it would be convenient to point to global politics or economics to explain the slippage. There is no one thing that is consistent among the various deals that have been delayed. None of the deals that were delayed have been canceled or awarded to a competitor.
Looking at our forecast and plan for fiscal 2024, we see enormous potential for a significant rebound in our hardware business. That said, certainty and the timing on a number of significant significant deals is not going to come before. Federal budget is approved, how is that progressing but could be further delayed by a government shutdown.
As a result, we expect that 2024 high-growth revenues will be even more back-end loaded than our typical seasonality has indicated, it is important to note that we still expect a rebound in our hardware business in fiscal 2020 for approaching the levels of 2022 up material materially from the abnormal 2023 results. A number of large opportunities could positively impact our 2024 results.
There was a large critical infrastructure protection opportunity that requires all of the Genasys protect platform, including significant acoustics of the revenue as well as recurring software revenues from the Genasys protect suite of solution.
On October 10, we announced that we were awarded a $1 million contract for the CROWS ASD. program with a fiscal 2020 for DOT budget in place, we expect to receive initial production orders in fiscal 2024. As we discussed on last quarter's call, the CROWS HD. program is expected to be a similar size to the prior Army Program of Record pending branch approval.
We have already secured a multimillion dollar acoustic award that will augment existing Genasys protect software customers. Bottom line Genasys has enough opportunities for growth summarizing the business as we enter fiscal 2024, we have a burgeoning software business with over 400 customers generate generating meaningful ARR.
Base expense is expected to roughly double in the next 12 months supporting this growth is a rebounding hardware business that historically has seen high teen adjusted EBITDA margins. Our balance sheet fortified by the recent public offering has no debt and adequate resources to not only weather the current storm, but to also facilitate the growth of our business back to a positive cash flow and beyond.
In closing, I want to express my gratitude and appreciation for the shareholders that have remained supportive of the company over the past couple of years of transition myself and the entire Genasys team is committed to completing our objective to build a larger, more balanced business that operates globally selling both hardware and software, resulting more predictable revenue and considerably higher profit margins.
Now I'll turn the call over to Dennis to global through the financials and outlook in greater details.

Dennis Klahn

Thank you, Richard.
In 2023, we successfully grew our site recurring software revenues each quarter. In the fourth quarter of fiscal '23, recurring software revenues were up 43% year over year and 21% sequentially. On the full year, recurring software revenues grew 44% versus the full year of 2022. Revenues from the fiscal 2013 fourth quarter were $10.7 million, a decrease of 33% for the prior year's record revenue quarter.
And compared to the same prior year period, total software revenue declined 3% to $1.1 million due to the decline in professional services. Hardware revenue decreased 36% to $9.6 million for all the reasons Richard discussed earlier. For the full fiscal year, total revenue was $46.7 million, a 14% decrease from fiscal 2022 revenues of $54 million. Software revenues for fiscal '23 increased 23% from $3.8 million, while hardware revenues decreased 16% from $42.9 million in fiscal 2023.
Gross profit margin was 49.6% in this year's fiscal fourth quarter, consistent with the prior year quarter. For most of fiscal 2023, gross margin percentage was negatively impacted by inflationary pressures. This has been partially offset by that increasing software revenues that carry higher gross margins. Quarterly operating expenses were $7.9 million, up from $7.5 million, excluding the $13.1 million goodwill impairment charge in the fourth quarter of fiscal 2022.
On the full fiscal year, operating expenses grew $3.1 million to $32.7 million. The year-over-year increase is directly tied to the planned investment to grow and accelerate our software business. On a GAAP basis, our current fiscal year fourth quarter operating loss was $2.6 million compared to a [$396,000] profit in the year-ago quarter excluding the one-time goodwill impairment charge.
Adjusted EBITDA, which excludes non-cash stock comp, was a negative $1.7 million compared to last year's positive $1.6 million. On the full fiscal year 2023 GAAP operating loss with $11 million compared to fiscal 2022 [$2.4 million] operating loss excluding the goodwill impairment charge. Fiscal 2023 adjusted EBITDA was a negative $6.8 million compared to last year's positive $2.4 million.
GAAP net loss for the fourth quarter in fiscal year 2023, was $10.1 million and $18.4 million, respectively. Excluding this year's $7.4 million non-cash deferred tax expense and last year's $13.1 million goodwill impairment charge for the fourth quarter and full year net loss for 2023 of $2.7 million and $11 million respectively, compares to [$664,000 and $3.1 million] net losses, the same periods in fiscal 2022.
Cash, cash equivalents and marketable securities totaled $10.1 million as of September 30, 2023, compared with $19.9 million as of the prior year end. Cash used in operating activities in the fiscal year was $9.6 million. Since the fiscal year end, the company has completed the acquisition of Evertel and closed on the sale of 5.75 million common share. The net cash proceeds from those two subsequent events was $9.6 million.
With our current backlog and forecasted bookings, we expect fiscal 2024 to be up materially from fiscal 2023. As Richard mentioned, we expect software revenues to at least double in hardware revenues should rebound close to fiscal 2022 levels. We do expect hardware revenues to be significantly skewed to the second half of fiscal '24 with numerous opportunities pending budget approval and appropriation at the federal level.
Including the addition of Evertel, we expect fiscal 2024 cash operating expenses to increase between 10% and 15% over -- year over year. Thus, adjusted EBITDA loss should improve in fiscal 24 versus fiscal 23.
Now I'd like to open the call to Q&A. Operator?

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Brian Colley from Stephens.

Brian Colley

Hey, guys, thanks for taking my question here. So Dennis, I'm curious, just if we can put a finer point on the expectations for EBITDA here and FY. 24. From what I can tell in the investor deck, it kind of looks like the illustrative chart that you have in there as you're around breakeven. Is that kind of how we should think about it?

Dennis Klahn

I'm for the full year -- no, I don't think that's as if the back end is more heavily weighted with revenue, and that's more likely the back half of the year, but not for the total year.

Brian Alger

Hey, Brian. This is Brian Alger. The slide you're referring to is a legacy slide from last quarter. We'll be updating the slide deck probably overnight. Bear in mind we do. We do have costs that came on board and we refer to them on the operating expense side coming from the acquisition of Evertel.

Brian Colley

Got it. That's helpful. And then any sense you can give me for the magnitude of how much the revenue the hardware revenues will be skewed first half versus second half. Are we talking 70% of hardware revenues in the back half or more than that?

Richard Danforth

Brian, if you had any if you look at on a typical year for us have substantially more than 50% of the hardware -- copy number on -- revenue in the second half.

Dennis Klahn

Yes, over the last three years, it's been right around 60%.

Richard Danforth

40%, 60%. It will likely be it was more skewed to, you know, 30%-70% kind of thing.

Brian Colley

Okay. That's very helpful. And then I wanted to ask about Evertel. So you now have a much more comprehensive unified platform with Genasys , protect them with Gem zone Haven and ever tell kind of under the same roof now, how should we think about like the incremental uplift uplift from upselling zone Haven and also upselling ever tell to like existing gyms customers?
I am not necessarily asking for a pricing number, but I'm just kind of curious like what the ASP uplift looks like from upselling those additional solutions.

Richard Danforth

But we'll see. But that's certainly one of the reasons we bought them in the two months we've had them, we've probably seen their ARR go up by 20%. And the use of Embratel historically has been in police forces but the application is there for first responders and fire, which we have a large installed base with other hardware and software solutions. So and our expectations are very high that there will be a lot of up and cross selling.

Brian Colley

Awesome. Well, I appreciate the time. I'll leave it there.

Richard Danforth

Thank you.

Operator

Mike Latimore, Northland Capital.

Mike Latimore

Great, thanks. Congrats on the strong software growth. I guess just on your last comment there that ARR is already up 20% have ever dealt Is that because you guys have brought in new customers or is it just stuff they've deployed or like what's driving that?

Richard Danforth

And whether some of that some of it was what was in the pipeline. Some of it is a consequence of would put together a five person sales team for every dollar of sales force ever tell had was to people and right now, there's five and again, we have a very large installed base. I mentioned over 400 customers combined. And so these calls on our call cold calls their calls to existing customers kind of.

Mike Latimore

And then I think I know the answer to this, but you're expecting your software business to at least double year over year. I assume that's both reported revenue as well as ARR.

Richard Danforth

Yes.

Mike Latimore

And then numbers on the $25 million of hardware business that slipped out to 23 and how much of that is US versus international.

Richard Danforth

Approximately 70-30 U.S. international.

Mike Latimore

Got it. Okay. And then just last, I know the Mali fires prompted a lot of states to reach out to you guys. What do you do you feel like there's a good chance that they will making decisions some of these other states this fiscal year?

Richard Danforth

I'd say, and I'm hopeful for that, Mike. It's whenever there's an emergency. There's an initial spike of interest and concern, and it tends to Wayne pretty quickly. I think if you the world saw what happened in Louisiana and that will result in additional business for Genasys . It's not clear to me at all on the timing of that quite yet.

Mike Latimore

Got very good. Thanks a lot.

Operator

Scott Searle, Roth.

Scott Searle

Good afternoon. Thanks for taking my questions. Maybe to dig in first on the hardware front, certainly still looks like a back-end loaded year. There were a couple of numbers that you threw out. There was 150% number. I wasn't clear to me if that was pipeline or backlog I was wondering if you could clarify that and also give us an idea of what that coverage ratio looks like in terms of that pipeline, given that we're talking about recovering to about $45 million, $48 million in terms of hardware sales, big ramp in the second half.
And also, I believe the gross margins have been under pressure on the hardware front, I thought they were expected to come back. It looks like that sort of embedded in the results. I was wondering if you could provide some more color on that front.

Richard Danforth

Scott, I'll do my best if I forgot one of your questions or you'll remind me. But the pipeline question I mentioned in my remarks, it's up 150% from this time last year without consideration of the 25 million, that's also moved.
And so if you put that in, there would be even a higher pipeline opportunity for us from a gross margin perspective, the fourth quarter gross margins were 49.6%, bringing the year to 46.6%. So we saw a significant uptick in Q2 is 43.9 Q. three was 46.9 in Q4 was 49.6. So historically, our gross margin on our hardware business, toggles plus or minus 50%. We saw that in Q4.
In terms of backlog, our backlog going into fiscal year 24 is down considerably from the backlog going into fiscal year 23 which was reflective of the poor bookings in fiscal year 2023, our revenue was ahead of our backlog, which means we rebate into revenue was ahead of our bookings, which means we ate into backlog.

Scott Searle

Okay. And then maybe moving over to the software side of the equation, looks like you're looking for sales to double this year conservatively. What clarification is ever tell built into that expectation because it seems like you're seeing some early momentum on that front. And then what is tablet command and ledgers do in terms of the revenue opportunity on fiscal 24.

Richard Danforth

What was the first question? Tablet commence, Embratel and Claro?
Yes.
Embratel is included in the remarks on expected annual growth of the growth of ARR and software revenue. It tablet command is a co-sharing kind of thing. It's not necessarily a revenue generating relationship as much as it is. We're first responders using tablet come and have access to our EVACEBAC. layer and other firefighters and counties and cities and states will be able to see the utility of having that. And it will help lighten them and get them interested in the Genasys protect platform. So you can think of that as more of a sort of marketing kind of thing than a revenue generating think Ladbrokes is, in fact a revenue-generating thing. Solaris is a NAI. driven platform from modeling how to get a lot of people out of harm's way in times of an emergency. So it allows a community or a large enterprise had to set up scenarios and then run the model if you needed to evacuate a large stadium, for example, are you using the existing road infrastructure? How long would it take for that stadium to be evacuated?
Well, that might come back and say it's going to take four hours, which is three hours too long of what the first responders can do in advance of this is then practice with well, what if we shut down this road waterfall, you open that road up to two-way traffic or one-way traffic and do all of that in advance of a catastrophic event. So it's a very useful utility, particularly when there's a lot of people involved.
So Richard, will that be integrated into E. VaxGen?
It's separate right now, Scott. But overtime, I would believe that we would have integrated.

Scott Searle

Okay. And then just on the opportunity pipeline. It seems like there have been a lot of inbounds on you look at things like Florida that got pushed out, but still kind of in that opportunity pipeline, it sounds like it's at record levels and the deal sizes are increasing. I'm wondering if you could provide a little bit more color in terms of what that translates to in terms of potential revenue or connected users? How should we be thinking about that?

Richard Danforth

I think I go back to what I said, Scott, that we expect software revenue and ARR to double in this fiscal year, and there's opportunities beyond that as well. But the pipeline is robust and the inbound opportunities, as you pointed out, is very good.

Scott Searle

Great.
And then lastly, if I could the enterprise market? I think you announced something earlier this week in terms of some energy wins. I was wondering if you could specifically address that in terms of the interest level there, what you're seeing kind of sales cycles, close rates on, are these kind of one-offs? Or is this something that we should expect to see more of in the future for the future.

Richard Danforth

So a vertical we focus on is critical infrastructure protection that the orders you're referencing are two nuclear power plants here in the United States. The order was will the opportunities for a total of four, two of which were books, and two more will likely book in our fiscal year 2025. But beyond that, we have in our forecast and pipeline power plants, large distribution centers anywhere. There's a lot of people is of the utility of our hardware and software is realized.

Scott Searle

Great. Thanks so much.

Richard Danforth

Thank you.

Operator

Thank you.
Ed Woo, Ascendiant Capital.

Ed Woo

Yes, congratulations on outlook for software. My question is on active shooters. It seems like there's news every day about some active shooting somewhere in the US. Are you going to possibly focus on that? What are your opportunities in that area?

Richard Danforth

Our evacuation platform has been used in cases of active shooters. The Genasys Protech platform allows first responders to send emergency messages to very specific geographic areas. In fact, we just went live in this county of San Diego for that. The other thing it does, the Connect or the former hotel, the Connect allows the first responders to be able to communicate privately. You mentioned active shooters. And I think it was in the state of Maine, not too long ago, there was an active shooter situation.
And I can tell you from my personal experience, I'm watching the national news and the reporters in the national news are listening to HF radios and saying, oh, the active shooter must be in this town and panics everybody in the area at one point the reporter said there was a parking garage behind them with a stairwell that was open and police were going to the top floor.
So we reported Assured has got to be up there. So a lot of misinformation out there and that misinformation as a consequence of the chaos during any one of these catastrophic events Connect platform is private. It's not subject to being listened to by the public or the or anybody else that can use that information against them. So both the geography, this highly geographic based messaging and connect it to very good applications when you have a active shooter.

Ed Woo

Great. Thanks for answering my questions, and I wish you guys a good luck.

Richard Danforth

Thank you.

Operator

Thank you. (Operator Instructions)
Martin Yang, Oppenheimer.

Dennis Klahn

Mark, thank you for taking the question. So my one question is about the inbound requests you have regarding the acoustic systems a little given the recent interest. Are you actively investing in more outreach efforts? Two accounts are regions where there might be a potential interest, but they have not actually inquired about the acoustics to combine with and this is protected.

Richard Danforth

Well, Martin, we've recently aligned the Genasys acoustic systems underneath the Genasys protect platform.
There are several customers, particularly here in California that have bought all of our software and hardware systems. And that's a slightly different approach than we have in the past where the and the hardware acoustic systems were sold principally through the Eldorado channels and our expectations are for some significant uptick in the Genasys acoustics as we channel through our SIS Group and this third leg of this, the Genasys Perfect Store, and I think I don't have any more questions.

Martin Yang

Thank you.

Operator

It was our last question. I'd like to turn the floor back to Mr. Alger for closing remarks.

Brian Alger

Grant, thanks for participating in the call tonight. A replay of the call will be available on our website shortly for additional information and up-to-date news and activity regarding Genasys , our products and the customers we serve. I highly recommend that you follow the company and Genasys protect on your social networks, particularly linked in an X where we actively posting comment on events as they're happening. And we look forward to speaking with you again next quarter when we report the fiscal first quarter of 2024 results. Thank you, goodnight.

Operator

Thank you. Ladies and gentlemen, this does conclude today's teleconference, and we thank you for your participation. You may disconnect your lines at this time and have a great day.