Decisionpoint Systems, Inc. (NYSE:DPSI) Q2 2022 Results Conference Call August 11, 2022 4:30 PM ET
Company Participants
Brian Siegel – Hayden IR
Steve Smith – Chief Executive Officer
Melinda Wohl – Vice President of Finance
Conference Call Participants
John Nobile – Taglich Brothers
Operator
Good day, and welcome to the Decision Point Systems, Inc. Second Quarter 2022 Earnings Call and Webcast. Today’s conference call is being recorded.
At this time, I’d like to turn the conference over to Brian Siegel. Please go ahead, sir.
Brian Siegel
Good afternoon, and welcome to DecisionPoint Systems Second Quarter 2020 Earnings Call. Joining me today are Steve Smith, Chief Executive Officer; and Melinda Wohl, Vice President of Finance. For those of you that have not seen today’s release, it is available on the Investors section of our website at www.decisionpt.com.
Before beginning, I would like to remind everyone that except for historical information, the matters discussed in this presentation are forward-looking statements that involve several risks and uncertainties. Words like believe, expect and anticipate mean that these are our best estimates as of this writing, but that there can be no assurances that expected or anticipated results or events will actually take place. So our actual future results could differ significantly from those statements.
Also, during this call, we will discuss non-GAAP measures, including non-GAAP net income, non-GAAP EPS and adjusted EBITDA. These non-GAAP financial measures adjust our GAAP net income and EPS for stock-based compensation, any gains on extinguishing debt, M&A and other financial transaction costs and other nonrecurring nonoperating income and expense items. Further information on the company’s risk factors is contained in the company’s quarterly and annual reports filed with the U.S. SEC.
With that, I’ll now turn the call over to Steve.
Steve Smith
Thank you, Brian. And good afternoon, everyone, and thank you for joining us today. I am very excited to say that we continue to see significant strength in our business during the second quarter, once again reporting record results today.
However, before I discuss these results, I’m going to start the call by discussing who is DecisionPoint Systems, our market opportunity and our growth strategy to capture and expand this opportunity. I will then briefly review our second quarter and then turn it over to Melinda to discuss our financial results.
DecisionPoint is a mobility-first enterprise services and solutions company. So what does that mean exactly? It means that we aim to be at the center of several emerging secular trends, including enterprise mobility, which encompasses work from home and field mobility, cloud, and managed services, SaaS, 5G and IoT. Now these markets represent hundreds of billions of TAM so we identified a handful of industries where we either already have, can acquire or develop expertise and therefore, the ability to become significant players.
Currently, these industries are retail, logistics, hospitality and health care, where we have established customers, industry-specific solutions, the right technology partners and several under or underpenetrated subsegments for us to go after. Our value proposition to customers is clear. We enable frontline employees to make better, fast and more accurate business decisions inside and outside the four walls and create operational efficiency effectiveness to drive better customer experiences and business outcomes.
Traditionally, companies like us have been classified as value-added resellers or VAR of handheld devices such as scanners, printers, point-of-sale and other mobile devices. Our OEM partners include Zebra, HP, Apple, Honeywell, VeriFone, Datalogic, Cradlepoint and distributors, BlueStar, ScanSource and Ingram.
This business has historically grown at a run rate of about 5% to 6%. With project orders being incremental to those numbers but also introducing some lumpiness at times. We also have an excellent annuity-type business, replenishing consumables for these devices. So think of it as the razor and the razor blade model here.
That said, over the past three years, we’ve transformed the company to both organically and inorganically increase these growth rates and margins significantly by aggressively moving up market to include various high-margin services, especially ones that generate reoccurring revenue.
Managed services where companies outsource certain IT functions, our key investment area for our services-led strategy. We offer a comprehensive product portfolio of managed services designed to simplify the complexity of designing, deploying and managing a mobile solution.
These managed services include provisioning, monitoring and help desk services to improve on the visibility and status of their device landscape. In addition to managed services, we offer professional services, including consulting, staging, deployment installation, repair and customer-specific software customization and hardware and software maintenance support.
We are also opportunistically building on higher-margin reoccurring revenue SaaS solutions in our portfolio, which today includes both packaged and custom-developed software such as MobileConductor and route manager for the direct store delivery or DSD industry and ViziTrace which helps manage an RFID implementation.
Moving to our four pillar growth strategy. The first is to increase share in our current verticals, specifically grocery and specialty retail, supply chain, health care, warehouse, distribution and transportation. The second pillar is to leverage our experience in these verticals into adjacencies. Examples here would include big box retail hospitality and supply chain logistics.
The third pillar is to drive growth and margin expansion by increasing service and software attach rates. These include professional services, managed services, ISV and SaaS services, software from partners and repair and maintenance services.
And the fourth pillar is geographic expansion, where we can pick up new customers expand field sales and increase our coverage. Our M&A strategy supports these four pillars, and we expect to remain active in this field to complement our organic growth.
With respect to M&A, we are going to make acquisitions to achieve — we’re not just going to make acquisitions to achieve more scale. We have specific requirements of companies we target. These include a track record of positive revenue growth and EBITDA, integration-ready solutions and operations and a cultural fit and compatibility.
By focusing on these areas, we have developed a successful integration strategy that allows us to move quickly to reduce SG&A costs, streamline operations, and drive revenue synergies by expanding their offerings nationwide through our system.
In fact, after acquiring two companies in the first quarter, we have progressively and quickly integrated those to the point where we are ready to look at potential targets for the second half of this year and in 2023. Now moving to our second quarter highlights. We once again had record quarterly revenue growing 85% to $28 million.
This strength was mostly driven by two large project orders that came in during the quarter. Note that these orders were not completely filled in Q2, and we’re expecting to be filled in the second half of ’22.
While this goodness was welcome, I’m particularly excited that our services revenue exceeded our internal targets during the quarter, growing 16% to $5 million. Adjusted EBITDA increased a whopping 393% to $2.7 million in the quarter. This means in the first half of the year, we reported adjusted EBITDA of $3.8 million versus you may recall our previous full year guidance of $3.5 million to $3.9 million. We also saw continued evidence that our M&A strategy is working.
In fact, the sales teams continue to grow our active cross-selling campaigns and deals in the progress with existing customers during the quarter. As we look to the remainder of the year, we are well positioned to continue our growth trajectory. We now expect to generate between $87 million and $90 million in revenue or approximately 33% to 36% growth. And in terms of mix, we currently expect approximately $20 million of that to come from services. From an adjusted EBITDA perspective, I would expect that we would deliver between $4.6 million and $5 million within those revenue ranges that I just provided.
Please note, these numbers do not include any potential acquisitions we may make during the second half of the year. In closing, we had a great first half of the year. And we expect that this is just the beginning as we continue to execute on our growth strategy.
I also want to thank our dedicated employees for their continued hard work. And finally, I will be presenting at the SidotiMicroCap Conference next week and available for one-on-ones. So if you’re interested in a meeting, please either submit a request through the Sidoti conference portal or reach out to Brian Siegel. Otherwise, I look forward to speaking with you again on our second quarter call.
Now I will turn it over to Melinda to review our financial results in more detail.
Melinda Wohl
Thank you, Steve. Details of our second quarter operating performance compared to 2021 second quarter were as follows: we saw continued strong demand in Q2 with total revenue up 85% to $28 million.
Excluding M&A, our gross revenue growth rate was still very impressive at 69%. During the quarter, we worked through a portion of our $21 million backlog from last quarter and we built it to $28 million, which is still about 4x our historical norms.
Backlog was higher than normal due to a combination of the two retail orders we received in Q2, combined with the global supply chain issues that are impacting many companies.
As a result, our clients are putting in orders with longer lead times, and we have fortunately been able to leverage our strong partnerships with OEMs and distributors to gain access to products to ship and build inventory. Moving to gross profit. We saw an 81% increase from the prior year. Product mix was heavy on the hardware side due to the unplanned orders we fulfilled, which led to a slightly lower growth rate when compared to revenue. GAAP operating expenses increased by about $1 million, split evenly between G&A and sales and marketing.
This increase was mainly a result of the acquisitions we made in the first quarter. As we move forward with our integration we expect to realize the benefits of cost synergies and improve operating leverage. GAAP net income and diluted EPS were approximately $700,000.09 our non-GAAP net income and diluted EPS were $800,000.11 compared to $300,000.03 last year.
The non-GAAP net income and EPS numbers excluded the following: stock-based compensation of $300,000 this year versus $74,000 last year, M&A-related expenses of $200,000 versus $100,000 last year and the $1.2 million gain on the extinguishment of debt last year that did not repeat this year. Adjusted EBITDA was $2.7 million compared to $0.6 million last year.
Turning to our balance sheet. We ended the quarter with cash and cash equivalents totaling $8.5 million versus $2.6 million at December 31, 2021. As I mentioned earlier, we continue to receive orders with long lead times leading to a $9 million increase in deferred revenue. Total debt at the end of the quarter was about $150,000, flat to year-end, and we had no borrowings on our line of credit.
Net cash provided by operating activities increased to $12.9 million from $2.5 million last year. So you can see we had a very strong start of the year, and we currently believe our business is positioned for continued growth for the remainder of 2022.
And with that, operator, we can move to questions.
Question-and-Answer Session
Operator
[Operator Instructions] And we’ll take our first question today from John Nobile with Taglich Brothers.
John Nobile
Good afternoon, Steven, Melinda. It’s nice to see the very strong numbers. Congratulations on that. I’d like to know, you just recently put out a press release about $22 million in new orders and that some of it was recognized in the second quarter I was hoping you could break down what was recognized in this current quarter that you reported.
And actually, second quarter or is it the third quarter? I’m sorry. But how much do you expect to recognize of that also in the second half of 2022?
Steve Smith
Melinda why don’t you handle that, please?
Melinda Wohl
John, we spoke about of that — about $22 million of it. We still have to recognize about $9 million of that set to go out in Q2 — I’m sorry, in Q3 and Q4.
John Nobile
Okay. So most of that was already recognized in the second quarter then?
Melinda Wohl
About $6 million, John. $6 million to $7 million.
John Nobile
Okay. I’m sorry. So the $22 million is not going to be recognized fully in 2022, obviously, because there’s more to be recognized, I guess, going into 2023 from this?
Melinda Wohl
You know what, sub of the 2022 revenues or orders was not specific to one customer. So it was already — some of it was already recognized.
John Nobile
Okay. And staying on that $22 million amount, is that strictly going to be — or is that related to the hardware sales segment of your business? Or is that going to be a combination of both the hardware and service segments?
Melinda Wohl
We still have some services to roll out related to that — to the $22 million orders.
John Nobile
Okay. Okay. Because I saw the guidance was still for pretty robust service growth there being $20 million, which actually equates to about 23%. So that guidance is still in range with the previous guidance before this $22 million of new orders came in. And just one final question.
I was hoping you could talk a little about your investments in your services offerings. Now — and not only that, but how you plan to drive that, what you call SaaS or services and subscription revenue going forward? If you could just add some light on that, I’d appreciate it.
Steve Smith
Yes, I’ll take that, Melinda. Thanks, John. Really, there’s three ways to grow here. You can grow organically, you can grow through partnerships and you could grow through acquisitions. We’ve done all 3.
So we continue to train our sales force on the ever-expanding portfolio of services that we are driving and focusing on.
Secondly, our portfolio of services has grown and it’s grown through organic build-out of those services, but also through partnerships, key partnerships that we’re able to leverage and represent almost white label, if you will, in the market. And then third, we are looking and we’ll continue to look for acquisition targets that will add to our services portfolio. In fact, my priority is to really look at companies where almost 100% of their revenues are from services. Where in the past, our acquisitions, the four that we’ve done have been more traditional “hardware” reseller based with some services as attached to that those hardware sales.
So we think that this is the right strategy, and we think it’s the right strategy because it’s exactly what our customers are asking for. And it’s not just that we are developing the strategy in a vacuum, we listen to our customers and we follow the money trail. And when our customers are looking to expand, virtually expand their IT organizations, they’ve come to us. And those two large retail orders, we basically operate as an extension to their IT organizations. They’ve leveraged our capabilities and we’ve delivered on those services, and they’re going to continue to leverage our services portfolio, provided we continue to deliver on them as successfully as we have.
John Nobile
Okay. And obviously, I could see the service margin is significantly higher than your product margin. I didn’t do the number crunching yet to figure out this year where the most growth is from, but if you could just provide that on the call right now, assuming $20 million in service sales, the remainder in product sales, which component of your business do you feel is growing faster this year and going forward.
Steve Smith
You don’t have to do the math, but the services is growing. I mean that’s where our focus is, right? It’s higher margin as you just alluded to. And it is growing and I would categorize that growth at mid-teens year-over-year.
By virtue of getting some anomaly large project orders on hardware, we’ve seen the hardware business grow year-over-year, which accounted for a good percentage of the Q2 over performance that we’ve realized.
But the focus of the company is clear, and that’s to continue to drive services. We’re bullish on our ability to maintain significant percentage year-over-year growth there, and we’ve categorized that at 15% or more. And we see the day in the next three to five years with 35% to 40% of our business will be services-based.
Operator
All right. We do have another question in the queue from Shrink Giordano with [Consulta.]
Unidentified Analyst
Smith and Melinda. Just one quick question. Congratulations, of course, on uptick in the stock to the Amex Stock Exchange. I just want to know if you are down the road are interested in putting options on the stock.
Steve Smith
We haven’t talked in those terms. We’ve really been operating at lightspeed here. We uplisted for the first time to the OTC in February of ’21. We, as you now know or noted, we uplisted from there to the New York Stock Exchange American and that occurred on May 4.
So we’re delighted with the position where we stand right now and the activity that we’re realizing that we have not discussed any option trading at this moment.
Unidentified Analyst
Okay. I know the stock is trading at times very heavy. That’s why I think you qualify for it if you look at the numbers.
Steve Smith
Yes, I have no further comment to it. Certainly that type of thing would be dealt with through our Investor Relations company as well as the Board. We’ll make those decisions as appropriate when the time is appropriate. It’s third parties that list options. So you’d have to talk to like CBOE and stuff like that.
Operator
That will conclude today’s question-and-answer session and today’s conference call. Thank you for your participation. You may now disconnect.
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