Route1 Inc. (OTCPK:ROIUF) Q3 2022 Earnings Conference Call November 18, 2022 9:30 AM ET
Company Participants
Tony Busseri – President & Chief Executive Officer
Conference Call Participants
Operator
Good day, ladies and gentlemen, and welcome to the Route1 Third Quarter 2022 Investor Update Conference Call and Webcast. At this time, all participants are in a listen-only mode. Shortly, we will begin the formal presentation. As a reminder, ladies and gentlemen, this call is being recorded today, Friday, November 18, 2022.
I would now like to turn the call over to Tony Busseri, Route1’s President and Chief Executive Officer.
Tony Busseri
Thank you. Good morning, everyone, and thank you for attending the call today. As described on the company slide, I would like to inform listeners that this presentation contains statements that are not current or historical factual statements that may constitute forward-looking statements. These statements are based on certain factors and assumptions, including expected financial performance, business prospects, technological developments and development activities and like matters. While Route1 considers these factors and assumptions to be reasonable, based on information currently available, they may prove to be incorrect. These statements involve risks and uncertainties, including, but not limited to, the risk factors described in the reporting documents filed by the company earlier today. Actual results could differ materially from those projected as a result of these risks and should not be relied upon as a prediction of future events. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, or to reflect the occurrence of unanticipated events, except as required by law. Estimates used in this presentation are from company sources. I also need to point out that on today’s call, we use names that are either registered trademarks or trademarks of Route1 Inc. in the United States and/or Canada.
So let’s get into it, now that we’ve done the formal part of it. As we’re moving forward today, we’re going to be talking about the financial results, as well as the business model. So why don’t we start with the business model part of it.
The company continues to be around 34, 35 employees. Its focus is working with video capture technologies, the creating data that can be used to act on, that data, excuse me, for outcomes for our clients are principally within the parking industry, as well as in public safety, law enforcement.
We also continue to have a strong business unit, our component business that’s tied to MobiKEY and our remote access technology, and we continue, lastly, have the element that’s related to the rugged device reselling.
About a year ago, we started that strong pivot towards focusing on leveraging video capture technologies and the professional services and support we can bring in that arena. And that’s really been our focus over the last couple of quarters to drive improvement and growth in that area. So let’s take that a little farther if we may.
Page four summarizes, where we’ve been as a company and the changes we’ve made to deal with market acceptance first of the MobiKEY technology being less than widespread accepted and more of a nichy technology. In 2018, we moved towards a more integrated or larger business model that dealt with using data for the benefit of our clients. We delivered security. We deliver that data to you, so you can use it, we can analyze it. And then about a year ago, we got more specific, and we went really after the video capture element of the technology arena. We’ve had some good success in it. It’s driven by where the market is going. And we think, again, that we’re going to be quite productive with that going forward.
To summarize on the marketplace for license plate recognition technology, we have a fairly strong view in this area. And specifically, it helped us frame the business that we’re in today and we want to continue to evolve in going forward. Specifically, we have a disconnect. We have clients wanting to use technology to deliver outcomes that are not transactional that are long term in nature. And the industry in our mind has been very transactional, where there’s great OEMs with great intellectual property and the services delivered, they have been, again, very much just a fix or installed versus working with the client to create the experience of the outcome over a longer period of time. So this is where we see the opportunity.
Lots of turnkey engineering services companies that are very transactional that installed video surveillance, that install LPR, the install body-worn cameras or other video capture-based technologies, we think bringing engineering to it, that could be using the data in a way that drives a new outcome. It’s a real-time actionable intelligence, is the area that specifically we can add value in and do some different things. And there’s a consolidation opportunity. So, we’re quite excited about this marketplace. We think it’s fairly immature from the services element, and we’re going — we’re all over that and working very hard to grow into a bigger position.
The way we do that is, there’s a set of services the industry expects or historically come to now. And then there’s the Route1 differentiation. And the differentiation is not just installing hardware, not just setting up the technology bits working with that client to use the data that’s being captured or created in a way that’s productive for them and not productivity on the public safety side, fairly easy and understandable how you use data to provide a more safer community.
But the other aspect is the parking vertical, where we have clients investing in this technology to provide better experiences for the clients or better profitability. Our clients would range from university parking lots to larger corporations that have multiple parking garages. So, it’s not just in the public sector with universities that we work with. We also work with corporate America in providing a better client experience or a better employee experience.
So, going a step further about the Route1 difference, we’ve talked about the relationship we have with Genentech. But one — the reason they’re so positive on us, excuse me, — it really goes to the fact that we are engaged in delivering an outcome for the clients. I can’t hammer that enough. Now, working with the client beyond the initial transaction, the initial transaction would deal with elements such as scoping it out, mapping out where the cameras will go, understanding how the technology would fit within other technologies or systems, the company that we’re serving has and working with them to get that installed perfectly right off the hop.
And then continuing on with them because there will be configuration changes, there will be adjustments to the cameras. There will be expansion to the use of the technology, et cetera, et cetera. We think it’s that latter area, operations optimization, help desk and support, training and continue to work with the client to get the maximum outcome out of their investment. This is the area, again, that we feel the industry is somewhat immature, and it’s an area that we’re aggressively investing in.
Talked a little bit about the Genentech partnership. We think they are a really good partner to work with, not just on the LPR side of the equation. They obviously are big players within video surveillance, and we are trained in that area, and we are starting to grow that aspect of our business. So, there’s a lot more to Route1 than just thinking about license plate recognition technology and our partnership with Genentech. It will go beyond.
But specific to LPR, there are other technologies in the marketplace. We feel that Genentech is a first-class technology and the right company to partner with. They’re highly supportive and we’ve enjoyed that working relationship and we think it’s getting broader and deeper as we’re moving forward here.
Well, that’s a little bit again about the technology, about the focus we have as a corporation. So, you say, well, what are you going to do for the next couple of months, Tony, like what’s the focus? And some of these things are somewhat similar to past comments we’ve made as a corporation. But the next 120 days continues to have an operational focus driving further cash flow of the business.
And what’s that mean? It means improving the working capital position, paying down our debt position, building a deeper pipeline so that the future of our business has a more robust profitability attached to it. We’ve had success with the Spyrus Solutions acquisition we did about 13 months ago.
We’ll talk a little bit about that today where the inventory we acquired has basically been used up. So we’re moving into the area of manufacturing, again, addition PocketVault P-3X product. There continues to be robust demand in our vernacular in our terms. So we are investing in that.
And then you’ll note with today’s quarter, the third quarter was a very good quarter. Some of that’s driven by the fact that some transactions that we expected in the fourth quarter got done in the third. So when we think of the fourth quarter that’s following after this, it’s going to be a little lighter than the third quarter.
And our focus right now, as we stand here in November, it’s finishing up this year strong and getting ready for a very healthy 2023 and building off the third quarter as hopefully more of a common quarter as we go into Q1 and Q2. We are continuing to research and develop I quite often get asked the question, Tony, where with MobiKEY, where is the cloud-based offering? What else are we doing from a software engineering perspective?
I will tell you the last 6 months has been heavily focused, even though we’ve had a reduction in MobiKEY user base or the user base with the DoD, evolving the Route1 MobiKEY technology. So it has a longer life and it’s more applicable to a broader number of client types, and we’ll talk a little bit about that.
MobiLPR we launched about a year ago. It has had some acceptance, but we are tweaking it now to fit better with the parking vertical. We think there’s going to be traction there. We think it’s a differentiator when we sell Genentech’s AutoVu ALPR technology, we can add in then the ability to use an Android device to scan plates and that’s a pretty good value add.
So the — really, the next 120 days is continuing to do what we’ve been doing, do it better, do it more and evolve the technologies we’re bringing into the marketplace. It’s setting up for 2023, where we’ll start acquiring again. And the question is going to be, well, Tony how do you acquire with where you’re at. It’s got to be careful. We’re going to have to be opportunistic. But we do think there’s other — there are companies out there that can be bought right, that will be accretive for us as a business. And we’ll selectively go after that. We also think the stock price where it is today is disappointing and doesn’t fully reflect where the business currently is at. So I think you’ll have to wait and see a little bit on 2023, but I would expect your company to do acquisitions.
So moving ahead, let’s talk a little bit about the results of the business. As you can see, the third quarter wasn’t improved over the second quarter. For us, what’s neat about that as we did have, as we have prior announced some MobiKEY losses, which impacted our subscription revenue, but as a business, we were able to overcome that and do even better than prior quarters.
Unfortunately, because the seasonality and bring in some Q3, Q4 deals into Q3, Q4 will likely not continue that trend. It will be a positive quarter. But we’re really pleased with what we were able to get done in the third quarter. We think the business is tracking well. I wanted to dig a little further into these numbers so that you understand where we’re at. But looking specifically at that recurring revenue number of about $1.3 million. As I’ve just said, the big impact to us is related to application software or MobiKEY revenue. Most of the losses associated with DoD accounts are now through with the exception of a little bit more from our August renewal.
So we still one month that we had a couple of months of recognizing that revenue in the third quarter that won’t be there in the fourth quarter. So our run rate application software revenue is more towards 575,000 to 600,000 a quarter. And that’s where we stand right now as a business. We continue to grow the support contracts. We’ll dig into that. We’ll continue to hopefully grow our professional services business. And so our support contracts are anywhere from one to five years. We do see them as recurring revenue and a nice piece of business to build.
So moving ahead then, going beyond the recurring revenue and talking more specifically about the support contracts, we have set a goal, and I think we have talked about it internally and for sure, and through communications in the public marketplace, we had really hoped to grow our book of contract support agreements from last year’s number of slightly shy of 600,000 to more towards 850.
For this year, we’ve already met that goal, and we suspect we’ll be bigger than that by the end of the year. But there is an appetite in the marketplace for a more comprehensive support plan, a more professional set of services, and we’re enjoying that benefit. We also have inflation. Our costs are up, not naive to that. And therefore, some of that price increase related to better support contracts is related to the cost environment we’re in.
Talking a little bit about LPR accounts by changing the type of service provider we are to one that’s life cycle or adds more value after the primary transaction. We have had some losses with accounts as we’ve shifted the nature of the support plan and the cost of it, but we’ve also had a number of new logos. So our net organic growth today is about 4%. We think that number will grow by the end of the year, because we still have the fourth quarter new logos that in.
The other metric to note is of our 150 accounts, 18% of them have accepted something above what we call our baseline elemental plan. And elemental was a step-up to the prior year pricing, the step-up above elementals called comprehensive. So we’re pleased with the direction of where we’re going with our support program and growing the recurring revenue related to it.
If we move ahead and talk again, drilling down a little bit about LPR as often, people say, well, why are we selling so much product? Why is there a resell component? Well, we do have the bar business for rugged devices, we bought a few companies in that area. The other part to that is when there’s a primary transaction for a new LPR client, we are reselling Genetec hardware. We are reselling Genetec’s software license at the warranties and there’s the sale of our own stuff, our professional services, our support plan.
I apologize if there’s a blower in the background. Not much I can do. It’s outside the building on it.
The secondary transactions or the follow-on transactions are interesting for us. It’s where we get expanded investment triggered by a hardware damage or it could be one instance or it could be — they’re expanding the number of cameras they want on site. There’s the purchase of off-site rent on professional services. I need to buy more configuration hours or I want remote training.
And then there’s declines, I want to improve support plan. They want us to go on site to do preventive maintenance or they want us to go on site to sit down and talk about the medium and longer-term use of the technology towards their goals. There’s the renewal of licensing and support. And then there’s obviously the sale of our software application MobiLPR.
So when you think of our business, because we report it by devices and appliances and then services, note that with the LPR transaction, there still is resell of certain elements, and that’s what I’m describing here for you.
Moving ahead and talking about SPYRUS, now to have of LPR for a second. It’s been a very productive transaction. We’ve talked about in prior quarters. The third quarter was really good for us. We are almost through the inventory that we acquired with the original acquisition. We will be making a further investment later this quarter to support additional EBITDA growth.
When I’m talking about investment, I’m not talking in the millions of dollars, or hundreds of thousands, it’s a further $100,000 to $150,000 of cash to use to build inventory for appeals that are in hand. We recently got one from a large government client in the province of Ontario, Canada. We have the ongoing relationship with the state department through our partner, ATCD [ph], where we support them with PocketVault P-3X under our contract for another almost two years.
So we do expect revenue that continue to be robust. Is it going to be 500,000 or 300,000 or 200,000 a quarter, no guarantees around that, but it will contribute EBITDA to us. We’ve more than paid back the original investment through the acquisition in SPYRUS. So it’s all where we’re in rainy time as some like to say.
From a cost management perspective, Q3 was again down from Q2. There is adjustments to the Board of Director costs and certain other cost savings that we acted on. The level of 1.4 million to 1.45 million costs without amortization is a level I would expect us to be for the next couple of quarters, if there’s growth, then we may have sales reps and continue to build the business. But the truth is, where we are right now, this is a good level for us as a business.
From a balance sheet perspective, I know one of the questions is going to be your bank debt went up, it did. But if you looked at it a couple of weeks later, it’s down, and that’s because towards the end of the quarter, as I mentioned earlier, we are able to pull certain Q4 transactions into Q3. So there’s some excess profit on the balance sheet that’s now been realized on.
I often get asked this question on the Audit Committee, where are you with the receivables at the end of September or at the end of a particular quarter. We have not had any bad debt, people have paid us. So what I take away from this balance sheet is this, the net baked-in a promissory note number should most likely will be reduced from the $3 million level at the end of September, okay? It often goes the timing of when transactions are completed. There will be a smaller current asset, current liability number.
Our working capital will continue to improve. And as a business, we continue to have lines available to us for the nature of our business, build evenly every week of a month. So we have the availability. We’re in a good position. Are we sitting here flush with a few million dollars in the bank? No. But our – we’re drawn to a level from time-to-time where we’ll have between $0.5 million to $750,000 of available lines to us. So no “panic”, I just can’t reiterate enough that, the view that, we’re about to hit a wall or we’re moving towards a wall, it’s just inaccurate.
I get what you’re looking at, because I look at it, but I also see where we are daily and the number came down quite quickly after September 30, simply because we collected AR, paid off the AP Associated with it, and make the profit from the deals.
So moving ahead again a little bit on the details of the debt, I’m breaking it down. We have two lines, RBC and Vectra. We paid out the – we’ve completed with the Spyrus promissory note. We’re working down on a promissory note from the last little bit of the PCS Mobile acquisition, and we will be paying out the Windsor promissory note by the end of April 2024.
So, there’s amortization plan in place for that. As the corporation is manageable, you never know what circumstances are going to hit you in the future. But as of today, I would have said, the same statement in each of the past quarters, we’re set up with the balance sheet to support where we want to be. There is no microcap CEO that will ever say that, they have enough cash, especially, if you want to do acquisitions.
So our job is always to balance risk that we put on the balance sheet, with debt with rewarder upside, which is new EBITDA through the issuance of stock or additional debt – so it’s a balancing act that we want to get bigger. We don’t like where we’re being valued. We want to create longer-term shareholder value. And we think the path to doing this is paying down debt based off of the current operation mix we have. And if we find new opportunities, transact at highly favorable terms to the company.
So again, trying to thread the needle a little bit, but we think we have the ability to do it based off of some of the deals we’re looking at. So again, to be repetitive, what we’re looking at over the next 120 days is managing working capital, repaying debt, building pipeline, not just with LPR, but video surveillance and a rugged device bit, putting in place the building blocks for the manufacture of additional PocketVault devices, which is working with contract manufacturers to source the components, which is a challenge in the technology marketplace. But we’ve already pre-bought a bunch of the things required and build the next 64, 128, 256 and 512 gigabyte PocketVault P-3X products, which is effectively a encrypted stack that’s highly secure. So it’s another way for people to be mobile, different than MobiKEY, but we think it’s a great add-on product in the mix of secure remote access.
We want to advance and be able to talk with you when we announce our Q1 results about success with Route1 cloud-based next-generation offering, advancing MobiKEY or maybe rebranding it. We want to talk about MobiLPR in the context of parking management use cases, and we hope to be sharing with you about the deal between now and then.
So, I think the business is set up. It’s gone through an interesting period of time, as we responded to changes in the marketplace are significant ones. And we’re working towards success as we move forward here, so quite pleased with the business. I decided not to take questions today quite often on these calls. There’s only a few listeners and a lot of people reach out to me and do one-on-one afterwards, which clearly is the preferred method and I welcome that.
So, where we are now is that we’ll be speaking with you either reporting on year-end results next or a material event that might look like an acquisition between now and then. But regardless, I look forward to speaking with you over the next 100, 120 days. So, I’m going to wrap up today’s call. I encourage you that, if you want to speak with me, I have an e-mail and the phone number that are in every press release, I take every call unless you’re calling me to talk about my haircut. So I’ll leave it there.
Operator, at this time, I’m going to close this up. So, I’d like to thank everybody for joining us for today’s conference call. For any of you, who may have joined the call while in progress, a replay will be available at toll free 1-877-481-4010 or international at 919-882-2331, passcode 47107. I will be available until 4:30 on November 25. A copy of this slide deck will be available on our website shortly. We look forward to speaking with you as we described with our year-end results or some other event that will trigger a discussion. So over to you, operator.
Operator
Thank you, sir. Ladies and gentlemen, this does conclude today’s conference. You may disconnect your lines, and have a wonderful day. Thank you for your participation.
Question-and-Answer Session
End of Q&A
Be the first to comment