Q2 2023 LRAD Corp Earnings Call
Good day, ladies and gentlemen, welcome to the Genesis incorporated fiscal second quarter 2023 conference call at.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be provided at that time.
I'd now like to turn the call over to your host Brian Alger, Brian you may begin.
Thank you and good afternoon, everyone.
Welcome to Genesis fiscal 2023 second quarter financial results Conference call I am Brian Alger, SVP Investor Relations and corporate development for Genesis.
With me on the call today are Richard Danforth, Chief Executive Officer, and Dennis <unk>, Chief Financial Officer.
During today's call management will make forward looking statements regarding the company's plans expectations outlook and future financial performance and 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 32022.
Other than statements of historical facts are forward looking statements made on this call are based only on the information and managements expectations as of today may eight 2023, 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 operational metrics, including adjusted EBITDA bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance.
For a 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.
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 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 Jennifer <unk> CEO Richard Danforth.
Sure.
Thank you, Brian and welcome everyone.
As expected financial results for the March quarter was similar to our first fiscal quarter with slight sequential improvements in revenue and adjusted EBITDA.
Based on our pipeline and bookings, we expect to see growth resume and accelerate in the second half of this fiscal year.
Steady growth in our software revenues are expected to be augmented by improved hardware bookings, particularly from international customers.
Over the course of the last past several quarters, we have proven that the Genesis protect solution is both diverse demand and differentiation versus competitive alternatives.
In numerous cases, including Riverside County, Aramco being a W. San Diego County in Los Angeles County, we have despised much larger incumbents.
As I will detail in a bit we expect our recent investments in marketing and sales will lead to increased demand higher conversion and greater velocity of new business, beginning with a revamped revenue focused campaign launched in our fourth fiscal quarter.
Last quarter, we talked about the success of our land and expand strategy.
In Q2, we continue to see success with this strategy expanding relationships with San Diego Alameda and Riverside counties in California to each include the complete Genesis protect platform.
In the case of Alameda County, our entire platform is being used by not only the county, but also the city of Berkley as well as UC Berkeley.
As discussed on our February call Genesis Protract played a critical role for numerous California customers. This past winter with the various weather and flooding events that devastated so many communities and affected millions of people.
In early March Governor Newsome declared a state of emergency for 'twenty, One counties in California affecting over 17 million residents.
Our team takes great pride in the improved outcomes facilitated by the Genesis protect solutions and the lessons learned we're in.
Instructional to public safety officials and to Genesis as we expand our coverage throughout California and increasingly into other regions.
While we will continue to expand our footprint and offerings with existing accounts. We're also targeting a number of new opportunities, including statewide opportunities that we believe we are well positioned for.
In the second half of this fiscal year, we will be augmenting our go to market and sales initiatives.
I want to take some time to discuss the significance of this effort and why we believe it will result in greater velocity and predictability of revenue and profit growth.
The objective of our cross functional go to market launches to grow profitability and drive business growth by building a predictable pipeline with high conversion.
Our investment over the past several quarters in sales marketing product and customer success teams helped lay the foundation of our unified platform.
Genesis protect combines the most comprehensive preparedness communication and analytical solutions to keep people communities and assets protected.
Our unified platform offers a diverse range of applications, including <unk>.
Emergency warning in mass notification for public safety critical event management for enterprise.
The escalation for defense and law enforcement as well.
In the second half of this fiscal year and leading into FY 'twenty four.
We will roll out enhancements to the product UI that unifies our solution set introduces a new platform pricing structure that scales to meet the needs of our diverse customer base execute sub vertical focused demand generation campaigns.
And launch a repeatable and scalable sales methodology that is rooted in best practices.
Obviously, our hardware solutions are an integral component of the Genesis protect offering and how we position ourselves against less complete alternatives.
However, in the majority of our situations our hardware revenues are still coming from a traditional end markets and use cases.
Hardware bookings continued to be a challenge in the March quarter. However.
Subsequent to quarter close we have seen activity, both domestically and internationally that gives us improved confidence in achieving our full year bookings targets for hardware.
Inconsistent bookings in the first half of the fiscal year has been from both domestic and international customers. The.
The net result is that Oh hardware backlog declined in the March quarter to $6 5 million as compared to $21 4 million in the year prior.
Our current forecast of qualified hardware business that has yet to be closed represents over $40 million in bookings.
As we expect coming into this fiscal year international bookings make up a substantial portion of this opportunity.
On last quarters Conference call I said, we expect fiscal 'twenty to 'twenty three bookings to follow our typical pattern with large step up in the fiscal Q3, driven by international orders.
Hardware bookings in our fiscal 'twenty two 'twenty three are expected to substantially exceed fiscal 2022 hardware bookings.
Everything about that statement remains true today.
The recent improvements in activity and momentum in contract bolsters, our confidence in the second half outlook that Dennis will detail in a moment.
Q2, again saw gross margin pressure as a result of the higher cost materials against orders that we priced and booked prior to us experienced the inflationary factors, we discussed at length on our last call.
Looking at our current component cost the hardware backlog and anticipated shipments for the remainder of the fiscal year, we expect to see rapid improvements from acute to both gross margins Mauro.
Moreover, as our software revenue scale, we would anticipate higher trending margins with normalized hardware module margins and increasing software contribution.
As I look into our current bookings and pipeline I am confident as ever that our decision to invest in our software offerings and to shift our go to market will yield significant growth in both revenue and profits.
The impact from our growing software bookings and a R. R gives us much more visibility and confidence in out years revenue and profit margins.
Previously we discussed a three to five year target model of $80 million in sales generating adjusted EBITDA margins of 22% to 26%.
With the bookings secured to date and the success, we have witnessed in both the sled and enterprise markets improved focus and the investment in our Genesis protect go to market.
US the confidence to update that long term target model model to begin at an annual run rate at at least 100 million in sales and greater than 20% EBITDA margins within the next three years.
Now I will turn the call over to Dennis to go through the financials and outlook in greater detail Dennis.
Thank you Richard revenues for the fiscal 2023 second quarter for 11.2 million 15.
15% less than the prior year quarter.
As compared to the same prior year period hardware revenue decreased 17% to $10 4 million, partially offset by a 27% increase in software revenue to 853000.
Recurring revenue grew 34% compared to last year's quarter.
Versus the prior year quarter, 70% growth in our core Genesis protect software is offset by attrition in our international new software offerings.
It is worth noting that there is a period of time between booking of software when and when revenue begins it is associated with configuration and implementation.
Gross profit margin was 43, 9% this quarter compared to 54, 5% in the prior year quarter.
As Richard mentioned, the gross margin percentage was negatively impacted by inflationary pressures on material costs against pricing and backlog established before the inflationary impacts.
A lesser degree the mix of hardware revenue and installation cost also contributed to the year on year and sequential decline in gross margins.
In our third fiscal quarter, our gross margins will significantly improve as material costs have been factored into new bookings pricing in our backlog reflects the adjusted pricing.
Operating expenses were $8 4 million up from $7 5 million.
In the second quarter of fiscal 'twenty, 'twenty, two and first quarter of fiscal 2023, respectively.
The increase is directly tied to the planned investment to grow and accelerate our software business.
On a GAAP basis, our operating loss was $3 4 million compared to 500000 in the year ago quarter.
Excluding stock compensation, and depreciation and amortization our quarterly adjusted EBITDA was a negative $2 3 million compared to last year's positive 900000.
The difference in both cases relative relates to the lower revenues gross margin percentage, and our intentional investments and improving and focusing our software offerings and marketing strategy.
Cash cash equivalents and marketable securities.
$12 5 million as of March 31, 'twenty twenty-three compared with $19 9 million as of the prior year end.
Cash used in operating activities in the second quarter was $2 $6 million.
Included in that number is approximately $1 4 million or inventory purchase to facilitate revenues in the second half of fiscal 2023.
This compares to cash used in operating activities of 500000 in the same period last year.
The fluctuation primarily reflects the negative adjusted EBITDA in this year's quarter.
With our current backlog in forecasted bookings, we expect full year fiscal 2023 revenues will be down slightly from fiscal 2022 revenues.
Considering our expected an improvement gross margins, we anticipate positive adjusted EBITDA in the second half of fiscal 2023.
So full year adjusted EBITDA is expected to be negative, reflecting the $5 million in incremental costs to support SaaS business growth discussed at the beginning of the fiscal year.
So hardware bookings and revenues could shift our current expectation is that fiscal third quarter of 2023, well see similar revenues to the third quarter 2022.
And now we'd like to open the call to Q&A operator.
Thank you.
To ask a question. Please press star one on your telephone keypad.
Once again to get into the queue for questions. Please press star one on your telephone keypad, one moment, while we compile the Q&A roster.
Your first question comes from Brian Colley of Stephens.
Hi, guys Hi, guys. Thanks for taking my question.
So I wanted to start off just asking about your visibility in the back half of the year could you just speak to what specifically gives you confidence in a rebound in hardware revenue, but also just kind of how you see <unk>.
Software sales ramping in the back half of the year as well.
Yeah from a bookings perspective, Brian .
We have.
Infinite visibility into our current forecast so we know exactly what the contracts are where they're coming from.
What.
Date Theyre expected on.
It's it's business, it's all been won yet not awarded.
So a great deal of visibility to answer your question from a.
Our software revenue the software revenue continues to grow quarter over quarter.
So the second half the second half of the year, we expect to see this trend to continue.
Okay got it.
I wanted to ask about the recent ever bridge situation in Florida.
They've gone through some contract changes.
With the state do you think that's business that you could potentially win as that contract comes up for renewal at the end of this year.
Ideal, it's well within our capacity and capabilities to win that.
Okay, Great and then I don't know.
The current outlook for go.
Go ahead, Bryan Oh No go ahead go ahead, Richard sorry to interrupt.
Yeah, you know this but the.
Contract is expected to be.
The complete with ever bridge at the end of this calendar year.
And the state plans on getting an RFP out and an award made.
Probably in the early fall timeframe.
Okay understood and then last question I had was just I'm curious if the weaker economic backdrop has had any impact on the pace of contract awards or discussions in any of your businesses, whether it's hardware or software.
And in particular I'm curious if it's impacted the pipeline at all in the enterprise software side.
No not at all in fact, we saw an increase in our pipeline, but about 25%.
On software.
And again it gets back to what we've talked about before the the world is increasingly becoming more dangerous whether it's for them.
The related events or.
What terrorism or just pandemic and other things so enterprises and.
Communities governments are more and more aware of their responsibility to keep people safe and.
We see that trend continuing.
Gotcha and what is it that caused the delays in booking international hardware orders.
Yes, good question.
International has been particularly hurt from a booking perspective during the Covid years, you know our.
National bookings are used to make up.
Somewhere between 30, and 50% of our total and during this COVID-19 years it was almost nonexistent.
All of the opportunities we had before Covid are still there we're having to refresh proposals in.
And get everything up to date with pricing and its just it takes a long time, but I do believe we will close on several of those this quarter.
Got it alright, thank you for taking my questions today.
Youre welcome.
Your next question comes from Ed Woo of <unk> capital.
Yes. Thank you for taking my question can you give us any update on your Aramco a contract and also how does your pipeline look, especially with enterprise customers.
Yeah <unk>, we took the contract at the end of December . We initially went live in the first site at the end of March.
We turned over the entire system, including the second site.
At the end of this month.
So it's going well.
Your next question was relative to enterprise Ed.
Yeah. So you know obviously aramco is a big customer.
Customer for you guys to win have you guys been able to use that to increase your ability to make proposals to other enterprise customers.
Not yet we go lives fully and a couple of weeks. So we want to have.
A reference set that can be.
Reached versus someone calling aramco and saying, yeah, but we're planning on going lives. So.
Over the next several weeks, we will do that.
Great well, thanks for answering my questions and I wish you guys. Good luck.
Thank you.
Your next question comes from Martin Yang of Oppenheimer.
Hi, Thank you for taking my question first of all aren't you asked about the updated long term model can you give us a sense of the share of software revenues from that $100 million long term model.
Okay.
Yes.
Hum.
Brian do you want to take that one I don't have it in front of me.
Yes happily.
Good afternoon, Martin so so that target model, obviously assumes continuing growth in the hardware business. Historically, we've seen 20 plus percent CAGR going back several years and that has a strong history with our hardware business. We expect growth to continue in that business and what a $100 million contemplates.
Is maybe not quite that much growth in hardware, but the growth being augmented by our software business and where we are today with the bookings that we have the forecast that's in the pipeline that we talked about we feel really good with where we're going to exit this year from an IRR standpoint, and as you all know on this call.
They are something that compounds at a very high rate of growth as you move forward and it's really a mathematical equation that gets you to $100 million plus three years out.
And the positive side of this is with the with the hardware gross margins coming back to normal and the software margins kicking in you end up throwing off quite a bit to the bottom line you will see a chart.
In our upcoming.
Our investor deck illustrating what this means in terms of the the leverage coming through to the P&L.
Got it.
Is there an update.
Potential operating margin coming from the software business.
Yes, the operating profit model for the software business improves as you ramp and scale right right now, we're making investments and Youll see this in our segmented reporting of course, right, where the software business is running and operating loss very quickly.
As revenue grows and you're able to leverage the operating expenses that we're making today, you'll see that turned into a profit generation and that's something we expect to see occur over the next three year timeframe.
Got it.
But do you expect software to be operating to be profitable at operating level three years' time.
Yes, we do.
Got it. Thanks last question is a follow up on the international sales is there any particular geography.
That caused the delay or is it more spread out.
Europe has actually been behaving, okay, APAC and the middle East have been delayed.
Got it thank you very much.
Welcome.
Your next.
Question comes from the <unk> of Northland capital.
Okay.
Hi.
I have couple of questions with me. The first one is do you have good visibility into the next U S Army order.
Calling device.
Yes, now there is.
There is a process that the government goes through that's ongoing as we speak.
Through various committees and ultimately the defense appropriation committee. So yes, we were aware of that we know where it is.
We expect our our.
Our expectations as we expect to have.
The budget as soon as the government is it doesn't go into a prolonged CR we.
We expect an award probably around this time next year.
Okay. Our next question is.
Do you have any state public alleging these in the pipeline.
Yes.
In my remarks, I mentioned several.
Uh huh.
Thank you.
Once again, ladies and gentlemen to ask a question. Please press star one on your telephone keypad.
At this time. It appears there are no further questions I'd like to turn the call back over to Brian Alger for any closing remarks.
Great well thank you.
As you all know we regularly discuss our business at Investor conferences throughout the year. Later this week, we'll be participating in the inaugural Es Hudson Global Conference in New York and the eighth annual Oppenheimer emerging growth conference virtually in June we'll be attending the LD Micro conference in Los Angeles.
Thank you for.
Participating in today's call and we look forward to speaking with you again next quarter. When we report the fiscal third quarter results.
Later this year.
Thank you everyone Goodbye.
This concludes today's presentation. Thank you everyone for attending.
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