Genasys Inc. (NASDAQ:GNSS) Q1 2024 Earnings Call Transcript
Genasys Inc. (NASDAQ:GNSS) Q1 2024 Earnings Call Transcript February 13, 2024
Genasys Inc. misses on earnings expectations. Reported EPS is $-0.15 EPS, expectations were $-0.1. Genasys Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to the Genasys' Fiscal First Quarter 2024 Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Brian Alger, SVP of Investor Relations and Corporate Development. Welcome, Brian, the floor is yours.
Brian Alger: Thank you, Karen. Good afternoon, everyone. Welcome to Genasys' fiscal quarter fiscal 2024 financial results conference call. I'm Brian Alger, SVP of Investor Relations and Corporate Development for Genasys. Today's earnings release is available up on our corporate website in the Investor section. And it should be crossing the wires any moment now. There has been a delay with our filing service, and we apologize for the delay in this call. But for those of you looking for the numbers and looking for our commentary, you can find it on the website right now, or it should, as I said, cross the wires just shortly. With me on today's call today is Richard Danforth, our CEO; and Dennis Klahn, the company's CFO. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook, and future financial performance that involve certain risks and uncertainties.
The company's results may differ materially from the projections described in these forward-looking statements. Factors that might cause such differences and other potential risks and uncertainties can be found in the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2023. Other than the statements of historical fact, forward-looking statements made on this call are based only on the information and management's expectations as of today, February 13, 2024. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We will also discuss non-GAAP financial measures in the operational metrics, including adjusted EBITDA, bookings, backlog, and adjusted net loss, which we believe provide helpful information to investors with respect to evaluating the company's performance.
For reconciliation of adjusted EBITDA to GAAP financial metrics, please see the table in the press release issued by the company at the close of the market today. As I said, it should be coming across any moment. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning. Bookings is an internal operational metric that measures the total dollar value of customer purchase orders executed in a given period, regardless of the timing of the related revenue recognition. Backlog is a measure of purchase orders received that are scheduled to ship within the next 12 months. Finally, a replay of this call will be available, in approximately four hours, through the Investor Relations page on the company's Web site.
Now, at this time, it's my pleasure to turn the call over to Genasys' CEO, Richard Danforth. Richard?
Richard Danforth: Thank you, Brian, and welcome, everyone. The strategic vision of Genasys Protect is being realized. Yesterday's announcement describing the integrated use of Genasys' cloud-based software and hardware for 37 dams in Puerto Rico is only the most recent example of our differentiated approach to protective communications. To recap, Genasys has been selected through a competitive solicitation to engineer, procure, and install a comprehensive emergency warning system for 37 dams on the island of Puerto Rico. Genasys had the highest score, beating the competition in all evaluation categories. This project has been fully funded by FEMA, and is expected to generate $60 million to $70 million of revenue for Genasys.
More than $50 million of hardware revenue is expected to be installed over the planned 18-month project line. Importantly, all of the sensors, data streams, and communication channels will be managed with the Genasys Protect software. In addition to approximately $1.9 million for a three-year software license, it is expected that we will also provide hardware maintenance services that could generate between $3 million and $10 million, depending on the length of the maintenance agreement. Our investments in developing the Genasys Protect software drove the selection for the Puerto Rico project. As a result, not only we would generate recurring revenues, but we will also be delivering more than a full-year's of incremental hardware revenue for this project.
The selection of Genasys Protect's platform, including both hardware and software for the Puerto Rico Dam Emergency Warning System is yet another example of the differentiation of our approach to protective communication. Already in fiscal '24, we have been selected for a multiyear engagement Los Angeles County, a county with more residents than most states in the Union, the Department of Corrections for the entire state of Utah, and most significantly the project I just outlined for the island of Puerto Rico. Our engagements are getting larger, but they're also becoming more comprehensive as the advantages of our platform approach became more evident. Our transition to a more balance hardware-software company is well underway. Our Software business continues to gain momentum and build sale.
Synergies from the acquisition of Evertel are beginning to be realized. And as a result, ARR for our CONNECT business grew nearly 18% sequentially in the first quarter as part of Genasys Protect. Similarly, we are getting significant leverage from our partnership with Ladris, which provides our Traffic AI solution. Recurring software revenue grew 85% year-over-year. Total realized ARR exiting the fiscal first quarter was $5 million. And we expect to exit our second fiscal quarter with nearly $7 million of ARR. Coming into this year, we had exceptional low hardware backlog. And as we communicated in early December, we expected financial results to be heavily weighted towards the second-half of the fiscal year. Though quarterly revenues were substantially lower than prior year, hardware bookings were in line with first quarter historical averages, and up nearly 90% versus the prior year's quarter.
Dennis will provide more detail on the hardware revenues momentarily. As we look out over the remainder of our fiscal 2024, we see a growing need for protective communications in communities, enterprises, and critical infrastructure across the globe. Too many events, including natural disasters, civil unrest, and geopolitical tension, require a more complete solution to protect the various constituents. Mass notification messages and 60-year-old sirens are not adequate. More is expected, and frankly, deserved. Internationally, we are finally beginning to see our hardware business recover. And we are also seeing new and growing interest for our software solutions as well. Recent wins and the continuing deal activity and pipeline expansion give us greater confidence in our second-half of '24 and our fiscal 2025 outlook.
Unchanged from our outlook in December, we are confident that the software revenues for fiscal 2024 will at least double over fiscal 2023. We continue to see a very back-end loaded year for our hardware business. Though there remains near-term uncertainty around the timing of the U.S. federal budget approval, recent bookings and the Puerto Rico selection bolster our confidence in approaching fiscal 2022 levels of hardware revenue, despite the exceptional low performance in the first quarter. Based on our assumptions that the U.S. federal budget is approved in the March time frame, we expect to be profitable on our adjusted EBITDA basis in the second-half of 2024. On a full year, we continue to expect to report a negative adjusted EBITDA, though improved quite a bit from fiscal 2023.
Now, I will turn the call over to Dennis to go through the financials and outlook in greater detail. Dennis.
Dennis Klahn: Thank you, Richard. In 2023, we successfully grew our recurring software revenues each quarter. In the first quarter of fiscal 2024, that growth accelerated to 85% year-over-year. Revenues for the first quarter of this fiscal year for $4.4 million, a decrease of 58% over the prior year's record first quarter revenue. As compared to the same prior year period, total software revenue increased 57% to $1.4 million. And to reiterate, our recurring software revenues were up 34% sequentially and nearly 85% year-over-year. More than offsetting that growth, hardware revenue decreased 72% to $2.9 million. As Richard mentioned, Genasys started fiscal 2024 with exceptionally low hardware backlog. In addition to a low backlog entering the quarter, we also had nearly $1.5 million of revenue that was booked and built during the December quarter, but the U.S. government was unable to pick up the orders until the first week of January.
Gross profit margin was 34% in the fiscal first quarter, a decline of 12 percentage points or $3.4 million in the prior year period. The drop in gross profit was attributable to lower hardware revenue in this year's quarter and the related reduction in overhead absorption. On a more positive note, software gross margins improved nearly 15 percentage points year-over-year. Quarterly operating expenses, including the first quarter of Evertel expenses, were $8.7 million, up 5% from $8.3 million in the first quarter of fiscal 2023. The increase was primarily tied to the acquisition. On a GAAP basis, our first fiscal quarter operating loss was $7.2 million, compared to a loss of $3.5 million in the year-ago quarter. Adjusted EBITDA, which excludes non-cash stock compensation, was a negative $6.1 million, compared to last year's negative $2.4 million.
The year-over-year decline in adjusted EBITDA was due to the lower hardware revenues and subsequent reduced overhead absorption. Cash, cash equivalents, and marketable securities totaled $13.6 million as of December 31, 2023, compared with $10.1 million as of the prior year-end. Cash used in operating activities in the first fiscal quarter was $5.7 million, while the working capital increased $1.5 million. As Richard mentioned, we continue to expect software revenues to at least double in fiscal 2024, and hardware revenues should rebound close to fiscal 2022 levels. We continue to expect adjusted EBITDA loss to improve in fiscal 2024 and fiscal 2023. And now, I'd like to open the call to Q&A. Operator?
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