Genasys Inc.

Ladies and gentlemen, thank you for your patience. Please stand by. The conference will begin immediately following the distribution of the earning release. Again, we thank you for your patience. Please stand by. Thank you. Thank you for watching. Thank you. Thank you. Ladies and gentlemen, thank you for your patience. Please remain on the line. Your conference will begin immediately following the distribution of the earnings release. Thank you for your patience. Thank you. Ladies and gentlemen, thank you for your patience. Please remain on the line The conference call will begin immediately following the distribution of the earnings release for Genesis. Thank you for your patience. © transcript Emily Beynon Thank you. Thank you. Thank you. Good day, ladies and gentlemen, and welcome to the Genesis Inc. Fiscal Third Quarter 2024 Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero to reach a live operator. At this time, it is my pleasure to turn the floor over to your host, Brian Alger, SVP of Investor Relations and Corporate Development. Welcome, Brian. The floor is yours.

Thank you. And good afternoon, everyone. Welcome to Genesis' third quarter fiscal 2024 fiscal financial results conference call. I'm Brian Alger, SVP of Investor Relations and Corporate Development for Genesis. The earnings release should be hitting momentarily. For those of you looking for the financials, you can reference our 10Q, which is already on file. at the SEC website under EDGAR, under the company's ticker. We'll be discussing the results on the call, and hopefully the earnings release will hit momentarily. With me on the call today are Richard Danforth, our CEO, and Dennis Klon, the company's CFO. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook, and future financial performance that involve 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 section of the company's Form 10-K for the fiscal year ended September 30, 2023. Other than statements of historical facts, forward-looking statements made on this call are based only on information and management's expectations as of today, August 6, 2024. We explicitly disclaim any intent or obligation to update these 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 timing of the related revenue recognition. Backlog is a measure of purchase orders that are received and scheduled to ship within the next 12 months. Finally, a replay of this call will be available in approximately four hours through the investor relations website, company's website, sorry. At this time, it's my pleasure to turn the call over to Genesis' CEO, Richard Danforth. Richard?

Thank you, Brian, and welcome, everyone. I am in Puerto Rico working through the final items for the PREPA agreement. As we finalize the contract negotiations and with documentation largely out of the way, we now look forward to moving into the implementation phase of the project. To recap, the Puerto Rico dam project is fully funded by FEMA. and is expected to result in $75 million worth of revenue for Genesis. Importantly, cash inflows will precede revenue recognition. While timing of precise revenue recognition is not yet known, we do expect to recognize most of the revenues in our fiscal 2025 and 2026. The significance of the Puerto Rico Early Warning System goes beyond the favorable financial implication. This project is the most significant and public demonstration of how Genesys Protect software is able to unlock and enable much larger hardware opportunities. With a growing pipeline of critical infrastructure protection opportunities, we believe the Puerto Rico dam project is just the beginning of Genesys' realizing a significant return on the deliberate software investments we have made over the past three years. Since our last earnings call, we announced further EVAC coverage in California with the addition of Santa Barbara County and the activation of San Diego County. Tragically, 2024 is shaping up to have another intense fire season with many of our customers throughout the western U.S. actively using our system as I speak today. Importantly, Genesis Protect EVAC is helping emergency managers and first responders across the country plan for and manage evacuations much more efficiently and safely. In Northern California, the nearly two-week-old Park Fire is only 35% contained and has burned over 400,000 acres and more than 600 structures have been destroyed. Thankfully, the residents have been able to get out of harm's way with no civilian lives lost. Throughout California, Oregon, Washington, Idaho, Montana, Wyoming, Utah, Nevada, and Colorado, the current focus is on fire. But out here in the eastern United States, the danger is of a much wetter variety as the Gulf and Atlantic Coast states prepare for hurricane season, with Floridians and Georgians facing changing evacuation conditions just recently over the past couple of days. The unfortunate reality is that evacuations need to be planned for and managed throughout the country for a variety of reasons. not just natural disasters. Genesis Evac is proving to be a critical tool for emergency managers and first responders across the country. Later this week, we are hosting a number of law enforcement leaders in Boston for an appreciation event that will include presentations from Commissioner Richard Woolley of Baltimore PD and Chief Chris Cooks from the White Settlement Texas PD. Each presents key learnings and lessons while managing cross-agency communications during and in the wake of major events. Additionally, Genesys' own Jeff Halstead will be speaking to the very current topic of why encrypted consumer apps and text messaging among government employees, especially those in law enforcement, need to be replaced with secure and compliant communication solutions like Genesys Connect. As we announced last month, We are beginning to realize synergies in the combined sales efforts of Connect and our traditional LRAD hardware to a shared customer base of law enforcement. Not only are we seeing strong customer growth on the Connect side, but we are also seeing meaningful uptick in LRAD bookings. Year-to-date, our law enforcement hardware bookings are already nearly 50% higher than the fiscal 2023 total. While some of this is likely due to the civil unrest we have witnessed this year, the combined sales engagements with both Connect and LRAD is also contributing in a meaningful way. Coming back to the hardware business, fiscal 2023 and 2024 have been challenging to say the least. In 2023, we had a number of forecasted opportunities get delayed. As we have progressed through 2024, some of those opportunities have been converted into bookings. But without the ballast of the prior program of record, bookings and revenues have not kept pace with prior year reported results. But that only tells part of the story. When we strip out the bookings and revenue from the prior year program of record, we see that this year's bookings activity is actually on a record pace before we start thinking about Puerto Rico or the new program with the United States Army. I already discussed how law enforcement hardware bookings are up. But international bookings are also showing strength, up 117% year-over-year for the first three quarters of fiscal 2024. Exiting fiscal year 2024, we will have built backlog in international and law enforcement hardware, in addition to having secured several years of very significant hardware revenues from the Puerto Rico Dam Project and the U.S. Army PROS-AHC Program of Record. Though annual purchase orders will vary in size, the aggregate of hardware business across these projects is well north of 200 million. Moreover, our software business, which remains on pace to at least double recurring revenues and ARR in fiscal 2024, gives us tremendous visibility and stability in revenues over the next few years. Exiting the June quarter, ARR was 7.6 million, up approximately 135% year over year. With extremely low customer churn and average contract length in excess of four years, we remain extremely bullish on the outlook for our software business, let alone the implications it has for expanding and accelerating our hardware business. What I said last quarter remains true today. Genesys is in the best strategic position in its history. Our product portfolio is diverse and differentiated, and we have one and or have a high degree of visibility on record revenues for the next several years. Now I will turn the call over to Dennis to go through the third quarter financials and outlook in greater detail.

Dennis?

Thank you, Richard. In the third quarter, we continued to see strength in our software business with year-over-year growth of 120% with recurring revenues growing 138% over the same time period. Revenues for the third quarter of this fiscal year were $7.2 million, a decrease of 50% over the prior year's third quarter revenue, which benefited from approximately $8.6 million from the prior program of record completed in 2023. Excluding the Army program of record, sales in the June quarter of 23, fiscal Q3 24 hardware sales increased 8% year over year. Software revenue this quarter was $2.1 million, reflecting 138% annual growth in recurring revenues. More than offsetting that growth, hardware revenue decreased 62% to $5.1 million. It is important to remember that Genesys started fiscal 24 with exceptionally low hardware backlog. Excluding the program of record completed in 23, hardware bookings in the first nine months of the fiscal year 24 are up over 40%. Within those bookings, international hardware bookings are up approximately 117% over the same time frame. Gross profit margin was 53% in the fiscal third quarter, a six percentage point improvement largely due to the mix of revenue in this year's quarter. Gross profit declined $2.9 million from the prior year period due to lower hardware revenue, partially offset by the improved software revenue. Quarterly operating expenses were $9.1 million, up 12% from $8.1 million in the third quarter of fiscal 23. SG&A increased 11%, while R&D increased 17% over the prior year period. the difference being largely attributable to the addition of EverTel-related expenses. On a GAAP basis, our third fiscal quarter operating loss was $5.4 million compared to a loss of $1.4 million in the year-ago quarter. Adjusted EBITDA, which excludes non-cash stock compensation, was a negative $4.3 million compared to last year's negative $0.4 million. The year-over-year decline in adjusted EBITDA was due to the lower hardware revenues and higher operating expenses. In the June quarter of this year, we incurred $1.4 million of other expense. Included in this amount was $1.1 million associated with debt issuance costs, $0.2 million of interest expense, and a fair value adjustment to the loan of approximately $0.1 million. Going forward, we expect to incur approximately $400,000 of quarterly interest expense, depending on the 90-day SOFR. Cash, cash equivalents, and marketable securities total $12.7 million as of June 30, 2023, sorry, 2024, compared with $10.1 million as of the September fiscal year end. Excluded from the cash figure, is $3.5 million being held as a bid bond for the Puerto Rico project. We anticipate a rapid return of the bid bond following the contract signing. Cash used in operating activities in the third fiscal quarter was $7.5 million. As we have discussed in our earnings release and this call, there are a number of large opportunities that we are excited about. Between the Puerto Rico and Crows AHD business alone, we're expecting over $200 million in highly profitable revenue in the coming years. Our software business continues to grow rapidly, and it is on track to post triple-digit growth in ARR this year. That said, given the nature of our end markets and the remaining uncertainty around the timing of revenue recognition from our larger awards, we are not in a position to provide more granular guidance. And now, we'd like to open the call to Q&A. Operator?

Thank you. Ladies and gentlemen, the floor is now open for questions. If you do have a question, please press star 1 on your telephone keypad at this time. Again, that's star 1 if you do have a question or comment. Please hold as we poll for questions. And we'll take our first question from Mike Lattimore from Northland Capital. Please go ahead, Mike.

Hi, this is Vijay Devar for Mike Lattimore. Yeah, I have to look at the press release. I just have this 10Q open in front of me. If you could quickly talk about the future project once again. I think I missed a little bit. In terms of the visibility and the revenue expected for this fiscal year,

We're not in a position to give guidance at this point, which is consistent with what we discussed in the last quarter.

Okay. And in terms of the ARR, do you have any visibility into what will be the exit ARR for the year ending fiscal year 2025?

Our expectation is that it will at least be double last year's.

And in terms of the hardware bookings, we expect a healthy hardware bookings quarter in the fourth quarter. Richard, do you want to take that?

I have lost Richard. Yes, the expectation for bookings in the fourth quarter of this fiscal year is expected to be exceptionally strong. with the inclusion of Puerto Rico, of course. We expect that negotiation to conclude rapidly and for the orders from Puerto Rico to be added to our backlog as we exit this fiscal year. Excluding the Puerto Rico opportunity, however, as both Dennis and Richard said, international is seeing a significant uptick from the prior year, up 117% for the first three quarters of this year. That's an important recovery for us is since COVID, international bookings have been exceptionally weak, and to see that come back and diversify our revenue base has been encouraging.

Okay. All right. And in terms of a little hypothetical question, if you were to kind of enter recession, I mean, it's tough to argue, but if we enter a recession, what do you think in terms of the impact on the demand or the timing of deployments?

Brian, I'll take that. I don't see that a significant recession is going to have a big difference in our business. Our best revenue years occurred during COVID, so we're very resilient.

All right. Yeah, I think I'm good. Thank you. Thanks a lot.

Once again, Star 1, if you do have a question or comment, and we'll take our next question from Scott Searle. from Roth Capital. Please go ahead, Scott.

Good afternoon. Thanks for taking my questions. I apologize. I'm a little late to the call, so I hope I'm not redundant. But I just want to dive in, Rich, quickly on PREPA. We've got the approvals. It sounds like it's still a little fluid at the current time. I'm wondering, as we get into the December quarter, what's the cadence of the number of dams per quarter that we should be thinking about?

I can't comment on that yet. What I said in the remarks, Scott, was that we expect most of the revenue for the Puerto Rico order to occur in 2025 and 2026. And the granularity by Dan, we need more work with PREPA before we can comment on that.

Okay. Fair enough. You know, on CROWS as well, it sounds like that is also starting to ramp up for an impact in 2025. I'm wondering if you could frame the size, kind of the worst-case scenario, best-case scenario of what that contract could look like and how we should think about that on an annualized basis going forward beyond 2025.

To answer the last one first, I think sizing it on a go-forward basis of $10 million to $15 million a year is reasonable. And the FY24 budget, defense budget for the AHD for crows, there's $15 million in that budget for that. Okay, great.

And lastly, if I could, you know, we continue to see weather-related events, whether it's wildfires in California, hurricanes, tornadoes, etc., that continue to increase, as well as then other first-person shooter events. So is there a way – have you been quantifying the pipeline of opportunities for Connect and EVAC? Is there some way that you could help us understand the magnitude of the opportunity there, be it in terms of pop coverage, subs, or otherwise? Thanks.

I don't think we'll put that data out. Brian or Dennis, if you could help me with that.

Yeah, you know, Scott, we've talked about this before, where the opportunity set and the TAM of the opportunity becomes very hard to calculate because in many cases, we're selling to the same population base multiple times. The example that we've used often is the case of Berkeley, right, where we have the University of California at Berkeley. We have the town of Berkeley, California, and we have the county of Alameda County, all buying each of our software solutions as well as our acoustics hardware systems. And against that same population base, you see a very large revenue contribution, right? It's very different from the early customer that we might have, say, where we're opening up a new territory, like, say, in Colorado, where we maybe are only selling to that group with the EVAC solution today. Our intention, of course, is to sell all of our suite and to sell the hardware equipment as well. In aggregate, you're talking hundreds of millions of dollars for our Genesys Protect software suite. But when you look at critical infrastructure, as Puerto Rico illustrates, it's a much bigger number. On a global basis, billions of dollars for critical infrastructure protection. Okay.

Thanks. That's very helpful, Brian. And if I could just follow up, with Everbridge being acquired by Toma Brava, I think it closed in the last several weeks. I'm wondering how that's impacting the competitive landscape, if at all. I know they've shifted their focus more towards the enterprise side of the equation. So I'm wondering what you're seeing in general and then what you're seeing in terms of some of the enterprise opportunities for Genesis. Thanks.

Scott, you're right. Everbridge, I think, focuses more on enterprise than state and local government. And I focus on state and local government. So I don't see any impact right now as a consequence of their acquisition.

Great. Thanks.

Once again, Star 1, if you do have a question or comment. And next, we'll take a question from Ed Wu from Ascendant Capital. Please go ahead, Ed.

Yeah, thank you. And following up on the prior question, what is your pipeline international look like?

It's been growing significantly. And as I mentioned, and I think Brian mentioned that for the first time since COVID, we expect, you know, to be back to levels of bookings from international customers. to reach the more normal levels that were pre-pandemic. And we expect to do that this year. Great. Well, thank you for answering my question.

And I wish you guys good luck. Thank you. Thank you. And we'll take any follow-up questions at this time.

Okay, I'd like to turn the floor back over to Brian Alger for closing remarks.

Great. Thank you, everyone, for tuning in tonight. And, again, apologies for the delayed release, which is on the wires at this point in time. Look forward to meeting with all of you over the next couple of months, and we look forward to presenting our fourth quarter and financial fiscal full-year results in early December. Thank you, and good night.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.