Ladies and gentlemen, good afternoon, and welcome to Genasys Inc.'s Fiscal Second Quarter 2020 Financial Results Call. [Operator Instructions]. At this time, it is my pleasure to turn over the floor to Satya Chillara, Investor Relations for Genasys. Sir, the floor is yours..

Thank you, Jim. Good afternoon, everyone, and welcome to Genasys Fiscal Second Quarter 2020 Financial Results Conference Call. I'm Satya Chillara, Investor Relations for Genasys. With me on the call today are Richard Danforth, Chief Executive Officer; and Dennis Klahn, Chief Financial Officer of Genasys.

Before we begin, I would like to take this opportunity to remind you that during the course of this call, management will make forward-looking statements. Other than the statements of historical facts, statements made during this call that are forward-looking statements are based on current expectations.

During this call, we may discuss company's plans, expectations, outlook or forecast for future performance.

These forward-looking statements are subject to a number of risks and uncertainties, including the consequences of COVID-19 outbreak, other pandemics and other risks and uncertainties, many of which involve factors or circumstances that are beyond the company's control.

These forward-looking statements are based on information and management expectations as of today. Future results may differ materially from our current expectations. For more information regarding potential risks and uncertainties, please refer to the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2019.

Genasys disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We may also discuss non-GAAP operational metrics of bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance.

We consider bookings and backlog as 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 the 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 in the next 12 months. Finally, a replay of this call will be available in approximately 4 hours through the Investor Relations page on our website. At this time, it's my pleasure to turn the floor over to Genasys' Chief Financial Officer, Dennis Klahn.

Dennis?.

Thank you, Satya, and welcome, everyone. I will open today's call with a recap of the fiscal second quarter 2020 financial results. Richard will then provide an update on the business. Afterwards, we'll open the call for questions.

Revenues for the second quarter of fiscal 2020 were $8.3 million compared with $10.2 million in the second fiscal quarter of 2019. The COVID-19 outbreak partially impacted the acceptance testing and delivery of 2 orders with a total value of approximately $1.6 million.

Virtual acceptance testing and partial deliveries were completed in April, with the balance scheduled to ship this quarter. Gross profit was $4.3 million or 48.4% of revenue.

The decrease in gross profit margin compared to last year was driven by $77,000 of additional engineering charges resulting from the use of a more precise process to charge engineering expenses to cost of sales.

Excluding this additional cost, gross profit as a percentage of sales this quarter would have been 49.4% compared to 50.9% in the prior year. And for first 6 months of the fiscal year, gross profit would have been 50.9% compared to 50.5% for the same prior year period.

Operating expenses in the fiscal second quarter of 2020 were $3.7 million, essentially flat compared to the same period last year. Selling and general administrative expenses increased this year as we added employees and increased sales and marketing activities.

Research and development expense decreased compared to the same period last year as hardware development cost decreased and some costs were charged to cost of sales, offset by continued increases in software development.

We generated net income of $302,000 or $0.01 per diluted share in the fiscal second quarter compared with net income of $1.2 million or $0.04 per diluted share in the same quarter last year. Cash used in operating activities in the quarter was $345,000.

This is largely due to increased inventory at the end of the quarter, offset by net income and noncash charges. And last year's similar quarter, operations provided $4.2 million. Our balance sheet remains strong. Cash and cash equivalents at March 31, 2020, were $16.4 million compared to $18.8 million at September 30, 2019.

The $2.4 million decrease in cash and cash equivalents was due to the cash used in operating activities in the year-to-date. Working capital increased by $0.7 million to $25.5 million at March 31, 2020, compared to $24.8 million at September 30, 2019. The increase was primarily the result of net income generated this year.

During this year's second fiscal quarter, we used $400,000 to repurchase 156,000 shares of company stock. Last year, the Board authorized a $5 million repurchase program through December 31, 2020, of which $4.1 million is still available. With that, I would like to turn the call over to Richard..

location-based SMS, cell broadcast, mobile push notifications, social media, e-mail, TV, radio, digital displays and Genasys acoustic arrays. This platform works anywhere in the world on dedicated in-country and in-region clouds.

Reliable, redundant and resilient, our platform ensures that critical communications are delivered to help keep people informed and safe during this and future crises. Since 2013, Australia has been using the Genasys National Emergency Warning System, or NEWS, to deliver emergency alerts and life-saving information to at-risk populations.

Working with 2 large telecom providers to flawlessly deliver more than 150 million SMS emergency notifications to date puts Genasys in a very good position to expand the use of NEWS in Australia. We have submitted proposals to all 3 telecom providers for Australia's national emergency notification delivery service tender.

Award decisions from all 3 providers are expected this quarter. Because of our experience and success in Australia, NEWS is also well positioned to compete for and win European Electronic Communication Code Directive awards.

The directive mandates that by June of 2022, every EU member must implement a public warning system that can send emergency alerts to mobile phones of residents and visitors in case of disaster or other critical events.

The system must include geo-targeted emergency communication and be able to notify residents and tourists of emergencies without having to opt in. Genasys NEWS fully complies with the EU mandate by providing robust location-based SMS systems deployed directly on mobile carrier networks.

In the second half of the fiscal year, we expect several RFPs for the Genasys software services from the European Union member nation. The powerful geolocation capability of NEWS enables emergency management officials to send geo-specific notifications to people in harm's way and monitor their progress during the mandatory evacuations.

While the pandemic efforts on our business and supply chain are uncertain, the strength of our balance sheet, bookings, backlog and a growing pipeline are providing the company with the resources and the flexibility to grow our business, expand our staff and meet the increasing demand of our critical communications systems and solutions.

We continue to actively pursue synergistic M&A opportunities that have the potential to expand our business and create additional shareholder value. Our systems and solutions are proving to be essential for a world experiencing exponential safety threats.

With our strong balance sheet and growing backlog and business pipeline, Genasys is on track for record revenues this fiscal year and well positioned for future revenue growth. With that, I'll turn it back to the operator for Q&A..

[Operator Instructions]. And gentlemen, our first question today will come from the line of Rick Neaton at Rivershore..

How do you see these new orders to help with coronavirus efforts by governments affecting your revenue stream in fiscal 2020? Do you feel that this is accretive? Or do you feel that this may offset some bumpiness?.

No. I think it'll be accretive. The bumping, as you referenced, Rick, is one of timing. The DLA, for example, here in the United States, we probably have $2-plus million pent-up in a process that usually takes 2 weeks, and now it's taking 4 to 8 weeks. So I do believe it will be accretive. And I see the slowdown slowly getting back to normal..

Okay.

What - how - can you give some examples of how your software can assist in antivirus efforts that are being planned by potential customers?.

Well, the new software, Rick, would enable the emergency management people to see where people are congregating. And in an area - in a time when social distancing is necessary, it would give the emergency management the information to know where that rule may not be being followed..

Okay.

So that would be with cell phone data?.

Yes..

Okay. In terms of your visibility into the second half of this year, you seem to have pretty good visibility into your fiscal year.

Do you have any - are you starting to see any visibility into the first quarter of your next fiscal year, which is the fourth quarter of this calendar year?.

We're intently focused on this fiscal year at this time. The - our backlog is forecasted to generate revenue based on particular lead times, and we're still inside those lead times for our fiscal '20. There are some orders like our Indian maintenance thing. We booked about a $4,750,000 order last year, and that actually delivers over a sort of....

Five year period..

Five year period. So there are cases, Rick, that we're beyond the normal lead time, but it's what the - it supports the customer schedule..

And are you expecting your military orders to be received this fiscal quarter?.

Yes..

Next, we'll hear from the line of Ed Woo at Ascendiant Capital..

Congratulations on the quarter. My question is, I know you haven't really had much of an impact with the coronavirus.

But as we start seeing massive fiscal problems with various governments due to the shutdown, do you see possibly that orders that may be curtailed further out?.

Not now, Ed. I mean our biggest customer, of course, is the U.S. Military. They budget on an annual basis. The FY '21 budget's in process. And although it still is not supposed to be turned into law until October 1 of this year, it is tracking to come close to that date. There's still a long time between now and then, so things could get derailed.

But it's an election year, and the budget that's running through the halls of Congress now is about the same level as it was this current fiscal year. So that's all very positive for us..

Great. And then you did mention that you guys were continuing to look at M&A opportunities. You guys have a very strong cash balance sheet. And obviously, there's been a lot of volatility in valuations recently.

Have you seen an increase in opportunities, particularly possibly with companies that may have weaker balance sheets?.

We've seen an increase in possible companies to buy, yes..

All right.

And have you seen valuations pull back at all yet?.

I think it's too soon at the - I think valuations will change. I mean there's always a spike in initial reaction, and then it dampens out. But I think as we come out of this, I think valuations will put more emphasis on balance sheet than it did before..

Next, we'll take a question from UBS and the line of Myles Wittenstein..

You mentioned that people working overtime.

Are you - is your capacity constrained? And has that put a limit on actual growth?.

No. We have a very large facility here so we have capacity. And we only work 1 shift. So we could effectively double the capacity by putting a second shift on. The current overtime is being utilized to address very specific revenue for our Q3..

Okay. And what would it take to see a breakout in terms of revenues? I mean we see, and have for many, many quarters now, modest growth.

What would it take to break out given the fact that you are in a leading technological position at a time when it seems the need is definitely there around the world?.

Revenue has grown from $16 million 3 fiscal years ago to 36.5% last year with record bookings of 46.5%. And I've said now on 3 occasions, I think, that I expect our revenues for FY '20 to be yet again a record for the company. So that pace is - on a CAGR basis is 35% or 36%, which is pretty good..

Is it fair to say that you're positioned to continue that kind of growth?.

Yes, for the foreseeable future. Notwithstanding - there is a little uncertainty because of this whole corona thing, but fundamentally, I agree. Yes..

[Operator Instructions]. Next, we'll hear from William Bremer at Vanquish Capital..

First question.

Of your product line, has any potential inquiries across your products surprised you in terms of demand or potential or bidding activity?.

I don't think surprised me is the right characterization. We have a pretty good pulse on what's going on in the marketplace, be it in emergency software, for national applications or for community applications or for enterprise applications.

Hardware typically has a long sales cycle, so we have pretty good visibility into where growth or contraction might take place and with a fair amount of lead time..

Times have definitely changed, and you guys are definitely in the sweet spot, for sure. Given the pockets of unrest that we're starting to see, not just domestically but in certain parts of the world globally with some protests and riots, are you guys seeing some type of maybe - because you did a good job of explaining the EU opportunity.

Are you starting to see some maybe local law enforcement agencies starting to maybe bid a little bit or inquire about your services because of these potential unrests?.

Yes. As I said in my prepared remarks, we've received orders, international orders, albeit small, during this corona outbreak from Germany, France, Belgium, Spain, Greece and the Czech Republic and Colombia. In all cases, they're buying 1Zs and 2Zs for specific notification applications.

But I think getting their hands on hardware and using it will beget additional demand from those countries..

And then lastly, I see inventory picked up here a little bit.

Any issue in terms of raw materials, given this sort of halt or slightly deferred business that we're having right now for your products?.

Two answers to that. A, the inventory grew as a consequence of the $1.6 million that Dennis mentioned. For our supply chain, we've queried - all of our suppliers, they have our current demand and forecasted demand. And at this time, everything fits.

So we're not aware of a material issue coming out of the corona '19 pandemic that we haven't been able to manage through yet. So, so far, so good..

Our next question will come from Lloyd Corton at Unique Investments [ph]..

A few questions. Being what's going on with the municipalities all over the country, I know you were working, I guess, with several potential counties, cities, et cetera.

How is it affecting us because their budgets are going to be - have a huge problem going forward?.

Well, it's affecting us because of their availability. So part of that revenue shortfall in Q2 was a community where their workforce was working one day a week. So having a factory acceptance test was impossible for those folks to come and do.

We've subsequently done it, but we did it virtually, and now the hardware will begin to be shipped and installed. So it's having that kind of an impact, Lloyd.

We have seen communities that are actually putting as part of the annual - it's where I'm looking for, the budgeting process, putting up potential changes in law that mandate these kind of systems. So we'll - I expect that to continue..

That would be nice. It's been quite a while since - I don't know what the last installation was in Newport or whatever. Why should....

Well, it hasn't been a while. We just finished Newport.

I think it was last month, wasn't it?.

I think so..

We're ongoing with Laguna Beach, and that's a big one. And that will take us probably a couple of months.

What's that?.

Maybe the announcement was several months ago..

It could have been. Yes..

And I was hoping that we'd be - a lot more municipalities would be running towards you for the same product..

There are some of those municipalities lined up..

Okay. Good. Another thing.

5G, does that affect us positively or negatively?.

Sure. In a favorable way, I'd say. I mean the - as I mentioned, regarding Australia, one of the requirements that has necessitated the 3 carriers to redo their network and therefore, require new emergency software includes, in some cases, 3G, 4G and 5G..

Okay. And as far as Europe is concerned, I mean, I'm excited about the potential. I hope you get some wins.

It's being done by country rather than the EU as a whole?.

That's correct. Country by country..

And how do you - how optimistic are you as from what you're hearing, what you're seeing?.

I am quite optimistic. If you look at the world market for National Emergency Warning Systems, Australia is probably the biggest one. That, as I mentioned, we should - we expect award announcements there. And I think from there, it'll hopefully put us in a very good position in the marketplace to go after the EU potentials..

[Operator Instructions]. Next, we'll hear from David Lipke at Summit Financial [ph]..

Yes. Thank you, and I need to say I'm a registered representative, not an analyst. Just a couple of numbers in your prepared remarks I think I missed.

Did you give a number for bookings for the quarter?.

I did. They were $4.2 million..

Okay. And also on the stock buyback, I caught the number, 156,000 shares.

What was the dollar amount?.

It was 156,000 shares, and the dollar amount was $400,000..

$400,000 divided by 156,000, $2.56 a share. Good job, guys. That's all I have..

And Satya and Richard and Dennis, at this time, we have no further questions from our audience.

Would you like to give any closing remarks before I close out the call?.

We regularly discuss our business at investor events during the year. We invite you to join us for these events. Thank you for participating in today's call. We look forward to speaking with you again in a few months when we report fiscal third quarter results..

Gentlemen, thank you. Ladies and gentlemen, this does conclude the Genasys Fiscal Second Quarter 2020 Financial Results Conference Call. We thank you all for your participation. You may now disconnect your lines. Have a great day..