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Edited Transcript of ROI.V earnings conference call or presentation 18-Apr-17 8:15pm GMT

Thomson Reuters StreetEvents

Q4 2016 Route1 Inc Earnings Call

TORONTO Apr 19, 2017 (Thomson StreetEvents) -- Edited Transcript of Route1 Inc earnings conference call or presentation Tuesday, April 18, 2017 at 8:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian D. Brunetti

Route1 Inc. - President and COO

* Peter F. Chodos

Route1 Inc. - CFO, EVP and Director

* Tony P. Busseri

Route1 Inc. - Chief Executvie Officer and Director

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Conference Call Participants

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* Jeff Silver

* Olivier Giguere

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to the Route1 Full Year 2016 Investor Conference Call and Webcast. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, April 17, 2017.

I'd now like to turn the call over to Tony Busseri, Route1's Chief Executive Officer. Please go ahead.

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [2]

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Thank you. Good afternoon, everyone, and thank you for attending the call today. I'm joined by Brian Brunetti, our President; and by Peter Chodos, our Executive Vice President and Chief Financial Officer. Hopefully, you've had the opportunity to review our press release issued last Thursday, which included Route1's financial statements and MD&A having been filed on SEDAR which -- and also available on our website. Fortunately, I got to bore you here for a few seconds. As described on the slide that's in front of you, I'd like to inform listeners that this presentation contains statements that are not current or historical factual statements, that may constitute forward-looking statements. These statements are based on certain factors and assumptions, including expected financial performance, business prospects, technological developments and development activities and like matters. While Route1 considers these factors and assumptions to be reasonable based on the information currently available, they may prove to be incorrect. These statements involve risks and uncertainties, including, but not limited to, the risk factors described in the reporting documents filed by the company on SEDAR. Actual results could differ materially from those projected as a result of these risks and should not be relied upon as a prediction of future events. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. Estimates used in this presentation are from company sources.

I also need to point out that on today's call, we use names that are either registered trademarks or trademarks of Route1 in the United States and/or Canada. Quickly, events, your company. Route1 evolved during the 2016 year to be a more broadly defined technology company. We enabled a more productive and flexible workforce without compromising system access, data at rest or data in use. Fundamentally, we now more holistically deal with the data protection issue.

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Peter F. Chodos, Route1 Inc. - CFO, EVP and Director [3]

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If you look at the annual operating performance of Route1, in fiscal 2016, we did $7.4 million in revenues, which was a 16.4% increase over the revenues achieved in fiscal 2015. Our recurring revenue up to $7.4 million was approximately $7.1 million, and so that was approximately a 14% year-over-year recurring revenue growth in our -- from our customer base. Gross margin for 2016 was 80.2% and operating income was $742,000. EBITDA, which we characterize as operating income before stock-based compensation, patent litigation and depreciation, was $1.2 million versus $1.15 million in the previous year.

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [4]

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So what's rolled that performance, while we only provide 2016 as a highlight we grew the MobiKEY user base by approximately 10%. That is somewhat impacted now by the recent announcement that our largest customer CBP has decided to go with the alternate technology. And in saying that, though, your management team has already taken steps to minimize that impact of the loss through growth in Q1 that we'll talk about in the coming weeks and beyond. Do we think we'll be able to make up all 7,000 users in 1 year? No. Do we think we'll be able to materially eat into that? The answer is yes. In saying that, you're going hear through today's presentation that the loss of CBP does not put us in a position where we believe in 2017, we'll have negative EBITDA or of any cash flow issues. Quite the opposite, we think we've accumulated the requisite cash flow on our balance sheet and in conjunction with go-forward cash flow, we're going to be able to talk or move forward with the litigation, which we're going to talk about in a few slides. Before we get there, let's just focus a little bit more on 2016. We had a onetime growth in devices as a result of a purchase of 2,000 Fusion3 devices by our U.S. Department of Defense client, in particular the Pentagon. We will hope each year that we have one-off device sales, but 2016 was greater than '15. I talked about earlier on that we evolved beyond MobiKEY. We invested heavily in a new technology called DerivID, which is a derived credential offering targeting the Department of Defense and the federal government in Washington. Clearly, the new President's cybersecurity executive order that we hope to -- that we believe will come down shortly, will have a material impact on just how important the DerivID technology will be for us going forward. I guess, I'd also like to point out the fact that during 2016, not that it took away from operating activities, but we spent quite a bit of time advancing the issue around the infringement complaint, that ultimately, we filed in March of 2017 versus AirWatch. And I guess, lastly, an important move for us was Peter Chodos joined us in a management capacity after being an independent director since 2009. And that move, fundamentally, was executed on so that we as a company could explore more diverse business options, including taking on projects like the patent infringement action.

Little bit about Q4. Fundamentally, for us, one of the major milestones during 2016 holistically by the -- it fell -- in Q4, excuse me, was that our flagship client within the U.S. Department of Interior, U.S. Fish and Wildlife Services, once again grew their subscription base. That's important for us because we've made a larger investment with them in time, effort and infrastructure, and you should expect from us to continue to announce additional bureaus within the U.S. Department of Interior to join Fish and Wildlife as paid active users from the DoI group. So that was important to us. Also completed in 2016 during the fourth quarter was the advancement of the reaccreditation of our technology with the Pentagon through the joint service provider as well as advancing a new accreditation with the U.S. Marine Corps, which we announced over last 6 weeks. Those, you don’t get it done in that quarter, but you advanced the ball quite a bit so you can get it done in Q1. Those were important execution of milestone for us during the fourth quarter. Turning it back over to you, Peter.

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Peter F. Chodos, Route1 Inc. - CFO, EVP and Director [5]

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Thank you. So the next slide shows you the historical track record and steady increases of our recurring revenue, which corresponds to the service revenue on 2 or 3 slides ago that I had mentioned. On the next slide, we look at the recurring revenue by quarter from 2015 to 2016. And you take a look at Q3 2015, we were -- we achieved $1.572 million of recurring revenue for the quarter. Q4 2016 was $1.865 million. That was a substantial increase in recurring revenue. You can also see in the middle of the page the closing number of MobiKEY subscribers, so that would be at the end of each quarter. And again, there was also substantial progress with that. ARPU has increased moderately over the same time period. You'll notice obviously that we have no outstanding debt on the balance sheet. And our common shares from Q3 2015 of 365.1 million, now were 348.2 million outstanding. So in 2016, we bought back a total of 14,466,000 shares for a total of $688,785 at an approximate average price per share of $0.048.

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [6]

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Or $0.048, Pete.

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Peter F. Chodos, Route1 Inc. - CFO, EVP and Director [7]

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That could be right. So the quarterly operating performance is fairly self-explanatory. One thing I'd like to mention is you'll notice that the G&A increased from Q3 2016 to Q4 2016, largely an increase in selling expense in the latter part of 2016, which was an investment for the future, i.e., 2017, 2018. On the balance sheet, I indicated previously that we have no debt on the balance sheet. We are in a strong cash position. And as the business currently exists, we just like to mention again that there's no -- we don't foresee any requirement to raise capital for our existing business.

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [8]

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Thanks, Peter. And let's turn our attention now to the area that I think most people joined us on the call. As much as the loss of CBP is a punch in the gut, there's no two ways about that. It doesn't take us down as a business. And so the question then becomes, what are we going to do? Like let's be clear. I'm not okay with where we are at as a company. We're not feeling happy about what happened with CBP. And even without the CBP issue, it was a nice moderate growth year in 2016, but we want a lot more. And so, as a shareholder, I think you're rightly entitled to ask what are you going to do for us to maximize the value of our investment in the company? Well, let's get at it. We're pursuing different avenues to what I call entrapping value that we believe is already there, but just hasn't come to the surface. The number one thing we're going to do in 2017 is advance a subject called IP realization or actualization. This revolves around the first step that we've taken by filing a complaint against AirWatch around infringing upon one of our patents. That may lead to a payment, a license and may lead to the sale of IP and may lead to other strategic sales relationships with VMware or other players in the industry. Because candidly, our view is that where VMware stands on infringing on our technology, they may not be the only party that sits there today. The second major initiative for us is to just get better and to grow more with MobiKEY. So you're going to hear that theme as you talk to us during the course of this year. We think Brian and his team have done a very good job laying the groundwork for incremental growth within the Department of Defense. So Brian is going to talk about that in a couple minutes. But we do expect material growth. There's something a lot more than the 1,600 paid active users we added during calendar 2016. The other item I should point out here is, look, when you lose an account the size of CBP, there is tweaking you do to your cost structure to make sure that you rightsize the business for the current revenue model. That's been done. And candidly, it's not a material shift that we have to make. But those tweaks have happened. Items 4, 5 and 6 I would point out to you are not going to be distracting to us. Are we opportunistic as a company? Yes. Under Peter's leadership, do we continue to look at M&A opportunities? Of course. Because things come across our desk. But our focus right now is maximizing on our IP, organically growing the business. And that's where our focus is. You have my commitment on that.

So let's talk a little bit more about the IP. So surfacing the value embedded in our intellectual property. Here's a quick summary of the steps we took around exploring this opportunity and then starting to act on it. I'm not going read each of them, but suffice to say that we have a partner in this process and that's a patent litigation firm called Vorys Sater Seymour and Pease principally based out of Ohio, a midsize patent litigation shop who is -- who we've worked with now for almost 7 -- 8 months, excuse me. And it's their advice that we took ultimately to move forward with the complaint. And we think that that partnership with them is going to be very productive in the months and years to come. We filed in Delaware court. That was important for us. That was done in late March 2017. And I just need to reiterate for all our stakeholders, that Route1, we strongly believe has the financial capacity to see the complaint through the trial based on current cash on hand and expect the cash flow will generate through our operating activities. A little bit more about this patent. The patent that we call the 216 Patent. It's important for us because this time gives us the ability to protect the capability, let's call it, of having a direct relationship between a controller or infrastructure and a mobile device. That fundamentally is what is patent's about. It is a public document. You can Google it and read the full time if it so tickles your fancy. Or if you want to e-mail me, I can send it to you. But this is the patent that right now is the center of our IP realization program. So I want to read this verbatim because I think it's important that we ultimately hear what the broader strategy is around servicing the value embedded in our IP. We've reached out to VMware and other parties that we believe have an interest in talking to us about the 216 Patent and more broadly, Route1's intellectual property or our patent portfolio. The VMware complaint initiation is the first step in our process. It's not the only step. We are having commercial discussions. We will continue to have commercial discussions to see where they take us about actualizing on the value of our IP. We are not excluding any potential option at this point in time. I don't want to read it one way or the other, but clearly when you open up these discussions, you're going to explore assets that haven't been fully realized and what's best that do for our shareholders. Brian?

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Brian D. Brunetti, Route1 Inc. - President and COO [9]

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So let's talk about the business development plan. At a high level, our BD strategy can be broken down into 3 main components: the first being protecting our major accounts and positioning for 2018 renewals and recompetes; secondly, driving organic growth within our existing accounts; and third, the addition of new accounts and customers. One of our main focuses is protecting our major accounts for those renewals and recompetes and ensuring that they go smoothly. We just recently secured our renewal with joint service provider who we commonly refer to as the Pentagon. They renewed their MobiKEY subscription at the end of March and what's nice about that renewal is as part of that contracting vehicle, they included 2 additional option years that can be executed at the customer's request. So they don’t have to go through another procurement process in 2018 and 2019. They can leverage that existing contracting vehicle. The second is the Navy. The Navy will be undergoing an engine recompete, something that they did a few years ago, in June of 2018. It's a good -- it's 14 months away. But we're starting the process now to make sure we're positioned properly as part of that recompete. It's something that's critical to our business development team. And we have been working on and are working on that. With the new administration in place and the change in tone related to cybersecurity, we believe our technologies are very much aligned with the new administration's messages. While the loss of customs and border protection is significant, it still should be a very good growth year for us within our other accounts, and adding subscriptions is our focus without having to cut our ARPU. Growth this year will come from the Navy as well as the Navy Bureau of Medicine and Surgery, the Marine Corps and the Department of Interior. Those will be our 4 main components for growth. And then we'll also be accredited shortly, as Tony mentioned, within the Army and Naval base customer this year. Now in the broader market, we are still seeing contradictory behavior. The market expects data security, but it implements technology it approaches to create unnecessary risk and often we see the technology leaders are unwilling to change to more secure approaches. A very good example of this are VPNs or virtual private networks. We see it all the time. It's prevalently used throughout organizations and governments. And what it allows -- what it does is effectively extends a secure network or an organization's or government network to endpoints potentially all over the world and also potentially untrusted endpoints. Then the organization tries to mitigate that risk by putting in place imperfect policies for data in transit, data at rest and endpoint security. We still are knocking on these doors and finding ways to have development discussions. But believe me, it's frustrating when we hear these things in our business development meetings. What's also frustrating is that we see widespread legislation focused on data breach notification as opposed to legislation that protects data where it lies and forces organizations and governments to instill the correct protections. That being said, we -- as Tony mentioned, we are very encouraged by the new administration's view on cybersecurity. We believe holding senior leadership accountable and more senior leadership than the CIOs having strong authentication, forcing reassessment of risk factors and of the current approaches and demanding cost savings are all really good and achievable initiatives that very much align with what we offer. We expect these views will translate beyond government to critical infrastructure and eventually will trickle down to corporate America.

Now on this slide, I just want to highlight a few of the key differentiators that we touch upon from a business development perspective for MobiKEY. The first being that MobiKEY is a cybersecurity technology and is architected as such. Other approaches to mobility and remote access were architected first with the capability in mind and then they layer on security after the fact and there is no perfect way to do that. MobiKEY delivers complete desktop computing without the risk of data in transit, data at rest or man-in-the-middle attacks. It does not establish a virtual private network, meaning untrusted endpoints never become a node on the secure network. And lastly, MobiKEY is very user friendly, easy to deploy and administer, and it's extremely cost effective. Although we are a small business, we continue to make significant investments in the sales and marketing. We have a dedicated business development team in place that has positioned us to close on the opportunities I mentioned in the prior slides. A critical part of this was obtaining the necessary technical approvals and authorities to operate that we've touched upon. We have made an investment into a sales intelligent tool in the last month that will help us further broaden our sales pipeline beyond government. We continue to leverage personal relationships wherever possible. These relationships come from our business development team, from our management team, from our Board of Directors, our partners, our resellers and our strategic advisers. And lastly, we're going to continue to focus on conferences and trade shows. Last year, we attended about 20 of those in our key verticals and markets. We're going to attend about the same amount this year. And we found those to be a very successful avenue both to drive new sales opportunities and to generate that organic growth that we need into 2017.

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [10]

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Thanks, Brian. To go along with the push we have in business development, there will be additional releases for MobiKEY, where that work started during 2016. The slide in front of you describes what we're doing with the Android operating system. MobiKEY 5.2 is a major update for our core flagship technology. It has a new protocol that goes with it and additional functionality. We think it sets us up quite well for 2017 and beyond. And then DerivID or derived credential offering will also support iOS as an operating system within the next month or so. So we've made the investment in people, we've made the investment in verticals, we've made the investment in the technology to get there. Ultimately, it's that connection between the market wanting it and the market buying it. The punchline that what Brian was saying really should be is that right now we are perceived as more of a vitamin than as a medicine. And I know I'm using a cliché from business school, but we're trying to change that view. And it's very much one meeting at a time. Before we wrap up today, I do want to touch on another subject that just again came in front of my desk over the last hour with our President talking about Buy American and what that might mean for us as a Canadian company with so much of a revenue leveraged against U.S. government, what we -- we do have a U.S. subsidiary, we do have direct relationships with parties that act as buy-sell agents for us. We think this is a real issue. We think we have strategies to address it. Nothing is a guarantee, but your board and your management team is not asleep at the switch on this subject matter. And quite candidly, we don’t think there will be any real impact for us at least in this calendar year. Legislation could always change but based of on what I saw today, I think we continue to be well positioned ourself for the federal government. So at this point, I'm going to wrap up the formal part of presentation. Brian, Peter and I are happy to take your questions.

And operator, I'll turn it over to you to facilitate that, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we do have a question that comes from Jeff Silver with Berson & Corrado.

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Jeff Silver, [2]

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Tony, I was wondering if maybe you could step back a little bit. There were comments around the IP and lawsuit that seem to suggest that there is more than just potentially lawsuits on these matters that there may be sort of changes in the way you do business or business model. Can you maybe just sort of qualitatively talk a little bit about what that might mean, I mean, licensing your technologies or joint ventures or joint product developments or any of these possibilities that maybe we really haven't talked about in the past?

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [3]

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Jeff. I guess, I'd answer it (inaudible). We have an operating company business model that's led by our flagship technology. MobiKEY is currently supported by DerivID and MobiENCRYPT. That is what we are as a business. We will continue to look to add additional technologies that support our overall vision for the marketplace. While at the same time, we have intellectual property that supports those things where we think that intellectual property is being used by others and there is compensation associated with it then. And how we create the consideration for us? I think it's premature for me to say. It's going to be dollars. It's going to be whatever. But we are not moving into a patent licensing business model, Jeff, to be very specific at this time because that's not what the market's telling us. What we are doing is investigating with the value of our intellectual property are -- is, excuse me, and then with the intent so to actualize on it a better way. And I think the licensing model is an interesting one. But through the course of those discussions, many different ideas can be brought forward. So I think candidly, it would be premature for me to give you guidance how we're going to land on this except to say as we talked about in the past, we filed a complaint. It will be served within that 90-day window that we need to by law. We are having discussions with the party on the other side of that complaint. We will see where that goes. And that may also then lead to us talking to other parties in the industry. So I don't want to go too far with that. These are the steps we're taking specifically on that complaint. At the same time, there's others that can give us guidance and input into ways that we can get better value out of our IP. Right now, our market cap, as you know very well, Jeff, is pulled somewhere between CAD 10 million and CAD 20 million depending upon the month we're in. We need to -- we want to generate significantly more value for our shareholders. And that's immediate goal for us.

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Operator [4]

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(Operator Instructions) And we will go back to Jeff Silver.

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Jeff Silver, [5]

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Yes, sorry, Tony. Just switch gears a little bit. With respect to the various U.S. government agencies, and I think I know the answer to this question. But it might help to hear your take on it. My sense is that the agencies are pretty well siloed. And that there's no sort of contingent or even sort of reputational issues that come up when one agency does something and the other agency does and/or vice versa. Maybe you can talk a little bit about that? I mean, I would imagine that it's reasonably public that you've had this loss. In your conversations with other U.S. government customers, does this come up at all? Or is it really not relevant in those discussions?

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Peter F. Chodos, Route1 Inc. - CFO, EVP and Director [6]

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Yes. I think it's the latter, Jeff. The various government agencies and departments that we're dealing with are quite siloed. They do leverage government reciprocity where they can on the accreditation side more to accelerate things. But look, the government customers we're dealing with are looking at MobiKEY and our other technologies. And they look at it as if they were a separate and discrete business. So in many ways, while they appreciate that there's other government people using this, us losing a customer or gaining a customer doesn't really hurt or help us. They evaluate it on the technology merits and whether it's applicable to their organization and meets their use cases and meets their budget cut requirements. So they're going to look at it relatively independently, I would say. So we haven't seen any backlash or negative outcome as a result of losing customs and border.

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Peter F. Chodos, Route1 Inc. - CFO, EVP and Director [7]

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And nobody has asked about it.

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Peter F. Chodos, Route1 Inc. - CFO, EVP and Director [8]

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It hasn't come up once. We don’t expect there to be any downside to that and that we've got quite a deep list of references within government both on the DoD and federal side. So we're not seeing that as a driver that will negatively impact business development.

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Operator [9]

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And we'll go to Olivier Giguere with National Bank Financial.

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Olivier Giguere, [10]

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Instead of waiting about the U.S. development and regrowing your customer base, are you looking other strategic alternatives?

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [11]

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Well, just I would say from a strategic point standpoint, our board has approved a process of reviewing the best way to actualize on the value of our intellectual property. So we've initiated the lawsuit against AirWatch and VMware and are talking to multiple other parties in the sector that could have various outcomes associated with it. So from a strategic standpoint, we most certainly have taken a different approach over the last months than we've done historically.

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Operator [12]

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And there are no other questions. So Tony Busseri, I'll turn it back to you for any additional or closing remarks.

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Tony P. Busseri, Route1 Inc. - Chief Executvie Officer and Director [13]

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Look, I understand it's been a tough month. And we understand what we need to do to get done. So I'm going to leave it there. We will have a call after our Q1 results as we committed to doing on a quarterly basis. So we'll be talking with you within the next 6 weeks. So let's wrap it up. I'd like to thank you for joining us for today's conference call. For any of you who may have joined the call in progress, a replay will be available until -- after 7:15 tonight at 1(844)512-2921 or 1(412)317-6671, passcode 1247452 until midnight on May 2. If you don’t have time to write those numbers down, they are listed in our news release from Thursday. A copy of this slide presentation will shortly be up on our website and it's there for you to consider. If you have questions after this call, glad to chat with you tonight, tomorrow or later this week when it's convenient. Thank you, again, for your patience. Operator, that's it.

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Operator [14]

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Thank you. And that will conclude today's conference call.