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spk03: Greetings and welcome to Decision Point Systems' third quarter 2022 earnings conference call and webcast. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brian Siegel. Thank you. You may begin.
spk02: Thank you. Good morning, and welcome to the Decision Point System's third quarter 2022 earnings call. Joining me today are Steve Smith, Chief Executive Officer, and Melinda Wall, Vice President of Finance. For those of you that have not seen today's release, it is available on the investor section at our website at www.decisionpoint.com. Before beginning, I would like to remind everyone that, except for historical information, the matters discussed in this presentation are forward-looking statements that involve several risks and uncertainties. Words like believe, expect, and anticipate mean that these are our best estimates as of this writing, but there can be no assurances that expected or anticipated results or events will actually take place, so our actual future results could differ significantly from those statements. Also, during this call, we will discuss non-GAAP measures, including non-GAAP net income, non-GAAP EPS, and adjusted EBITDA. These non-GAAP financial measures adjust our GAAP net income and EPS for stock-based compensation, any gains on extinguishing debt, M&A and other financial transaction costs, and other non-recurring, non-operating income and expense items. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the U.S. SEC. With that, I'll now turn the call over to Steve.
spk05: Thank you, Brian. Good morning everyone and thank you for joining us today. I'm excited to say our business remains strong as we reported record third quarter revenues today. Before I discuss these results, I'm going to start the call by discussing who is Decision Point Systems, our market opportunity and our growth strategy to capture and expand this opportunity. I will then briefly review our second quarter and then turn it over to Melinda Wall to discuss our financial results. Decision Point is a mobility-first enterprise services and solutions company. So what does that mean exactly? It means that we aim to be at the center of several emerging secular trends, including enterprise mobility, which encompasses work-from-home and field mobility, cloud and managed services, SaaS, 5G, and IoT. Now, these markets represent hundreds of billions of TAM. So we've identified a subset of industries within these markets where we either have or can acquire or develop expertise and therefore the ability to become significant players. Currently, these industries are retail, logistics, hospitality, and healthcare where we have established customers, industry-specific solutions, the right technology partners, and several under and under-penetrated sub-segments for us to go after. Our value proposition to customers is clear. We enable frontline employees to make better, faster, more accurate business decisions inside and outside the four walls. and create operational efficiency and effectiveness to drive better customer experiences and better business outcomes. Traditionally, companies like us have been classified as value-added reseller, or VAR, of handheld devices such as scanners, printers, point of sale, and other mobile devices. Our OEM partners include Zebra, HP, Apple, Honeywell, Verifone, DataLogic, CradlePoint, and distributors Bluestar and ScanSource and Ingram. This business has historically grown at a run rate at mid single digits, with M&A and project orders being incremental to those numbers, the latter of which can also introduce some lumpiness at times. We also have excellent annuity type business replenishing consumables, for these devices that we sell. So think of the Razor and the Razor Blade model here. That said, over the past three years, we've transformed the company to both organically and inorganically increase these growth rates and margins significantly by aggressively moving up market to include various high margin services, especially ones that generate recurring revenue. Managed services, where companies outsource certain IT functions, are a key investment area for our services-led strategy. We offer a comprehensive product portfolio of managed services designed to simplify the complexity of designing, deploying, and managing a mobile solution. These managed services include provisioning, monitoring, help desk, to improve on the visibility and status of our customer's device landscape. In addition to managed services, we offer professional services, including consulting, staging, deployment, installation, repair, and customer-specific software customization and hardware and software maintenance support. We're also opportunistically building our higher margin, reoccurring revenue SaaS solutions portfolio, which today includes both packaged and custom-developed software, such as Mobile Conductor, Route Manager for direct store delivery, and VigiTrace, which helps manage an RFID implementation. Moving to our four pillars of growth strategy, the first pillar is to increase share in our current verticals. specifically grocery, specialty retail, supply chain, healthcare, warehouse, distribution, and transportation. The second pillar is to leverage our experience in these verticals into adjacencies. Examples would include big box retail, hospitality, and supply chain logistics. The third pillar is to drive growth and margin expansion by increasing services and software attach rates. These include professional services, managed services, ISV, and SAS services, software for partners, and repair and maintenance services. And the fourth pillar is geographic expansion, where we can pick up new customers, expand field sales, and increase our coverage. Our M&A strategy supports these four pillars. and complements our organic growth. Note we aren't just going to make acquisitions to achieve more scale. We have specific requirements of companies we target. These include a track record of positive revenue growth, EBITDA growth, integration-ready solutions and operations, and cultural compatibility. By focusing on these areas, we have deployed a successful integration strategy that allows us to move quickly to reduce SG&A costs, streamline operations, and drive revenue synergies by expanding their offerings nationwide through our system. Our goal is to acquire one to two companies per year, adding between $2 and $5 million or more of EBITDA before synergies expire. at an EBITDA valuation of four to five times. Moving to the third quarter highlights, we once again had record quarterly revenue growth of 41% to $26 million. This strength was broad-based across run rate, follow-on orders and services, the latter of which grew 22%. While large customer equipment orders can skew gross margin within any quarter, The 22% growth in services validates our strategy of growing our software and services revenue over the time to generate higher gross margins and operating margins. Adjusted EBITDA increased 74% to $2.3 million in the quarter. We also saw continued evidence that our M&A strategy is working. The sales and support teams are engaged in cross-selling activities across our expanded customer base by leveraging our services and software portfolio and partnerships. This activity is yielding incremental business for the company. Additionally, we completed the integration and rebrand of our extend data acquisition into decision point systems. As we look to the remainder of the year, we are well positioned to continue our growth trajectory. We now expect to generate between 90 and 93 million dollars in revenue or approximately 36 to 41 percent growth. In terms of mix, we currently expect approximately 19 million of that to come from services. From an adjusted EBITDA perspective, I would expect that we would deliver 6.5 to 7 million dollars within those revenue ranges. In closing, We are in track for another great year with strong revenue, profit, and adjusted EBITDA growth. I also want to thank our dedicated employees for their continued hard work. I look forward to speaking with you again on our fourth quarter call. Now, I will turn it over to Melinda to review our financial results in a bit more detail. Melinda?
spk01: Thank you, Steve. Details of our third quarter operating performance compared to 2021's third quarter were as follows. We saw continued strong demand in Q3 with total revenue up 41% to $25.7 million. Excluding M&A, our growth revenue growth rate was still very impressive at 25%. During the quarter, we worked through a portion of our $21 million backlog from last quarter and rebuilt it back to $29 million, which is still about four times our historical norms. Backlog was higher than normal due to global supply chain issues that are impacting many companies. As a result, our clients are putting in orders with longer lead times, and we have fortunately been able to leverage our strong partnership with OEMs such as Zebra and our distributors to gain access to products to ship and build inventory. Moving to gross profit, we saw a 37% increase from the prior year. Product mix was heavy on the hardware side due to the fulfillment of both run rate and follow-on orders, which led to a slightly lower growth rate when compared to revenue. GAAP operating expenses increased by about $0.9 million or 27.7%, split evenly between G&A and sales and marketing, and demonstrated the operating leverage we have. This was a result of increased commissions on higher sales volume, rent costs, and the operating expenses from the acquisitions we made in the first quarter. We expect to continue to realize the benefits of cost synergies and improve operating leverage. Gap net income and diluted EPS were approximately 1.1 million and 15 cents. Weighted average shares outstanding increase to 7.6 million from 7.2 million last year. Our non-gap net income and diluted EPS were 1.2 million and 16 cents compared to 700,000 and 10 cents last year. The non-GAAP net income and EPS numbers excluded the following. Stock-based compensation of 50,000 this year versus 35,000 last year and M&A related expenses of 66,000 versus 75,000 last year. Adjusted EBITDA was 2.3 million up 74% compared to 1.3 million last year. Turning to our balance sheet, we ended the quarter with cash and cash equivalents totaling $9.4 million versus $2.6 million at December 31, 2021. As I mentioned earlier, we continued to receive orders with long lead times, leading to a 34% increase in our deferred revenue. Total debt at the end of the quarter was about $150,000, flat to year-end, and we had no borrowings on our line of credit. Net cash provided by operating activities increased $13.9 million from $2.2 million last year. We have had two record quarters this year and believe our business is positioned for continued growth for the remainder of 2022. And with that, operator, we can move to questions.
spk03: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk04: One moment, please, while we poll for questions. Our first question comes from Howard Halpern with Padlidge Brothers.
spk03: Please proceed with your question.
spk06: Congratulations, guys. I'm here pinch-inning for John today. So I have a couple questions on your numbers. Could you describe, I guess, what kind of opportunity you have within your existing customer base to drive recurring revenue growth for the remainder of this year and in the years to come?
spk04: Yeah, Howard, this is Steve.
spk05: I'll give you a response that, I mean, simply stated, with every acquisition we make, our services portfolio is expanding. And that services portfolio is expanding with some software products. Most all of that software is sold in an as-a-service way, which represents recurring revenue. So that is one element of our recurring revenue growth strategy, but there are other elements. For example... As we expand our customer base, we're expanding the ability to sell consumables, that razor blade, razor paradigm that I explained in the call. That is every bit as reoccurring as all other elements of our revenue portfolio. So we're encouraged with the growth in consumables, which is contract-based and represents reoccurring revenue. And then last, we do have service customers. I think anytime we sell a serial number device, it represents an opportunity for add-on repair or field service or support services. And that is typically sold in a one, two, and three-year contract basis, which represents to us reoccurring revenue.
spk06: Okay. And also, you recently announced the addition to your sales team. What is that going to mean for future growth opportunities for you?
spk05: Could you just repeat the first part of that question, Howard?
spk06: I'm sorry. You previously announced, I guess, a couple weeks ago an additional personnel to your sales team. How is that going to impact future growth?
spk05: Yeah, so we've made some decisions to bring on some industry experts, subject matter experts. that have certain historical track record performing in a particular subset of our market, and that is direct store delivery and RFID. These represent intellectual property of decision points. And given the fact that we own it, we think we can double down and double click on that and drive incremental revenue which should represent and will represent reoccurring revenue on a go-forward basis. So we have made a hire. We plan to make another, and that will be announced before the end of the year. And both of those individuals will serve in a business development way, driving and assisting the field in driving incremental revenue around those software platforms. Okay.
spk06: And, I mean, you talk about, you know, and we know what the environment is with the supply chain. supply chain challenges that are out there. But is there also, I guess maybe for next year, is there like a periodic upgrade cycle for new products that your OEMs are in the process of launching that also might cause a little bit of longer lead times or is that not an issue?
spk05: It's really not an issue. The OEM has constantly upgraded their portfolio and And we take those options to our customers. And really, the notion of a refresh cycle is really customer dependent. And typically, the equipment that they have installed is written off over a three and five year period. And so those write-off cycles is what dictates most the refresh cycles that our customers engage us on. And so that's the primary driver. The OEMs that we work with, Zebra is constantly putting money into research and development, and they're constantly refreshing their product line, scanners, mobile computers, and printers. And we take those new devices, those new product announcements out to our customers, and they could and should drive upgrade cycles to a degree as well.
spk06: Okay, and one final one. I know you haven't really given anything out for next year, but would you say it's fair to assume that based on this year's forecast and growth next year that your adjusted EBITDA should be at least approaching 9% of revenue next year?
spk05: Yeah, we have not provided any guidance for 23%. we're going to be taking a close look at that here as we wind down on the year. I believe this year my EBITDA percent is in the 5% to 7% range, and we will continue to drive towards that range. Naturally, as I mentioned on the call, we have project-related business, and we have acquisitions that could potentially drive that to a higher range, but we're certainly comfortable in delivering on the range we're delivering on today.
spk06: Okay.
spk04: Thanks, and keep up the great work, guys. Thank you. There are no further questions at this time. This concludes today's conference.
spk03: You may disconnect your lines at this time, and we thank you for your participation.
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