Genasys (NASDAQ:GNSS) Q4 2019 Earnings Call

0:00 Good afternoon and welcome to Genesis Incorporated's fourth quarter fiscal 2019 financial results call. All lines have been placed in a listen-only mode and the floor will be opened for questions following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone keypad to reach a live operator. At this time, it is my pleasure to turn the floor over to Satya Chalara, investor relations for Genesis. Sir, the floor is yours. Thank you, Christy. Good afternoon, everyone, and welcome to Genesys' fourth quarter and fiscal 2019 financial results conference call. I'm Satya Chellara, investor relations for Genesys.

0:45 With me on the call are Richard Danforth, chief executive officer, and Dennis Klan, chief financial officer of Genesys. 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 our current expectations. During this call, we may discuss the company's plans, expectations, outlook, or forecast for future performance. These forward-looking statements are subject to risks and uncertainties, and the actual results could differ materially from the views expressed today.

1:34 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 30, 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. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning.

2:19 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. At this time, it's my pleasure to turn over the floor to Genesis Chief Financial Officer, Dennis Klan. Dennis? Thank you, Satya. I'll open today's call with a recap of our fiscal fourth quarter and fiscal year 2019 financial results. Mr. Danforth will then provide an update on the business. Afterwards, we will open the call for questions.

3:07 Genesis revenues for the fourth quarter of fiscal year 2019 were $7.7 million. an increase of 135% compared with $3.3 million in the prior year fourth quarter. Gross profit was $3.6 million or 46% of revenue in this year's quarter. This is a 241% increase over the gross profit in the prior year quarter. Operating expenses in the fiscal fourth quarter of 2019 were $3.9 million, essentially unchanged compared to the same period in the prior year. The company reported a small net loss of $78,000 or zero cents per share in the fiscal fourth quarter of this year compared with the net loss of $2.4 million or seven cents per share in the prior year's fiscal fourth quarter.

3:57 We move now to fiscal year 2019 results. Genesis revenue for fiscal year 2019 was a record $37 million. a 41% increase over the $23.6 million in the prior year. Gross profit for fiscal year 2019 was $18.5 million or 50% of revenue, an increase of $5.7 million or 45% over the prior fiscal year. Operating expenses for fiscal year 2019 increased 8% to $15.3 million from $14.2 million in 2018. This was largely due to increased investment in software development this year. Fiscal 2019 had $572,000 of income tax expense. Fiscal 2018 had income tax expense of $2.4 million due to a change in the deferred tax asset resulting from the reduction to U.S.

4:57 corporation income tax rates. For fiscal year 2019, the company reported net income of $2.8 million or 9 cents per share, 8 cents per diluted share, compared with the net loss of $3.7 million or 12 cents per share in fiscal year 2018. Cash flow provided by operating activities in fiscal 2019 was $9.9 million, a record for any year in our history. In fiscal year 2018, cash flow provided by operating activities was $1.3 million. This year's increase was the result of a higher level of customer advances, net income, and non-cash charges.

5:43 Our balance sheet remains strong. Cash and cash equivalents at September 30, 2019 were $18.8 million compared with $11.1 million at the end of the prior fiscal year. The $7.7 million increase in cash and cash equivalents was primarily due to the $9.9 million of cash provided by operating activities offset by $2.2 million of stock repurchases. Working capital increased by $3.7 million to $24.8 million at September 30, 2019, compared with $21.1 million at the end of the prior fiscal year. This is primarily the result of the fiscal year 19 net income.

6:28 In fiscal 2019, We used $2.2 million to repurchase 788,425 shares of our stock. Last year, the Board authorized a $5 million repurchase program beginning January 1 of 2019 through December 31, 2020. Of this, $4.5 million is still available. With that, I'd like to turn the call over to Richard. Thank you, Dennis, and good afternoon to everybody on the call. In fiscal 2019, we returned to profitability, achieved record performance across nearly all of our financial metrics, and made extensive progress in establishing Genesys as a leading global player in the emergency warning and public safety mass notification industries.

7:18 Just to briefly summarize our financial performance in fiscal 2019 compared with fiscal 2018. revenues increased 41%, profit was up 45%, operating income increased 345%, and net income was up 175%. Backlog at September 30, 2019 was 27 million, a new record and up 14% from the previous fiscal year. Fiscal year bookings were a record 45.9 million, an increase of 26% over fiscal 2018. I want to thank the entire Genesys team for their efforts in delivering these results. Now I want to turn to recent business developments and some of the strategies we are implementing to create additional values for our shareholders.

8:10 On October 23rd, we rebranded the company as Genesys to reflect our broader commitment to critical communication and address larger markets with our expanded portfolio of hardware and software solutions. The Genesys platform includes our industry leading LRAD voice broadcast systems, our critical communication as a service, which compromises mobile device mass notification, and integrated solutions, which combines our hardware, command and control software, and critical communications as a service. Genesis is the only provider of a unified hardware and software platform, delivering emergency alerts and public safety mass notification. This approach can substantially increase the number of people who receive critical information before, during, and after a crisis situation.

9:04 The rise in the number and intensity of critical events, such as last year's deadly campfire in Northern California, and the increasing severity of the annual brush fires in Australia have state, regional and national governments taking action to upgrade and modernize their emergency warning and public safety mass notification systems. The European Union has mandated that all member states have nationwide mobile messaging in place by June of 2022. We expect the member states to begin issuing requests for quotes this fiscal year. Other jurisdictions in Asia and Latin America are expected to pass similar mandates in the coming years, significantly increasing our addressable market.

9:52 Genesis is well positioned to compete for these business opportunities. Our experience in Australia, where we have partnered with the large telecom providers to deliver more than 150 million SMS warning messages over the last six years, gives us an advantage over our competition. The information contained in the Australian SMS warning messages has been integral to saving lives during the major brush fires both recently and in previous years. The coverage and response to our October press release calling on the California legislature and Governor Newsom to fund safety technology and fill the state's emergency warning notification coverage gap has been positive and is leading to more awareness of our solution.

10:39 Last week, California state auditors called out state and county emergency management officials for inadequate disaster and evacuation planning and called on changes in state law to protect vulnerable residents. Last month, the Washington Post published an article comparing and contrasting how Australia and California prepare residents for wildfires and warn them during the act of blazes. In Australia, for example, no opt-in is required for mobile device users to receive geospecific local, regional, or national emergency notifications from their wireless carrier. This allows emergency management to deliver critical and potentially lifesaving information to all mobile devices in crisis-affected areas and provide specific direction on what to do and where to go when evacuations are ordered.

11:30 The system also determines how many people are in harm's way and monitors their evacuation progress. In the United States, it's estimated that less than 20% of mobile device users opt in to emergency mass messaging services. In Australia, this year, over two and a half million acres have been burned. Six lives have been lost. Since 2018, California wildfires have claimed more than 120 lives. We are working with California legislators and emergency management officials on measures that fund and implement advanced public safety mass notification systems and practices. While we see many opportunities in California, the timing and the outcome of our work with legislators and officials is dependent on funding and the political process.

12:22 The successful installations and utilization of the Mill Valley and Laguna Beach systems should lead to additional orders from community or county-funded initiatives this fiscal year. On a federal level, we continue to work with FEMA-funded emergency warning opportunities, like the previously announced Puerto Rico order, where our system will provide warning and life-saving instructions to residents living in elevated disaster risk areas. With disasters and critical events becoming increasingly widespread and endangering larger populations, the necessity of delivering critical communications containing clear, concise warnings and actionable information is more important than ever. The expanded Genesys products and service portfolios address the unified critical communication market, a market that is expected to grow globally to more than $14.8 billion by the end of calendar year 2020.

13:22 Increasing geopolitical unrest in many areas of the world and the 2020 U.S. election are creating a surge of acoustic hailing device interest and inquiries. We anticipate increasing law enforcement, homeland security, defense, and public safety mass notification orders this fiscal year, including strong sales to the Army and other branches of the U.S. military. In summary, the efforts we have made to date, developing our unified critical communication platform and expanding our addressable markets has Genesys positioned for further business and revenue growth in fiscal 2020 and subsequent fiscal years. We look forward to sharing our progress on these calls and at investor-oriented events.

14:07 With that, I'll turn it back to the operator for Q&A. Thank you. The floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. And any time your question has been answered, you can remove yourself from the queue by pressing 1. If you're using a speakerphone, we ask that while posing your question, you pick up your handset to provide favorable sound quality. Again, ladies and gentlemen, if you do have a question, please press star 1 on your telephone keypad at this time. Please hold while we poll for questions. And our first question comes from Aman Juliani with B.

14:58 Riley FBR. Please go ahead. Hey, guys. Thanks for taking my question. I guess my first question, I just want to get a bit more color on the backlog. It's up quite a bit. I just want to get sort of, you know, a breakdown of what that consists of. Maybe if you could dive into, you know, hardware versus software, yeah, that would be helpful. Yeah, we started the year with $27 million of backlog, all addressable in the next 12 months. Vastly hardware-centered, so I'm sort of estimating this, Aman, but probably $2 million, $3 million of software is in that $27 million.

15:48 Got it. Okay, that's helpful. And just looking at the fourth quarter gross margin, it looks like it's up year over year, but sequentially it's down. I just want to get a bit more color with that. It's a new product that we designed for the Japanese market, and initially the margins are lower than we would expect, but they will improve. Okay, so maybe back to, you know, over 50%. 50% is still the right target for our business. Okay, and then, okay, thank you. And then, you know, you've made some new hires, specifically you hired a new VP of software sales. You're at a high level.

16:37 Can you talk about what the strategy is there with the new VP? Sure. We've now hired... and three people here in the U.S. to pursue software opportunities. Communities that currently have a call-out safety system, a lot of those are coming up for re-bid and our software can provide that functionality. So we're putting a team together, have begun putting a team together to go capture as much of that as we can. In the coming year, Aman, we will also begin to augment our sales and marketing particularly in the EU to pursue that EU directive.

17:23 So we see growth in sales and marketing in both the United States and in the EU as we go forward here in 2020. Okay, and then on that EU directive, when do you think those RFPs will start to come in? I think the first one will be in the first calendar quarter of 2020. Okay. All right. That's helpful. And then last question from me. Obviously, you're seeing success in Laguna and Newport with your acoustic alien devices. Are you seeing other cities showing some interest where you can sort of in California where you can sort of showcase Newport and Laguna and show them the system and that sort of stuff to sort of get some more cities on board?

18:16 Yes. It's unfortunate that in California there is no statewide mandate or standards for the cities and towns to follow, so it has to go down to the cities and towns themselves. So that's the bad news. The good news is it's a fairly small community of safety personnel in the state, so we've gotten an awful lot of attention in Mill Valley. that led to Laguna Beach and Newport Beach, and there's others in the pipeline behind that. Okay. Thank you. I'll pass it on. Thank you, everyone. And our next question comes from Ed Wu with Ascendient Capital. Please go ahead.

19:01 Yeah, congratulations on the year. My question is, have you seen any change in competition, you know, as you guys are growing this addressable market? I haven't seen any change. I'm not sure that's the answer you're looking for. So if you look at acoustic hailing devices, Ed, there's not a lot of players left doing that. So we have a fairly dominant presence there. When you look at just the software-only solutions for emergency notification, there are several players both here in the United States and around the globe. If you look at a combined hardware software public safety system solution, I believe we're the only ones that are doing that right now.

19:50 Great. And then my next question is on the rebranding from LRAD to Genesys. I know Genesys was much stronger internationally. Have you guys seen a relatively smooth transition? And do you envision, you know, spending any significant amount on marketing to rebrand the company? I think we've spent about all we're going to spend on the rebranding, Ed. I mean, there's a certain amount of level activity for marketing and brand awareness, but the expense was 2019 for us, for sure. Great. And have you had any confusion at all with the LRAD Genesis brand in the US market, or has it gone through pretty seamlessly?

20:42 In the US, it's been quite seamless, I think. In the Asia Pacific region, I think we confused people. They thought that Genesis bought LRAD, which is opposite of what actually happened. But whatever initial confusion that was out there has been resolved. Great. Well, thank you for answering my questions and good luck. Thank you. And our next question comes from Rick Neaton with River Shore Investments. Please go ahead. Thank you. Hi, Richard. Hi there. Of the bookings that you called out in your press release, is the percentage of that associated with and the other. So, are your comprehensive software and hardware sales about the same as the percentage in your backlog, or is it higher or lower? Can you provide some additional color on that?

21:42 Dennis, correct me if I'm wrong, but just the nature of the software bookings, it's probably a higher percentage in our backlog than it is in our revenue. Revenue for the year was probably in the neighborhood of $2 million out of the $37 million, so that's probably the right ratio. Okay. Thanks. That's all I have, though. All my questions have been answered by the prior analysts. Thank you. Thank you, Rick. Next call, please. And our next question comes from Lloyd Corton with Unique Investments. Hey, guys. Hello, Richard. Glenn, congratulations on nice numbers.

22:30 Thank you. I guess just to go over this, I think we have military-grade hardware along with our software, which is a great calling card. So I think being that we're the only one that has both, I think we really have a hands-up on the market. You're the catcher over there, and I'd really like to know How many different people we're talking to now in cities and states and how much interest we're really generating out there? I can't give you a specific number, Lloyd, but in my remarks, I think I stated that we see demand here in the United States, in Europe, in the Asia-Pacific region.

23:19 We see that growing. We see our pipeline getting bigger. You see what's happened with world events and weather-related events and those kind of catastrophic events that our systems can be used to help keep people's lives safe. So I think for reasons I just mentioned, the demand is growing, and we're in a good position to capture that growth in demand. So you're getting a lot of activity for people who want to know more about it and considering our systems? Yes, across the globe, Lloyd. Great. Also, you've been to shows, I guess, with the Genesis product with you now. How kind of reaction are we getting at the trade shows?

24:08 We went to our first one in Savannah, Georgia about three or four weeks ago. It was very well received, very well received. Do we have the manpower to show up on all that? You broke up there, Lloyd. I'm sorry. Do we have the manpower to follow up? I know at these shows, bunches of people give their cards and are curious and want to, you know, have contacts later. Do we have the manpower to go after everybody? We do. And as I mentioned a moment ago, we will be adding to our sales team, continue to add to the sales team here in the United States and in Europe in this fiscal year. Right. One concern is I know we have some really robust military orders.

24:55 When will those things, when will all those orders, it was like 25 million, when will we have shipped them all? We had an order in FY19 of 20.2 million for the United States Army. We will ship that ratably over the four quarters of 2020. So there will be some nice revenue from that. Well, great. Listen, I look forward to your bulletins and notices, and thank you for all you do, sir. Thank you. Thank you, Lloyd. Next call, please. Our next question comes from John Gruber with Gruber McBain. Please go ahead. Good afternoon. What's the outlook for a repeat of the big portion of the orders with the 20.2 million military you just mentioned?

25:48 Is there any... follow-on or other military orders that you expect to book this year to give you a good order year? We're in an annual award for the United States Army. It is dependent on having a DOD budget passed, which we do not right now as a country. The country is currently operating under a continuing resolution that expires on December 20th. It's impossible to predict how it's all going to end up, but right now I would say there's a good chance that a budget will be passed on or about that December 20th date. And then it takes some time for the money to trickle down to the program offices, and then we expect an award.

26:41 How big an award would you expect after the budget is passed? I think... We don't really know until the budget is passed, but I believe it'll be slightly less than in FY19. FY19 had some pent-up demand that we fulfilled, or will fulfill. It'll be a similar size, perhaps slightly less than what we did in FY20. And the second question... And it will go on for many years. I mean, it's several years ahead of us. Gotcha. You did $37 million in revenue, only two software companies. With the acquisition of Genesis, what's your goal for software revenue in the new year, and what kind of growth top line do you expect for the total company?

27:27 I won't answer the absolute number, but we expect significant growth. Here in the U.S., the EU initiative is going to get off to a slow start. I expect the first RFP to show up, as I said, in the first quarter of calendar year, calendar year 20. But it will really happen in earnest in the following year, I believe. The initiatives in Australia, they could add to an uptick in our revenues for FY20, but we need to wait and see how the competition rings out.

28:12 So I'm hopeful that 20 will show some significant growth, but more likely we'll see it in the following year. Got you. And my final question here, the gross margin, this was dealt with why, but your gross margin fell five points from Q3 to Q4. and you said, well, you expect 50, but would 50% be if you need to get a lot of software, you need a lot of software to get to 50 for the full year this year? No. The new year? No. No? Okay. Thank you very much. You're welcome. Thank you, John. Next, we move to Alex Bilverman with AWM Investments. Please go ahead.

28:59 Hi, guys. Can you give us a quick sense of what this new product is for the Japanese market? Yeah, it's a line array. It's intended for congested cities. Okay. And it's a modification of an existing product or it's a new product? No, it's a new product. Okay. It's a new product we designed and developed for that marketplace. Got it. In terms of the EU 110, how are you thinking about allocating resources? Is it salespeople? Is it going through distributors? How are you bidding on some of this?

29:46 It depends by country because there's a different strategy for each country, but it'll largely be done with Genesis people. We'll leverage where we can, but I'd expect that we're going to largely do it ourselves. Okay. Has anyone put out there an estimate of what the opportunity is for a Europe-wide deployment? I haven't read anything that's publicly available about that. We have obviously our own internal metrics, but we're not going to share that. Fair enough. Thanks a lot. Thanks, Alan.

30:33 And next we'll go to Will Hamilton with Manitouk Hill Partners. Hey, good afternoon, Richard. Just a question on 2020. So the last couple of years, if we go back to look at what you booked in terms of revenue relative to what you entered the year with backlog, has been around 150 to 200%. So one half to two times the revenue versus backlog. Is that a good range for 2020, given where the backlog stood at the end of this year? Not sure I understood the question well. So it's sort of like you deliver the backlog and then there's an element of book and ship.

31:21 Book and ship. So if I look at 19, 37 million of revenue versus you went into the year with around a little less than 24 million of backlog. The year before that. Yeah, so if you're doing your math, you're correct. I think there's probably more revenue upside than that calculation will predict. Okay. Yeah, I mean 1.5 to 2.2 is a reasonable range. Okay. And can you give us any color in terms of the cadence through the year? It was a little lumpy, obviously, this year, but... Well, it wasn't terribly lumpy this year. Correct me if I'm wrong, but we did 10, 10, 9, and almost 8. Yeah.

32:11 So that was better than our typical performance, Will. And I'll show back or refer back to the gentleman's question regarding the Army order. One of the reasons it's it's going out relatively in all four quarters is to provide that stability and predictability. So if you look at it, we'll have 10 more million dollars of revenue in our second half for the U.S. Army order above what was in the FY 18 actuals. 19, sorry, 19. So it might be like a 60-40 or 40-60 split between first half . Lastly, in the past you've talked about a handful, if not six or seven, countrywide mass notification opportunities you're trying to pursue. Any sort of update you can provide us there?

33:09 All still very active. Outside of Europe, obviously. All still very active. So we haven't lost or been awarded yet. It's still in the pursuit phase. Okay. Thanks. You're welcome. Thank you, Bill. Next call, please. Our next question comes from William Brummer with Vanquish Capital. Please go ahead. Hey, good afternoon, Richard and Dennis. Hi there. Just for this fourth quarter, can you give me an update on the split between domestic revenue and international for this fourth quarter of 7.7? Probably not sitting here. What we can do, Will, is look it up and just send you a note.

34:02 That's fine. Okay. Going back to this European mandate, if I remember correctly from your PowerPoint, 15 countries were receiving some European funds and they'll be early adopters. Can you give me a little more clarity on that statement? Sure. So the EU is going to fund this initiative in some of the smaller budget constrained countries in Europe. and those will, in my opinion, will be the ones that will likely come out first because the funding is being made available by the EU. All right, okay. All right, and then finally- It's the smaller countries for sure, smaller, poorer countries. All right, great. Do we feel as though we have the team in order at this point or should we expect some additional hires in some of those regions?

34:55 There'll be more hires. There'll be more hires, again, in the sales group, business development and some more in engineering. So, Dennis, here's one for you. Should I be tweaking my SG&A here or pretty much keep its status quo to revenue as a percentage? Operating expenses, we would expect, will increase next year, probably in line with our growth of revenues. But we still expect to have the 50% margins. Okay, got it. And then finally, gentlemen... Where's the stock buyback stand at this point? Are we active or are we just, and what has been done maybe this last fourth quarter, if any?

35:43 We didn't do any in the Q4. I don't think we did any in Q3 either. Right. As Dennis mentioned in his remarks, there's still $4.5 million that the board has authorized for stock repurchase. Again, we did not do any in Q3 or Q4. Okay. Great. Thank you. Good quarter. Thank you. Thank you. And there appear to be no further questions at this time. Would you like to give any closing remarks before I close out the call? Sure. As a reminder, Richard and I are scheduled to present tomorrow at the LD Micro Main Event Conference in Los Angeles. A webcast of our presentation will be available through the Events and Presentations section of the website.

36:30 Thank you for participating and listening in on our call. A replay of this call will be available in approximately four hours through the investor relations page on our website. Thank you. This does conclude the Genesis fourth quarter and fiscal 2019 financial results conference call. You may disconnect your lines at this time.