U.S. Markets closed

Edited Transcript of ROI.V earnings conference call or presentation 26-Nov-19 2:00pm GMT

Q3 2019 Route1 Inc Earnings Call

TORONTO Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Route1 Inc earnings conference call or presentation Tuesday, November 26, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Peter F. Chodos

Route1 Inc. - Executive VP, CFO & Director

* Tony P. Busseri

Route1 Inc. - CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Hugh Jackson

Brant Securities Limited - Analyst

* Jeff Silver

Corrado Financial Group - CIO

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen, and welcome to the Route1 investor update conference call and webcast. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Tuesday, November 26, 2019. I would now like to turn the conference over to Tony Busseri, Route1's Chief Executive Officer.

--------------------------------------------------------------------------------

Tony P. Busseri, Route1 Inc. - CEO & Director [2]

--------------------------------------------------------------------------------

Thank you. Good morning, folks, and hope it's a pleasant morning wherever you are around the world, and thank you for attending today's call. I'm obviously joined by our Chief Financial Officer, Peter Chodos. Hopefully, you've had the opportunity to review the results we've put out about an hour ago, which are our Q3 financial results press release. The related financial statements and MD&A were also filed around the same time on SEDAR or they can be found on our website.

As described on the company's slide, 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 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. Actual results could differ materially from those projected as a result of those risks and should not be relied upon as a prediction of future events. The company undertakes no obligations to update any forward-looking statement to reflect events or circumstances after the date on which such statements are 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 Inc. in the United States and Canada. I appreciate your patience as I went through the pro forma matters.

Real quickly, again, our company is an advanced North American technology company. We empower our clients with data-centric solutions that drive greater profitability, improve operational efficiency, and gain sustainable competitive advantages, all while emphasizing a strong cybersecurity and information assurance posture. We believe and we have seen that we deliver exceptional client outcomes through real-time secure delivery of actionable intelligence to our client decision-makers, whether it be in a manufacturing plant, in-theater operations, a university parking lot or for public safety purposes.

Lastly, I want to point out that our ticker symbol in the U.S. has changed a couple of times over the last 90 days as we've consolidated our stock. The current ticker symbol is ROIUF, and we do not expect that to change.

Let's talk about the results that were published earlier today. Again, we often like to describe the business model we have today as an outcomes-based approach. Quite often, we've talked in the recent past about moving from a produce -- product to a solutions-based model from a sales perspective and from a client delivery perspective. I think a truer picture is to discuss it as outcomes-based model. And the difference there is not only are we addressing the challenges and issues our clients have identified, but we're identifying future and current issues for a client that they may not yet know that they have, and we are providing an outcome that provides a sustainable change that delivers to the objective of improving profitability, reducing costs, improving competitive positioning.

This chart here is reflective for us and it was in a prior presentation because it shows how we think and how we'll move going forward. Today's existing solution becomes tomorrow's product. We continue to evolve and add arrows to our quiver as may be a poor man's metaphor.

Again, as I said earlier, we are an outcomes-based company. We continue to have the 4 strong legs to our stool. I'm told quite often that a stool with 3 legs is a little more stable than a stool with 4 legs, but you'll bear with me why we're using 4. We're all about data security. We also analyze and acquire data. We visualize it, and we provide additional new technologies and services around our clients' data. We think the way we go to market, again, outcomes-based model with a set of core competencies, is really the best way to sustainably grow the business.

I'd be remiss to say that a core part of us will always be our data security capabilities or our bona fides, and the experiences we've had selling MobiKEY to the federal government in Washington have been very, very important for us. And core to delivering that is our private cloud infrastructure, which we call MobiNET as it pertains to enterprise clients or DEFIMNET when we're dealing with the arm of the U.S. government. It is the cornerstone of our ability to deliver software applications, security software applications, data analytics applications and other applications that are yet not defined.

Recently, we acquired PCS Mobile on June 28, as you know, and a key part of that acquisition was the new relationship with Genetec and, particularly, Genetec's AutoVu technology or the license plate recognition technology. Part of the results we're going to talk about here shortly are a product of this technology and the strong desire and interest in the marketplace for not only public safety, but those that own parking lots or operate parking lots to find a technology that will help them reduce costs and increase their revenue streams. Our new burgeoning partnership with Genetec will see us do more than just the AutoVu technology in the quarters to come, but we're thrilled with the acquisition of PCS and the opportunity to do business with Genetec.

The new technology and services group, as I've talked about the last few times over the last few times I've spoken with you is a key part to who we are. It is the area where we incubate new ideas and bring them to life and new products or software applications. That element to our new technology and services group is the blocking-and-tackling things that we do in this team, and this is where we do the provisioning for our clients and the products that they procure. It's the post-sales support and it's everything about us that we do that isn't directly related to the sale of something to our client. It's the feeling, it's the culture around how we deliver our -- the outcome for our clients, and it's become a really important part of our business.

Historically, just being an independent software vendor, we had a great help desk that would support MobiKEY users. But as we've expanded the delivering so much more, this continues to grow in importance for us. And I'm very proud of our team and the things they are doing that build the credibility in our brand in the marketplace.

So in some ways, I'm sure you're tired of me talking about the strategy of the business, but let me just end on one note before we specifically get to the numbers. I'm asked, "Tony, you've done acquisitions, but where is the growth going to come from going forward?" And the team here at Route1 really believes there's multiple elements to it. It's not just organic growth or acquisition growth. The growth will come from new technologies that are to be -- yet to be discovered but will be and are built around the outcomes that we want to deliver for our clients. It's ultimately the discovery of the unknown or unarticulated issues, which drive better outcomes for our client.

A second growth area for us is going to be the expansion of our core sales channel, product selling. We do sell products, and that will continue to grow as we gain new clients and as we become more confident with the outcomes or solutions we can offer our clients. Expansion of our existing outcome technologies, whether that be MobiKEY, DerivID, ScreenSTOP or ActionPLAN. Obviously, because I've said it, we will continue to acquire new technologies and presence in the marketplace that could look like acquiring a company like GMI or PCS Mobile. It also could be a pre-revenue technology that we define as important to us for an outcome for our client that will accelerate our ability to deliver that. So will we buy intellectual on a pre-revenue basis that supports our mission? You bet you.

Growth doesn't just come through new clients and new technologies, it also comes from giving more tools or better tools to the team here. And we're heavily investing in our people and the talent that we have. It would be wrong to call them employees. I think it's a better name to say, talent. And so therefore, we think enhanced selling techniques and the tools for our team is the right way of characterizing that. I think the others -- I could go on with additional ways that we see our growth, but what I want you to take away from this is that we're not a one-trick pony. We are going to do multiple things that will organically grow the business as well as grow it acquisitively.

So let's talk about those numbers because one of the things we're really excited about is the first 100 days post closing. Quite often, you're in the mode of bringing cultures together and doing integration and then going through your checklist and things like that. I think over the course of the last 100 days, we've actually done quite a bit, everything from buying a company, PCS Mobile; to increasing the debt facilities to support that and the working capital requirements of the business going forward; to heavily investing in us, whether that be the DEFIMNET infrastructure for the Department of the Navy; to upgrading the MobiNET infrastructure as well as our internal systems. We also use cash flow and capital to repurchase our stock to support it. And at the same time, we're growing gross profit. We're growing EBITDA to the point that through the first 9 months of this year, we've already surpassed or we're right around that number that we delivered on for the full year of last year.

Specifically, we had a -- we consider it to be an outstanding quarter. And if we talk about it, as you can see from the slide here on Page 13, we delivered $744,000 worth of EBITDA. It is the biggest EBITDA number we've had over the last decade. And I know I'll be asked at different times today and over the coming weeks, is that sustainable, is it like Q3 last year, is it a one-time contract? Well, in our operations update that we've put out a few weeks ago, we made crystal clear that it isn't, that this is a number of contracts, a number of clients -- LPR sales. It's Technology-as-a-Service sales to enterprises. It's government sales related to MobiKEY use. It's ActionPLAN sales. So when we look at this, one of the things we're really happy about the diversification related to the revenue and the gross margin, our gross profit and ultimately, EBITDA.

So a little more detail, I guess, on that quarter and then the commentary that goes with it would be the items there on the slide in front of you here right now. I guess from our perspective, it always takes a number of things that make the quarter exceptional. Do we think every quarter with the current mix of business we have is going to be plus $700,000? Well, we're not going to give out a forward-looking statement today, but I do think it's fair to say that the area we're in right now around EBITDA, revenue and gross profit is an area we're comfortable with. We think this reflects the characteristics of our business.

Around the recurring revenue of the business, it's important to note under the software application some small tweaking down, part -- primarily related to FX. We are growing the number of MobiKEY users. We no longer report that as a specific metric, but we are across 12,000 MobiKEY users, paid, active subscribers. We've had good growth or growth in our TaaS model, or Technology-as-a-Service. And then we've had good growth in other services under long-term contracts, primarily related to the acquisition of PCS Mobile.

From an operating expense perspective, I think what's important to take away here, we are actively investing in the team of people that represent us in the marketplace. Whether it be business development officers, inside sales reps, sales managers, et cetera, we are investing in the future sales of the business. When you see Q3 sales, marketing costs up at roughly $1 million, yes, that's important to us for the current quarter, but it's also very important to us for future quarters. And let's talk a little bit more about that.

One of the new metrics that we are holding ourselves very much accountable to is the number of gross profit dollars we get to each dollar invested in sales and marketing costs or your GP to sales and marketing cost ratio. The slide in front of you shows 3 bars on a quarterly basis. One is what the gross profit was. Two is the black column, what the actual sales and marketing dollars invested were and then the ratio between the two.

We're quite comfortable at these levels. Again, Q3 2018 reflected a big onetime contract. Q2 and Q1 earlier this year reflected the business with just GMI and the old Route1. We're looking to see this number continue to grow and grow across 3x. We want to get at least $3 -- excuse me, of gross profit to $1 of sales and marketing dollars invested. I think a lot of businesses will tell you that once you cross 2.5 to 3x, that's good; 3 to 3.5 is very good; and 3.5 plus is great. We think you will continue to see this metric grow. We are not going to be silly and overspend on sales and marketing, nor are we going to starve the business and underspend so that we hit a little better results in a particular quarter. We think that we need to be between 2 and 2.5 and 3.5x or anything better than that would be exceptional. So that's where we're at.

As we move forward beyond operating results, we should talk about the balance sheet and some of the characteristics of that, and I'll have Peter Chodos take that from here. Peter?

--------------------------------------------------------------------------------

Peter F. Chodos, Route1 Inc. - Executive VP, CFO & Director [3]

--------------------------------------------------------------------------------

Thank you, Tony. Good morning, everybody. I hope everybody has read the information or at least has absorbed what Tony has said. It's been a very, very exciting quarter for Route1, and it's putting us on a path to increased growth and expansion, both organically and externally.

I want to take you through the balance sheet now and just point out a couple of highlights. Number one, you'll see that we have cash of $320,000 at September 30 along with bank debt and seller notes of $2.3 million. And a lot of that, it's about $900,000 or $1 million worth of bank debt from Vectra Bank, which is a subsidiary of Zions Bank in Denver and Royal Bank. But you'll see that the net of that is around $800,000, and that also, the $2.3 million of bank debt and seller notes, includes the notes that we issued on the acquisition of PCS taken back by the vendor. And we are repaying the bulk of those notes on a monthly basis over 36 months. So you'll see that number diminish quite substantially over the next several quarters. You'll also notice that we have a working capital deficiency but a large number of -- a large amount of contract liability or what used to be called deferred revenue, where we receive cash up-front and provide the service on an ongoing basis based on the subscription period for that -- relative to that cash.

Most of the contract liability we have, as everybody knows, is from the MobiKEY subscriptions, and that service is virtually -- from a cash outlay point of view, virtually no cost. Obviously, from an accounting point of view, we do allocate costs on an ongoing basis.

The next slide shows the purchase of PCS. That purchase equation has changed slightly as new information that was available at June 28 comes to light and the allocations between the assets, the fixed assets and hard assets versus the intangible assets changes slightly. The purchase amount obviously doesn't change. The net consideration issue doesn't change. It's just a matter of allocating the assets among categories, and that will change and will be finalized with the December 31 year-end audit.

The next slide talks about the NCIB. And there's -- an interesting fact here is that when we acquired GroupMobile back in March of 2018 and issued stock in consideration for the purchase, we had approximately 300 -- at that time, 372 million shares outstanding immediately after the purchase, which equates now on a consolidation basis to about 37.2 million.

Right now, as you see at the bottom of that slide, we have 36.1 million shares outstanding. So we bought back a substantial amount of stock, and that also takes into account the issuance of 1.1 million shares on the purchase of PCS Mobile. So we've spent or invested an awful lot of our time, effort and capital in buying back the stock. And up to September 30, you'll see that we've bought just over $500,000 of stock back in the market. So -- and we continue to do that on an ongoing basis.

The next slide, we talk about the AirWatch litigation. And for those of you who have been following the litigation, it's gone back and forth with respect to our appeal. We filed our Notice of Appeal back in October. AirWatch, upon the order from the court becoming final, AirWatch, based on the law, turned around and filed a motion to recover costs based on our lawsuit.

We filed our response to AirWatch's motion yesterday and AirWatch will file its response next week, and then that matter goes to the court for its decision. We also responded on November 6 to the "final" office action from the U.S. PTO. And we did 2 things there. We objected to the finality of it. We responded and we're now awaiting the response from the PTO, which could come prior to the holidays.

The final piece of our litigation against AirWatch is the Canadian lawsuit. Depositions and discoveries have started in Canada. We expect to complete those in the first quarter of 2020, and we will petition or we will ask the case manager for the litigation for a court date end of 2020 or first quarter of 2021. And that decision will be made in the first or second quarter of next year.

The final slide in this segment is the trading price with which I'm sure everybody on this call is familiar. Tony?

--------------------------------------------------------------------------------

Tony P. Busseri, Route1 Inc. - CEO & Director [4]

--------------------------------------------------------------------------------

So without going to specifics on M&A opportunities, there are targeted acquisitions that we are working with. Those targets, again, would kind of encompass companies that may be pre-revenue or companies that have revenue and would give us new clients and a new position in different geographies. So as an organization, we will continue to grow. I'm not going to revisit all the different forms of growth, but it's important to leave you on with the slide to say that we're very active looking to grow through acquisition.

So let me wrap it up at this juncture and open this up for questions. Operator, if you would please provide us with the questions, we're glad to give answers right now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We'll go first to Hugh Jackson at Brant Securities.

--------------------------------------------------------------------------------

Hugh Jackson, Brant Securities Limited - Analyst [2]

--------------------------------------------------------------------------------

Tony, now that you're located -- physically located down in the U.S., what efforts are you undertaking to get the story exposed to U.S. investors?

--------------------------------------------------------------------------------

Tony P. Busseri, Route1 Inc. - CEO & Director [3]

--------------------------------------------------------------------------------

Hugh, we've started to turn our attention to the capital markets in New York City. We recently did an event a couple of weeks ago, the National Investment Bankers Association, which was meeting with a lot of intermediaries and high net worth or family funds. We're going to continue down that path. I'm also doing a podcast, and that podcast is available online. I'll be doing another one today. I do about one a month and then we tweet that out, and it just gives shareholders a continued view on where we are organizationally, things we're doing around growth, how we like to integrate. So we are starting to what you might call "ramping up" our Investor Relations activity. I think there's a lot going on with the business and we want to be able to give timely updates to our shareholders. So I could talk about some of the classic blocking and tackling things we do about, doing nondeal road shows and those type of things. But in today's social media frenzy environment, I think what's important to note, we are doing podcasts, we are out there with intermediaries and are trying to share the story with a number of people.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) We'll move to Jeff Silver with Corrado Financial Group.

--------------------------------------------------------------------------------

Jeff Silver, Corrado Financial Group - CIO [5]

--------------------------------------------------------------------------------

Tony and Peter, nice quarter, some great progress. Tony, can you talk a little bit about how you think about recurring revenue? As you think now through your business and sort of the different aspects of your business, are you able to look at parts of it and say, "Well, this is recurring revenue," or we think -- and sort of maybe break that out, at least qualitatively, maybe a little bit what that number might look like on a quarter-to-quarter basis? One of the reasons is because as I look at the valuation of the company now, if I just take an EBITDA number of $2.5 million to $3 million as a -- let's call it, a baseline and then look at the enterprise value of the company, I mean you're selling at between 5 and 6x EBITDA, which for a technology services company, is obviously ridiculously inexpensive. It could be selling at a multiple of that number. And one of the ways to get our hands around what we think the value ought to be is to think about sort of recurring revenue and the profitability of that going forward. So maybe you can talk a little bit about that.

--------------------------------------------------------------------------------

Tony P. Busseri, Route1 Inc. - CEO & Director [6]

--------------------------------------------------------------------------------

Good morning, Jeff, and thank you for your question. I guess first of all, recurring revenue means for us is a stream of revenue and profitability with it as we enter a new quarter and a new period that's already in place. And quite often, deferred revenue is a good proxy for that. In aggregate, it's the total nominal dollar amount accumulated. So where you don't have recurring revenue, it's you eat what you kill in that particular period, to use a metaphor there. I look at this and I say, if I have a 3-year or a 5-year Technology-as-a-Service contract, that allows me over a period of time to know a stream of cash that's going to come in, much the same way as a subscription services model or pure services. We look at the work we're doing with Genetec for a number of our public safety accounts. That would have a 3- or 5-year services component to it, whether that's help desk services, whether it's quarterly updating technology, et cetera. So when we break that 1 slide out and if I was to go backwards here, we think those components that we mentioned -- let's see if the slide will come up here, it's Slide 15. Here you go. Where we're talking about application software, Technology-as-a-Service and other services, we see this as our base of recurring revenue.

Each of these elements will have contracts, software would be generally under 1 year, TaaS is 3 to 5 years, and other services are generally 3 years. And so we see this, we want to grow the 2,136 number to something a lot bigger. And it's roughly about 25% or thereabouts of our overall revenue. Do I want to grow 25% to something bigger of the overall pie? Yes. But we -- I think, notionally, you're heading in a direction here, Jeff, that we think continuing to build long-term relationships where we have deep client relationships that manifest themselves in the term contracts is the right thing to do, and we will continue to do that. So I'm -- we're advocates subscription-based models versus perpetual license as an example. So the way we think about this, if we have to use our balance sheet a little bit and put some capital to work but we get a great return over a longer period of time, then we're glad to do that. And so we will grow TaaS. We will do deals with our clients where we take away the capital investment in exchange for a long-term contract.

--------------------------------------------------------------------------------

Jeff Silver, Corrado Financial Group - CIO [7]

--------------------------------------------------------------------------------

Yes. That's helpful. So I mean, if I would just -- and again, this is rough. I'm not asking you to comment, but on the -- maybe on the logic of the statement. But if I just annualize the $2 million, I've got $8-plus million of recurring revenue on an annual basis and you've got a $16 million enterprise value. And quite often, one of the ways that investors value companies that produce recurring revenues is at some multiple of recurring revenues. You're trading at 2x recurring revenues, whereas, quite often, you see multiples that are substantially higher than that. So not only on an EBITDA basis, as I'm looking at this, I'm thinking 5 to 6x EBITDA, but now you start looking on a recurring revenue basis and also sort of confirms the fact that the company is extraordinarily inexpensive or cheap in the market, which brings me to my next question.

So you bought back about 3% of the shares in the quarter, made a little more than that in the last 100 days, which, of course, is also an extraordinary amount of stock and it's probably the most stock that you went back in that shorter period of time since I've been involved with the company now over the last several years. And you have an authorization, I think, for about another 2% of the shares. Given where your balance sheet is, which is strong, but you need cash and working capital for growth and things like that, I mean just in general, do you think that you will continue to be -- well, instead of saying, will you continue to be as aggressive, let me just say, do you anticipate completing new authorization, which would be another 2% of the shares or so.

--------------------------------------------------------------------------------

Tony P. Busseri, Route1 Inc. - CEO & Director [8]

--------------------------------------------------------------------------------

Yes. And I guess 2 things for that is that to upsize that is something that we believe we could get if we wanted to, right, Jeff? So that's going back to the regulator, and what we' put out and what we initially requested was a standard pro forma amount of 5% of the issued and outstanding. But look, more philosophically, we consolidated the stock in the quarter. There are certain participants in the marketplace that don't believe in that and, therefore, may have decided to exit the name. And we felt it would be an appropriate use of our capital to buy that stock, particularly when it traded down to the levels it did.

So look, if people want to sell the stock in the 20s or the 30s or the -- are we going to take advantage of that aggressively? You bet you. That being said, the company can't be the only buyer of its own stock. And part of the goal of -- as Mr. Jackson asked earlier, with the IR campaign, is create more awareness. We do think that the company has lurched forward quite aggressively here. Its pivot has gone well, and the investment we made in buying our stock with our cash is the right thing to do. As Peter Chodos often likes to point out, we've done 2 acquisitions and we're right around the same number of shares outstanding but dramatically changed the profile of the gross profit, EBITDA and overall earnings potential of the business, which is -- quite often doesn't happen. Your shareholder doesn't -- in this case, wasn't diluted, basically, and you dramatically change the profile for the positive of the business. So a very long answer to a short question, but we will be active. Let's get that correct. We will -- we've been asked by our Board, we've been asked by shareholders to use our cash flow to support the stock when there's one-off oddities and it's trading at levels that are just kind of obscene. So we're going to be active in the marketplace as appropriate.

--------------------------------------------------------------------------------

Jeff Silver, Corrado Financial Group - CIO [9]

--------------------------------------------------------------------------------

All right. And I think that last point is important to -- well, maybe the next and last point, which is that you've kept the shareholder base or the share, the number of shares actually declined over the last year even where there's -- even in the aftermath of doing a couple of deals. So I certainly appreciate that.

--------------------------------------------------------------------------------

Tony P. Busseri, Route1 Inc. - CEO & Director [10]

--------------------------------------------------------------------------------

Appreciate it, Jeff. Thanks for your support.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

(Operator Instructions) Mr. Busseri, at this time, I have no other questions holding.

--------------------------------------------------------------------------------

Tony P. Busseri, Route1 Inc. - CEO & Director [12]

--------------------------------------------------------------------------------

Thanks. Look, I appreciate the Q&A today, and I always welcome the direct private calls or reach outs if you have questions. Glad to take them. And I thank you for your support and interest in the name and what we're trying to achieve here. We think as fun as it's been over the last 18 months, I look forward to the next 18 months. And a shout-out to our now 52-plus talented employees and partners with me in this business. You're making a massive difference. We're excited to continue to build this business with you. And to Kathy Pakkebier, who entrusted us with PCS Mobile, we thank you for that, and we're just real pumped.

So let me wrap this up by saying that if you joined while this call was in progress, you're able to get a replay of it. It's in our press release, the numbers, but I'll say it here real quickly. The replay is available almost immediately after today's call. You can call in at 1 (877) 481-4010 or 1 (919) 882-2331. Please use passcode 56854. The replay will be available until 9:00 a.m. on Tuesday, December 10. And for our American friends on the line, of which I am one, enjoy your Thanksgiving dinner and the best of the season. Everyone be safe. And operator, that wraps my end of it. Thanks, folks.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Thank you, ladies and gentlemen, for your participation. That will conclude today's conference call. You may disconnect at this time, and have a great day.