Good day ladies and gentlemen, and welcome to the Genasys Inc.'s Fiscal Year 2020 Conference Call. All lines have been placed on listen-only mode and the floor will be open for your questions and comments following the presentation. At this time, it is my pleasure to turn the floor over to your host Mr. Satya Chillara. Sir, the floor is yours..

Thank you, Jess. Good afternoon everyone, and welcome to Genasys Fiscal Year 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 statements of historical facts, statements made during this call that are forward-looking statements are based on our current expectations.

During this call, we may discuss the 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 risk 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's 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, 2020.

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 such as bookings and backlog, which we believe provide helpful information to investors with respect to evaluating company's performance.

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 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 fourth quarter and fiscal 2020 financial results. Richard will then provide an update on the business. Afterward, we will open the call for questions.

Revenues for the fourth quarter of fiscal 2020 were record $14 million, the highest revenue for any fourth quarter in the company's history. This compares with revenues of $7.7 million in the fourth fiscal quarter of 2019.

The 80% increase in revenues was primarily due to a higher backlog entering the fourth quarter of fiscal 2020 compared to the prior year period. Gross profit was $7.6 million or 54% of revenue. The increase in gross profit margin compared to last year was largely due to the additional leverage of fixed overhead costs gained on the higher revenues.

Operating expenses in fiscal Q4 were $4.5 million, an increase from $3.9 million in the same period a year ago. The increase was primarily due to higher selling, general and administrative expenses to support our higher revenue and future revenue growth opportunities.

In the quarter ended September 30, 2020, we had a non-cash income tax benefit of $6.5 million, which resulted from the $7.1 million release of a portion of the valuation allowance against deferred tax assets. The non-cash benefit and higher revenue generated net income of $9.5 million or $0.27 per diluted share in the fiscal fourth quarter.

This compares with a net loss of $100,000 or $0.00 per diluted share in the same quarter last year. Cash, generated from operating activities in the quarter was $3.2 million. Revenues for fiscal year 2020 were a record $43 million. This compares with revenues of $37 million in fiscal 2019.

The 16% increase in revenues was primarily due to higher backlog entering fiscal 2020 compared to the prior year. Gross profit was $22.6 million, or 52.6% of revenue. The increase in gross profit margin compared to last year was largely due to the additional leverage of fixed overhead cost gained on higher revenues.

Operating expenses in fiscal 2020 were $16.6 million, an 8% increase from the same period a year ago. The increase is primarily due to higher selling, general, and administrative expenses to support our higher revenue and future revenue growth opportunities.

We had a non-cash income tax benefit of $5.7 million during the fiscal year ended September 30, 2020, which resulted from the $7.1 million release of a portion of the valuation allowance against deferred tax assets. The non-cash benefit and higher revenue generated net income of $11.9 million or $0.35 per diluted share in fiscal 2020.

This compares with net income of $2.8 million or $0.08 per diluted share in fiscal 2019. Our balance sheet remains strong. Cash and cash equivalents total $23.3 million on September 30, 2020, up from $18.8 million at the end of the prior fiscal year.

The $4.5 million increase in cash and cash equivalents from last year was due to cash provided by operating activities. Working capital increased by $5 million to $29.8 million at September 30, 2020 compared with 24.8 million at the end of the prior fiscal year.

The increase in working capital was primarily due to the net income from operations and cash received from the exercise of stock options in fiscal year 2020. With that, I would like to turn the call over to Richard..

Thank you, Dennis and good afternoon to everybody on the call. Genasys had a great FY 2020. Record fiscal fourth quarter and second half revenues powered the company to meet the fiscal year 2020 pre-pandemic outlook we provided on our December 2019 conference call.

In spite of the unprecedented societal and business conditions in the second half of the fiscal year, our Genasys team members in San Diego and around the world did a tremendous job at helping the company achieve record fiscal year revenues and profits.

California and Spain's stringent lockdowns notwithstanding, as an essential provider of critical communication systems and solutions, Genasys stayed open and working throughout fiscal 2020, and we plan to do so in fiscal 2021.

Our supply chain is intact and providing the necessary resources to build our industry leading hardware systems and software solutions for a rapidly growing customer base. As COVID-19 quickly spread throughout the world, most governments and communities responded with shutdowns followed by partial re-openings and workaround measures.

Although our business pipeline is grown during the pandemic, these headwinds impacted our fiscal 2020 bookings, which were $36 million. As anticipated, government orders – anticipated government orders were pushed out with many governments and communities adapting to the new normal.

We expect to return to bookings growth, as they move ahead with planned emergency warning initiatives. As evidence, we expect record fiscal 2021 first quarter bookings that will put us on track for a record fiscal 2021 revenues.

We anticipate revenues in fiscal 2021 will follow the same trend as fiscal 2020 with revenues weighed more heavily to the second half of the fiscal year. We finished fiscal 2020 with multi-year contract awards for mobile network carriers in Australia to use the unique location based SMS technology of our National Emergency Warning Systems.

Deployed directly on mobile network carriers across SMS and Cell Broadcast channels our National Emergency Warning Systems or NEWS enables emergency communication officials to send critical notifications and information to anywhere, anytime with no opt-in required.

The powerful geolocation capability of NEWS also provides authorities confirmation whether each mobile phone user received a potential life saving alerts and information. Our Australia emergency alerting awards are strategically important to Genasys because of the June 2022 European Union National Public Warning System Directive.

The EU Article 110 Directive mandates that every EU Member State implement a public warning system that can send emergency alerts to the mobile phones of residents and visitors in case of disasters or other critical events.

The system must include geo-targeted emergency communication, and be able to notify residents and visitors of emergencies without having to opt-in.

There are between two and five mobile carriers per each EU Member State, all of which will be required to deploy a software platform similar to NEWS that features SMS, cell broadcast, or a combination of both to comply with the mandate.

Having delivered over 150 million emergency SMS alerts to the mobile phones of Australians in parallel since 2013, provides Genasys significant experience and competitive advantages as we aggressively compete for awards in the EU, and in other countries actively seeking to implement emergency warning systems.

Based on the June 2022 deadline and previous guidance from the EU, we anticipate the member states would begin announcing awards in mid-calendar 2021. While we expect the EU awards will push towards the end of calendar 2021, activities throughout the EU continues at a rapid pace.

We recently conducted a demonstration for a large EU country and the country's mobile telecom providers. The demonstration resulted in a pilot program expected to go live in January. The pilot program will include location based SMS, cell broadcast, and speaker integration, all part of the NEWS platform.

Despite the pandemic, we continue to have ongoing dialogue with EU mobile carriers and government officials and received RFIs, Requests for Information from many EU Member States and other countries. We started fiscal 2021 by closing the acquisition of enterprise software provider, Amika Mobile now known as Genasys Communications Canada.

The integration of our businesses and enterprise software solutions is going well and a pipeline of enterprise business opportunities has increased significantly. The acquisition addresses important areas of our business and revenue growth plan.

Genasys Canada's enterprise software is being utilized across a diverse customer base, including professional sports teams, stadiums, Canadian and U.S. Government agencies and large North American companies. We expect this customer base to expand throughout fiscal year 2021.

The enterprise software market in the United States and Canada has grown significantly over the last five years.

Because the installed base is relatively new and software licenses are typically sold in a one, three, or five year term, Genasys is in a strong position to now compete for and win first time contracts and replace license renewals with our enterprise solution.

As we look into fiscal 2021, with more employees working from home, and multiple COVID-19 vaccines expected to be approved and distributed soon, business and government agencies are engaged in post-pandemic planning, including how to better ensure workers safety and productivity.

Even though our acquisition just closed a few months ago, demand for Enterprise Solutions has spurred a dramatic increase in Genasys enterprise software interest and RFPs. We are pursuing additional acquisitions as part of our strategy to expand the company's business while continuing to grow revenues, all while generating positive operating cash.

While we have not utilized our 110 million S3 shelf registration today, we believe it offers the company the greatest flexibility in attracting and closing acquisitions that could substantially enhance our business and maximize shareholder value.

In fiscal 2021, we're expanding our domestic and international sales staff to serve the growing demand for our unified critical communication platform. GEM enterprise software and LRAD systems.

With the political unrest, COVID-19, future pandemics and other natural and manmade disasters continuing to increase throughout the world, Genasys systems and solutions are proving to be essential to help keep people safe.

Augmented by the recent acquisition and ongoing integration of Genasys Communication Canada and our NEWS contract awards in Australia, we expect software bookings to grow significantly in fiscal 2021. Combined with our growing defense, public safety, and law enforcement, LRAD business, Genasys is well-positioned for another year of higher revenues.

With that, I'll turn it back to the operator for Q&A..

Thank you. [Operator Instructions] Our first question comes from Mike Latimore at Northland Capital..

Great, thanks. Congratulations on the great year and quarter.

You know, you mentioned you're hiring more enterprise sales people, you know, what's the timeframe for that? And then, how long do you expect – how long do you expect the take for them to become sort of fully productive?.

We began a hiring process, Mike, almost immediately after we completed the acquisition of Amika Mobile on October 2. So, we have hired two full time sales people. We have outstanding offers to two additional, and are looking to put six more on, I expect that they'll all be on between probably by our second – end of our second quarter..

And then for them to ramp up the full productivity, what are you assuming there?.

It depends on the individual and the geography. But as you know, it's not going to be immediate, but I expect certainly by the third and fourth quarter that will ramp up fairly steeply..

Okay. Great.

And then you mentioned the [pilot] in Europe, are you the only one sort of doing a pilot in this specific country?.

I can only speak for Genasys and we're doing the pilot..

Okay.

And then just on the LRAD business, what's the visibility there in terms of another, you know kind of sizable order in fiscal 2021, what's kind of the visibility into that and timeline?.

Our bookings for 2021 are expected to be substantially higher than that which is in – we experienced in FY 2020. That's across the board in our integrated systems, our LRADs and our enterprise software solutions. In terms of visibility, it's quite good. The sales cycle for systems and programmed LRAD acquisitions is quite long.

So, we got good visibility into the pipeline that which is in our forecast as well..

Okay, great. Thanks very much..

You're welcome..

Thank you, Mike. Next call please..

We'll go next to Ed Woo at Ascendiant Capital..

Yeah. Also, congratulations on the quarter and the year.

Did I hear you correct that you said that there’s going to be record revenue in Q1 and record revenue for fiscal year?.

Not exactly. I said, I expect record bookings in fiscal Q1 of FY 2021. And I do expect yet again, record revenues for our fiscal 2021. From what I can see now Ed, that's all in the cards. Now, again, as I’ve cautioned in the past this pandemic casts a very long shadow, but what I see now I see continued revenue growth year-over-year..

All right, great. And then you know, obviously, you guys have done a very good job of growing revenue at a pretty healthy rate.

You guys move into your, you know, new offices last year, what are the opportunity for, you know, much more margin improvement, as you guys, you know, are able to grow revenue at such a high pace?.

While we did – I’ll let Dennis comment on that, but I think we’ve hit record gross margins in fourth quarter, but go ahead Dennis..

Yeah. In the fourth quarter we had 54% gross margin. For the total year is 52.6%. 54% is quite an improvement over – where we've been over the last couple of years. We've achieved a 54% over both – each of the last two quarters. So, obviously that – with the increased revenue that's been a big driver in that margin growth.

The software business, as you look down the road, you know, over the last couple years, it's – we've added to the software business, but it's not yet a significant part of the total company revenue. It's probably 5% or less of total company revenue.

And, but as that grows in as a percentage of the total revenue, you would expect that the margins would increase somewhat..

Right. And then the last question I have is, you know, you mentioned that you guys were still pursuing M&A opportunity. You know, congratulations on closing the Amika deal.

Are you pretty much fully integrated for Amika? And also, in terms of M&A deals, are you going to continue to look for smaller Genasys Amika type size deals or the – think you guys are potentially, you know, looking for a much bigger acquisition?.

The integration of Amika mobile with the Genasys Enterprise Solution is ongoing and we’ll continue over the next couple of quarters, Ed. In terms of acquisition candidates, we’re not particularly constrained in size, although the two we have bought have been of the smaller variety.

But no, it's not a particular focus on small versus large, its capabilities, and what the acquisition can help improve from a shareholder value perspective..

Great. Well, thank you for answering my questions. And I wish you guys good luck. Thank you..

Thank you..

We’ll go next to Ryan MacWilliams at Stephens..

Thanks for taking the questions and congrats on the results. Really nice to hear about the incremental demand you're seeing for emergency notification solutions as these corporates and municipalities are planning to go back to work.

Are there any particular used cases that they're asking Genasys about that you can solve? And do you think there's a difference between, if corporates or municipalities will move first to add yourself or solutions?.

I think Ryan, both whether it's a municipality, a government, or a business, it's all about giving the employees and the management confidence that if there's a fence occurring that could harm them that they get notified as quickly as possible and necessary actions are taken as quickly as possible. So, the used cases are just that.

It's about critical communications and getting – knowing where people are and if they might be in harm’s way and what action those people should be taking..

Perfect. And just on the public warning opportunity.

Would it make sense to acquire a cell broadcast provider to add maybe some country examples or existing country examples for cell broadcasts or maybe some additional cell broadcast capabilities? And then separately, do you think there's an opportunity for Genasys to sell its hardware solutions on top of your software capabilities to the European countries as a part of this public warning opportunity?.

The second question first, and the answer is yes. As I mentioned, the pilot we're doing includes both cell broadcasts, location based SMS, and acoustic device integration.

If your first question was, what – do we want to think about buying a cell company or what was it?.

Yeah, cell broadcast provider to add additional country examples for cell broadcasts or any capabilities..

At this time I say no to that. We have our own integrated platform that has cell broadcast and location based SMS. As you know, would likely work with, you know, a hardware provider that would provide all the horsepower necessary to run the software? And those are pretty available Ryan..

Yeah. You have the capabilities of your platform already.

Just to that point, do you think the country is going forward as a result of COVID will trend more towards [hybrid solutions] in Europe or is it really still on a case by case basis at this point?.

I think more and more looking at the hybrid solution. It was a mix of cell broadcast versus location based SMS. The attributes of the location based SMS and knowing where the phones are and how many phones, what might be in an area that they need to be notified of a pending emergency. That functionality is provided by the location based SMS.

It's not in the cell broadcast. So, knowing where the phones are, how many and how they're moving, I think has proven to be quite a versatile and valuable tool for emergency management people..

Perfect. Yeah, that's my understanding. There's not too many providers that can do both, but congrats on the quarter again. Thanks for taking the questions..

Thank you, Ryan..

[Operator Instructions] We'll go next to Rick Neaton at Rivershore Investments..

Thank you. Good afternoon, guys and congratulations on a record year.

First question was, last year you suggested that revenues would be allocated about 40% in the first half 60% in the second half, by your comments about how revenue growth will occur this year in fiscal 2021, is that how we should look at it?.

Yes..

Okay.

And looking at your higher OpEx in the fourth quarter of 4.5 million, is that going to be kind of a baseline going forward as you expand your sales force and integrated Amika?.

It’ll probably be a little bit higher than that. Amika has its own base. So, that's going to be accretive. In addition, as we've noted, we're looking to substantially increase our sales force worldwide. We're looking at hiring 10, just to support the enterprise software.

The Amika acquisition, plus we're looking to expand our worldwide sales force and to continue to support the EU initiative. So, I would expect to see that it will increase in 2021..

One last question.

How's the visibility on the – right now on the federal level military contracts and some of the government contracts looking forward into fiscal year 2021?.

It's still a bit murky. As you're well aware Rick, the country is still in the midst of a continuing resolution with no fiscal year 2021 budgets passed. The current CR expires Friday, the 11th of December. It's likely they'll pass a one-week extension to that.

From a perspective of Genasys, we're obviously very interested in the Defense Appropriations Bill. That bill has passed Congress, they’ve voted on it from the house side. Senate hasn't, but is expected to shortly.

There's a scenario that all 12 Appropriations Bill, as well as a COVID relief package will be put together in an [Omnibus] and submitted to the President next week. We shall see though. I mean, there's still a lot of things that have to happen. But it is – there’s general bipartisan support for the defense bill.

So there are, you know, political issues that always get in the way, but we've got a chance that this will make it certainly before the end of the calendar year..

Okay. So it's more of a timing issue.

You view it as more of a timing issue then of visibility, your actual performance issue at this point?.

Yes..

Okay. Thanks, guys. Appreciate you taking your time to answer my questions..

Alright. Thank you..

We’ll go next to Lloyd Korten at Unique Investments..

Hello, hi..

Hi there, Lloyd..

Hello. Yeah. Hi. Waited a long time for a quarter like this. Thank you and your whole team, really exciting. Thank you again. A couple there, you know, just on Australia, I know, we had one contract and this time we want two, but there was a third contract.

Is there any word on that?.

There's been no announcement on the third Australian carrier..

Oh, good. Okay. So we haven't lost that. We might get a hat-trick there.

Are you feeling any headwinds in the States because of the financial constrictions that they're all under right now?.

We certainly have in our fiscal year 2021. 2021 was filled with people not working and then partially working, and then figuring out how to work remotely. Tax revenues from most communities will be down across the country in the world. So, that will put some pressure on it, no doubt.

I will, however, say, Lloyd that in today's environment, whether it's the pandemic, whether it's terrorism, whether it's natural disasters, it's unlikely, in my opinion that a community or a government or a business is going to say, we're going to cancel our safety systems for our citizens our employees. That could happen.

But I think what's more likely than not that they will continue down the course..

I’m just more interested in new. You know, cities, states that have not implemented it yet, whether it's going to be a burden for them to spend that money that they don't have right now. That was my question..

It'll be a challenge..

Yeah. Anyway, listen, that was – everything else has been answered. And thank you again..

You're welcome. Thank you, Lloyd..

Next question, please..

We’ll go next to [Myles Wittenstein]. Your line is open. Sir, please go ahead..

Thank you. Hi, guys. How you doing? Three questions. First of all, can you comment on backlogs at this time? Number one. Number two….

Backlog going in at 2021 is down the difference of the bookings and the revenue. So, the bookings as I mentioned were 36 million and the revenue was 43. So, $7 million..

Okay, got it.

And the status of your stock buyback program?.

That expires at the end of this year. This year we purchased about $400,000 worth of stock in the second quarter that the board will be looking at that and we'll see what the future holds. .

Okay.

Finally, do you see any emerging competitor, single competitor that you're running up against? I don't know how price sensitive your sale is, but with a weaker dollar overseas is that going to be of any import to you?.

Well, we deal with the FX all around the world. In terms of competitors for the – the LRAD product, we have become the de facto standard. We don't frequently run into a competition here in the United States or outside the United States.

From an Enterprise Software Solution provider here in North America, there's a fair amount of competition with some very large companies, as well as some very small companies.

In terms of our integrated systems, like we're sold in Puerto Rico, and Laguna Beach, an integrated hardware software solution, I believe we’re the only ones that have that integrated solution. So, there will be competition, but it would have to be a consortium of companies that would compete against Genasys that has a single solution.

And in terms of the National Emergency Warning Systems like Australia, like the requirements in the European Union there will be competition for both the location based SMS and the cell broadcast, but I think the heritage of Genasys and its abilities to – they actually if you look back far enough, they were a pioneer in location based SMS services.

We have decade's worth of experience in that area. And I like our chances as we move into the EU..

I like your chances too. Thanks a lot guys. Nice quarter. Nice job..

Thank you..

And with no other questions holding, I'd like to turn the conference back to management for any additional or closing comments..

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 2021 first quarter results..

Ladies and gentlemen that will conclude today's call. We thank you for your participation. You may disconnect at this time and have a great day..