Gorilla Technology Group Inc.

Good morning and welcome to Guerrilla Technology Group 2022 Financial Results Conference call. As a reminder, today's call is being recorded. All participants are in listen-only mode. For opening remarks and introductions, I would like to turn the call over to Gary Dvorak of the Blue Shirt Group. Mr. Dvorak, please go ahead.

Thank you. Good morning and welcome to GORILLA's conference call to discuss 2022 results. With me today are Jay Shandon, our Chief Executive Officer, and Daphne Wong, our Chief Financial Officer. Certain statements made during this conference call that are not historical facts may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may include those regarding our future plans, objectives, growth, and expected performance, including our outlook for the fiscal year 2023. These forward-looking statements are our outlook only as of the date of this call. While we believe any forward-looking statements we make are reasonable, actual results could differ materially because the statements are based on current expectations and are subject to risks and uncertainties. We do not undertake and expressly disclaim any obligation to update or alter our forward-looking statements, whether because of added information future events or otherwise. Further information on these and other factors that could affect the company's financial results is included in filings we make with the SEC from time to time, including the section entitled risk factors in the company's form F-1 previously filed with the SEC. Additionally, some financial measures discussed on this call will be non-GAAP. A discussion of why we use non-GAAP financial measures in a reconciliation schedule showing GAAP versus non-GAAP results is available in the earnings press release that can be found on our investor relations website and also in the form 6K filed with the FCC. With that, I will turn the call over to our CEO, Jay Shandon. Jay, go ahead.

Thank you, Gary, and thank you, everyone, for joining us on the call today. Although we went public last summer and have reported first half of 2022 results, this is our first conference call in conjunction with Earnings. We're excited to report great news to you and to take your questions at the same time. We intend to maintain this practice, conducting a conference call with each quarterly report. Daphne will provide more details on our financials and our 2023 outlook later in the call. I will focus my comments on our strategic objectives and key priorities for the year ahead. And let me start with a guiding principle. When I became CEO, I was determined that we needed to establish trust as a top priority for Gorilla. This means trust for the employees, trust as a partner, trust as a vendor, and a platform solution provider, and more importantly, trust for all shareholders. After the merger, we looked at every element of our business, top to bottom, products, marketing, human resources, you name it. In every part of the business, we looked at where trust was high and where it was lacking. This drove a lot of the decisions we made in the second half of the year, which I will elaborate now. 2022 was a transition year for us. We made some necessary changes and started exciting new initiatives. The key changes were as follows. First, we expanded our offering to encompass security convergence, which complements our core advanced AI video analytics offering. Second, We beefed up video analytics by acquiring technology assets of Sequestr. Third, we improved our access to capital by listing on the NASDAQ via the merger with global SPAC partners. And finally, we expanded from being a Taiwan-based regional supplier to a London-based global leader with customers throughout the universe. Notably, we expanded our sales force in Singapore, Thailand, Taiwan, the UK, and in the MENA regions. which should revitalize the existing business, create expansion opportunities within our existing customers, while striving momentum with new large customers. We are already seeing the evidence of success. Most important is the large smart city cybersecurity implementation project in the MENA region, which gives us great revenue visibility for the next two to three years. We also won our first UK customer for a smart port project. We announced that we will develop a new generation Edge AI appliance with Halo and Lanner Electronics. And we continue to strengthen our team, most recently adding Dr. Evan Medeiros to the board and Lawrence Ng as our head of Asia. The MENA project is a milestone for us, which with size, far in excess of anything we have done to date. The project will stretch over a few years with revenue from the phase one loan approximating over $100 million. Phase one should be complete in the next 12 months. The second phase, which we believe will be significantly larger, the devices installed are likely to be three to four times more than phase one. The revenue opportunity, we believe, should be at least double than phase one. A project win like this demonstrates the power of the new strategy, the new team, products and infrastructure we've built this year. This large MENA project is just the first of what we believe could be many similar projects around the world in the year ahead. Now, we have three key priorities for 2023. First, is to build upon the foundation of innovation at Gorilla and establish us as a trusted, predictable platform as a service provider. Second, to pivot away from marginally profitable, cost-plus project business, and increase our focus on larger, longer-term opportunities. We will increase our mix of predictable, recurring revenue streams with more strategic platform-based business. Third is to create a culture at Guerrilla fostering trust and respect that allows all our employees to innovate and grow their careers. We believe such a culture will enable us to sustain our commitment to workforce diversity and belonging. As a result, our teams are more collaborative, and we aim to exceed client expectations. Now, to support this, we've also created an attractive employee incentive program to attract, engage, and retain talent. The key elements of our human resources initiatives include professional development, participation in RSEs, team-wide recognition of accomplishments, freedom of choice of projects across the world, and attractive bonuses or raises based on personal and company performance. To enable this pivot to a high-growth global profitable business with strategic customer accounts, we've set out an aggressive three-year plan with a laser focus on key measurable KPIs determined to drive value for all our stakeholders in the years to come. With Gorilla technology focusing on leveraging and delivering AI capabilities to meet our customers' needs by providing the best solutions, we find it imperative to reiterate our commitment to operating in the highest ethical standards. We maintain strict compliance with all applicable laws and regulations. We note advances in AI technologies have largely outpaced the development of comprehensive legal frameworks on its responsible use by governments across the globe. Now, as such, Gorilla has voluntarily adopted these principles outlined in our AI ethics policy and is committed to safeguarding customer data and ensuring that Gorilla's AI systems and algorithms are developed and implemented in alignment with the current global understanding of ethical AI practices. Now, in the absence of a comprehensive legal framework, Gorilla has developed the policy alongside guidance from the Alan Turing Institute, a national institute of data science established in 2015 by the universities in the United Kingdom and the UK Engineering and Physical Sciences Research Council. Now, before turning the call over to Daphne to go over the detailed financials I'd like to summarize the progress once again. In November 2022, we laid out four immediate priorities for the coming year. These were, first, to establish a world-class customer-centric team responsible for commercializing Gorilla's technology. Second, to globalize the company to bring our technologies to the countries that are leading the world in smart city adoption. Third, to build a robust sales pipeline that will complement our existing products and services with a special focus on security convergence. And fourth, to transform our business away from a cost plus model and towards a value-based platform as a service model, which will bring in customer stickiness and a continuous revenue stream. I am extremely proud of our team's hard work to deliver on all these objectives so rapidly and I'm confident that we will make even more progress in 2023. Now Daphne can take us through the financial highlights. Daphne.

Thank you, Jay. 2022 was a challenging year if measured strictly by near-term revenue performance. Given our focus to walk away from less strategic or less profitable business, we're confident that we will see improved financial performance from our up-level strategy. In fact, we're beginning to see evidence of success supporting our decision to walk away from marginally profitable business. Solid growth in the security convergence sector demonstrates the wisdom of our product pivot, and the mean of win shows that this segment can drive explosive growth in the years ahead. Of course, the revenue decline in 2022 was challenging, but necessary to instill sound operational and financial discipline. We executed the reset well, holding growth margin stable despite intentional reduction in projects, which impacted revenue. So let's go through our financial results for 2022. For 2022, total revenue was $22.4 million, down from $42.2 million in 2021, as we walked away from less profitable or small-scale legacy business. This refocus enabled us to grow our security convergence business to 12.7 million from 12.1 million in 2021. Security convergence is now 57% of revenue. Meanwhile, video IoT felt the brunt of our shift to more strategic and profitable business, declining to 9.7 million from 30.1 million in 2021. Despite the deleveraging associated with a smaller revenue base, The increased mix of strategic revenue enabled us to maintain growth margin at 37%. Over time, growth margins should expand with scale. Operating expense growth focused on transforming Growla into a global cybersecurity leader, added public company expense, and incremental one-time expenses related to the D-SPAC merger, the public listing, as well as the sequester asset acquisition. In total, operating expense in 2022 were $94.8 million, excluding one-time expenses with $21.9 million, which compares to $23.9 million in 2021. In 2023, operating expenses should be higher than 2021, reflecting growth of the business and increased annual public company costs, but lower than 2022 as the one-time listing expenses are not repeated. One-time D-SPAC expense in 2022 was $70 million, reflecting a non-cash charge related to accounting for the reverse merger transaction as a capital reorganization and inclusive of the D-SPAC. Other transaction-related one-time expenses totaled $2.8 million. Turning to profitability, excluding one-time expenses, Net losses for the year totaled $14.6 million, higher than prior year, mainly due to increase in public company expenses. Adjusted EBITDA loss was just $6 million, and operating cash flow was an outflow of $8.3 million. CapEx was $2.9 million, and we ended the year with $23 million cash. Now let's turn to guidance. gives us outstanding visibility on revenue for the next couple years. For the full year 2023, we expect revenue in the range of $65 to $75 million. Operating expenses, the percentage of revenue is expected to decline as we anticipate significant revenue growth. Now we'd like to open the call for any questions. Operator, please proceed ahead.

Thank you. We will now begin the question and answer session. To ask a question, please press star 1 1 on your telephone and light for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the question and answer roster. So once again, that's star 1 1 for questions.

question comes from the line of mike letmore from northland capital markets please ask your question mike great uh good morning yeah congrats on getting this uh foundation in place and this this landmark win here um on the on this uh mina deal can you just talk a little bit more about that i guess the first question there is is this kind of is this getting deployed presently is it Or is it going to start in a quarter or two?

Mike, if I may, this is Jay. Hope you're well. So the project has already started. I'm actually sitting here with a client right now as we speak. We are going through the deployment phase of understanding the solutioning design. As you can imagine, this is a very large project. We want to get the architecture right. And so we're working very closely with our client to get the architecture right, get the solution design right, and then start the deployment schedule.

It gets deployed over the next 12 months or so. What type of revenues are you willing to see? Is it services, hardware, recurring SaaS? What kind of revenues do you get from this?

This is a mix of all three, hardware, software, and services.

Great.

think of this as first implementing a full infrastructure on top of which we build our security solutions and on top that we provide our services and of course this is going to be a long-term contract because we are also managing the operation not just warranty and maintenance but we will also be managing the operation for the foreseeable future very good now smart city as a can be a broad

Can you give a little bit more detail on what the specific use cases are?

Yes. I'm going to be a bit vague on purpose, purely because we want to be very careful in what we say about the customer and what we are implementing. But this is about securing the digital and operational footprint. It's about increasing visibility across the network activity. It's about hardening their existing infrastructure. to prevent cyber attacks. It's also about detecting and preventing any malicious activity and blocking any rogue devices upon any discovery. But more importantly, we're about building what we call an environment which prevents any threats that are being posed by malicious activity. Think of it as building a hardened network.

Yep, makes sense. And then this looks like a very big project. Are you going to have to bring on more resources or third-party service providers to get it all deployed?

We're currently working with a number of the world-leading hardware providers as far as the hardware is concerned. As far as the software is concerned, it's all Gorilla in-house software which is being deployed. And in terms of resources, we've already identified the top key resources required. We are going through a hiring process right now to bring in some experts, solutioning experts. But what we're also doing, Mike, is we're hiring people in the local region so that we can help build on the economic progress of the region as well. What we're doing is we're bringing these people in day zero, training them alongside the client personnel, and we're also helping them scale up so that as and when we kind of deploy the solution and move on to phase two, they take over and we just look after the operations at that point of time.

Okay. I assume the customer is a government entity, one, and then two, do they, have they fully funded this or is there another, is there legislation that needs to occur to get this fully funded?

No, it's fully funded and yes, it's a government client. Okay.

Just last one. Phase two, when will you know if you've won that and what is the use case on phase two?

I'm going to try and be as careful as I can when I respond to this. But, Mike, the phase two is merely an extension of phase one. Okay. The phase one is to protect a bunch of devices and networks. All we are doing in phase two is expanding that four to five times. That's about it. So I hope I've responded to your question.

Great. Thanks very much. Best of luck.

Thank you.

Once again, to ask a question, please press star 1 1 on your telephone keypad. Next follow-up question comes from the line of Mike Littemore from Northland Capital Markets. Please ask your question, Mike.

Great. Thanks. Well, I'll just kind of go down my list a little bit more here. Thanks. So maybe, Jay, can you talk a little bit about why you won this deal? Like what were the critical factors there? And then I don't know if you can say who the competitors were, but, you know, what were the alternatives here?

Great question, Mike. as they were good to speak with you. The most important was our product capability and experience. The client has visited our premises, sat down with us for a better part of eight months, built the proof of concept, done the same with some of the competitors, which are some of the biggest names on the planet today. and then made the decision to award the project to us purely on merit. They felt that our solution and the overall architecture which we had designed was more holistic and prepared them for the expansion that was coming.

Okay, very good. You've given guidance for the year. You know, we've obviously been through first quarter already. Can you give a little bit of color as to how the revenue should play out this year? Should we assume first quarter is a low point and then kind of build throughout the year? Is that a fair way to think about it?

That's a fair assumption, because obviously, as you can imagine, the MENA region project, as we are in very heightened preparation stage, most likely will fall into the second half of the year. And in the meantime, obviously, we're maintaining the refocus and reduced baseline.

Right, right. On that baseline business, can you talk a little bit about what are some of the opportunities there? And when you mean baseline, do you mean in the traditional regions or?

The main one is the traditional kind of existing Taiwan region runoff project. Yeah, we are, you know, with the refocused business strategy and financial and project discipline, we are actively seeking opportunities larger strategic accounts and expansions in both the, you know, our legacy Taiwan and Southeast Asia region. But more importantly, Mike, you know, as Jay mentioned earlier, we're also actively seeking new business and we won, you know, the smart port business in UK, but, you know, the rest of the world as well.

Great. And then just last on your sequester acquisition, was that important for this MENA deal or the UK port deal? How is that kind of helping your pipeline?

That's a very good question, Mike. So let me take that in two parts. The first most important part of it, if you recollect when we went public and both pre and post, we had made a pledge that we were going to become a truly platform as a service provider. And to do that, we had to build a Lego bricks block one by one. And what was important for us at that point of time was to identify where the gaps were. And one of the gaps which we identified was to provide customers with what we call post-event analytics. where the customers can actually analyze terabytes of data and provide meaningful results to their business. But more importantly, it allowed them to save one time and a significant amount of money. And just to give you an example, one of the projects we worked on, the client had been engaged for about 12 months trying to identify some miscreants. We came in and spent only about 20 days and identified all the issues they had, and it saved them almost 11 plus months of cash and resources and time. So that's one of the examples. The second part of it as to what it allows us to do is also allows us to play in what we call the smart infrastructure side of it. It allows us to play in smart ports, which is one of the reasons why we won this project. It allows us to play in smart transportation, smart logistics, smart buildings, and smart utilities as well at the same time.

So they were important to this UK port deal?

They were a part of it, yes.

And then just last on the MENA deal, Maybe too early, but can you talk a little bit about what kind of gross margins you might see on something this large?

I understand if you don't want to. No, no, no, no, no. I mean, you know, as we speak, we're working with the government client on the project mapping and planning as we speak. So it's a little kind of a tricky, it's a very large scale project, very tricky for us to kind of give you a gross margin in this juncture. But obviously, you know, we, because it's the first business, a very large scale business that, you know, for the region that we intern in, and we intend to to maintain and grow the relationships in the region, right? So we did sharpen our pencil, but at this juncture, I think it's a little tough for me to give you a gross margin expectation just because we haven't finalized the project plan with all the really mainly the main suppliers. There are probably, you know, more than 12, 13 suppliers on this project that we need to finalize at this juncture.

And just to add a little color to that, I think I mentioned in the previous question that we are working through the solution architecture right now and the solution design. Once that is complete, that will give us a better picture on the gross margin. Rest assured, we are absolutely going to make sure that, one, it is in line with our expectations and in line with the market expectations.

Great. And then last question on this phase one. $100 million is a big, big deal. I guess, did you win an initial portion of that and then your opportunity expanded, or has it always been this large from the start?

Yeah, we actually won a sizable portion initially, as you recollect. We kind of announced that in November. But as and when we went through the process, the client actually realized that our capabilities were far exceeding any competitor within the process. And so they decided to just award the contract to us and made us the sole supplier for the entire two phases.

Yeah. So you're basically sort of the prime contractor here, it sounds like.

That is correct. So we'll be deploying the hardware, we'll be deploying the software, hardening the entire network infrastructure and so on, and at the same time providing full integration services as well and maintenance operational services after we've done the deal. Yeah. All right. That's great. Thanks very much. Thanks, Mike.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone.

Get the star 1 1 for questions. Reminder, to ask a question, please press star 1 1 on your telephone. Our next question comes from the line of Bruce Ball from Canaris Holding.

Please go ahead.

Hi. So just a quick question about the pipeline. You mentioned that you hired a sales team all across the world. Are they just getting their feet under the desk, or how active have they been in developing a pipeline for the next year, 18 months?

Good question, Bruce. Always a pleasure to talk to you. So the sales team have already got their feet wet. What we have managed to do, Bruce, is use our existing relationship and our contacts, mine especially, and gone and knocking on doors, which made a lot more sense. Opened up doors and then asked these guys to actually provide and increase what we call their adoption across the organization. So as you know, our strategy from the very get-go has been land and expand. So the idea was to go in, provide a small, land a small deal with a customer, and build upon the footprint by capturing additional departments, products, services, and so on and so forth. So long story short, no, the The salespeople are already being very productive. They have created high level of potential customer engagement. And we're also already, apart from the MENA deal in terms of the pipeline, which you alluded to, we are looking at a very strong potential customer pipeline, which is on our roster right now. I hope that responds to your question.

Yeah, and kind of follow-up to that would be, what does the process look like with a typical client? Is there sort of discussions, and then there's an RFP or an RFI process, and then there's a few steps in that? How does it go from sales contact all the way to awarding a contract? And then how do you guys think you're doing in that process?

Okay, I'm going to take that question and break it down into two, if that's okay with you, Bruce. The first one is, there are two types of customers. Customers who know what their problems are and what solutions they want, and there are customers who just don't know what they want. They just want to boil the ocean, as I call it. Now, in terms of the first customer, They've already identified what their pain points are. They have put together an RFP, and they will say, listen, Jay, if you're interested, we'd like you to participate in this. This is our pain point. Can you take a look at it? And they'll provide us the RFP. That's a very simple client. A client who wants to boil the ocean is where we have to use our consulting hat on. We have to sit down with a client, get him to understand what it means to boil the ocean And then step back and put together a very simple initiative for him. Create an objective solution for him which solves his immediate pain point. And on top of that, allows him to see some ROI. Because I can go and do a $20 million implementation and say, thank you very much. I made a 50% gross margin. I've gone. But if the customer is not happy, he's not going to come back to me. And to that extent, to complement our sales team, we've actually built what is called the customer success alliance as well at the same time. That allows us to move with the customer's success, build on new departments, and as a direct result, create new initiatives with the customer. Now to the second part of the question, I mean, we always believe in what we call as the top-down approach, right? So we go into the heads of the departments or the heads of the business or the heads of the government agencies. We then work with them to build on what we have as what we call our capabilities. deploying the technology process development solutions, work with them in understanding what it means for them over the next five years and what that investment should look like. Because remember, the most important, every customer we work with does not really understand what that investment is going to look like. So like I said, there are two types of customers. So again, we have to break it down. Customers who know what they want, they've got a budget. Customers who don't know what they want and think they have an unlimited budget. I hope that responds to your question.

Yeah, that's great.

Thanks, Bruce.

Thank you.

Once again, to ask a question, please press star 11.

I'm showing no further questions, so thank you very much for all your questions. I'll now turn the conference back to Mr. Jay Tandon for closing remarks.

Thank you, operator. And thank you, everybody, for your questions and for your time. Before we conclude, I want to mention some investor-relation events we've been coming up. We will be presenting and holding one-on-one meetings at the 18th Annual Needham Technology and Media Conference in New York City in mid-May. This is a private event for the clients of Needham, so please contact your sales rep to register and schedule meetings. Once again, I want to thank you all for attending our first earnings call. We have never been more excited about the future for Guerrilla. We undertook an extensive transition after closing the merger and going public last year. We globalized the company, rationalized our customer, and more importantly, we're looking forward to reporting our progress at the next earnings call. Thank you for joining today. Thank you for your continued support. But if you have any further questions, I'm always available. Please contact Daphne, our investor relations team at the Blue Shed Group. This concludes our call today. and you may all disconnect. Thank you.

Thank you, everyone.