Good day, ladies and gentlemen and welcome to the Genasys Incorporated Fiscal Second Quarter 2021 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Satya Chillara. Sir, the floor is yours..

Thank you, Kat. Good afternoon, everyone. Welcome to Genasys’ fiscal second quarter 2021 financial results conference call. I am 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 be making forward-looking statements. Other than the 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 forecasts for future performance.

These forward-looking statements are subject to a number of risks and uncertainties, including without limitation the business impact of epidemics or pandemics and other risks and uncertainties, many of which involve factors or circumstances that are beyond 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, 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 of 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 is my pleasure to turn the floor over to Genasys’ CFO Dennis Klahn.

Dennis?.

Thank you, Satya and welcome everyone. I will open today’s call with the recap of the fiscal second quarter 2021 financial results. Richard will then provide an update on the business. Afterwards, we will open the call for questions. Revenues for the second quarter of fiscal 2021 were $11.3 million, up 37% from the prior year quarter.

As compared to the same prior year period, LRAD HD revenue was $9.8 million, up 34%, integrated mass notification systems revenue was $826,000, up 45%, and software revenue was $678,000, up 64%. The increase in software revenue was primarily from Professional Services, a new software contract.

Gross profit margin was 47.2% compared with 48.5% in the second quarter of fiscal 2020. Gross profit as a percentage of revenue was lower in the fiscal 2021 second quarter due to a 56% increase in engineering personnel, primarily software-related.

Higher software expenses were due primarily to the recent addition of our Genasys Communications Canada subsidiary and additional employees to support the Australia, European Union and enterprise software initiatives. Operating expenses were $4.8 million, up from $3.7 million in the same period a year ago.

The increase was largely due to a 67% increase in sales and marketing personnel over the prior year to support future revenue growth opportunities, including opening sales offices in Singapore and the United Arab Emirates. Net income for the quarter was $0.3 million or $0.01 per share.

Net income per share was unchanged on the fiscal 2020 second quarter. Cash provided by operating activities for the year-to-date was $363,000 due to ordinary course of business, non-cash charges, offset by an increase in inventory and the year-to-date net loss. Our balance sheet remains strong.

Cash, cash equivalents and marketable securities totaled $26.4 million on March 31, 2021 compared with $31.4 million on September 30, 2020. Working capital totaled $26.5 million on March 31, 2021 compared with $29.8 million on September 30, 2020.

The decrease in working capital was primarily due to cash used to complete the purchase of Amika Mobile assets in the first quarter of fiscal 2021. With that, I would like to turn the call over to Richard..

Thank you, Dennis and good afternoon to everybody on the call. Strong performance from our software integrated mass notification and LRAD acoustic hailing device business segments and sales increases in all our major geographic business areas drove revenue 13% higher in the first 6 months over the same period last year.

Fiscal first half bookings were $15.6 million, an increase of 83% from the first 6 months of fiscal 2020. Backlog at March 31, 2021 was $13.8 million, down from $16 million a year earlier. In April, we received nearly $20 million in new orders with more expected this month and in June.

Today’s bookings and backlog are substantially higher than last year at this time and have the company well positioned for record fiscal year bookings, backlog and revenue.

We continue to invest in critical communications technologies and key personnel to grow our emergency management software, integrated mass notification systems and LRAD acoustic hailing devices, market applications and business opportunities.

In addition to our software development, engineering support and sales and marketing teams throughout – through hiring and efforts of the Genasys Communications Canada and Genasys Madrid, have enabled us to meet the surge of U.S. and international demand for Genasys life saving systems and solutions.

With offices now open in the United Arab Emirates and Singapore, staff with business development professionals with extensive in-region sales experience, we expect revenue growth in all our major geographic business areas this fiscal year.

Genasys NEWS, or National Emergency Warning System, continues to deliver location-based SMS emergency alerts in Australia to help keep people safe. In March, extreme rainfall in eastern Australia led to widespread flooding for several days, affecting many of the country’s most populated areas.

NEWS was used to warn and provide safety and evacuation information to millions of Australians. The use of NEWS to send more than 180 million mobile alerts in Australia over the last 8 years has provided Genasys, the extensive knowledge and experience to successfully compete for the European Union Public Warning Systems awards.

Our business development and engineering teams in Europe are very active responding to and participating in RFPs from numerous EU member states. Genasys NEWS fulfills the EU requirement that every EU country implement a national public warning system that sends emergency alerts to mobile phones of residents and visitors.

Multi-channel, flexible and customizable, Genasys NEWS features industry leading location-based SMS and advanced cell broadcast technology, all engineered, built and supported by our team in Europe.

The flexibility and competitive feature set of our Genasys Emergency Management Software platform were recognized last quarter with an opening contract from a global automobile manufacturer, a COVID-19 vaccination tracking project from the Government of Canada, and a recent foundational mass notification and emergency management service award from Riverside County, California.

The multi-year GEM Enterprise contract from the worldwide automobile manufacturer expedites the delivery of critical event notification and life saving alerts to more than 25,000 employees and contractors working at 24 facilities in Canada and 12 U.S. states.

Opportunities to expand GEM Enterprise to that automakers’ facilities outside North America are being contemplated. Vaccination tracking is becoming important capability to fully reopen many government facilities.

The Canadian government vaccination tracking project leverages GEM’s proprietary automated events, situational awareness and geo-fencing features. The project includes two-way alerts and responses over e-mail, SMS, callouts, voice-over-IP, pop-ups and mobile applications.

Vaccination tracking data is anonymized to strictly safeguard private information. Additional GEM Enterprise and government recurring revenue contracts are anticipated this fiscal year.

Last month selection of the GEM software platform by Riverside County to power multi-channel public safety warnings to residents before, during and after crisis situation is a major stepping stone in our California business strategy.

With wildfire season and the accompanying power shut-offs now extending through much of the year, the delivery of timely emergency alerts and life-saving notifications will help keep people safe.

As the only provider of a public safety platform that unifies emergency management software, sensor inputs, multi-channel alerting solutions and industry leading voice broadcast speaker arrays that feature solar power, satellite conductivity and battery backup, we anticipate increasing GEM sales and growth in California and other major geographic business areas.

The rollout of the COVID-19 vaccination campaigns in the U.S. and throughout the world is providing optimism that the challenges and disruptions around the world will soon be resolved.

Genasys team members in the United States are working from the office and our manufacturing facility remains fully operational, fulfilling orders for all of our vital life saving systems. Per the outlook provided on the last two calls, we expect second half fiscal year revenues will be much stronger than the first half.

Additionally, we anticipate the combination of key business initiatives to further augment the company’s technology and product offerings, extend Genasys market reach and maximize shareholder value. On the strength of the recently announced U.S.

Army and Riverside County, California awards as well as others expected, GEM, IMNS and AHD orders, Genasys is on track for record fiscal year bookings, backlog and revenue and well-positioned for long-term business growth. With that, I will turn it back over to the operator for Q&A..

Thank you. And our first comes from Mike Latimore from Northland..

Yes, thank you. Thank you. Hey, great quarter there. Outlook sounds strong.

Just on the – I guess in terms of the sales group, can you just kind of update us on how many people you have and do you expect to hire more sales people by year end?.

We do expect to hire more sales people by year end. We have hired, Mike, sales professionals in Europe and Asia-Pacific and Middle East, the United States and Canada. And we have been doing that principally all this fiscal year. I think the pace of hiring will slow, but it will continue this quarter..

Great. And then you said the year is sort of off to a strong start here in the second half. I guess, can you talk a little bit about sort of the software side of the business.

Is that also off to a strong start and is that more enterprise or EU kind of business?.

I will answer both markets. The EU is quite active right now in terms of RFPs and RFIs and demonstrations. I expect contract awards to begin to be announced this summer for the EU. So, it’s very busy over there for us right now. In terms of enterprise, we have never been busier. We are doing demonstrations on a daily basis answering RFPs.

I think the win in Riverside County and the win with the automobile manufacturer certainly pointed to that our strategy is in fact working. It’s still – it was a validation..

Great, thanks.

And then on the software business that you are getting now or this is in the pipeline, is that going to take the form of a recurring SaaS business or is it licensed software just kind of a rough sense of the mix will be great?.

The National Emergency Warning System software, you can you can model that it will be 50% of professional services and 50% SaaS model. The enterprise suite will be 99%. SaaS..

Okay, great. Alright, excellent. Thanks a lot..

You are welcome..

Thank you, Mike. Next question, please..

And the next question comes from Martin Yang from Oppenheimer. Go ahead, Martin..

Hi, good afternoon. Thank you for taking my questions.

First, on the Riverside awards, can you maybe talk about the competitive dynamics for that wing and if there is any implications for the Riverside awards to other regions for California?.

Sure. There was an incumbent and there was six competitive offerings to provide this service and Genasys was selected. So we displaced the incumbent in Riverside and beat out the other four. In the case of the automobile manufacturer, we were selected to compete and we were only competing against the competitor.

And we were successful at displacing the incumbent competitor. So, I think that as I said a moment ago, it’s a validation.

The first wins, particularly those as large as the automobile manufacturer and Riverside County provides reference sets to other counties and other large manufacturers in the world that we will leverage in our business development activities..

Thanks.

Next question is how do you feel about your current software engineering resources? Do you foresee maybe acceleration in investments being software side of the business given the momentum you are seeing?.

Yes. We have about tripled software development, human resources in the last 2 years, not for years. We have continued to hire through the pandemic and we are still hiring in grid now. So I think that’s going to continue..

And follow-up on that, do you expect that to extend well into the next fiscal year where maybe there are some lot more revenues coming up?.

Yes, it will extend to the next fiscal year and beyond..

Got it. Thanks. My final question is more longer term. I think in the past, you sort of talk about the really a long-term mix in your business where software would take a much higher share.

And with that in mind, how would your margin profiles change versus where you are today?.

It will go up. So, I have said in the past, Martin, that if you look out 3 to 5 years or so we will see – we will continue to see that we expect to continue to see substantial top line growth and we expect to see a mix of more 50:50 from our hardware and software. The hardware margin for Genasys is very healthy from a model perspective about 50%.

The software margins will be higher than that. So, I think the aggregate will certainly be higher..

Thanks. I will jump back into queue..

Thank you, Martin. Next question, please..

Certainly. And our next question comes from Ed Woo from Ascendiant Capital. Go ahead, Ed..

Yes, congratulations on the quarter as these are going back to normal, you guys are getting an acceleration in your business.

How important is it for us to look at M&A opportunities and do you see any good opportunities or valuations out there?.

Yes. So, as you know, Ed, we are normally looking at ways to increase the portfolio of Genasys inorganically through acquisition. And we closed on Genasys Communications Canada in October and we are actively pursuing other opportunities as we speak..

Great. And then you mentioned a lot of strength in the U.S. business, what about in Asia? I know you guys all committed a lot of investments out there.

Are you seeing a lot of opportunities now?.

Yes. In the press release, you will see we have – let’s see if I can find it real quick. There it is. So, if you look at our sales as compared to the same quarter last year. Revenues were up across all geographic areas and we believe we are going to continue to see that as we continue through the balance of this fiscal year and the next and beyond..

Great. Well, thanks for answering my question and good luck. Thank you..

Thank you..

Thank you, Ed. Next question, please..

Sure. Our next question comes from Rick Neaton from Rivershore Investments. Go ahead..

Good afternoon and thanks for taking my call today. I noticed when you broke out your revenue for the quarter you had about 9% non-hardware.

In your bookings, as you are looking forward, is that percentage of non-hardware revenue increasing as a percentage of your bookings and backlog?.

Sure. It is..

Do you have a target for fiscal ‘21 as to where – what percentage of revenue you want to get your software and emergency management revenues too as a percentage of total?.

We do. We characterize the growth in a more longer term outlooks versus the quarter or the year and to repeat what I said a moment ago, it’s – we expect to be at 50-50 hardware software kind of business in the next several years and as I have said before eclipsing $100 million..

Okay.

And with most of your business coming in North America in the second half of your fiscal year, do you see any particular areas of the rest of the world where you anticipate being stronger than others? And if you – and in early fiscal ‘22, do you see any different geographic areas coming on more strongly?.

Yes. I mean, there is a big – as you know a big initiative of outfitting each country with a public warning system. And we have committed significant resources to capture that. And again, things – our pipeline looks very good. Geographically, we are up from a revenue perspective up in every region of the world in our second half.

And despite the fact that a fair amount of the world is still having large impacts from COVID, but that is changing and the pipeline is looking robust and we are optimistic for the year and the future..

Okay. Thanks, Richard. Appreciate your time today..

You are welcome..

Thanks, Rick. Next question, please..

Sure. Our next question comes from Myles Winston [ph] from UBS. Go ahead, Myles..

Hi, Richard. How are you? I tuned in late. So you may have already responded to this. Terrific increase in revenues.

I didn’t see increase in the bottom line what impact of that?.

As was mentioned since last year, our expense side is up, particularly in sales and marketing. And Myles we would describe this year as a year of transition and growth.

The transition is in support of the initiatives in the EU and in support of the enterprise initiatives here in North America and other regions of the world, including as I mentioned, the Middle East and the APAC region..

Okay, terrific job again and thanks a lot. Appreciate it..

Welcome. Thank you..

[Operator Instructions] And our next question comes from Lloyd Korten from Unique Investments. Go ahead..

Hello. Nice revenue this. I was really happy to see that.

The – how big is the potential European business on their rollout?.

Lloyd, I have stayed away from commenting on that only in as much as it could lead to some discussion or triangulation on pricing..

No.

I mean, the – I mean I have no idea what these – what they pay for these systems, etcetera, but is it total or mean, is it $1 billion or is it $100 million? If the – I am not talking that you will win at all, but you might get a piece of it or a fraction or percentage, how big is that business generally? Is that a public information?.

You can find it. You can find people’s opinion in publicly available data and I’d ask you, Lloyd, to look there. I am going to shy away from that question..

Okay.

Also, any projections on profits going forward?.

Yes, we have said, Lloyd since we began this fiscal year that we will be – we expect to be profitable and we expect to be cash flow positive yet again this year. But as I mentioned to the prior caller, our expenses are up. It was planned. We are meeting our plan and we are meeting our forecast.

So, our operating income is going to be less than it was last year and the cash flow will likely be less than it was last year, but still both very positive..

Okay.

Also, the Navy, are they retrofitting the ships with more modern LRADs or is that something that’s going to be coming up?.

No, they aren’t. We have a Navy IDIQ to begin to replace that which has been in the fleet for more than a decade..

How much is what kind of dollars are there? Has that been published?.

I don’t think so. But I mean, just put a round number on it, Lloyd, it’s probably in the order of $1 million a year..

Okay, alright. Well, thank you. Good luck next 6 months..

Thank you..

At this time, I would like to turn it back to management for any closing remarks. Thank you..

We regularly discuss our business and industry 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 third quarter results..

Thank you. This does conclude today’s conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful day..