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spk02: Greetings. Welcome to Decision Point Systems Incorporated's second quarter 2023 earnings call and webcast. At this time, all participants are in 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. Please note this call is being recorded. I will now turn the conference over to Brian Siegel with Hayden IR. Thank you. You may begin.
spk03: Good morning and welcome to the Decision Point Systems Earnings Call. Joining me today are Steve Smith, Chief Executive Officer, and Melinda Wohl, Chief Financial Officer. For those of you that have not seen today's release, it is available on the investor section of our website at www.decisionpt.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 that there could 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 comp, any gains on extinguishment of 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 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. We reported strong second quarter results today. at the high end of our revenue guidance and above our adjusted EBITDA guidance. 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 to discuss our financial results. Decision Point is a mobility-first enterprise services and retail technology solutions company. So what does that mean? 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-managed services, SaaS, 5G, and IoT. These markets represent hundreds of billions of TAM. So we've identified a subset of industries within these markets where we either already have, can acquire, or develop expertise and, therefore, the ability to become significant players. Currently, retail is our largest market with a significant presence in logistics, hospitality, and healthcare, where we have established customers, industry-specific solutions, the right technology partners, and several under or under-penetrated sub-segments for us to go after. Our value proposition to customers is clear. We position our customers to be their best at their moments that matter. We do this by enabling frontline employees, those task workers who work at the edge of the network, 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 business outcomes at the moments that matter. What we like to say, the decision points. Moving to our four pillar growth strategy, the first pillar is to increase share in our current verticals, specifically retail, including grocery, convenience stores, and mass merchants, hospitality, healthcare, transportation logistics, and their associated warehouse and distribution center operations. The second pillar is to leverage our experience in these verticals into adjacencies. Examples here would include big box retail, fast food, specialty retail, and supply chain logistics. The third pillar is to drive and margin expansion by increasing services and software attach rates. These include professional services, managed mobile services, managed network services, staff services, software from partners and repair and maintenance services. The fourth pillar is geographic expansion, where we can pick up new customers, expand field sales, and increase overall coverage. Our hardware solutions business, which includes razor blade business model of preparing and staging hardware with software and applications and selling the consumables necessary to use the hardware, has historically grown at a run rate in the mid single digits. Project orders, which can also sometimes introduce some lumpiness, are incremental to those numbers. Finally, our thriving, accretive M&A strategy accelerates growth to generate combined long-term CAGR of 20% or more consistently. Our M&A strategy supports these four pillars and complements our organic growth. Note, we aren't going to make acquisitions just to acquire scale. We have specific criteria for the companies we target. These include a track record of positive revenue growth and EBITDA, integration ready solutions and operations, and cultural compatibility. By focusing on these areas, we have developed a successful integration strategy that allows us to quickly reduce SG&A costs, streamline operations, and drive revenue synergies by expanding their offerings nationwide throughout our system. And macro integration systems, or MIS, was a perfect example. It hit three of our four strategic growth areas and met our M&A criteria. It also was a little bigger than our previous acquisitions, but we are quickly integrating them into DecisionPoint, and we will look to move back into acquisition mode by the end of this year. In general, We are targeting one to two acquisitions per year. That will add two million or more in EBITDA. Over the past three and a half years, we've transformed the company to increase growth rates while increasing margins significantly by aggressively moving up market to include various high margin services, especially ones that generate reoccurring revenue. For example, we offer professional services, including consulting, staging, deployment, installation, repair, and customer-specific software customization and hardware and software maintenance support. The gross margins for these services tend to be significantly higher than when we resell technology hardware, and part of our strategy is to increase services and software mix significantly within our portfolio to 35-plus percent and drive higher gross margins and more recurring revenue. Our April acquisition of MAS was the next step in our transformation. We acquired them for $13 million in cash with an earn-out paid over two years of up to $10 million. Based on current performance and expectations, we believe it is probable that we will pay out this year's portion. In the final two quarters of 2023, we expect them to do over 16 million in revenue at a low to mid 30% gross margin, well above our company average. Strategically, this couldn't have been a better fit. First, MIS's business is 70% services, adding to our shift in revenue mix. They also brought us five new top 10 customers, new service offerings, filled a geographic gap with 100,000 square foot warehouse facility in the Southeast, 30,000 of which to support our staging and integration capabilities and significantly expand and strengthen our presence in the retail industry, especially the supermarket, food service, and hospitality verticals. The last point is real important as it enables us to become more than an enterprise mobility company over time. It also sets the stage for us to become a retail point of sale and technology solutions company. Another part of our software and services strategy is to accelerate our margin service offerings where companies outsource certain IT functions. We are opportunistically building our higher margin reoccurring revenue SaaS solutions portfolio, which today includes both packaged and custom developed software solutions, such as Mobile Conductor and Route Manager for the direct store and DSD industry, and VisiTrace, which helps manage an RFID implementation. As we mentioned last quarter, we made some investments to the tune of a million dollars in incremental operational expense in 2023 versus 22 in developing products in these areas and adding sales and BD heads to go after these high margin opportunities and drive growth over the mid to long term. We also offer a comprehensive managed services product portfolio to simplify the complexity of designing, deploying and managing mobile and wild networks. These managed services include provisioning, monitoring, and help desk services that improve the visibility and status of their device landscape. The competition landscape for our services is broad and diverse, depending on each client's customer and industry needs. Our company has spent the past year developing a new portal, for the managed services called Vision. Vision offers our customers a customizable solution for monitoring actions on everything in their IT infrastructure. DecisionPoint can now manage the entire lifecycle of mobility and IT infrastructure all in one view. Vision provides real-time visibility to the managed the health and location and status of a customer's mission-critical IT assets, regardless of their enterprise location. Vision also enables customers to monitor the progress of major rollouts, which enables our customers to minimize downtime and simplify the overall management of a large distributed enterprise. Now, moving to our results. Our second quarter continued the streak of record quarters, with revenue growth over 12% to $31 million and gross margins of 25%. Both were helped by the mixed shift brought on by the MIS acquisition, with software and services making up a larger percentage of overall revenue. Adjusted EBITDA decreased by 9% to $2.5 million in the quarter, mainly due to the investments we made making this year in sales and business dev to drive medium to longer term growth in our higher margin software and managed service offerings. Finally, by the end of the second quarter, we generated enough cash from operations to pay down over $4 million of the $12 million in debt we took on at the end of Q1 related to the MIS acquisition. Looking to the third quarter, we expect our run rate business to continue to perform well. And with the addition of MIS, we are expecting to report revenue in the range of $27 to $29 million with adjusted EBITDA between $2 and $2.3 million. In closing, we delivered a solid quarter with strong revenue and adjusted EBITDA. And I want to thank our dedicated employees for their continued hard work. I look forward to speaking with you again on our third quarter call. Now I will turn it over to Melinda to review our financial results in more detail.
spk01: Thank you, Steve. Details of our second quarter operating performance compared to 2022 second quarter were as follows. We saw continued strong demand in Q2 with total revenue up 12.4% to $30.9 million. During the quarter, we worked through half of our $26 million backlog from last quarter as we completed a large retail customer order. Our backlog is back closer to historical norms. Moving to gross profit, we saw a 22.5% increase from the prior year, which was a result of the mixed shift towards services on higher overall revenues. Gap operating expenses were 20.7% of revenue versus 15.8% last year. The $2 million increase was mainly the result of operating costs related to acquisition of Macro on April 1st and the sales and business development investments. As we move forward with integrating Macro, we expect to realize cost synergies and improve operating leverage over time. Gap net income and diluted EPS increased 15.8% and 16.9% to $0.8 million and 11 cents. Weighted average shares outstanding increased by 244,000 from last year to 7.9 million. Our non-GAAP net income and diluted EPS were 1 million and 13 cents, an increase of 26.6% and 19.6% respectively. The non-GAAP net income and EPS numbers excluded about 210,000 this year versus $100,000 last year. The vast majority of this year's adjustments were related to M&A expenses. Adjusted EBITDA was $2.5 million, a decrease of 9.4% compared to $2.7 million last year. Again, most of this was tied to the sales and business development investments we are making this year in our software and managed services to accelerate growth in these higher margin offerings. Turning to our balance sheet, we ended the quarter with cash and cash equivalents totaling $7.2 million versus $7.6 million on December 31, 2022. Deferred revenue increased by 7% to $11.1 million, of which approximately $7.4 million is expected to be recognized over the next 12 months. Total debt at the end of the quarter was about $7.9 million. During the quarter, we paid down $4.3 million in debt related to the acquisition of Macro. We will pay down $250,000 quarterly for our term loan, and our plans are to continue to pay the remaining down as swiftly as possible. Net cash provided by operating activities was $5 million versus $12.9 million last year. The decrease was a result of changes in working capital as we had two large orders last year that would be fulfilled over several quarters. With that, operator, we can move to questions.
spk02: Thank you. If you would 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 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the headset before pressing the star keys. Our first question is from Howard Halpern with Taglage Brothers. Please proceed.
spk04: Well, congratulations, guys. Great quarter. I'm going to start off with, I guess, the broad big picture. What are you seeing in terms of your customers? Is there... are they still active and willing to, you know, deploy right now, or is there any hesitation that you're seeing?
spk05: Yeah, Howard, Steve, thanks for the compliments on the front end. Yeah, listen, you know, we are seeing, you know, some hesitancy in some areas, and that is sort of supported by the not so strong quarter of Zebra Technologies in Q2. But that said, it really underscores and highlights the important decisions that we made to balance our hardware business with services, right, to the extent that we have, which today if you add up services, software, and consumables, it's 40% of our revenue. So in a sense, I view that as a little, it's a strategy to immune ourselves to a degree from, you know, the strains that the industry has seen with regard to capex spend in general and what maybe some other suppliers have felt. We've been able to outmaneuver it by virtue of our results. We think we have the power of small numbers in our favor, which, you know, just that it plays in our favor. And so we think we should and could and will be able to offset any headwinds that might be out there in the way of inflation, recession, the macro trends that we have no control over. We believe we'll outmaneuver those, as we have in the past, going forward, and hence our guidance and our optimism going forward. Okay, and...
spk04: Should we expect that at least the services line to be about that 34% to 35% area at least in the second half of the year of total revenue? Yes. Okay. And of the acquisition, the MIS, which is a great acquisition, have you brought any of those new customers onto the portal? Yes.
spk05: Yeah, not onto the portal per se, but if I would read between the lines of your question, Howard, what have we done to maybe integrate and realize the synergies between the two companies? And we've done a massive amount of work there. In fact, we have active, live, cross-selling sales campaigns ongoing right now. We've identified customers that could benefit from what Decision Point has to offer. and what macro has to offer to get deeper and wider into those customers. There's more wallet share to be had. We said all along that this acquisition was the right one from many perspectives, and we believe we're still yet to realize the sales synergies that exist between the two entities. I can tell you there are multiple sales campaigns going on right now, large sales campaigns, that we like our chances to be able to win a percentage of those on a go-forward basis by virtue of putting these two companies together. Okay.
spk04: And in terms of synergies, have you begun to see logistical synergies with the new warehouse?
spk05: Yeah. Ironically, I mean, we were fortunate enough. We had great working relationships even during due diligence. And before we purchased the company, we engaged on those services. So, you know, we leveraged the extended warehouse capability in a commercial way. but it just spoke to the level of willingness and cooperation between the two leadership teams that are now one. We were working as one prior to close, and it showed with some of the operational synergies we were able to leverage, in this case warehousing, staging, and integration capabilities that we were able to leverage into some of our larger customers and the existing teams. a book of business services that we had on the table. So we really like this one in all regards. And if you take a look at our criteria, I don't mean to pound the table on this one, but I spend a lot of time on culture. We do. We as a company spend a lot of time on making sure there's a cultural fit. And I will tell you categorically, there is a great cultural fit between the leadership teams of both companies and all other associates, I might add. Okay.
spk04: And just one final question. If you have a number, a proximate number, what would you estimate the earn-out payment might be to MIS in the second half of the year?
spk05: Melinda, you want to take a stab on that? I don't think we do it by half a year, but we say for the full fiscal year, which will end March 31st. Why don't you pick up on that, Melinda?
spk01: Correct. Yeah, it's... Hey, Howard, it is approximately we've estimated about $6 million based on their performance or estimated performance, and we will continue to monitor that through the end of that period and potential changes at that time.
spk04: Okay. Okay. Thank you, and keep up the great work, guys. Thank you, Howard.
spk02: As a reminder, just star 1 on your telephone keypad if you would like to ask a question. We will just pause for a brief moment to see if there's any further questions. There are no more questions at this time. I would like to turn the conference back over to Steve for a brief closing comment.
spk05: Yeah, just I want to use this time to commend and compliment every associate that is in this company. Without them, and their persistence, their dedication, and professionalism. We would have never been able to deliver on these results. And I know I've said that before, but now more than ever, acting as one, one company, one culture, one team, we will continue to exercise and execute against our business plan for the year, and now it's a combined, consolidated business plan. So I just want to make sure I end the call with a big shout-out And a compliment and a big thank you to every associate that had a hand in helping this company deliver on these results. Thank you.
spk02: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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