Good day, ladies and gentlemen, and welcome to the Genasys Inc. Fiscal First Quarter 2022 Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Kim Rogers, Hayden IR, Investor Relations for Genasys. Ma'am, the floor is yours.

Thank you, Gegmma [ph]. Good afternoon and welcome to the Genasys Incorporated fiscal first quarter 2022 financial results conference call. I'm Kim Rogers with Hayden IR, the Investor Relations firm for Genasys. On the call with me today from Genasys are Richard Danforth, Chief Executive Officer; and Dennis Klahn, Chief Financial Officer. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook and future financial perform that involve certain risk and uncertainties. The company's results may differ materially from the projections described in these forward-looking statements. Factors that might cause such differences in other potential risks and uncertainties can be found in the risk factor section of the company's Form 10-K for the fiscal year ended September 30, 2021. Other than statements of historical facts forward-looking statements made on this call are based only on information and management's expectations as of today. We explicitly disclaim any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. We will also discuss non-GAAP financial measures and operational metrics, including adjusted EBITDA, bookings and backlog, which we believe provide helpful information to investors with respect to evaluating the company's performance. For reconciliation of adjusted EBITDA to GAAP financial metrics, please see the table in the press release issued by the company at the close of the market today. 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 customer purchase orders executed in a given period, regardless of the timing of 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 four hours through the investor relations page on our website. At this time, it's my pleasure to turn the call over to Genesis Chief Executive Officer, Richard Danforth. Please go ahead, Richard.

Thank you, Kim and welcome, everyone. Our fiscal 2022 is off to a solid start with another quarter of strong revenue, solid execution and new business developments. First quarter revenues increased 33% year-over-year, despite external supply chain challenges that are disrupting businesses globally. We are managing our supply chain challenges primarily through reengineering our hardware components and developing alternative channels for sourcing our materials. We are taking proactive measures, including managing for longer lead times by building inventory and crucial components to fulfill our customer orders and meet our fiscal 2022 growth objectives. The year has started with good contract award activity, with bookings totaling 7 million and progress towards accelerating our Software-as-a-Service or SaaS business. We've recently announced new SaaS contracts with key wins in Texas, California, and our first European Union public warning system win in the country of Slovenia. Our unified solutions are now on to help protect more than 40 million lives globally. Said another way, lives covered globally by Genasys software increased by over 30% in the fiscal first quarter demonstrating the global expansion which we are capable of. We grew our Genasys Emergency Management, or GEM, software service business in Texas with new contracts that replace competitors' emergency notification services in Madison County and in the Town of Little Elm. In addition to renewing our GEM contract with the Texas office of the Attorney General, new GEM software sale -- services were added to the Port of Houston to enhance worker and visitor safety. We had previously installed an integrated mass notification system at the port. The synergies of our suite of software and hardware systems offer key competitive advantages that are spurring new and follow on orders and increasing pipeline growth. The synergies of our software and hardware systems enable Genasys to expand…

Thank you, Richard. Revenues for the fiscal 2022 first quarter were $10.7 million, up 33% from the prior year quarter. As compared to the same prior year period, LRAD revenue was $7.5 million, up 6%. IMNS revenue was $2.6 million, up 88%. And software revenue was $550,000, a decrease of $91,000 from the prior year quarter due to lower professional services performed in the current year offset by higher recurring revenue. Gross profit margin was 45.9%, roughly in line with 46.1% in the first quarter of fiscal 2021. Gross margin percentage was slightly lower due to higher cost from increased software related personnel added via acquisition and new hires in the prior year to support the growing SaaS business offset by the higher gross profit from the higher hardware revenue in the fiscal 2022 first quarter. We continue to expect gross profit margin to be plus or minus 50% for the fiscal year. Operating expenses were $6.5 million, up from $4.4 million in the same period a year ago. The increase is largely due to a 42% increase in sales and marketing personnel over the prior year to support future revenue growth opportunities, including the opening of new sales offices, additional personnel, primarily engineers for product development and amortization of intangibles related to the Zonehaven acquisition. As you may recall from our last conference call, our fiscal 2022 business plan includes a year-over-year increase in operating expense. This increase is for strategic growth initiatives targeted at materially shifting our revenue mix towards a higher proportion of SaaS revenue and expanding our margins. Net loss for the quarter was $1.3 million or $0.04 per share, an increase from a net loss of $619,000 or $0.02 per share in the fiscal 2021 first quarter. The increase was largely due to the increase…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Brian Colley. Please state your question.

Hey, good evening guys. Thanks for taking my question. I was hoping you guys could just provide some color around the expected annual revenue contribution from the Slovenia country wide win. And kind of when do you guys expect that to begin? Just expect to begin recognizing revenue from that contract.

The revenue recognition will likely begin in our Q3, and we haven't put out in the public domain, Brian, the economics of it.

Okay. Got it. But in terms of, I guess, how it's structured, is it -- I think in the past, like maybe in Australia, a good portion of it was recognized as services revenue, and then the remainder as licensed revenue, any color on how it's structured?

Yeah. There was -- professional services required upfront. It's not nearly as complex as Australia however, so. Where Australia took a full year, this is only expected to take a handful of months and then it would turn over to a recurring revenue model.

Okay. Got it. That's helpful. And do you expect the Slovenia win to lead to additional follow on business with companies and local governments within the country?

I do. And I think it's throughout Europe that opportunity exist.

Got it. And I was also curious, are there additional countries in the EU that have RFPs out right now. And do you feel pretty confident that you can win additional customers this year in the EU?

Yes, I do. And there's at least two countries with active RFPs right now and several right behind them. Brian, we have seen a good uptick in activity in the EU in terms of getting compliance to directive. So, there's an awful lot of RFI and beginning to be an awful lot of RFP activity going on.

Got it. Okay. In terms of the guidance, is it still your expectation for over 50% SaaS bookings this year in addition to the $9 million to $11 million increase in operating expenses?

Yeah. The OpEx was still on track with what we talked about before. The 50%, our bookings for SaaS will substantially exceed 50%. It takes some time for that to ramp up as revenue, but bookings in ARR are expected to go up substantially from what it was at the end of last year.

Yeah. The 50% would be year-over-year growth in the software business.

Great. Okay. Got it. Well, I'll leave it there. Thanks for taking the questions guys.

Thank you.

Okay. Our next question comes from Mike Latimore. Please state your question.

Good. Thanks. Yeah. Congratulations on the results here. Just in terms of the software pipeline, is there one category that really stands out and should be the leaders this year from the software bookings? Is it Zonehaven, is it the EU stuff? Is it enterprise? Just what's sort of the biggest potential software drivers here?

It's the SaaS offerings from Zonehaven and GEM. They have different cycles, Mike. The Zonehaven bookings have a much shorter lead time than the GEM ones do. So, our pipeline is quite full and getting more full every day in both areas. We still enjoy no competition kind of scenario with Zonehaven whereas with GEM, there is competition. But I think those two from a bookings and revenue perspective, will see substantial improvements this year. And as I mentioned a moment ago, the National Emergency Warning Systems being driven out of the EU, I think we'll see a substantial increase in activity there. I think the revenue -- recurring revenue from that -- those anticipated wins will more likely be in our 2023 than in our 2022.

Okay. And then, in terms of the Zonehaven business, well, I guess, first of all, even though it's a number of wins recently, were those all going to -- are those all going to show up in March quarter bookings or were some of those booked in the first quarter?

I don't know. What are you referencing Mike? The ones in my remarks?

No, just you've announced Slovenia and Zonehaven wins and all that. So, I'm just kind of curious, are those March quarter bookings or are those December quarter bookings?

For example, a couple weeks ago we released the Los Angeles Zonehaven award. That was a Q1 award. We needed to get the requisite authority and approvals to put it out in the public domain, which we did receive, but the award notification went out in Q2.

Yeah. And then you gave a 7 million booking number. Was that total booking?

Yes.

Okay. And any comment on what percent of that was kind of in the software CAGR?

We haven't put that out there. But it's a much bigger piece than it used to be, that's for sure.

Okay. Great. And then it sounds like you're guiding the gross margin being about the same this year as it was in fiscal 2021. I think you said about 50%. And so you feel good about that despite the supply constraint?

Well, we're managing through the supply chain constraints. We've seen price growth and availability issues across the spectrum of parts. But so far the team has kept up with it and that's my expectation that they will continue to keep up with it. 50% gross margin, Dennis mentioned, and it's correct. It's historically what we're able to do. And we still believe that 50% is plus or minus is where we're going to end up.

Great. And then just last one on Slovenia, did you win sort of everything there, meaning the government business, the government front end, all the mobile operators and whatever feature that they needed, cell broadcast, location based stuff? So did you get kind of the full suite there?

No. The RFP was issued by the Ministry of Defense. Our obligation under the contract is for the front end and all of the location based data. So, we will be able to display where all the phones are in their real-time and how they're moving.

Okay. Great. Thank you.

You're welcome.

Okay. Our next question comes from Martin Yang. Please state your question.

Hi. Good afternoon. Thanks for taking the question. First question is, can you maybe give us a little more context on Slovenia win, what was the competitive situation and how much weight was placed on pricing versus technology?

Martin, all the usual suspects were there including Everbridge. The pricing was not the principle award criteria technical was.

Got it. Thanks. And also, looking into maybe Zonehaven and GEM pipeline and ongoing customer engagement activities, which would you say is a little stronger at a moment. And do you expect that -- how do you expect this fiscal year to shake out the respective strength and customer interests on those software products?

Well, we've seen a significant uptick in interest for both Zonehaven and GEM. GEM has a longer cycle because of what I mentioned a moment ago, it -- they're longer because the competitive nature of them. When you get into Zonehaven, there's a recognized urgency to get the systems in place to the counties that we have sold them in. And that urgency amps up more as we enter fire season, which now appears to be like 12 months out of the year in California. You all saw about the New Year's Eve fire in Colorado that took down thousands of homes in less than 24 hour period. And that -- fortunately there was a limited loss of life there. But given circumstances be just a little it different, albeit at night or when people weren't home, there could have been a much more significant loss of life and that kind of an event really shines a light on the utility and the need for Zonehaven. So, we see a big uptick in -- every time we've got events like that, that happen.

Got it. Thank you. A final question. OpEx for the year, given that maybe Omicron and COVID may extend the reopening pace. Do you think that the investment -- do you still expect the same pace of your OpEx investments for this year?

Yes.

Got it. Thank you.

You're welcome.

Okay. Our next question comes from [indiscernible]. Please state your question.

Thanks for taking my question here, gentlemen. And I just have one question. Most of my questions have been answered. But I wanted to ask about your investment in your SaaS offerings. Is that largely going to be going to like expanding headcount for engineers, or is it more on the sales side?

Both. We saw a 40% something increase -- 42% increase in engineering in our fiscal 2021 -- sales and marketing. What was the engineering -- was in the 40% as well.

I don't have that.

So we had significant like a 40% to 45% increase in both sales and marketing and engineering 2021 to 2022. And that growth will continue in this fiscal year.

Okay. Thank you. That's all I have.

Okay. Thank you.

Our next question comes from Ed Woo. Please state your question.

Yeah. Congratulations on the quarter. My question is on M&A opportunities. You guys did a number of acquisitions in the past year. Are you guys still opportunistic out there?

Yes.

And how's the M&A environment?

Ed, it's up and down, but it's -- as you know, we're always active and looking. Valuations have actually come down a bit, which is makes them more affordable, which is good. But yeah, they're an important part of our growth levers and we will continue to be opportunistic with additional M&A.

Great. Is there any particular focus, either international or technology or customer reach that you're looking at or is it just whatever opportunistic will come by?

It's generally in the critical communication area software and recurring revenue focused, SaaS focused.

Great. Well, thank you and good luck.

Thank you.

Our next question comes from Tucker Anderson. Please state your question.

Yes. First let me add my congratulations on the Slovenia win. And a lot of my questions have been answered, but I do have a couple. With regard to the supply chain disruptions, do most of them relate to areas where semiconductors are in short supply or there other materials besides that, that you're seeing supply chain problems with?

It's beyond just micro circuits. Raw materials, resins, steel, even plywood for a while was hard to come by. So, it covers the gambit. Nothing is immune to it right now.

Which applies that it's likely to continue for a while. The other question is with regard to labor …

Absolutely correct. That is correct.

The other question …

There's no sign yet tailing off. Yeah.

The other question is with regard to labor availability and compensation cost pressures, could you sort of talk what you're seeing there?

Labor availability, we've been very fortunate, both in the U.S., Canada and in Spain. Particularly Spain we've substantially increased the headcount over there. Here in the U.S., it's been sales and marketing, mainly growth and we've been able to attract the necessary folks we needed to do the job we're trying to do. And we continue to add to the Salesforce here in the United States. So, there is upward pressure on the salaries, the compensation, for sure. And that extends to the hourly folks, building hardware to the engineers, manufacturing, hardware and software, and sort of across the board.

Well, once again, congratulations and thank you very much.

Thank you.

Okay. Our next question comes from Paul Oki [ph]. Please state your question.

Hey, thank you for taking my call. Most of my questions have been answered. Richard, do you feel that you guys have enough cash?

Yeah. We have plenty of cash, Paul.

Okay.

Our working capital -- if you look at our cash consumption in Q1, it was 2.7, I think, in total from an operating basis and it's all in inventory. Yeah. And that was a tactic. We -- I think I even announced we would likely be doing things like that on the last conference call. But in order for us to hit our revenue, we need to secure the material soon as it's made available. And that was the consumption of cash for Q1. And that, as you know, is a temporary thing. It'll, as Dennis mentioned in his remarks, turns to cash when we ship the product.

Hey, as long as I've owned, Q1 has always been weaker quarter, but this one seems to be getting up there. But I was just curious, I like more cash. Okay. Thank you. Congrats on the quarter.

You're welcome.

I hope you are going to have a great year.

Thank you.

Okay. And our final question is from Brian Colley. Please state your question.

Hey, thanks for taking the follow-up here. I was curious on the decline in software revenue, what drove the year-over-year step down in services revenue? Was it just a contract ending and not renewing or was there kind of higher one-time--?

Yeah, it was that. So a year ago, we had a substantial development activity for Australia. Australia went live on September of last year, so that non-recurring completed and now it's into a recurring revenue model.

And we had about a year's worth of development work. I think it may have been 10 months of development work that started approximately October 1 of 2020. So, the first month or so of our fiscal 2021. And as Richard said, it went live on September 1. So, there was quite a bit. We had two different cell carriers that we were doing to work for. So, that's the reason for the decrease in software revenue.

Okay. Got it. I mean, would it be your expectation for that -- for software revenue to increase sequentially moving forward for the rest of this year?

Yeah. It will follow up bookings, Brian. So, you keep looking at our press releases. We'll try to announce all wins. We've seen a substantial uptick in RFPs and a substantial uptick in SaaS bookings.

Got it. Okay. Thanks for the follow-ups.

You're welcome.

Okay. Richard, I'll turn her back over to you for closing remarks.

Dennis will handle this.

We regularly discuss our business at investor conferences throughout the year. This week we'll be participating in the Best Ideas Virtual Investor Conference. Additional investor conference presentations are plan throughout this fiscal year. Thank you for participating in today's call. We look forward to speaking with you again next quarter, when we report fiscal second quarter 2022 results.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.