GNSS - Genasys: Hardware Driving Sales But SaaS Becoming Key Part Of Growth

Summary

• Expectations are for a weak to modest first half of 2023 but should gain momentum in the second half.
• SaaS is becoming an increasingly important part of its potential long-term growth success.
• Hardware sales, which represented 90 percent of revenue in the first fiscal quarter, are considered the economic engine that will self-fund its SaaS business.

Since March 15, 2021, Genasys Inc. ( GNSS ) has dropped from approximately $8.10 per share to a 52-week low of $2.40 per share on April 4, 2022, and has since traded in a range of about $2.44 to $4.25, hitting that ceiling several times since November 9, 2021, but never being able to break above it.

It has also had a triple bottom of about $2.45 per share over the last couple of years, which is where support on the floor now stands.

In its recent first fiscal earnings report the numbers were in alignment with management expectations, as it's typically the slowest quarter of the year. The company expects the second fiscal quarter to be modest as well, with business picking up in the second half of calendar 2023.

Approximately 90 percent of company revenue comes from hardware sales at this time, but its SaaS business is starting to show signs of life, and a recent big win from Saudi Aramco, underscores the fact the company can successfully compete against its formidable competitors, although it'll have to prove it can do so on a consistent and sustainable way before it becomes a solid tailwind for the company.

In this article we'll look at its most recent numbers, how things look in the short term, and what it'll take to drive revenue and earnings growth over the long haul.

What it does

Genasys is a company that provides critical communications hardware and software solutions internationally. On the hardware side it provides devices used to project audible voice messages and sirens, along with software that is used by mobile carriers to send out emergency messages in via text, emails, and voice calls. It also provides alerts on desktops, television, and social media.

Among its customers are companies in the private sector, end-users, militaries, and governments.

Some of the numbers

Revenue in the first fiscal quarter of 2023 was $10.5 million, compared to $10.7 million in revenue generated in the first fiscal quarter of 2022.

Gross profit in the reporting period was $4.5 million, compared to gross profit of $5.1 million in the first fiscal quarter of 2022.

Gross profit margin was 43.3 percent in the first fiscal quarter, compared to 48.2 percent last year in the same quarter. The reasons given for the decline were revenue mix, input costs on products, and a boost in costs associated with software that were for the purpose of increasing revenue growth in the software segment.

Net loss in the first fiscal quarter was -$(3.5) million, or -$(0.10) per share, compared to a net loss of -$(1.3) million, or -$(0.04) per share last year in the first fiscal quarter.

Adjusted EBITDA in the first fiscal quarter of 2023 was -$(2.4) million, compared to adjusted EBITDA of -$(412,000) in the first fiscal quarter of 2022.

At the end of calendar 2022 the company held cash and cash equivalents of $7.56 million, compared to cash and cash equivalents of $12.74 million as of September 30, 2022. Including marketable securities, the company had $15.1 million in cash and cash equivalents at the end of calendar 2022.

Short-term outlook

As mentioned above, the first fiscal quarter of any year is usually the slowest one for the company, so the numbers reported above weren't a surprise. And for the second fiscal quarter management expects the numbers to be modest as well.

Past that, it expects business to pick up and gain momentum after the second fiscal quarter and into the second half of fiscal and calendar 2023.

When asked about how he views fiscal 2023, CEO Richard Danforth confirmed it, saying, that in regard to hardware he sees the second fiscal quarter slightly improving over the first fiscal quarter, and hardware revenue recovering in the second half of the fiscal year, led by bookings associated with the U.S. Army.

It should be mentioned that hardware sales can be lumpy and uneven, so from quarter to quarter they can easily beat or miss. The best way to view hardware sales is on an annual basis, as it provides a more accurate picture of demand.

For full fiscal 2023, the company expects strong hardware bookings in APAC, Europe and the Middle East.

How to consider company growth

Hardware continues to be the major revenue driver of the company, and management looks to it as the mechanism to self-finance its growing SaaS business. To that end the company is committed to increasing spending on developing software and its related support network of sales, marketing, and customer service.

Management stated in the recent earnings call that its priority focus was in fully integrating its SaaS solution improving upon what its protective communication platform can do.

As the integration continues it will empower the company to deal with an increasing number of crises, which in turn is creating more demand for the platform.

As its capabilities increase it'll be able to be used during "hurricanes, storm surges, tsunamis, avalanches, flooding, debris flow, wildfires, chemical plumes, active shooter, and other natural and manmade disasters." In the first fiscal quarter the company booked a record $6.1 million, primarily driven by the Saudi Aramco deal. It should be noted that the deal represented total contract value and not annual contract value.

Adding to that were several counties located in California, and it rounded out a good quarter for its SaaS business. The company also stated its SaaS pipeline was up 25 percent over the last few months. As for how this all relates to how to view the growth of the company, the first thing to watch is hardware sales and how they're performing for the year. They need to a minimum maintain growth, and of course at best, continue to at least grow on an incremental basis.

Next is how quickly SaaS sales are ramping up, and if they're becoming a larger percentage of overall sales. Assuming hardware sales continue to grow, if SaaS sales become a larger percentage of overall sales, it would be, in my opinion, a key catalyst that would point to the company breaking out of the trading range it has been stuck in.

Conclusion

There is a growing awareness of the need for high quality communications systems in times of natural and man-made disasters. GNSS has developed such systems on the hardware side and is rapidly improving its SaaS business to expand the types of disasters it can help play a role in that improves public safety.

It has proven it can win some significant contracts, as it has with Saudi Aramco and a number of government jurisdictions, and if it can continue to do so on a consistent basis, it's going to turn into a company that has a lot of tailwinds at its back.

The company is competing in a sector that should continue to grow for some time, and while I think it's going to struggle at least for a couple of quarters, if it can not only gain momentum in the second half of fiscal and calendar 2023, but do so in a convincing way, it could be the catalyst that returns it to sustainable growth in the years ahead. If the stock is to break out, what to look for would be for it to break convincingly past the $4.25 mark, which has been the ceiling since the latter part of November 2021.

Finally, take into consideration if considering taking a position in the stock that it is very thinly traded, so it could be hard to get out of if it makes any quick moves on either side of the play.

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