Good day, ladies and gentlemen, and welcome to the Genasys Fiscal Year 2023 Conference Call. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Brian Alger, SVP of Investor Relations and Corporate Development. Sir, the floor is yours.

Thank you, Karen. Good afternoon. Welcome to Genasys' Fiscal 2023 Fourth Quarter and Full Year Financial Results Conference Call. I'm Brian Alger, SVP, Investor Relations and Corporate Development for Genasys. With me on the call today are Richard Danforth, our CEO; and Dennis Klahn, the company's CFO. During today's call, management will make forward-looking statements regarding the company's plans, expectations, outlook, and future financial performance that involve certain risks and uncertainties. The company's results may differ materially from the projections described in these forward-looking statements. Factors that might cause such differences and other potential risks and uncertainties can be found in the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2022, or the 10-K that's going to be filed later today. Other than the statements of historical fact, forward-looking statements made on this call are based only on the information and management's expectations as of today, December 7, 2023. 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, backlog, and adjusted net loss, which we believe provide helpful information to investors with respect to evaluating the company's performance. A 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 the related revenue recognition. Backlog is a measure of purchase orders received that are scheduled to ship within the next 12 months. Finally, a replay of this call will be available in approximately four hours through the Investor Relations page on the company's website. Now at this time, it's my pleasure to turn the call over to Genasys' CEO, Richard Danforth. Richard?

Thank you, Brian, and welcome, everyone. Before we get into discussing the results of last fiscal year and our outlook for fiscal year 2024 and beyond, I want to take a moment to thank our shareholders that have been incredibly supportive and resilient through our transition to a more balanced hardware and software company. The investments we have made over the past two years are beginning to bear fruit, and I have increasing confidence that these investments were not only well made, but will yield substantial returns in the not-too-distant future. Using the balance sheet and profits from the hardware business, in less than two years, we have incubated a strategic software business that has already generated a recurring revenue stream in excess of $5 million, with a clear line of sight to roughly double in 2024. We appreciate your support, and we look forward to delivering the results to generate the return you patients deserves. Moving on. As expected, we exited fiscal year 2023 with over $10 million in cash and no debt. However, finishing out the quarter, we correctly assessed that the federal government was likely to, once again, delay approving a DoD budget. And as such, FY '24 orders from this U.S. government would be delayed. This is a further complication to the numerous order delays that we experienced throughout fiscal 2023. With this in mind, we pursued and closed on a follow-on equity offering of 5.75 million common shares, raising net proceeds of approximately $10.6 million to protect the investments that we have been made to date and to assure that we remain positioned to capture the opportunities before us. Moving on. It is worth noting that the statewide RFP for Florida that we discussed on last quarter's call resulted in a no award decision. And…

Revenues for the fiscal '23 fourth quarter were $10.7 million, a decrease of 33% over the prior year's record revenue quarter. As compared to the same prior year period, total software revenue declined 3% to $1.1 million, due to a decline in professional services. Hardware revenue decreased 36% to $9.6 million, for all the reasons Richard discussed earlier. For the full fiscal year, total revenue was $46.7 million, a 14% decrease from fiscal 2022 revenues of $54 million. Software revenues for fiscal '23 increased 23% to $3.8 million, while hardware revenues decreased 16% to $42.9 million in fiscal 2023. Gross profit margin was 49.6% in this year's fiscal fourth quarter, consistent with the prior-year quarter. For most of fiscal 2023, the gross margin percentage was negatively impacted by inflationary pressures. This has been partially offset by the increasing software revenues that carry higher gross margins. Quarterly operating expenses were $7.9 million, up from $7.5 million, excluding the $13.1 million goodwill impairment charge in the fourth quarter of fiscal 2022. On the full fiscal year, operating expenses grew $3.1 million to $32.7 million. The year-over-year increase is directly tied to the planned investment to grow and accelerate our software business. On a GAAP basis, our current fiscal year fourth quarter operating loss was $2.6 million compared to a $396,000 profit in the year-ago quarter excluding the onetime goodwill impairment charge. Adjusted EBITDA, which excludes noncash stock comp, was a negative $1.7 million compared to last year's positive $1.6 million. On the full fiscal year, our 2023 GAAP operating loss was $11 million compared to fiscal 2022's $2.4 million operating loss, excluding the goodwill impairment charge. Fiscal 2023 adjusted EBITDA was a negative $6.8 million compared to last year's positive $2.4 million. GAAP net loss for the fourth quarter and fiscal year…

[Operator Instructions]. And we'll take our first question from Brian Colley from Stephens. Please go ahead.

So, Dennis, I'm curious, just if we can put a finer point on the expectations for EBITDA here in FY '24, from what I can tell in the investor deck, it kind of looks like the illustrative chart that you have in there, as you're around breakeven, is that kind of how we should think about it?

I don't -- for the full year, no, I don't think that's -- the back-end is more heavily weighted with revenue. And that's more likely in the back half of the year, but not for the total year.

Brian, this is Brian Alger. The slide you're referring to is a legacy slide from last quarter. We'll be updating the slide deck probably overnight. Bear in mind, we do have costs that came on board, and we referred to them on the operating expense side coming from the acquisition of Evertel.

Got it. That's helpful. And then any sense you can give me for the magnitude of how much the revenue -- the hardware revenues will be skewed first half versus second half? Are we talking 70% of hardware revenues in the back half or more than that?

Brian if you look at a typical year for us, substantially more than 50% of the -- correct me if you think I'm wrong, revenue is in the second half.

Yes. Over the last three years, it's been right around 60%.

40%, 60%. It will likely be more skewed to 30-70 kind of thing.

Okay. That's very helpful. And then I wanted to ask about Evertel. So, you now have a much more comprehensive unified platform with Genasys Protect, with GEM, Zonehaven, and Evertel kind of under the same roof now. How should we think about like the incremental uplift from upselling Zonehaven and also upselling Evertel to like existing GEM customers? I'm not necessarily asking for a pricing number, but I'm just kind of curious like what the ASP uplift looks like from upselling those additional solutions?

We'll see, but that's certainly one of the reasons we bought them. In the two months we've had them, we're probably seeing their ARR go up by 20%. And -- the use of Evertel historically has been in police forces. But the application is there for first responders and fire, which we have a large installed base with other hardware and software solutions. So, our expectations are very high that there'll be a lot of up and cross-selling.

And we'll take our next question from Mike Latimore from Northland Capital. Please go ahead, Mike.

Great. Congrats on the strong software growth. I guess just on your last comment there, that ARR is already up 20% of Evertel. Is that because you guys have brought in new customers? Or is it just stuff they've deployed? Or like what's driving that?

Some of it was what was in their pipeline. Some of it is a consequence of -- we've put together a five-person sales team for Evertel. What sales force Evertel had was two people. And right now, there's five. And again, we have a very large installed base, as I mentioned, over 400 customers combined. So, these -- the calls are not cold calls, there are calls to existing customers.

Got it. And then I think I know the answer to this, but you're expecting your software business to at least double year-over-year. I assume that's both reported revenue as well as ARR?

Yes.

Okay. Got it. And then on the $25 million of hardware business that slipped out of '23, how much of that is U.S. versus international?

Approximately 70-30 U.S.-international.

Got it. Okay. And then just last, I know the Maui fire has prompted a lot of states to reach out to you guys. What -- do you feel like there's a good chance that they will be making decisions from these other states this fiscal year?

I'd say I'm hopeful for that, Mike. It's -- whenever there's an emergency, there's an initial spike of interest and concern and it tends to wane pretty quickly. I think if you -- the world saw what happened in Lahaina, and that will result in additional business for Genasys. Not clear to me at all on the timing of that quite yet.

And we'll take our next question from Scott Searle from ROTH. Please go ahead, Scott.

Good afternoon. Thanks for taking my questions. Maybe to dig in first on the hardware front. Certainly, sort like a back-end loaded year. There were a couple of numbers that you threw out. There was a 150% number. It wasn't clear to me if that was pipeline or backlog. I was wondering if you could clarify that? And also give us an idea of what that coverage ratio looks like in terms of that pipeline, given that we're talking about recovering to about $45 million, $48 million in terms of hardware sales, big ramp in the second half. And also, I believe the gross margins had been under pressure on the hardware front. I thought they were expected to come back. It looks like that's sort of embedded in the results. I was wondering if you could provide some more color on that front.

Scott, I'll do my best. If I forgot one of your questions, you'll remind me. But the pipeline question, I mentioned in my remarks, it's up 150% from this time last year, without consideration of the $25 million that's also moved. So, if you put that in there, it would be even a higher pipeline opportunity for us. From a gross margin perspective, the fourth quarter gross margins were 49.6%, bringing the year to 46.6%. So, we saw a significant uptick. Q2 was 43.9%, Q3 was 46.9%, and Q4 was 49.6%. So historically, gross margin on our hardware business toggles plus or minus 50%, and we saw that in Q4. In terms of backlog, backlog going into fiscal year '24 is down considerably from the backlog going into fiscal year '23, which was reflective of the poor bookings in fiscal year 2023. Our revenue was ahead of our backlog, which means we paid -- revenue was ahead of our bookings, which means we aid into a backlog.

Okay. And then maybe moving over to the software side of the equation. It looks like you're looking for sales to double this year conservatively. What clarification is Evertel built into that expectation? Because it seems like you're seeing some early momentum on that front. And then what does Tablet Command and Ladris do in terms of the revenue opportunity in fiscal '24?

All right. What was the first question? Tablet command?

Evertel include.

Yes, Evertel is included in the remarks on expected annual growth of ARR and software revenue. Tablet Command is a co-sharing kind of thing. It's not necessarily a revenue-generating relationship, as much as it is, we're first responders using Tablet Command have access to our EVAC layer. Other firefighters in counties and cities and states will be able to see the utility of having that, and it will help enlighten them and get them interested in the Genasys Protect platform. So, you can think of that as more of a marketing kind of thing than a revenue-generating thing. Ladris is, in fact, a revenue-generating thing. So Ladris is an AI-driven platform for modeling, how to get a lot of people out of harm's way in times of an emergency. So, it allows a community or a large enterprise to set up scenarios and then run the model. If you needed to evacuate a large stadium, for example, and you're using the existing road infrastructure, how long would it take for that stadium to be evacuated? Well, that might come back and say it's going to take four hours, which is three hours too long. What the first responders can do in advance of this is then practice with, well, what if we shut down this road? What if we open that road up to two-way traffic or one-way traffic? And do all of that in advance of a catastrophic event. So, it's a very useful utility, particularly when there's a lot of people involved.

So, Richard, will that be integrated into Evac then?

It's separate right now, Scott. But over time, I would believe that we would integrate it.

Okay. And then just on the opportunity pipeline, it seems like there have been a lot of inbounds. You look at things like Florida they got pushed out, but still kind of in that opportunity pipeline. It sounds like at record levels and the deal sizes are increasing. I'm wondering if you could provide a little bit more color in terms of what that translates to in terms of potential revenue or connected users? How should we be thinking about that?

I think I'll go back to what I said, Scott, that we expect software revenue and ARR to double in this fiscal year. And there's opportunities beyond that as well. But the pipeline is robust and the inbound opportunities, as you pointed out, is very good.

Great. And lastly, if I could, the enterprise market, I think you announced something earlier this week in terms of some energy wins. I was wondering if you could specifically address that in terms of the interest level there, what you're seeing kind of sales cycles, close rates? Are this kind of one-offs? Or is this something that we should expect to see more of in the future?

More in the future. So, a vertical we focus on is critical infrastructure protection. The orders you're referencing are two nuclear power plants here in the United States. The order was -- will -- or the opportunity is for a total of four, two of which were booked and two more will likely book in our fiscal year 2025. But beyond that, we have in our forecast and pipeline power plants, large distribution centers. Anywhere there's a lot of people, the utility of our hardware and software is realized.

And we'll take our next question from Ed Woo from Ascendiant Capital. Please go ahead, Ed.

Yes. Congratulations on the outlook for software. My question is on active shooting, it seems like there's news every day about some active shooting somewhere in the U.S. Are you going to possibly focus on that? What are your opportunities in that area?

Our evacuation platform has been used in cases of active shooters. The Genasys Protect platform allows first responders to send emergency messages to very specific geographic areas. In fact, we just went live in the County of San Diego for that. The other thing it does, the CONNECT or the former Evertel, the CONNECT allows the first responders to be able to communicate privately, you mentioned active shooters at I think it was in the state of Maine, not too long ago, there was an active shooter situation. And I can tell you from my personal experience, I'm watching the national news, and the reporters on the national news are listening to HF radios and saying, "Oh, the active shooter must be in this town" and panics everybody in the area. At one point, the reporter said -- there was a parking garage behind them with a stairwell that was open, and police, we're going to the top floor. So, we reported the shooter has got to be up there. So, a lot of misinformation out there, and that misinformation is a consequence of the chaos during any one of these catastrophic events. The CONNECT platform is private. It's not subject to being listened to by the public, or the -- or anybody else that can use that information against them. So, both this highly geographic-based messaging and CONNECT, two very good applications when you have an active shooter.

[Operator Instructions] And we'll take our next question from Martin Yang from Oppenheimer. Please go ahead, Martin.

So, my one question is about the inbound requests you have regarding the ACOUSTICS systems. Given the recent interest, are you actively investing in more outreach effort to accounts or regions where there might be a potential interest, but they have not actively inquired about ACOUSTICS to combine with Genasys Protect?

Well, Martin, we've recently aligned the Genasys ACOUSTICS systems underneath the Genasys Protect platform. There are several customers, particularly here in California, that have bought all of our software and hardware systems. That's a slightly different approach than we have in the past, where the hardware acoustic systems were sold principally through the LRAD channels. Our expectations are for some significant uptick in the Genasys ACOUSTICS as we channel through our SaaS group, this third leg of the Genasys Protect tool.

And that was our last question. I'd like to turn the floor back to Mr. Alger for closing remarks.

Great. Thanks for participating in the call tonight. A replay of the call will be available on our website shortly. For additional information and up-to-date news and activity regarding Genasys, our products, and the customers we serve, I highly recommend that you follow the company and Genasys Protect on your social networks, particularly LinkedIn and X, where we actively post and comment on events that are happening. We look forward to speaking with you again next quarter when we report the fiscal first quarter of 2024 results. Thank you. Good night.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.