Q3 2023 DecisionPoint Systems Inc Earnings Call
Participants
Brian Siegel; IR; Hayden IR, LLC
Steve Smith; CEO & Director; DecisionPoint Systems, Inc.
Melinda Wohl; CFO; DecisionPoint Systems, Inc.
Howard Halpern; Analyst; Taglich Brothers, Inc.
Presentation
Operator
Greetings and welcome to DecisionPoint Systems' third-quarter 2023 earnings conference call and webcast. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host, Mr. Brian Siegel. Thank you. You may begin.
Brian Siegel
Good morning, and welcome to the DecisionPoint Systems earnings call. Joining me today are Steve Smith, Chief Executive Officer; and Melinda Wohl, Chief Financial Officer. For those of you that have not seen today's release, it is available on the Investors section of our website at www.decisionpt.com.
Before beginning, I would like to remind everyone that, except for historical information, the matters discussed in this presentation are forward-looking statements that involve several risks and uncertainties. Words like believe, expect, and anticipate mean that these are our best estimates as of this writing, but that there can be no assurances that expected or anticipated results or events will actually take place. So our actual future results could differ significantly from those statements.
Also, during this call, we will discuss non-GAAP measures, including non-GAAP net income, non-GAAP EPS, and adjusted EBITDA. These non-GAAP financial measures adjust our GAAP net income and EPS for stock-based comp, any gains on extinguishment of debt, M&A, and other financial transaction costs and other non-recurring, non-operating income and expense items. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the SEC.
With that, I'll now turn the call over to Steve.
Steve Smith
Thank you, Brian. Good morning, everyone, and thank you for joining us today. We reported solid third-quarter results today within our revenue guidance and above our adjusted EBITDA guidance. The highlight from this quarter is our strategy to shift the mix towards services and software; and it's working. Software and services were a record 45% of revenue in the quarter, which drove record gross margin.
On the heels of this success, I'm going to provide you an overview of who is DecisionPoint Systems, what is our market opportunity, and what is our growth strategy to capture and expand this opportunity. I will then briefly review our third quarter and then turn it over to Melinda to discuss our financial results.
DecisionPoint is a mobility-first enterprise services and retail technology solutions company. This means that we aim to be at the center of several emerging secular trends, including enterprise mobility, which encompasses work-from-home and field mobility; retail technology solutions, which encompasses point-of-sale and other in-store solutions; cloud and managed services; SaaS; 5G; AI; and IoT.
Now these markets represent hundreds of billions of TAM. So we've identified a subset of industries within these markets where we already have expertise, can acquire expertise, or develop expertise and, therefore, the ability to become more significant players. Retail is our largest market with a significant presence in apparel; grocery; C-store; quick-serve restaurants; along with logistics, hospitality, and health care, where we have established customers, industry-specific solutions, the right technology partners, and several under or unpenetrated subsegments for us to go after.
Our value proposition to our customers is clear. We position our customers to be their best at moments that matter. We enable front-line employees for work at the edge of the network to make better, faster, and more accurate decisions inside and outside the four walls and create operational efficiency and effectiveness to drive better customer experiences and better outcomes at their moments that matter: what we like to say, the decision points.
Moving to our four-pillar growth strategy. The first pillar is to increase share in our current verticals, specifically retail, including grocery, convenience stores, mass merchants, hospitality, healthcare, transportational logistics, and their associated warehousing and distribution center operations.
The second pillar is to leverage our experience in these verticals into adjacencies. Examples would include big box retail, fast food, specialty retail, and supply chain logistics.
The third pillar is to drive growth and margin expansion by increasing services and software attach rates. These include professional services, managed mobile services, managed network services, SaaS services, software from partners, and repair and maintenance services.
The fourth pillar is geographic expansion: where we can pick up new customers, expand field sales, and increase our coverage. Our hardware solutions business, which includes a razor-razorblade business model of preparing and staging hardware with software and applications and selling the consumables necessary to use that hardware has historically grown at a run rate in the mid-single digits.
Project orders, which can also sometimes introduce lumpiness from quarter to quarter and year to year, are incremental to these numbers. For instance, we had $22 million from two project orders last year that were fulfilled in the second through the fourth quarters. This year, we only had one project order for $13 million, mostly fulfilled in the first half of this year. That makes our second-half comps tougher this year.
Finally, our thriving accretive M&A strategy accelerates growth to generate combined long-term target CAGR of 20% or more consistently. Our M&A strategy supports these four pillars and complements our organic growth.
Note, we aren't going to make acquisitions just to achieve more scale. We have specific criteria for the companies we target. These include a track record of positive revenue growth and EBITDA, integration-ready solutions and operations, and cultural compatibility. By focusing on these areas, we have developed a successful integration strategy that allows us to quickly reduce SG&A cost, streamline operations, and drive revenue synergies by expanding their offerings nationwide through our system.
Macro Integration Systems, or MIS, was a perfect example. It hit three of our four strategic growth areas and met our M&A criteria. It also was a little larger than our previous acquisitions, but we are quickly integrating them into DecisionPoint, paying down the acquisition debt, and are starting to look at new targets. In general, we are targeting one to two acquisitions a year, adding $2 million or more in EBITDA.
Over the past 3.5 years, we've transformed the company to increase growth rates while increasing margins significantly by aggressively moving upmarket to include various high-margin services, especially ones that generate reoccurring revenue. For example, we offer professional services, including consulting, staging, deployment, installation, repair and customer-specified software customization, and hardware and software maintenance support.
The gross margins for these services tend to be significantly higher than when we resell technology hardware. And part of our strategy is to shift the services and software mix over the next few years towards 50% of revenue on a consistent basis, which will drive more recurring revenue and higher gross margins.
Our April acquisition of MIS was the next step in our transformation. We combined with the strength in our existing software and services offerings. This acquisition was key to improving services and software mix as, 80% of its business is services.
Strategically, this couldn't have been a better fit. They brought us five new top 10 customers, new service offerings, filled a geographic gap in the Southeast with a 100,000-square-foot warehouse facility, and 30,000 of which supports our staging and integration capabilities and significantly expanded and strengthened our presence in retail industry, especially the supermarket, foodservice, and hospitality verticals.
The last point is an important one as it enabled us to become more than an enterprise mobility company over time. It also sets the stage for us to become a retail point of sale and technology solutions company.
Another part of our software and services strategy is to accelerating our managed services offerings where companies outsource certain IT functions. We're opportunistically building our higher-margin, recurring revenue SaaS solutions portfolio, which today includes both packaged and custom-developed software solutions, such as mobile conductor; en-route manager for the direct-store delivery industry; and ViziTrace, which helps manage an RFID implementation.
As we mentioned last quarter, we made significant investments to the tune of $1 million in incremental operating expense in 2023 versus '22, in developing products in these areas, and adding sales and business development headcount to go after these higher-margin opportunities and drive growth over the mid to long term. We also offer a comprehensive managed services product portfolio to simplify the complexity of designing, deploying, and managing mobile and wired network solutions. These managed services include provisioning, monitoring, and help desk services that improve the visibility of the status of their device landscape.
The competitive landscape for our services is broad and diverse depending on each client's customer and industry needs. Our company has spent the past year developing our new portal for managed services, VISION. VISION offers our customers a customizable solution for monitoring actions on everything in their IT infrastructure.
DecisionPoint can now manage the entire lifecycle of mobility and IT infrastructure, all in one view. VISION provides real-time visibility to manage the health, location, and status of a customer's mission-critical IT assets, regardless of their enterprise location. VISION also enables customers to monitor the progress of major rollouts which enables our customers to minimize downtime and simplify the overall management of a large distributed enterprise.
In the fourth quarter, we added three highly respected, quota-carrying sales and business development managers beyond our original initial $1 million investment to help further accelerate sales of our software and managed services. We expect to see modest incremental contributions in Q4 with significant contributions in 2024 and beyond.
Now moving to our third-quarter results. Revenue grew over 5% to $27 million, with record gross margins approaching 28% driven by a 45% mix of software and services mainly from the MIS acquisition. Also, this year was an especially tough comp as last year, we had two large project orders that were still being fulfilled in Q3; while this year, we did not have any Q3 three project orders.
Despite the significant incremental SG&A investments I mentioned earlier, adjusted EBITDA still increased by roughly 2% to $2.3 million in the quarter. We also continued to pay down our acquisition-related debt during the quarter.
Looking to the full year, we expect our run rate business to continue to perform well. And with the addition of MIS, we are expecting to report revenue in the range of $111 million to $113 million, with adjusted EBITDA between $8.9 million and $9.2 million. This implies Q4 guidance of 6% to 14% in revenue growth and 14% to 31% adjusted EBITDA growth.
In closing, we executed on our strategy and delivered a solid quarter. I want to thank each and every one of our dedicated employees for their contribution and hard work. I look forward to speaking to you again within the fourth-quarter call. Now, I will turn it over to Melinda to review our financial results in more detail.
Melinda Wohl
Thank you, Steve. Details of our third-quarter operating performance compared to 2022, third quarter, were as follows. We saw continued strong demand in Q3 with total revenue up 5.5% to $27.1 million. During the quarter, we worked through our $13 million backlog from last quarter and rebuilt it to the same levels.
Moving to gross profit, we saw a 30% increase from the prior year, which was a result of the mix shift towards services with higher profit margins. This mix shift led to a record quarterly gross margin of 27.6%.
GAAP operating expenses were 22% of revenue versus 16.4% last year. This increase was mainly due to the acquisition of MIS and [thus], no corresponding expenses for the comparable period last year as well as the additions in sales and biz dev headcount in our software and services portfolio Steve had mentioned earlier. As we continue to integrate MIS, we expect to realize cost synergies and improved efficiencies in operations.
GAAP net income and diluted EPS decreased 5% and 11% to $1.1 million and $0.13. Weighted average shares outstanding increased by about 200,000 from last year to 7.8 million. Our non-GAAP net income and diluted EPS were also $1.1 million and $0.13, a decrease of 8% and 20%, respectively. The non-GAAP net income and EPS numbers excluded about $71,000 this year versus $116,000 last year.
Adjusted EBITDA was $2.3 million, an increase of 1.5% compared to last year. Our operating leverage was impacted by the sales and biz dev investments we are making this year in our software and managed services to accelerate growth in these higher-margin offerings in 2024 and beyond.
Turning to our balance sheet, we ended the quarter with cash and cash equivalents totaling $3.6 million versus $7.6 million on December 31, 2022. Deferred revenue increased by 12% to $11.7 million. Of which, approximately $6.9 million is expected to be recognized over the next 12 months.
Total debt at the end of the quarter was about $6.7 million. During the quarter, we paid down $1.2 million in debt related to acquisition of MIS. We will continue to pay down $250,000 quarterly for our term loan, and our plans are to continue to pay the remaining down as swiftly as possible.
Net cash provided by operating activities was $2.8 million versus $13.9 million last year. The decrease was primarily the result of payments for inventory purchases that were fulfilled this year.
With that, operator, we can move to questions.
Question and Answer Session
Operator
Thank you. (Operator Instructions) Howard Halpern, Taglich Brothers.
Howard Halpern
Congratulations on navigating this environment. I know it hasn't been easy. In terms of some of your managed services, could you talk about the opportunity in managed mobile, since you hired a professional just recently to lead that effort?
Steve Smith
Yeah, sure. So know that every mobile device we sell has a serial number. It has an IP address, whether it's a handheld mobile device, a printer, even consumer-grade versus enterprise grade. Each one of those represent the seed. Think of it as the seed you're planting, where you could engage your customers in lifecycle management services that include staging, integration, provisioning of the device, loading of software, the management of the device while it's in the field, downloading of new applications, using mobile device management software to communicate to that device remotely, and last, if it breaks.
In day two operations, the customers that we sell to need to have these devices up and running. So there is a portfolio of no fewer than 10 to 12 services that we could provide. And it all happens when you sell a serial number device to a customer.
Howard Halpern
Okay. So that's a -- I'm assuming now you believe that's a large opportunity over the next three to five years then to round out that part of your portfolio.
Steve Smith
Yes, we do. Customers need the service. These aren't just computers. They're tools that are used by front-line task workers to perform their job, and they need to be up and running all the time. And so that spells goodness for the investments customers need to make with us to keep those devices up and running and performing.
Howard Halpern
Now with the acquisition of Macro, have you seen new opportunities, new customers, either come to you or you go to them and they recognize Macro and some of those working their way through the pipeline?
Steve Smith
Yes. So the good news here and the takeaway on the Macro acquisition is the bulk of their activities dealt with retail point of sale systems and services. In very few instances did they address the mobile needs of those customers. So we have had -- active sales campaigns are underway. We've met with CIOs and C-level personnel within their customer base to explain.
And it was really borne by their request. As we were doing due diligence on the purchase of Macro, they wanted to know -- these customers wanted to know. Hey, what exactly does DecisionPoint do? And what can now this combined entity of Macro and DecisionPoint do for our mobile device landscape? So we've had multiple senior-level meetings, and we have active sales campaigns going on right now for now the extended capabilities that DecisionPoint and Macro offer.
Howard Halpern
Okay. And you mentioned the hiring of three additional sales people to your team. What should the expectations be in terms of their sales process? And is it skewed more towards hardware projects with a little bit of the services? Or are you going to actually try to keep it towards a good mix of 60-40, 55-45, for them moving forward?
Steve Smith
Well, percentage-wise, at a macro level, the company is looking to drive to 50% of its revenue in services. This quarter, we hit the 45% mark, which was a great indicator and a great signpost for our future.
These individuals are chartered to come in and build a expanded portfolio of mobile managed services and lead with that and sell that. And their backgrounds speak to that in spades. They have done this before. They -- in large part, they're familiar with our technology naturally.
But they have built companies and businesses around mobile managed services and the extended portfolio of managed services that we provide. So we're very bullish. I'm very bullish. They were identified very specifically, and I knew that they can help us in a material way. And I think they will going forward.
Howard Halpern
Okay. So I look forward to seeing that higher-margin business flowing through to the bottom line. Thanks and keep up the great work.
Steve Smith
Thank you, Howard.
Operator
(Operator Instructions) There are no further questions at this time. I'd like to turn the call back over to management for closing comments.
Steve Smith
Yeah. I'd like to thank everyone for attending the call. We look forward to a continued execution on our strategy in Q4. And we look forward to getting back in front of you with an update. By the middle of February, I believe, is when we schedule our next earnings call. Thank you all for attending this call.
Operator
This concludes today's conference. You may disconnect your lines at this time. And we thank you for your participation.
