Good afternoon and welcome to Genasys Incorporated Fiscal First Quarter 2020 Financial Results Call. All lines have been placed in a listen-only mode and the floor will be opened for questions following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to Satya Chillara, Investor Relations for Genasys. Sir, the floor is yours.

Thank you, Christie. Good afternoon, everyone, and welcome to Genasys' fiscal first 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 our 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 risks and uncertainties and the actual results could differ materially from the views expressed today. 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 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 shift in the next 12 months. Finally, a replay of this call will be available in approximately four hours through the Investor Relations page on our website. At this time, it's my pleasure to turn over the floor to Genasys' Chief Financial Officer, Dennis Klahn. Dennis?

Thank you, Satya, and welcome everyone. I'll open today's call with a recap of the fiscal first quarter 2020 financial results. Richard will then provide an update on the business. Afterwards, we'll open the call for questions. Revenues for the first quarter of fiscal year 2020 were $8.8 million compared with $10.2 million in the first fiscal quarter of 2019. Gross profit was $4.6 million or 52.4% of revenue. The improvement over the 50% gross profit in the prior year quarter was due to more profitable product mix. Operating expenses in the fiscal first quarter of 2020 were $3.9 million, an increase of 3% compared to the same period in the prior year. This primarily reflects the company's increased level of investment in software development to support the previously discussed European Union and other public warning initiatives. We generated net income of $620,000 or $0.02 per diluted share in the fiscal first quarter, compared with net income of $1 million or $0.03 per diluted share in the same quarter last year. Cash used in operating activities in the quarter was $1.8 million. This represents an improvement of $3.3 million compared with the first quarter last year. The use of cash in the quarter was primarily due to higher accounts receivable and reduced liabilities, compared with balances at September 30, 2019. This was somewhat offset by the net income and non-cash charges recorded this quarter. Our balance sheet remains strong. Cash and cash equivalents at December 31, 2019, were $17.1 million, compared to $18.8 million at September 30, 2019. The $1.7 million decrease in cash and cash equivalents was mostly due to the cash used in operating activities in the quarter. Working capital increased by $1 million to $25.8 million at December 31, 2019 compared to $24.8 million at September 30, 2019. The increase was primarily the result of net income generated in the quarter. There were no repurchases of company stock in the quarter. Last year, the board authorized a $5 million repurchase program through December 31, 2020, of which $4.5 million is still available. With that, I would like to turn the call over to Richard.

Thank you, Dennis, and good afternoon to everybody on the call. First quarter revenues were in line with our expectations. As discussed on our last call, we anticipate -- we continue to anticipate, the second half revenues in fiscal year 2020 to be stronger than the first half revenues. Based on our fiscal first quarter bookings and backlog of $4.3 million and $23.3 million respectively, and a growing sales pipeline, we continue to expect revenue growth in fiscal year 2020. The European Union public warning system directive discussion on our last call raised questions for more information about our NEWS. NEWS is the acronym for the Genasys' National Emergency Warning System, NEWS software module. As many of you know, Australia has been using NEWS since 2013 to deliver emergency alerts and notifications to populations at risks from fires, excessive heat, flooding and other critical events. The European Union directive mandates that by June of 2022 every EU member country must implement a public warning system that can reach mobile phone users affected by major emergencies. The public warning system must include geo-targeted emergency communications. The system must also notify residents and tourists of emergencies without having to opt in. Each country in the EU is responsible for complying with directive and ensuring its citizens and visitors receive alerts, warnings and other critical information during crisis situations. The two best options to fulfill the directive are; first, location-based SMS, which sends text to cell phones within a specific area and enables two-way communication. And second, cell broadcast, a one-to-many system that sends messages to mobile devices and range of selected cell towers similar to the AMBER ALERT system. NEWS is deployed directly on mobile carrier networks across SMS and cell broadcast channels. The powerful geo-location capabilities of NEWS ensure emergency management…

[Operator Instructions] And our first question comes from Aman Gulani with B. Riley FBR.

Hey guys, thanks for taking my question. Just wanted to get a sense for Acoustic Hailing Device orders from the Army for 2020? What's your expectation there in terms of revenue?

I've said before Aman that's probable or maybe likely that the order for '20 will be slightly smaller than the order for 2019. 2019's order had some pent-up demand in it. But we'll see when the budgets actually get to the program office.

Got it. Thanks. And then just like looking at these orders from Laguna Beach and Newport Beach, what's like the timing for that? Like how long does that convert to revenue?

It depends I'd say from one quarter to two quarters installation can sometimes require permitting and access that takes some time to get.

Okay. Thanks. And then nice to see gross margin starting to normalize above 50%. What do you think is driving the improvement in the gross margin?

As Dennis mentioned it really is mix. We -- gross margin year-over-year has shown some improvement, but it's in the 0.1 points. Mix last -- if you recall last quarter I think Dennis help me we're at 49%?

48%.

48% something like that. So mix has most of it Aman.

Got it. Okay. And last question for me. How should we think about the cadence for R&D for 2020 relative to 2019?

Growth. We are putting in both the SG&A line and the R&D line. We expect more in '20 than we realized in 2019 in support of some of the initiatives I spoke about.

Right. Would you say it's largely focused on the software piece of the business or more hardware?

Software.

Okay. Thank you. I’ll pass it on.

Thank you, Aman Next caller please.

And our next question comes from Ed Woo with Ascendiant Capital. Please go ahead.

Yes. Thank you for taking my question. My question is you mentioned that there's going to be some request for proposals from the EU for their mandate. What do you think the timing would be for request for proposals to actually getting selected to actually potentially delivering a product?

Ed I don't know the answer to that question. I do expect a handful of proposals to come out of the EU in this fiscal year. How long they take to evaluate it? I just don't know. I mean there will be multiple proposals that have to be evaluated and this is the first time these countries are doing this. So it's more likely going to take longer than anybody would expect.

All right. That sounds good. And then my other question is I know you talked about gross margin improvement because of mix. Is it because of the greater amount of software that's being included with your product sales? And what do you think about the longer-term gross margin potential?

I think if you look at us today our revenues are still dominated by hardware. In FY 2020 we continued to grow our software development team as we have since we acquired Genasys Spain. That team has just about doubled in count in the last two years. We recently opened a second office in Spain to support pursuits in Australia, the EU and the United States and other regions of the world. I think you'll start to see substantive revenue growth in the software side more likely in our FY 2021 and 2020.

Great. And what is the long term --

You broke out Ed.

Ed?

And I believe as line may have dropped. We can move on to our next question if you'd like.

Sure.

Yes, please.

Our next question comes from Rick Neaton with Rivershore Investments. Please go ahead.

Thank you. Good afternoon, guys. Do your bookings and expectations for the revenue proportion or proration in 2020 include any assumed revenue from your EU business that you talked about getting RFPs out later this year?

No. No timing -- as I said a moment ago Rick the timing is such that I don't think we're going to see any substantive EU revenue in our fiscal year 2020 for this initiative.

Okay. So that's -- so you're not assuming any of that in your bookings or in your backlog numbers that you put out each quarter?

No.

Okay. Thanks. And how your NEWS system works? I'm just curious does that detect and identify the mobile phones without them turning on their location services?

The location services are not necessary.

Okay, so they just detect the phone off of some tower and then identify where it is and then determine if it should or should not receive a message is that right?

Yes.

Okay. And in your press release you said about a 40-60 split in your revenue recognition this year. And should we see some according shifts in your backlog numbers as -- in bookings numbers as we get into the second half of fiscal 2020?

Yes.

Thanks, guys. I appreciate it. I’ll -- that’s it. Thanks.

Thanks, Rick.

Next caller please.

And our next question comes from Scott Billeadeau with Walrus Partners. Please go ahead.

Great. Thanks for taking my questions. A couple of them are already asked just relating to the EU timing. I was going to say it's probably out there. Do you have -- just another question related to those. Do you have any idea of what the size of those maybe based on what you foresee potentially, what those implementations will be compared to contracts in the past?

Yes. We have our internal estimates on that Scott, but I'm not going to comment on those, it gets too close to pricing. So we'll leave it at that.

Yes. And I guess, yes, I mean the idea is you get RFPs out this year, you respond and then again you don't know how long these are going to take and how much political crap will be in them and all that kind of good stuff. So it's probably good not to expect anything this year or -- and what the conversion rates on there. How about domestic business? What's out there in terms of -- you talked about a large pipeline. More of the -- some of the things you've seen from Orange County and so forth or what -- any color you can give?

Yes. We expect revenue -- bookings growth in all geographic regions of the world. Some more than others, but it looks pretty solid Scott.

Okay. All right.

Thank you Scott.

And next we'll move on to David Luke [ph] with Summit Financial. Please go ahead.

Hello. Thanks for taking my call. After that big Army order $20 million plus, I think I remember you saying or writing that the order would be pretty much split up the revenues between all four quarters of 2020. Was that the case in quarter one, was that close to one-fourth of that order delivered?

Yes.

Okay. Thank you.

Thanks, David. Next caller please.

[Operator Instructions] And our next question comes from Jonathan -- I'm sorry -- from Lloyd Korten [ph], a private investor.

Hey, gentlemen. Hey Richard, how are you?

Good Lloyd. How are you?

I’m good. Thank you. I have a few questions. Maybe I was typing some notes while you were talking about it, but I'm certainly aware of the California initiative that you're doing. But do we have people going after different states here in this -- here in America before we talk about Europe?

Yes. From both a hardware and a software perspective, Lloyd.

I'm talking about the Genasys program, which includes them both for the various cities. How many people do we have that go after that kind of business?

The entire network in the U.S. and outside the U.S. is identifying the opportunities and then the opportunities usually will come back to San Diego, we'll put a team together to go prosecute the opportunity.

I guess what I'm asking, we have 50 states here. And you've got a foothold in California. In other words, do we go after all 50 states individually with different…

Yes eventually you have to, but not all 50 states are going to buy. So it will be in the areas, the states that have historically been burdened with disasters be it fires, tornadoes, floods, Tsunamis that kind of thing.

I would think Florida would be a perfect target base we've got California and Puerto Rico and Florida has their share. You think we'll get in there?

We're working opportunities in Florida as we speak.

Okay. Next thing, the European initiative can be extremely lucrative for us, obviously. So we have an office in Spain, how many different people do we have there are going to be going after the initiative there? I mean, as each country is going to be submitting their own, I assume, right?

Yes. Yes.

We have a sales team that -- a few -- X amount of people there?

We do and we're growing that. We've added, I think, since the last call two people and we're putting more people on throughout this quarter and next certainly.

Great. Is there any -- ever any thought of consideration about an alliance with a telecom, whether it be European telecom or domesticated telecoms, since we --

Yes.

Okay. Good. Thank you. Okay. That’s it for today and good luck for the rest of the year. Thank you.

Thank you.

Thank you, Lloyd. Next caller, please?

Our next caller is Jonathan Manela with Edge. Please go ahead.

Hey, Richard. How are you? I apologize, I dropped earlier. If you answered this, I apologize. Is it your expectation still for bookings growth for this fiscal year?

I do. Yes.

Okay. Do you expect -- obviously, it'll be -- is your expectation sort of similar, it will be very lumpy towards the fourth quarter?

Bookings always can be lumpy. They always move to the right further than you expect and that's just the nature of it. I've said before, Jonathan, our bookings have grown at a CAGR of close to 50% over the last three years, four years. I think that slope will remain positive, but flatten out a bit from the 50%.

Yes. I got you. I got you. The other thing is, I noticed there was -- just on a separate topic, there were some recent strategic hires from BlackBerry's AtHoc business. BlackBerry has been in the news lately. Are there any strategic initiatives that are being explored with that business that might be opportunistic for the company?

I'm not going to comment on that, Jon.

Okay. Okay. That’s all.

Okay. Thank you.

Next caller, please?

Next, we'll take a question from Jack Shaw [ph] with Personal Share [ph]. Please go ahead.

Hi. How are you doing? I'm calling because in the past you've talked about always looking for strategic add-ons and while we've spoke or listen to what you have to say, your prospective market is huge and the things that you're doing. My question is, it occurs to me that you're a relatively small fish, do any of the big fish ever call you up?

Would the big fish ever call us up?

You know, what I'm saying? In other words, does this market look so big to some of the bigger players, that they say, you know what, Genasys is in a great spot, maybe Genasys should be part of us. Do you ever get that?

I'll tell you this, there's not a lot of people in the news-like market. There just aren't. There's, of course, one other major player and they are bigger than we are. And that's the way the market has shaped out so far.

Okay. Thank you.

You're welcome.

And there appear to be no other questions at -- I'm sorry, there's another question from Carter Christopher with CBDG. Please go ahead.

Hi, guys. I was just curious how -- if there's any developments on the border, Southern border?

Not really. It continues to be very, very slow. There's a significant discord between Congress and DHS. And that affects budgeting, that affects everything that's going on. And I don't frankly see it changing in the near term, maybe after the election.

What about the CROWS initiative that was out there years ago in LRAD? Is CROWS kind of a dead end as well? Or has that kind of been you serve part of the Army contracts?

No. CROWS is alive and well. It does have some initial money budgeted to begin, I'll say, concept development. We expect a small contract to begin that effort sometime this fiscal year. But, I think, you would expect to see the bulk of the activity to begin in earnest in FY 2021.

Is that CROWS -- can you talk about the size of that CROWS deal? Is it -- at one time it was supposedly big? Is it scaled back? Or any comment you can make on the size? Or is that just too sensitive?

I don't know what was said in the past. I can say that what we know now, it's a sizable order. More to follow though. More to follow.

Yes. I think it was estimated to be over $100 million in over a multiyear deal if I remember right. But last question on the -- as you differentiate you got yourselves with the NEWS program with Genasys. Is there a way you can use the experience in Puerto Rico and/or Australia more recently to kind of use metrics to say this is how effective the system is as you go approach the European market or other U.S. States that Lloyd talked about. Is there any way to kind of say, hey our system is from a KPI like a Key Performance Indicator standpoint is more effective at doing what it's designed to do than our competitors? Is there - can you numerically quantitate that effectiveness in a way of differentiating the product and system?

Yes there is. I'm not going to do it on this call, but we have the granular, 7 years of experience in Australia and a very satisfied customer.

Okay. Well thanks guys for your time. Appreciate it.

You’re welcome. Next caller please.

And next we'll move to Walter Ramsley with Walrus Partners. Please go ahead.

Thank you. Congratulations good looking quarter. Got a couple of kind of higher-level questions I guess, the coronavirus. Has that had any effect on your business? Or is it threatening to?

Let me see. Currently, we're not aware of any material impact. Most of our supply chain is here in the United States. We do source a small amount of composite parts from that part of the world. Within our supplier base, it is likely that vendors may source parts in China. We're in contract with -- in contact with those vendors and evaluating the situation. So I'll go back and say currently we're not aware of any material impact.

Okay. And if the 5G networks proliferate over the next few years will that change the value proposition of your products at all?

I'll answer that more broadly. When a network provider upgrades to 5G it's highly probable that we will have to upgrade the NEWS software module to integrate within it. So it provides opportunities.

Well, thanks again. Appreciate it.

You’re welcome.

And with that I do not see any further questions in the queue. Would you like to give any closing remarks before I close out the call?

Thank you. We regularly discuss our business at investor events during the year. We look forward to seeing some of you at these future 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 second quarter results.

And thank you. This does conclude the Genasys Fiscal First Quarter 2020 Financial Results Conference Call. You may disconnect your lines at this time.