Summary
- Rekor Systems recently reported its Q2 2022 financial results.
- The firm provides a range of transportation system management software and data in the United States.
- REKR has recently acquired firms to expand its offerings and footprint.
- Now, management needs to ignite organic revenue growth while reducing operating losses.
- Until we see evidence of achieving those twin goals, I'm on Hold for REKR.
A Quick Take On Rekor Systems
Rekor Systems ( REKR ) reported its Q2 2022 financial results on August 11, 2022, beating expected revenue while missing EPS estimates.
The company provides transportation management software and data for a variety of applications for public and private customers.
Until the firm can make a meaningful move toward operating breakeven while igniting organic revenue growth, I'm on Hold for REKR.
Rekor Systems Overview
Columbia, Maryland-based Rekor Systems was founded to provide software and related services to cities seeking to improve their transportation infrastructure.
The firm is headed by President and Chief Executive Officer, Robert Berman, who has been with the firm since March 2016 and was previously Chairman and CEO at Cinium Financial Services Corporation, and Chairman and CEO of Empire Resorts.
The company's primary offerings include:
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Roadway monitoring and response
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Real-time traffic analytics
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Public safety and compliance
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Live and archival traffic view
The firm acquires customers in the public and private sectors via its direct sales and marketing outreach and is seeking to focus its efforts on subscription software and data accounts.
Rekor Systems' Market & Competition
According to a 2022 market research report by Grand View Research, the global market for transportation management system software and data was an estimated $9.2 billion in 2021 and is forecast to reach $31.4 billion by 2030.
This represents a forecast strong CAGR of 14.6% from 2022 to 2030.
The main drivers for this expected growth are growth in ecommerce and retail industries, increasing usage of advanced transportation systems and a desire to reduce costs.
Also, below is a chart showing the historical and projected future U.S. transportation management systems market:
U.S. Transportation Systems Management Market (Grand View Research)
Major competitive or other industry participants include:
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3GTMS
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Cerasis
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IBM
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Kuebix
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Manhattan Associates
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JDA Software Group
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MercuryGate International
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BluJay Solutions (E2open)
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Descartes Systems
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Infor
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Trimble Transportation
Rekor's Recent Financial Performance
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Total revenue by quarter has varied markedly in recent quarters, as the chart shows below:
5 Quarter Total Revenue (Seeking Alpha)
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Gross profit by quarter has followed a similar trajectory to total revenue, in some respects:
5 Quarter Gross Profit (Seeking Alpha)
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Selling, G&A expenses as a percentage of total revenue by quarter have remained in excess of total revenue:
5 Quarter Selling, G&A % Of Revenue (Seeking Alpha)
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Operating losses by quarter have worsened materially in recent quarters:
5 Quarter Operating Income (Seeking Alpha)
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Earnings per share (Diluted) have also remained substantially negative, as the chart shows here:
5 Quarter Earnings Per Share (Seeking Alpha)
(All data in above charts is GAAP)
In the past 12 months, REKR's stock price has fallen 88.6% vs. the U.S. S&P 500 Index's drop of around 11.3%, as the chart below indicates:
52 Week Stock Price (Seeking Alpha)
Valuation Metrics For Rekor Systems
Below is a table of relevant capitalization and valuation figures for the company:
Measure ((TTM)) | Amount |
Enterprise Value/Sales | 5.49 |
Revenue Growth Rate | 2.2% |
Market Capitalization | $70,680,000 |
Enterprise Value | $75,510,000 |
Operating Cash Flow | -$34,010,000 |
Earnings Per Share (Fully Diluted) | -$0.99 |
(Source - Seeking Alpha)
Commentary On Rekor Systems
In its last earnings call (Source - Seeking Alpha ), covering Q2 2022's results, management highlighted its revenue model transition from a 'point-in-time revenue to recurring revenue' model, focused on software and data services sold on a subscription basis.
The firm said that in the year since beginning its transition, it has 'reached a point where the growth in our recurring revenue has essentially compensated for the decline in point-in-time revenues.'
The company recently completed its acquisition of Southern Traffic Solutions ((STS)) for total potential consideration of $14.5 million. STS provides traffic engineering and data collection expertise, with a significant footprint in the Southeast U.S.
The STS deal is expected to add $15 million in revenue for fiscal 2022, 50% of which is recurring, and $3 million of EBITDA.
As to its financial results, total revenue was essentially flat year-over-year while gross profit dropped materially.
Operating losses worsened significantly due to its Waycare acquisition and additional headcount.
Management did not disclose the company's net dollar retention rate, an important metric providing visibility into its product/market fit and sales and marketing efficiency.
For the balance sheet, the company ended the quarter with $14 million in cash and equivalents and long-term debt of $2.4 million.
In the trailing twelve months, the firm has used free cash of $42 million.
Looking ahead, management intends to 'consolidate operations, concentrate on near-term profitability and steadily reduce headcount growth.'
Regarding valuation, the market is valuing REKR at an EV/Sales multiple of around 5.5x.
The SaaS Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 7.7x at July 31, 2022, as the chart shows here:
SaaS Capital Index (SaaS Capital)
So, by comparison, REKR is currently valued by the market at a discount to the broader SaaS Capital Index, at least as of July 31, 2022.
The primary risk to the company's outlook is an increasingly likely macroeconomic slowdown or recession, which may slow sales cycles and reduce its revenue growth trajectory.
Rekor is turning toward a cloud-centric approach and appears to be making good progress in that regard.
However, its legacy business may continue to slow its growth rates while the subscription revenue model also represents a slower organic revenue recognition ramp while expenses remain high.
REKR is at a critical point in its trajectory, and management will need to show significant revenue growth while rationalizing expenses.
Until the firm can make a meaningful move toward operating breakeven while igniting organic revenue growth, I'm on Hold for REKR.
For further details see:
Rekor Systems Aims For Revenue Growth But Operating Losses Remain High