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Edited Transcript of ROI.V earnings conference call or presentation 16-Aug-18 1:00pm GMT

Q2 2018 Route1 Inc Earnings Call

TORONTO Sep 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Route1 Inc earnings conference call or presentation Thursday, August 16, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peter F. Chodos

Route1 Inc. - Executive VP, CFO & Director

* Tony P. Busseri

Route1 Inc. - CEO & 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 morning, ladies and gentlemen. Welcome to the Route1 Second Quarter 2018 Investor Conference Call and Webcast. (Operator Instructions) As a reminder, ladies and gentlemen, this call is being recorded today, Thursday, August 16, 2018.

I would 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. - CEO & Director [2]

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Thank you. Good morning, everyone. Thank you for attending the call today. I'm joined by our Chief Financial Officer, Peter Chodos. Hopefully, you've had the opportunity to review our press release issued earlier this morning as well as the financial statements and MD&A filed on SEDAR and also available on our website.

As we do on all our calls, I'm going to read the preamble that I'm required to do so before we get into today's presentation. As described on the accompanying slides, I would 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 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's 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 or Canada. Let's get into our presentation.

I'd like to start with information we recently put out through a news release describing our new street name or trade name, called Group Mobile and to provide you with the thought process behind that and what it means to us in the whitespace that we're going to participate in and more accurately, our value proposition.

As you would know us today, there are 3 -- there were 3, what it would seem to be fairly separate and discrete business units. There is the bar business, which was recently acquired, the company called Group Mobile. There is the security software business, which relates to technology such as MobiKEY, MobiENCRYPT and DerivID. And then, obviously, there's the industrial Internet of Things, recent entry being the ActionPLAN powered by MobiNET technology. We also have the fourth value driver in our business, which is our intellectual property and patent portfolio, which as we described first about 15 months ago, we're in the process of actualizing on. All of these elements have an underpinning of security. And we have a strong reliance today on relationships with our -- the federal government in the United States.

If we think about our primary assets, it really goes to trust. There have been others that have been technological leaders in the broader security space, mobility space over the last decade that once started with great relationships with the Federal Government in Washington and then forgot about how important that relationship was or how important that trust is. We do not and we understand that the credibility that has been attained through the relationship with the Department of Defense and civilian government agencies is valuable to us. And we'll continue to underpin who we are as we move forward.

What we do for our customers ultimately is allow them to use their data to drive better results. The end goal for us ultimately is process optimization, operational efficiency, mission accomplishment and regulatory compliance. In all things, it's about accessing the data and using the data to make better decisions. But again, I can't emphasize enough the way we do it is different than others. It's much like we would say, in the retail business, it's all about location, location, location. For us it's about security, security, security. It underpins and is the backbone of how we deliver our service and our products to our clients. Therefore, there's 5 components that make up our whitespace or our value proposition. Again, it's all about the data. We authenticate users. We acquire data. We assure that information or data. We analyze that data and then present it to the client, all with the goal of providing real-time secure delivery of actionable intelligence, which again -- intelligence can be used either in the sense of government requirements our commercial or industrial requirements.

Using classic marketing vernacular, the is, does means statements for us and I'll read this through because, hopefully, I'll summarize it, is that we are North America's, we believe, most advanced provider of ultra-secure mobile workforce solutions, user authentication solutions and data intelligence solutions. We give organizations the durable tools and real-time, industrial-grade intelligence they need to create efficiencies, while maintaining military-grade data security. What it means for our clients is that your organization has the tools and the fact-based insights it needs to create efficiencies, including streamlining operations, cutting costs while keeping data secure. Hopefully, that's clear. But that's who we're going to be going forward and that's where we're going to invest around. The punchline is, we are using the name Group Mobile on the street. It's all about the data.

I have been asked this question as we've rolled out the new name, what's that mean for MobiKEY, what's that mean for ActionPLAN? Are we rebranding, renaming? And the short answer is no. Our MobiKEY technology that is a differentiator from other technologies in the space, the un-VPN as we like to call it, will continue to be branded as MobiKEY. It has great brand equity with it, and its technology, we believe, will have a resurgence of growth related to the federal government as well as with commercial clients as we now have expanded our relationships, and we see new opportunities for growth for MobiKEY.

Again, MobiKEY, like all our software applications, are delivered through our service delivery platform MobiNET. This technology is critical to the way we deliver those applications. And as we move forward, we will continue to develop new technologies to meet the needs of our clients in using their data to make better decisions by leveraging our backbone, which is the MobiNET.

ActionPLAN as a technology is the first example of our analytics software that's used by business or government towards making real-time decisions to improve their bottom line. So when we talked about the 5 components of our business, this is the area that we'll most aggressively invest in and grow and that is the use of data and the analyzing of that data to make better business decisions, not just for the automotive space, not just for one particular business vertical. We are looking anything that has electrical inputs, where we can extract that data and help them make better decisions, them being our clients.

The environment we participate in today is quite interesting. Some of us read many headlines in the newspaper about President Trump and the things he's doing and the impacts here in Canada. What is safe to say is the following: is that we are going through a resurgence in the economy in the United States. We are seeing a lot of activities, whether it's driven by lower tax rates for business or individuals. And we're seeing more money being put into the system related to investing in infrastructure, investing in technology, looking for new technologies to make business improvements. That's an exciting thing for us. And there's a window here where we think we're going to have good solid growth as a result of the stimulus that's in the system. It will not be there forever. And what that means for us is that we need to continue to evolve our business, such as the technologies we're providing are providing real returns for our clients. It's not just about refreshing something, it's about using hardware with software applications to drive business improvements, which means more profitability for our client.

From the Canadian context, there's now some instability in the automotive sector as it relates to where NAFTA is headed. We've seen some clients be a little more reserved about investing in new technologies until there is greater certainty or clarity with whether there's going to be automotive tariffs placed.

From a social and technological perspective, we think there is a great embrace for the Internet of Things, that's saying a very obvious statement. But from an industrial application perspective, we are seeing clients want to better use their data, so that they can make real-time decisions. And we think the investments we have in authenticating users, interpreting data, securing data, all are in the vein of what our clients are demanding. And we think we are extremely well positioned with the data and devices to drive efficiency or the data solutions and devices to drive efficiency.

From our '18 plan perspective, this was shared with you on the last call, I didn't put checks or Xs or -- somewhere in between here. But some of the things that become pretty clear from all the results we presented today. We are seeing improved and dramatically improved EBITDA generation as a result of the Group Mobile acquisition. And based off of some of the things we announced over the last 4 weeks, we think the third quarter will be even more robust relative to revenue and EBITDA as a result of the things we've completed, i.e. new large contracts.

We continue to integrate the new business being Group Mobile, and we are now at that point where we have 1 brand name and that means things like websites and business cards and all those good things start falling into place. But we're coming together as one company, we see a lot of interest in what we're offering going forward. We do have a progressive team that we acquired that sees value-added reselling as not doing that, it's really a solutions-based business to address commercial objectives or questions. And we are thankful for the Group Mobile personnel that were acquired, and we think that they're going to be a key part of our business going forward.

Organic growth, clearly, we continue to invest and push very hard on driving new MobiKEY and ActionPLAN sales. I won't read through the whole list of the plan but we are well advanced into this. The pivot started in the middle of '17. We think as we exit this year, we'll be at -- run rates are far in excess of ever -- where we've ever been relative to cash flow generation or earnings. And as a business, we're well poised and positioned for some great -- good growth in '19, '20 and '21.

Recent company news. I won't read through all our releases but it's clear that we've had a plethora, I'd almost call it, of activity over the last 6 weeks or maybe it's 8 weeks now. Our company historically has had not as many good things to report to you in such a tight window but the reality is whether it's a financing partner related to the litigation, some results from the courts or the Patent Trial and Appeal Board that were favorable in our opinion towards us. It's announcing of new contracts. It's announcing of partnerships with Thursby and working together with Samsung with the particular technology called the DeX technology. All these things lead us to believe that we're well down the path of improving the business and driving new growth that's going to translate into greater profitability. And again, greater value for you, the shareholder.

Peter will talk a little bit more about the AirWatch litigation in a couple of slides. But suffice to say, we think the progress has been positive for us. And we are moving towards an outcome that, again, we think will be favorable.

Peter?

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

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Thank you, Tony. Good morning, ladies and gentlemen. Slide -- the slide you're seeing now shows our quarterly operating performance. Pretty straightforward. A few things that I'd like to point out. Number one, if you take a look at subscription revenue and services, that's our recurring revenue. You can see that's growing quarter over quarter. It's larger than Q2 of 2017. That is -- and that consists of our -- largely of our MobiKEY subscription business. And now the TaaS business from the acquisition of Group Mobile, which is the Technology-as-a-Service business. This is monthly, recurring revenue by contract with particular clients. We are very excited about this component of the business. It is an excellent part of our business. Strong, deep customer relationship, which is obviously very, very important when you're talking about recurring revenues. You'll also notice that our EBITDA is -- has improved dramatically over Q1, dramatically over last year, say, the first quarter of last year, which included CBP but we think this is now a growing trend in our operating performance.

(technical difficulty)

To note that Q2 numbers do not reflect the previously announced contract for Entergy of $5.9 million and the City of Portland for $1.9 million, approximately.

These contracts will be included in Q3. The Entergy equipment has been delivered to the customer. So that has now been invoiced and we're still waiting on Portland but we expect that over the next few weeks it will -- through September, it will be delivered.

It's also important to understand that when you take a look at our devices and appliances component of our revenue, you'll note that it's substantially greater than it ever has been. And the reason for that primarily is the acquisition of Group Mobile. All the hardware that we sell through the Group Mobile channel is included in devices and appliances. So going forward, that will include both MobiKEY devices and appliances as well as the Group Mobile ruggedized tablets, ruggedized equipment and related accessories. So that's also an important thing to note.

And finally, I'd just like to say that -- and I think everybody is aware, the hardware business in and of itself is seasonal for sure and it is somewhat lumpy. So we do get contracts like Entergy, like Portland. And obviously, those are very advantageous to the business, but -- and, I should say not but, and the focus though is on the smaller ongoing sustainable business opportunities that our sales team is focused on. So the takeaway for this slide is we are growing cash flow and we are growing earnings.

The following slide shows subscription revenue and services. I've talked a little bit about that but note that our application software, which is primarily MobiKEY and ActionPLAN, is $1.2 million for the quarter. And the Technology-as-a-Service business is $266,000 for the quarter. The bottom line here is that on a quarter-over-quarter basis and on an ongoing basis, we expect the Technology-as-a-Service business to grow. The -- our application software business is also going to help us achieve our increased cash flow and earnings.

Just a quick note that the acquisition equation that we reported in Q1, it has -- we've made some modifications to it. I won't dwell on it other than to say that the changes were reflected or are reflected in Q1 results, they have no bearing in that limited context on Q2 results. So that's just a note. The explanation for the changes -- the explanation is pretty straightforward.

If you take a look at the balance sheet, you'll notice we have a strong cash position. We have positive working capital. No debt. All our major vendors in all sides of the business are current, a dramatic improvement from March 22 when we acquired the business of Group Mobile. So we're, a, very proud of that fact and b, the credibility that we gained from that has been much to our advantage.

You'll -- just one final thing on the balance sheet, you'll notice that the contract liability or previously deferred revenue, we now have to call it contract liability because that's what IFRS tells us to do, has increased over the last year. And that's obviously because of the MobiKEY business, the way -- as Tony has explained numerous times, the way the cash flow comes in from DoD and other government agencies but also, we have now another component to the contract liability segment, which is the service component of the offerings that we have in Group Mobile. So that's just an ongoing -- that will be an ongoing factor in our contract liability on our balance sheet.

With respect to the AirWatch litigation, we put out a number of press releases as decisions have come out from the court in Delaware. As Tony mentioned before, we believe that we have a very positive case. The case is going, in our perception, quite well. And the next major hurdle -- well, not hurdle. The next major activity, I should say, is over the next few months. Depositions and discovery will happen. And on -- the beginning of January and throughout early winter, experts will file damages reports and rebuttals, et cetera, as well as final technical reports.

So we are looking forward to the process. Just a heads up that the trial is scheduled for September 9 of next year. So it's a year and a bit away. And we definitely intend to pursue this through trial.

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

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So if we take the combination of comments, our plan going forward therefore is, I think, in many ways pretty obvious but let's reinforce that. We empower organizations with data-centric solutions and insights necessarily -- necessary to streamline operations, minimize costs and gain competitive advantages, while maintaining the highest level of cybersecurity, which means we will expand our thought leadership position. We will focus on growing our product and service offerings. We will continue to emphasize cybersecurity and information assurance to retain market differentiation. We will look for acquisition targets to strengthen our core and fill technology gaps. We will emphasize end-to-end solutions in the sectors that we have penetration in, from data acquisition through to operational efficiency.

I appreciate your time today and considering where we are at with the second quarter results.

At this point, Peter and I would be happy to take your questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Jeff Silver with Berson & Corrado.

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Jeff Silver, [2]

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Great transformation over the last several quarters, great progress and a lot of exciting things. I wanted to ask you about the fourth and fifth part of the value proposition to analyze and present data. Can you talk a little bit about what you need to do internally and what you are doing internally to build an organization that can both respond to customers' needs to analyze and present? And obviously, with ActionPLAN you're doing this. And also, if you're doing this to develop your own products in-house that you could then go out and market to potential clients? And along those lines, I mean, you had great success early on. Can you talk a little bit about what you might be looking to acquire because there are a lot of capabilities, a lot of companies out there that may have some of the capabilities that you need. And it would be helpful to hear about how you are positioning yourselves in the acquisition market?

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

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So Jeff, I'll deal with the strategy and then invite Peter to talk about the acquisition profiling. It's pretty early for you if you're on the West Coast today, so thank you for getting up. From an analytics perspective, you should expect from us to come out with a new technology shortly, called ActionPLAN HR. And think about it from a factory perspective quite often, there's 3 components to improving profitability or making it all come together to drive the profitability improvement. One is accessing the data from the lines through the PLCs, which we think ActionPLAN powered by MobiNET is doing a very good job with. The second part of that is the people. The labor and the career professionals that drive efficiencies or nonefficiencies, let's call it, based off of their performance and execution of their tasks. So we have a technology that's coming out. Our partner and now our CSMO, Bob Hooper, was a leader in developing this technology. It's called ActionPLAN HR, and we'll have more to say about that over the next 45 days. But it is going to be able to integrate in with the side of the business where you'd better understand what inputs on a real-time basis are at fault or not functioning as expected. And then you're going to better understand how that correlates with the staff or the people that are working on that particular line or component, and that will be Phase 2. The third part of obviously integrating into the P&L that management would see is working with the company's ERP system or their financials. And so we will continue to evolve to bring technologies so that a specific input and addressment of that is easily translatable into one's P&L on a daily, weekly or monthly basis. So I would see that as an exemplary area where we will invest in by way of that. From a data visualization perspective, to be really clear about that, a large component of visualization is obviously the hardware that's used by our clients to be able to read the data and use the data. We think that the work that our reseller business is doing with locations in Phoenix and Chattanooga is well down the path of that. We have strong relationships with Getac, with Zebra, now the owner of Xplore, Durabooks, DT Research and a number of others. But it's working with them to understand where they're heading with their hardware, let's call it, and how that will work for our clients in their use cases. So we -- to be very clear, we do not expect to integrate backwards and become a manufacturer of devices but rather be a partner with those manufacturers so they can better understand how we see the market evolving and how they should build their technology to meet the market needs going forward. Other smaller components of data visualization deals with the protocols that are used to access the data from enterprise networks and deliver it to those devices on a secure basis. So whether it be the hardware that's part of the ActionPLAN technology, called the data collection device or data projection device, MobiKEY with what it does to deliver the visualization of the data. That's all part of it. But I see the analytics as really the key investment area for us. From a data visualization, I think the summary would be building -- continue to building stronger relationships with the ruggedized device hardware manufactures, whether it be a scanner, a tablet, a PC, whatever that's going to look like in the future. Pete, maybe a little bit on how we're profiling acquisitions.

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Peter F. Chodos, Route1 Inc. - Executive VP, CFO & Director [4]

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Sure. Basically, the entire emphasis is consistent with Route1's data-centric focus. So if you sort of remember back to the earlier part of this presentation, Tony focused on data and how to help clients use data properly to maximize efficiency, productivity, et cetera. So that's where we are looking. That's where we are focused in all aspects of that. So if you have a big circle, there are lots of points on the arc. And some of the things that we are looking at include add-ons to our -- or complements, I should say, to our MobiKEY technology in terms of virtual smart cards. We are looking at areas such as industrial efficiency, productivity, efficiency measurement, all using data, data analytics and real-time reporting back to the client, back to the person who generates the data but doesn't really know how to assemble it, use it in any -- and use it in any meaningful way. So a lot like ActionPLAN. And in addition, we are -- in the context of ActionPLAN and gathering data and analyzing data for clients, no matter what the object of the data are, we have an enormous amount of data that requires storage that will require backup. So basically, Jeff, to answer the question is what we're looking at is anything that can enhance Route1's emphasis on data and using that data for the client's benefit.

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Tony P. Busseri, Route1 Inc. - CEO & Director [5]

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And just to -- I can't say it enough. Everything will be backboned or underpinned by security. So authenticating users, how we move that data or access that data, how we store that data, all will be done in that way that we have brand equity in. So through MobiNET and through a security-first posture.

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Operator [6]

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(Operator Instructions) And we will move on to Olivier Giguere from National Bank Financial.

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Olivier Giguere, [7]

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Just a quick question. And as we are clearly getting traction, do you plan, guys, to resume a buyback?

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

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We have been buying back the stock for the last 2, 3, 4 months. And we will, where appropriate, continue to purchase our stock for sure.

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Operator [9]

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[Operators Instructions)

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

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Excellent. Since there's no further questions, I'd like to thank all of 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 after 12 p.m. today at 1 (844) 512-2921 or 1 (412) 317-6671, Passcode 3698568, until midnight on August 30. A copy of this slide presentation is -- will now -- will shortly be available, excuse me, on our website. We look forward to speaking with you again shortly. Thanks for your time and happy [web] running. Thanks folks.

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Operator [11]

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Once again, ladies and gentlemen, that concludes today's conference. We appreciate your participation today.