Genasys Inc.
Q2 2024 Earnings Call Transcript

Published: 14 May 2024

[Operator:]

Welcome to the Genasys Inc. Fiscal Second Quarter 2024 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, Kat. Good afternoon, everyone. Welcome to Genasys' Second Quarter Fiscal 2024 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 Klahn, 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 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 fact, forward-looking statements made on this call are based only on information and management's expectations as of today, May 14, 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 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 the 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 purchases executed in a given period regardless of the other related revenue reduction. Backlog is a measure of disorders received that are scheduled to ship within the next 12 months. Now finally, a replay of this call will be available and approximately 4 hours to the company's Investor Relations website. At this time, I'd like to turn the call over to Genasys' CEO, Richard Danforth. Richard?

[Richard Danforth:]

Thank you, Brian, and welcome, everybody. After the market closed today, we issued 2 press releases in addition to our quarterly earnings report

[Dennis Klahn:]

Thank you, Richard. In the second quarter, we continued to see strength in our software business with year-over-year growth of 104% and recurring revenues growing 123% over the same prior year period. Revenues for the second quarter of this fiscal year were $5.7 million, a decrease of 49% from the prior year second quarter, which benefited from approximately $5.7 million from a prior program of record that was completed in 2023. Software revenue this quarter was $1.7 million, reflecting the 123% growth in recurring revenue. More than offsetting that growth, hardware revenue decreased 61% to $4 million. As we discussed last quarter, Genasys started fiscal 2024 with exceptionally low hardware backlog. In addition to a low backlog entering the quarter, the delayed approval of the 2024 U.S. DoD budget resulted in revenue again slipping out of quarter. Gross profit margin was 38% in the fiscal second quarter, a decline of 6 percentage points or $2.7 million from the prior year period. The drop in gross profit was primarily attributable to lower hardware revenue in this year's quarter and the related reduction in overhead absorption. We do expect gross margin percentages to recover with increased revenues in the coming quarters. Quarterly operating expenses were $9.2 million, up 10% from $8.3 million in the second quarter of fiscal '23. SG&A increased 10% while R&D increased 11% over the prior year period. The difference was largely attributable to the acquisition of Evertel and increased professional services expenses that account for more than 50% of the incremental change. On a GAAP basis, our second fiscal quarter operating loss was $7 million compared to a loss of $3.4 million in the year ago quarter. Adjusted EBITDA, which excludes noncash stock comp, was a negative $5.7 million compared to last year's negative $2.3 million. The year-over-year decline in adjusted EBITDA was due to the lower hardware revenues and subsequent reduced overhead absorption in the current year. Cash, cash equivalents and marketable securities totaled $6.6 million as of March 31, 2024, compared with $10.1 million as of the September fiscal year-end. Excluded from the cash figure is $3.5 million being held as a bid bond for the Puerto Rico business Richard discussed just a moment ago. Cash used in operating activities in the second fiscal quarter was $6.8 million. As Richard mentioned in his remarks, we expect to receive both the return of our $3.5 million bid bond and an initial award payment after the terms and conditions of the Puerto Rico contract are finalized later this quarter. Strong software bookings continue to provide upfront cash and the announced financing is fortified our balance sheet considerably. We believe we have ample resources to monetize the investments we have made in growing and diversifying our business. As we have discussed in our earnings release and in this call, there are a number of large opportunities that we are excited about. Between the Puerto Rico and CROW 16 business alone, we're expecting nearly $200 million in highly profitable revenue in the coming years. Our software business continues to grow rapidly, and it is on track to post triple-digit growth in ARR this year. We are confident that second half fiscal '24 hardware and software revenues will grow considerably from the first half, but we're not in a position to be more prioritized than that at this time. And now we'd like to open the call to Q&A. Operator?

[Operator:]

[Operator Instructions]. Our first question comes from Mike Latimore from Northland Capital.

[Mike Latimore:]

Thanks for the update here. On the CROW revenue, I believe that in the budget. But what do you have clarity on whether you'll get it by calendar year-end funding for the growth order?

[Richard Danforth:]

It's not currently in our internal forecast, Mike. The money is beginning to flow to the program office. The initial kickoff meeting is scheduled for the first week of June. After that, we'll have more clarity.

[Mike Latimore:]

Got it. Okay. And then you gave some guidance for fiscal '24 excluding Puerto Rico, but it sounds like you're expecting maybe a payment from the right after closing of the deal, I guess any clarity on how much revenue you might get from Puerto Rico this year?

[Richard Danforth:]

I think we spoke about this on the last call. I'm not expecting any at this point. There's an initial phase of -- they need to accept our designs for each of the 37 dams. I think if we close the contract by the end of June, which is our expectation, it gives us July and August and September to get the approvals required and then we're into our fiscal '25. There will be an initial deposit subsequent to the contract being signed.

[Mike Latimore:]

Got it. Okay. And then on the revenue recognition on the Puerto Rico deal, what 242 days.

[Richard Danforth:]

Too soon to tell. There's been a lot of moving parts, Mike, since the last call we had I believe we told you the contract would be worth, I don't know, $60 million to $65 million last time, and now it's worth about $75 million. So the customer has added scope to each and every dam. So that all has to be included in our designs and our proposal, and we're doing that now. So I think we can -- at our next conference call, Mike, I would expect to be able to provide way more clarity than I can right now.

[Mike Latimore:]

I mean is that something that can get deployed over like 5 years or 10 years?

[Richard Danforth:]

No, no, I don't think so at all. The initial RFP had done 240 days after approval of all the dams.

[Dennis Klahn:]

Year-over-year growth of 104% and recurring revenue is growing.

[Richard Danforth:]

It will not likely be 240, it will be more than that. But I'll know more next conference call. still should be very good for '25 and probably '26 as well.

[Operator:]

And our next question comes from Ed Woo from Ascendiant Capital.

[Ed Woo:]

My question is on a slightly different market that you have been used to, civil disobedience. Across the country, we've been hearing about all these processors on the college campuses and people claiming that they're not getting notified or whatnot. Obviously, that will be a great opportunity for your LRAD devices. Have you seen any upticks in civil disobedience type of opportunities with police forces?

[Richard Danforth:]

Yes, [indiscernible] coming in queries, Ed, but it's typical during a crisis is not a good time to be selling most all police forces -- major police forces here in the United States have LRADs. What this typically would do is shine a light on the need for more of them, and the acquisition of those would follow. But as you've watched some of the news over the last several weeks, there's been a lot of use of LRAD around the countries.

[Ed Woo:]

Well, that's great to hear. I'll then say play some really loud music and maybe some of these protestors wouldn't be so happy to be capping overnight. Thank you very much. I wish you guys good luck with everything.

[Operator:]

[Operator Instructions]. And at this time, I'd like to turn it back to management for any closing remarks.

[Brian Alger:]

Well, I appreciate everyone getting on the call tonight. Obviously, there's a lot been going on over the past several months, and we look forward to updating you all on our next quarterly conference call. With that, I wish everyone good night. Thank you.

[Operator:]

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect connect your lines at this time, and have a wonderful day.