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spk01: Good day, ladies and gentlemen. Welcome to the Genesis Incorporated Fiscal Second Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be provided at that time. I would now like to turn the call over to your host, Brian Alger. Brian, you may begin.
spk03: Thank you, and good afternoon, everyone. Welcome to Genesys' fiscal 2023 second quarter financial results conference call. I am Brian Alger, SEP and investor relations and corporate development for Genesys. With me on the call today are Richard Danforth, chief executive officer, and Dennis Kwon, chief financial officer. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook, and future financial performance that involves certain risks and uncertainties. The company's results may differ materially from the projections described in these forward-looking statements. Factors that might cause such 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, 2022. Other than statements of historical facts, forward-looking statements made on this call are based only on the information and management's expectations as of today, May 8, 2023. 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 reconciliation of 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 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 the company's website. Now, at this time, it's my pleasure to turn the call over to Genesis' CEO, Richard Danforth. Richard?
spk00: Thank you, Brian, and welcome, everyone. As expected, financial results for the March quarter were similar to our first fiscal quarter, with slight sequential improvements in revenue and adjusted EBITDA. Based on our pipeline and bookings, we expect to see growth resume and accelerate in the second half of this fiscal year. Steady growth in our software revenues are expected to be augmented by improved hardware bookings, particularly from international customers. Over the course of the past several quarters, we have proven that the Genesys Protect solution has both diverse demand and differentiation versus competitive alternatives. In numerous cases, including Riverside County, Aramco, BMW, San Diego County, and Los Angeles County, we have despised much larger incumbents. As I will detail in a bit, we expect our recent investments in marketing and sales will lead to increased demand, higher conversion, and greater velocity of new business, beginning with a revamped revenue-focused campaign launched in our fourth fiscal quarter. Last quarter, we talked about the success of our land and expand strategy. In Q2, we continue to see success with this strategy, expanding relationships with San Diego, Alameda, and Riverside counties in California to each include the complete Genesis Protect platform. In the case of Alameda County, our entire platform is being used by not only the county, but also the city of Berkeley, as well as UC Berkeley. As discussed on our February call, Genesis Protect played a critical role for numerous California customers this past winter with the various weather and flood events that devastated so many communities and affected millions of people. In early March, Governor Newsom declared a state of emergency for 21 counties in California, affecting over 17 million residents. Our team takes great pride in the improved outcomes facilitated by the Genesis Protect solutions and the lessons learned were instructional to public safety officials and to Genesis as we expand our coverage throughout California and increasingly into other regions. While we will continue to expand our footprint and offerings with existing accounts, we are also targeting a number of new opportunities including statewide opportunities that we believe we are well positioned for. In the second half of the fiscal year, we will be augmenting our go-to-market and sales initiatives. I want to take some time to discuss the significance of this effort and why we believe it will result in greater velocity and predictability of revenue and profit growth. The objective of our cross-functional go-to-market launch is to grow profitability and drive business growth by building a predictable pipeline with high conversion. Our investment over the past several quarters in sales, marketing, product, and customer success teams helped lay the foundation of our unified platform. Genesys Protect combines the most comprehensive preparedness, communication, and analytical solutions to keep people, communities, and assets protected. Our unified platform offers a diverse range of application, including emergency warning and mass notification for public safety, critical event management for enterprise, de-escalation for defense and law enforcement as well. In the second half of this fiscal year and leading into FY24, we will roll out enhancements to the product UI that unifies our solution set, introduces a new platform pricing structure that scales to meet the needs of our diverse customer base, execute sub-vertical focused demand generation campaigns, and launch a repeatable and scalable sales methodology that is rooted in best practices. Obviously our hardware solutions are an integral component of the Genesis Protect offering and how we position ourselves against less complete alternatives. However, in the majority of our situations, our hardware revenue are still coming from a traditional end markets and use cases. Hardware bookings continue to be a challenge in the March quarter, however. Subsequent to quarter close, we have seen activity both domestically and internationally that gives us improved confidence in achieving a full year bookings targets for hardware. The inconsistent bookings in the first half of the fiscal year has been from both domestic and international customers. The net result is that our hardware backlog declined in the March quarter to 6.5 million as compared to 21.4 million in the year prior. A current forecast of qualified hardware business that has yet to be closed represents over $40 million in bookings. As we expect coming into this fiscal year, international bookings make up a substantial portion of this opportunity. On last quarter's conference call, I said we expect fiscal 2023 bookings to follow our typical pattern with large step-up in the fiscal Q3, driven by international orders. Hardware bookings in our fiscal 2023 are expected to substantially exceed fiscal 2022 hardware bookings. Everything about that statement remains true today. The recent improvements in activity and momentum in contracts bolsters our confidence in the second half outlook that Dennis will detail in a moment. Q2, again, saw gross margin pressure as a result of the higher cost materials against orders that we priced and booked prior to us experiencing inflationary factors we discussed at length on our last call. Looking at our current component cost, the hardware backlog, and anticipated shipments for the remainder of the fiscal year, we expect to see rapid improvements from our Q2 gross margins. Moreover, as our software revenues scale, we would anticipate higher trending margins with normalized hardware margins and increasing software contribution. As I look into our current bookings and pipeline, I am confident as ever that our decision to invest in our software offerings and to shift our go-to market will yield significant growth in both revenue and profits. The impact from our growing software bookings in ARR gives us much more visibility and confidence in out-years revenue and profit margins. Previously, we discussed a three- to five-year target model of $80 million in sales, generating adjusted EBITDA margins of 22% to 26%. With the bookings secure to date and the success we have witnessed in both the sled and enterprise markets, improved focus and the investment in our Genesys Protect go-to-market, gives us the confidence to update that long-term target model to begin at an annual run rate at at least $100 million in sales and greater than 20% EBITDA margins within the next three years. Now I'll turn the call over to Dennis to go through the financials and outlook in greater detail. Dennis?
spk06: Thank you, Richard. Revenues for the fiscal 2023 second quarter were $11.2 million, 15% less than the prior year quarter. As compared to the same prior year period, hardware revenue decreased 17% to $10.4 million, partially offset by a 27% increase in software revenue to $853,000. Recurring revenue grew 34% compared to last year's quarter. Versus the prior year quarter, 70% growth in our core Genesys Protect software was offset by attrition in our international news software offerings. It is worth noting that there is a period of time between booking a software win and when revenue begins that is associated with configuration and implementation. Gross profit margin was 43.9% this quarter compared to 54.5% in the prior year quarter. As Richard mentioned, the gross margin percentage was negatively impacted by inflationary pressures on material costs against pricing and backlog established before the inflationary impacts. To a lesser degree, the mix of hardware revenue and installation costs also contributed to the year-on-year and sequential decline in gross margins. In our third fiscal quarter, our gross margins will significantly improve as material costs have been factored into new bookings pricing, and our backlog reflects the adjusted pricing. operating expenses were $8.4 million, up from $7.5 million and $8 million in the second quarter of fiscal 2022 and first quarter of fiscal 2023, respectively. The increase is directly tied to the planned investment to grow and accelerate our software business. On a gap basis, our operating loss was $3.4 million compared to $500,000 in the year-ago quarter. excluding stock compensation and depreciation and amortization, our quarterly adjusted EBITDA was a negative 2.3 million compared to last year's positive 900,000. The difference in both cases relates to the lower revenues, gross margin percentage, and our intentional investments in improving and focusing our software offerings and marketing strategy. Cash, cash equivalents, and marketable securities totaled $12.5 million as of March 31, 2023, compared with $19.9 million as of the prior year end. Cash used in operating activities in the second quarter was $2.6 million. Included in that number is approximately $1.4 million, or inventory, purchased to facilitate revenues in the second half of fiscal 2023. This compares to cash used in operating activities of $500,000 in the same period last year. The fluctuation primarily reflects the negative adjusted EBITDA in this year's quarter. With our current backlog and forecasted bookings, we expect full-year fiscal 2023 revenues will be down slightly from fiscal 2022 revenues. Considering our expected and improvement gross margins, We anticipate positive adjusted EBITDA in the second half of fiscal 2023. The full year adjusted EBITDA is expected to be negative, reflecting the $5 million in incremental costs to support SAS business growth discussed at the beginning of the fiscal year. Though hardware bookings and revenues could shift, our current expectation is that fiscal third quarter of 2023 will see similar revenues to the third quarter of 2022. And now, we'd like to open the call to Q&A. Operator?
spk01: Thank you. To ask a question, please press star 1 on your telephone keypad. Once again, to get into the queue for questions, please press star 1 on your telephone keypad. One moment while we compile the Q&A roster. Your first question comes from Brian Colley of Stevens.
spk02: Hi, guys. Hi, guys. Thanks for taking my question. So I wanted to start off just asking about your visibility in the back half of the year. Could you just speak to what specifically gives you confidence and a rebound in hardware revenue, but also just kind of how you see software sales ramping in the back half of the year as well?
spk00: Yeah, from a bookings perspective, Brian, we have infinite visibility into our current forecast. So we know exactly what the contracts are, where they're coming from, what date they're expected on. It's business that's all been won, yet not awarded. So a great deal of visibility to answer your question. The software revenue continues to grow quarter over quarter. So the second half of the year, we expect to see that trend to continue.
spk02: Okay. Got it. And I wanted to ask about the recent Everbridge situation in Florida. You know, they've gone through some contract changes with the state. Do you think that's business that you could potentially work when as that contract comes up for renewal at the end of this year?
spk00: I do. It's well within our capacity and capabilities to win that.
spk02: Okay, great.
spk00: And then- As you know, the current outlook for- Go ahead, Brian.
spk02: Oh, no. Go ahead. Go ahead, Richard. Sorry to interrupt.
spk00: Yeah, you know this, but the contract is expected to be complete with Everbridge at the end of this calendar year. And the state plans on getting an RFP out and an award made probably in the early fall timeframe.
spk02: Okay. Understood. And then last question I had was just, I'm curious if the weaker economic backdrop has had any impact on the pace of contract awards or discussions in any of your businesses, whether it's hardware or software. In particular, I'm curious if it's impacted the pipeline at all on the enterprise software side.
spk00: No, not at all. In fact, we saw an increase in our pipeline by about 25% on software. And again, it gets back to what we've talked about before. The world is increasingly becoming more dangerous, whether it's from weather-related events or terrorism or just pandemic and other things. So Enterprises and communities, governments are more and more aware of their responsibility to keep people safe. And we see that trend continuing.
spk02: Gotcha. And what is it that caused the delays in booking international hardware orders?
spk00: Yeah, good question. The international has been particularly hurt from a booking perspective during the COVID years. You know, our international bookings used to make up, you know, somewhere between 30 and 50% of our total. And during the COVID years, it was almost non-existent. All of the opportunities we had before COVID are still there. We're having to refresh proposals and get everything up to date with pricing. And it's just, it takes a long time. But I do believe we will close on several of those this quarter.
spk02: Got it. All right. Well, thank you for taking my questions today.
spk01: You're welcome. Your next question comes from Ed Wu of Ascendian Capital.
spk04: Yeah, thank you for taking my question. Can you give us any update on your Aramco contract? And also, how does your pipeline look, especially with enterprise customers?
spk00: Yeah, Aramco, we took the contract at the end of December. We initially went live on the first site the end of March. We turned over the entire system, including the second site, at the end of this month. So it's going well. Your next question was relative to enterprise, Ed?
spk04: Yeah, so obviously Aramco is a big customer for you guys to win. Have you guys been able to use that to increase your ability to make proposals to other enterprise customers?
spk00: Not yet. You know, we go live fully in a couple of weeks, so we want to have a reference set that can be reached versus someone calling Aramco and saying, yeah, we're planning on going live. So over the next several weeks, we will do that, Ed.
spk04: Great. Well, thanks for answering my questions, and I wish you guys good luck.
spk07: Thank you.
spk01: Your next question comes from Martin Yang of Oppenheimer.
spk05: Hi. Thank you for taking my question. First, I want to ask about the updated long-term model. Can you give us a sense of the share of software revenues in that new 100 million long-term model?
spk00: Brian, do you want to take that one? I don't have it in front of me.
spk03: Yeah, happily. Good afternoon, Martin. So that target model obviously assumes continuing growth in the hardware business. Historically, we've seen 20-plus percent CAGR, you know, going back several years, and that's a strong history with our hardware business. We expect growth to continue in that business, and what $100 million contemplates is maybe not quite that much growth in hardware, but the growth being augmented by a software business. And where we are today with the bookings that we have, the forecast that's in the pipeline that we talked about, we feel really good with where we're going to exit this year from an ARR standpoint. And as you all know on this call, ARR is something that compounds at a very high rate of growth as you move forward. And it's really a mathematical equation that gets you to $100 million plus three years out. And the positive side of this is with the hardware gross margins coming back to normal and the software margins kicking in, you end up throwing off quite a bit to the bottom line. And you'll see a chart in our upcoming slides. investor deck illustrating what this means in terms of the leverage coming through to the P&O.
spk05: Got it. And is there an update on potential operating margin income from the software business?
spk03: Yeah, the operating profit model for the software business improves as you ramp and scale. Right now we're making investments. And you see this intersegmented reporting, of course, right, where the software business is running an operating loss. Very quickly, as that revenue grows and you're able to leverage the operating expenses that we're making today, you see that turn into a profit generation. And that's something we expect to see occur over the next three-year timeframe.
spk04: Got it.
spk05: But do you expect your software to be operating – to be profitable at operating level in three years' time?
spk00: Yes, we do.
spk05: Thanks. Last question is a follow-up on the international sales. Is there any particular geography that caused the delay, or is it more spread out?
spk00: Europe has actually been behaving okay. APAC and the Middle East have been delayed.
spk05: Thank you very much.
spk01: You're welcome. Your next question comes from Vivek Palani of Northland Capital.
spk08: Hi. I have a couple of questions with me. The first one is, do you have good visibility into the next U.S. Army order for the acoustic hailing device?
spk00: Yes. Now, there is There's a process that the government goes through that's ongoing as we speak through various committees and ultimately the Defense Appropriation Committee. So yes, we're aware of that. We know where it is. We expect our expectations. We expect to have the budget as soon as the government doesn't go into a prolonged CR. We expect an award probably around this time next year.
spk07: Okay.
spk08: My next question is, do you have any statewide public alerting things in the pipeline?
spk07: Yes. In my remarks, I mentioned several. All right. That's just from my side. Thank you. Once again, ladies and gentlemen, to ask a question, please press star one on your telephone keypad.
spk01: At this time, it appears there are no further questions. I'd like to turn the call back over to Brian Alger for any closing remarks.
spk03: Great. Well, thank you. As you all know, we regularly discuss our business and investor conferences throughout the year. Later this week, we'll be participating in the inaugural EF Hutton Global Conference in New York and the 8th Annual Oppenheimer Emerging Growth Conference virtually. And in June, we'll be attending the LD Micro Conference in Los Angeles. Thank you for participating in today's call, and we look forward to speaking with you again next quarter when we report the fiscal third quarter results later this year.
spk07: Thank you, everyone. Good night. This concludes today's presentation.
spk01: Thank you, everyone, for attending.
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