Genasys (NASDAQ:GNSS) Q2 2020 Earnings Call

0:00 Please stand by, we are about to begin. Ladies and gentlemen, good afternoon and welcome to Genesis Incorporated's fiscal second quarter 2020 financial results call. All lines have been placed in a listen only mode and the floor will be open for questions following today's presentation. If you would like to place yourself into the queue for a question, simply press star and one on your telephone keypad. These instructions will be repeated after our prepared remarks. Also, if you should require assistance throughout the conference, please press star and zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn over the floor to Satya Chalara, Investor Relations for Genesys. Sir, the floor is yours. Thank you, Jim. Good afternoon, everyone, and welcome to Genesys Fiscal Second Quarter 2020 Financial Results Conference Call.

0:52 I'm Satya Chalara, Investor Relations for Genesys. with me on the call today are Richard Danforth, Chief Executive Officer, and Dennis Clam, Chief Financial Officer of Genesis. Before we begin, I would like to take this opportunity to remind you that during the course of this call, management will make forward-looking statements. Other than the statements of historical facts, statements made during this call that are forward-looking statements are based on current expectations. During this call, we may discuss company's plans, expectations, outlook, or forecast for future performance. These forward-looking statements are subject to a number of risks and uncertainties, including the consequences of COVID-19 outbreak, other pandemics, and other risks and uncertainties, many of which involve factors or circumstances that are beyond the company's control.

1:54 These forward-looking statements are based on information and management expectations as of today. Future results may differ materially from our current expectations. For more information regarding potential risks and uncertainties, please refer to the risk factors section of the company's form 10-K for the fiscal year ended September 30th, 2019. Genesis disclaims any intent or obligation to update those forward-looking statements except as otherwise specifically stated. We may also discuss non-GAAP operational metrics of bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance.

2:41 We consider bookings and backlog as 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 the 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 our website. At this time, it's my pleasure to turn the floor over to Genesis Chief Financial Officer, Dennis Clam. Dennis?

3:29 Thank you, Satya, and welcome, everyone. I will open today's call with a recap of the fiscal second quarter 2020 financial results. Richard will then provide an update on the business. Afterwards, we'll open the call for questions. Revenues for the second quarter of fiscal 2020, or $8.3 million, compared with $10.2 million in the second fiscal quarter of 2019. The COVID-19 outbreak partially impacted the acceptance testing and delivery of two orders with a total value of approximately $1.6 million. Virtual acceptance testing and partial deliveries were completed in April with a balance scheduled to ship this quarter. Gross profit was $4.3 million, or 48.4% of revenue.

4:19 The decrease in gross profit margin compared to last year was driven by 77,000 of additional engineering charges resulting from the use of a more precise process to charge engineering expenses to cost of sales. Excluding this additional cost, gross profit as a percentage of sales this quarter would have been 49.4% compared to 50.9% in the prior year. and for first six months of the fiscal year, gross profit would have been 50.9% compared to 50.5% for the same prior year period. Operating expenses in the fiscal second quarter of 2020 were 3.7 million, essentially flat compared to the same period last year.

5:06 Selling and general administrative expenses increased this year as we added employees and increased sales and marketing activities. Research and development expense decreased compared to the same period last year as hardware development cost decreased and some costs were charged to cost of sales, offset by continued increases in software development. We generated net income of $302,000, or one cent per diluted share, in the fiscal second quarter, compared with net income of $1.2 million, or four cents per diluted share, in the same quarter last year. Cash used in operating activities in the quarter was $345,000. This was largely due to increased inventory at the end of the quarter, offset by net income and non-cash charges.

5:58 In last year's similar quarter, operations provided $4.2 million. Our balance sheet remains strong. Cash and cash equivalents at March 31, 2020 were $16.4 million, compared to $18.8 million at September 30, 2019. The $2.4 million decrease in cash and cash equivalents was due to the cash used in operating activities in the year to date. Working capital increased by $0.7 million to $25.5 million at March 31, 2020 compared to $24.8 million at September 30, 2019. The increase was primarily the result of net income generated this year.

6:46 During this year's second fiscal quarter, we used 400,000 to repurchase 156,000 shares of company stock. Last year, the board authorized a $5 million repurchase program through December 31, 2020, of which 4.1 million is still available. With that, I would like to turn the call over to Richard. Thank you, Dennis, and good afternoon to everybody on the call. Fiscal second quarter and first half revenues were in line with the backloaded fiscal year revenue outlook we've discussed on our two previous conference calls. In spite of the COVID-19 pandemic, we remain on track for a very strong second half and another record fiscal year in revenue.

7:35 Bookings for the second fiscal quarter were $4.2 million, up 10% compared with $3.8 million from the same period last year. After posting record revenues and backlog in fiscal 2019, Q2 of fiscal 20 ended with a backlog of $16 million, up 13% from the same period last year. As an essential provider of critical communication systems for the US military and public safety agencies, Genesis has remained open and will remain open through the COVID-19 crisis. We continue to execute on all facets of our business. Our employees that can work from home are, and those that must be in the office, they are here every day.

8:23 Our full production team has worked since the beginning of this crisis, Monday to Friday and overtime. We express our sincere appreciation to our employees for their professionalism, commitment, and loyalty during these difficult times. To date, our supply chain remains intact. We are diligently monitoring and working with suppliers to achieve maximum visibility within the constraints of the current global supply chain conditions. Our key vendors remain open and producing parts for current and expected orders. Domestic and international government funding continues to flow, but in some cases slower than normal. It is, however, moving.

9:09 As we discussed on the last earnings call, the additional U.S. Army orders expected this fiscal year would be somewhat smaller because of the Army's pent-up demand for LRADs in fiscal 2019. We expect the FY20 orders to be received very shortly. New and follow-on defense and homeland security orders from the U.S. military, the Asia Pacific, and other agencies and areas are also anticipated. We ended fiscal Q2 with $21.5 million of cash and marketable securities. The importance of our strong balance sheet and no debt is self-evident during this COVID-19-induced economic downturn. We have not taken a Paycheck Protection Program loan and we do not intend to.

9:59 As Dennis mentioned, we repurchased shares last quarter and plan to continue strategically utilizing our buyback program. As we announced earlier today, Genesis donated our public safety system software module to the Salvation Army Western Territory. This software module, the Western Territory, can rapidly react to changing requirements and conditions during the pandemic and other crisis situations. and efficiently exchange information with officers, corps and volunteers. Our donation will help the Salvation Army more effectively serve those in need. Genesys hardware and software solutions are being used to deliver COVID-19 notification and information in the United States, Australia, Colombia, Spain, Poland, Morocco, South Africa, India, Thailand, Malaysia and other countries.

10:54 In the United States, we've received COVID-19 related hardware orders from the United States State Department, Department of Homeland Security, Immigration and Custom Enforcement, and the Florida Office of Emergency Management and local police departments. International hardware orders have been received from Homeland Security and public safety agencies in Germany, France, Belgium, Spain, Greece, and the Czech Republic and Colombia. additional domestic and international coronavirus-related orders are expected. The public's need for accurate and reliable information during this pandemic has shown governments and emergency management officials the importance and utility of directly reaching as many people as possible.

11:40 Unifying the delivery of potential life-saving alerts and information through multiple communication channels provides this increasingly critical capability and can help mitigate further large outbreaks, speeding economic recovery and reopening society. The Genesys public safety platform unifies the following mass notification channels, location-based SMS, cell broadcast, mobile push notifications, social media, email, TV, radio, digital displays, and Genesis acoustic arrays. This platform works anywhere in the world on dedicated in-country and in-region clouds. Reliable, redundant, and resilient, our platform ensures that critical communications are delivered to help keep people informed and safe during this and future crises.

12:34 Since 2013, Australia has been using the Genesis National Emergency Warning System, or NEWS, to deliver emergency alerts and life-saving information to at-risk populations. Working with two large telecom providers to flawlessly deliver more than 150 million SMS emergency notifications to date puts Genesis in a very good position to expand the use of NEWS in Australia. We have submitted proposals to all three telecom providers for Australia's national emergency notification delivery service tender. Award decisions from all three providers are expected this quarter. Because of our experience and success in Australia, news is also well positioned to compete for and win European electronic communication code directive awards.

13:27 The directive mandates that by June of 2022, every EU member must implement a public warning system that can send emergency alerts to mobile phones of residents and visitors in case of disaster or other critical events. The system must include geo-targeted emergency communication and be able to notify residents and tourists of emergencies without having to opt in. Genesis News fully complies with the EU mandate by providing robust location-based SMS systems deployed directly on mobile carrier networks. In the second half of the fiscal year, we expect several RFPs for the Genesis software services from the European Union member nations.

14:15 The powerful geolocation capability of news enables emergency management officials to send geospecific notifications to people in harm's way and monitor their progress during the mandatory evacuations. While the pandemic's efforts on our business and supply chain are uncertain, the strength of our balance sheet, bookings, backlog, and a growing pipeline are providing the company with the resources and the flexibility to grow our business, expand our staff, and meet the increasing demand of our critical communications systems and solutions. We continue to actively pursue synergistic M&A opportunities that have the potential to expand our business and create additional shareholder value. Our systems and solutions are proving to be essential for a world experiencing exponential safety threats. With our strong balance sheet and growing backlog and business pipeline, Genesis is on track for record revenues this fiscal year and well positioned for future revenue growth.

15:19 With that, I'll turn it back to the operator for Q&A. Gentlemen, thank you. The floor is now open for questions, and if you do have a question, simply press star and 1 on your telephone keypad at this time. Anytime you find your question has been answered, you can remove yourself from the queue by simply pressing the digit 1. If you're using a speaker phone today, we ask that while posing your question, you pick up your handset to provide favorable sound quality, also to make sure that your signal does reach our equipment. Again, ladies and gentlemen, if you have a question, please press star and 1 on your telephone keypad at this time. We'll take a few moments. Please hold while we poll for your questions. And gentlemen, our first question today will come from the line of Rick Neaton at River Shore. Please go ahead, Rick.

16:06 Thanks. Hi, Dennis and Richard. How do you see these new orders to help with coronavirus efforts by governments affecting your revenue stream in fiscal 2020? Do you feel that this is accretive or do you feel that this may offset some bumpiness? No, I think it'll be accretive. The bumpiness you referenced, Rick, is one of timing. DLA, for example, here in the United States, we probably have $2-plus million pent up in a process that usually takes two weeks, and now it's taking four to eight weeks. So I do believe it'll be accretive.

16:52 And I see the slowdown slowly getting back to normal. OK. Can you give some examples of how your software can assist in antivirus efforts that are being planned by potential customers? Well, the new software, Rick, will not enable the emergency management people to see where people are congregating. And in an area, in a time when social distancing is necessary, It would give the emergency management the information to know where that rule may not be being followed.

17:39 Okay. So that would be with cell phone data? Yes. Okay. In terms of your visibility into the second half of this year, you seem to have pretty good visibility into your fiscal year. Do you have any Are you starting to see any visibility into the first quarter of your next fiscal year, which is the fourth quarter of this calendar year? We're intently focused on this fiscal year at this time. Our backlog is forecasted to generate revenue based on particular lead times, and we're still inside those lead times.

18:29 for our fiscal 20. There are some orders like our Indian maintenance thing. We booked about a $4,750,000 order last year, and that actually delivers over a five-year period. So there are cases, Rick, that were beyond the normal lead time, but it supports the customer schedule. And are you expecting your military orders to be received this fiscal quarter? Yes. Okay. Hey, thanks, guys, and thanks for the clarity in your prepared remarks. Thank you, Rick.

19:14 Next question, please. Next, we'll hear from the line of Ed Wu at Ascendant Capital. Yeah, congratulations on the quarter. My question is, you know, I know you haven't really had much of an impact with the coronavirus, but as we start seeing, you know, massive fiscal problems with various governments due to the shutdown, do you see possibly that orders may be curtailed, you know, further out? Not now, Ed. I mean, our biggest customer, of course, is the US military. They budget on an annual basis. The FY21 budget's in process. And although it still is not supposed to be turned into law until October 1st of this year, it is tracking to come close to that date.

20:08 There's still a long time between now and then, so things could get derailed. But it's an election year, and the budget that's running through the halls of Congress now is about the same level as it was this current fiscal year, so that's all very positive for us. Great. And then you did mention that, you know, you guys were continuing to look at M&A opportunities. You guys have a very strong cash balance sheet, and obviously, you know, there's been a lot of volatility in valuations recently. Have you seen an increase in opportunities, particularly, you know, possibly with companies that may have weaker balance sheets? We've seen an increase in possible companies to buy, yes. All right. Have you seen valuations pull back at all yet?

20:58 I think it's too soon. I think valuations will change. I mean, there's always a spike in initial reaction, and then it dampens out. But I think as we come out of this, I think valuations will put more emphasis on balance sheet than it did before. Great. Well, thank you for answering my questions, and good luck. Thank you, Ed. Thank you, Ed. Next question, please. Next, we'll take a question from UBS and the line of Miles Wittenstein. Your line is open, sir. Thank you. Hello, Dan. Thank you very much. You mentioned that people are working overtime. Is your capacity constrained?

21:46 is that put a limit on actual growth? No, we have a very large facility here. So we have capacity, and we only work one shift, so we could effectively double your capacity by putting a second shift on. The current overtime is being utilized to address very specific revenue for our Q3. And what would it take to see a breakout in terms of revenues? I mean, we see and have for many, many quarters now modest growth. What would it take to break out given the fact that you are in a leading technological position at a time when it seems the need is definitely there around the world?

22:38 Revenue has grown from $16 million three fiscal years ago to $36.5 million last year with record bookings of 46.5. And I've said now on three occasions, I think, that I expect our revenues for our FY20 to be yet again a record for the company. So that pace is on, if on a CAGR basis, is 35 or 36%, which is pretty good. Is it fair to say that you're positioned to continue that kind of growth? Yes, for the foreseeable future. There is a little uncertainty because of this whole corona thing, but fundamentally I agree, yes.

23:27 Great. Thanks so much. Appreciate it. Keep up the good work. Thanks. Once again, ladies and gentlemen, joining today over the phones, if you have a question or a follow-up, that is star and one. on your telephone keypad. Next, we'll hear from William Bremer at Vanquish Capital. Hello, William. Your line is open. You may have us on mute, sir. Mr. Bremer, are you there? Gentlemen, can you hear me? Yes, sir. Welcome. Go ahead. Okay, great. Thank you. Hey, sorry about that, Dennis and Richard. My apologies. Okay, first question. of your product line, has any potential inquiries across your products surprised you in terms of a demand or potential or bidding activity?

24:25 I don't think surprise me is the right characterization. We have a pretty good pulse on what's going on in the marketplace, be it in emergency software for national applications or for community applications or for enterprise applications. Our hardware typically has a long sales cycle, so we have pretty good visibility into where growth or contraction might take place with a fair amount of lead time. Well, times have definitely changed and you guys are definitely in a sweet spot for sure. Given the pockets of unrest that we're starting to see, not just domestically but in certain parts of the world globally, with some protests and riots, are you guys seeing some type of maybe, because you did a good job of explaining the EU opportunity, are you starting to see some maybe local law enforcement agencies starting to maybe bid a little bit or inquire about your services because of these potential unrests?

25:37 Yes, as I said in my prepared remarks, we've received International orders, albeit small, during this corona outbreak from Germany, France, Belgium, Spain, Greece and the Czech Republic and Colombia. In all cases, they're buying onesies and twosies for specific notification applications, but I think getting their hands on hardware and using it will beget additional demand from those countries. and then lastly, I see inventory picked up here a little bit. Any issue in terms of raw materials given this sort of halt or slightly deferred business that we're having right now for your products?

26:26 Two answers to that. A, the inventory grew as a consequence of the $1.6 million that Dennis mentioned. For our supply chain, We've queried all of our suppliers. They have our current demand and forecasted demand. And at this time, everything fits. So we're not aware of a material issue coming out of the COVID-19 pandemic that we haven't been able to manage through yet. So far, so good. Okay, great. Thank you, gentlemen. Thank you. Our next question will come from Lloyd Corton at Unique Investments.

27:13 Hello, Lloyd. Hey. Hi, Richard. Hi, Lloyd. I have a few questions. Being what's going on with the municipalities all over the country, I know you were working, I guess, with several potential counties, cities, et cetera. How is it affecting us because their budgets are going to have a huge problem going forward? Well, it's affecting us because of their availability. So part of that revenue shortfall in Q2 was a community where their workforce was working one day a week.

28:00 So having a factory acceptance test was impossible for those folks to come and do. We've subsequently done it, but we did it virtually, and now the hardware will begin to be shipped and installed. So it's having that kind of an impact, Lloyd. We have seen communities that are actually putting, as part of the annual is the word I'm looking for, the budgeting process, putting up potential changes in law that mandate these kind of systems. So I expect that to continue. That would be nice. You know, it's been quite a while since, I don't know what the last installation was in Newport or whatever.

28:49 Well, it hasn't been a while. We just finished Newport, I think it was last month, wasn't it? I think so. We're ongoing with Laguna Beach, and that's a big one. And that'll take us probably a couple of months. What's that? Maybe the announcement was several months ago. It could have been, yeah. And I was hoping that we'd be, you know, a lot more municipalities would be running towards you for the same product. There are some of those municipalities lined up. Okay, good. Another thing, 5G, does that affect us positively or negatively? Sure, in a favorable way, I'd say.

29:35 As I mentioned regarding Australia, one of the requirements that has necessitated the three carriers to redo their network and therefore require new emergency software includes, in some cases, 3G, 4G, and 5G. Okay. As far as Europe is concerned, I mean, I'm excited about the potential. I hope we get some wins. It's being done by country rather than the EU as a whole? That's correct. Country by country. Uh-huh. And how optimistic are you from what you're hearing, what you're seeing?

30:23 I am quite optimistic. If you look at the world market for national emergency warning systems, Australia is probably the biggest one. As I mentioned, we expect award announcements there. And I think from there, it will hopefully put us in a very good position in the marketplace to go after the EU potentials. That would be a wonderful win. Okay, thank you, guys. Thanks for all your hard work. Thanks, Lloyd. Once again to our phone audience, if you do have a question or need clarification on anything covered in today's announcement, simply press star and 1 on your telephone keypad. A friendly reminder, return to your handset prior to pressing star and 1 to be sure that your signal does reach our equipment, ladies and gentlemen.

31:11 Next, we'll hear from David Lipke at Summit Financial. Yes, thank you, and I need to say I'm a registered representative, not an analyst. Just a couple numbers in your prepared remarks I think I missed. Did you give a number for bookings for the quarter? I did. They were 4.2. Okay. And also on the stock buyback, I caught the number 156,000 shares. What was the dollar amount? It was 156,000 shares, and the dollar amount was $400,000. 400 divided by 156,256 a share. Good job, guys. That's all I have.

32:01 Thank you, David. And Satya and Richard and Dennis, at this time, we have no further questions from our audience. Would you like to give any closing remarks before I close out the call? We regularly discuss our business at investor events during the year. We invite you to join us for these events. Thank you for participating in today's call. We look forward to speaking with you again in a few months when we report fiscal third quarter results. Gentlemen, thank you. Ladies and gentlemen, this does conclude the Genesis Fiscal Second Quarter 2020 Financial Results Conference Call. We thank you all for your participation. You may now disconnect your lines. Have a great day.