2023-11-30 17:22:24 ET
Summary
- Rekor Systems, Inc. reported Q3 2023 financial results that missed revenue and earnings estimates.
- The company is focused on winning state-level contracts for its Urban Mobility segment in the U.S.
- Rekor Systems' financial position is uncertain due to substantial operating losses and large free cash flow use.
- While the firm may win state contracts, the ensuing revenue growth may be "lumpy and hard to predict."
- I remain Neutral [Hold] on Rekor Systems, Inc. shares in the near term.
A Quick Take On Rekor Systems
Rekor Systems, Inc. ( REKR ) reported its Q3 2023 financial results on November 14, 2023, missing both revenue and consensus earnings estimates.
The firm sells software to public transportation entities and commercial customers in the United States and internationally.
I previously wrote about REKR with a Hold outlook on revenue growth combined with high operating losses.
Much of the company's focus is on winning and executing state-level contracts for its Urban Mobility segment in the U.S.
Given the uncertainty of future contract wins, financing its implementations, and continued substantial operating losses, I reiterate my previous rating for Rekor Systems, Inc. of Neutral [Hold].
Rekor Systems Overview And Market
Maryland-based Rekor Systems provides software and related services to cities seeking to improve their transportation infrastructure and to enterprises.
The firm is led by president and CEO Robert Berman, who has been with the company since March 2016 and was previously Chairman and CEO at Cinium Financial Services Corporation and Chairman and CEO of Empire Resorts.
REKR'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 company seeks new 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.
According to a 2023 market research report by Grand View Research, the global market for transportation management system software and data was an estimated $10.45 billion in 2022 and is forecast to reach $31.5 billion by 2030.
This represents a forecast strong CAGR of 14.8% from 2023 to 2030.
The primary reasons for this expected growth are growth in ecommerce and retail industries, increasing usage of advanced transportation systems, and a desire to reduce costs.
Below is a chart showing the historical and projected future U.S. transportation management systems 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 Systems' Recent Financial Trends
Total revenue by quarter (blue columns) has continued to grow; Operating income by quarter (red line) has remained substantially negative, as shown below:
Seeking Alpha
Gross profit margin by quarter (green line) has trended higher; Selling and G&A expenses as a percentage of total revenue by quarter (amber line) have dropped from excessive figures but remain quite high:
Seeking Alpha
Earnings per share (Diluted) have remained materially negative:
Seeking Alpha
(All data in the above charts is GAAP).
In the past 12 months, REKR's stock price has risen by 195.4% vs. that of the iShares Expanded Tech-Software Sector ETF's ( IGV ) gain of 44.2%:
For balance sheet results, the firm ended the quarter with $7.1 million in cash and equivalents and $10.1 million in total debt, all of which were categorized as long-term.
Over the trailing twelve months, free cash used was ($38.3 million), mostly from its net loss, during which capital expenditures were $1.7 million. The company paid $4.4 million in stock-based compensation in the last four quarters.
Valuation And Other Metrics For Rekor Systems
Below is a table of relevant capitalization and valuation figures for the company:
Measure (Trailing Twelve Months) | Amount |
Enterprise Value / Sales | 7.1 |
Enterprise Value / EBITDA | NM |
Price / Sales | 5.6 |
Revenue Growth Rate | 117.8% |
Net Income Margin | -137.1% |
EBITDA % | -120.6% |
Market Capitalization | $196,380,000 |
Enterprise Value | $216,660,000 |
Operating Cash Flow | -$36,640,000 |
Earnings Per Share (Fully Diluted) | -$1.47 |
Forward EPS Estimate | -$0.30 |
Free Cash Flow Per Share | -$0.64 |
SA Quant Score | Hold - 3.35 |
(Source - Seeking Alpha.)
Commentary On Rekor Systems
In its last earnings call (Source - Seeking Alpha ), covering Q3 2023's results, management's prepared remarks highlighted recurring revenue for the first nine months of the year, accounting for 62% of total revenue.
The company also expanded its footprint internationally in Latin America, EMEA, Asia, and via its OEM licensing and reseller channels.
Management said its customer pipeline for its U.S. Urban Mobility continues to expand, "with an additional 14 pilot programs already underway in various states."
In the earnings call, I tracked the frequency of various keywords and terms used by management and analysts:
Seeking Alpha
The chart highlights the "challenges" the firm is facing with constraints with funding and from the weather in the Southeast U.S. that has disrupted road operations.
Analysts asked leadership about its Urban Mobility segment, debt-based funding of implementations, and state-level contracts driving revenue growth.
Management said that its Urban Mobility segment provided a large percentage of bookings in Q3 and is likely to continue that growth in Q4 2023. The firm is focused on rolling out its IoT sensors nationwide.
Leadership believes that debt-based funding is the most efficient way to fund large-scale implementations and that it has structured replicable debt financing at favorable terms that can support its scaling efforts.
Management says that state contracts are quite sticky, lasting 5 - 10 or more years, although they require the company to improve its funding and footprint execution capabilities to install its systems over large road areas.
Total revenue for Q3 2023 rose by 145.9% year-over-year while gross profit margin increased by 12.2%.
Selling and G&A expenses as a percentage of revenue fell by 203.4% YoY and operating losses were reduced by 37.6% to a still substantial $9.8 million for the quarter.
The company's financial position is uncertain, given its large free cash flow usage in the past four quarters.
Looking ahead, consensus revenue estimates for 2023 indicate revenue growth of 89.3% over 2022.
If achieved, this would represent an increase in revenue growth rate versus 2022's growth rate of 71.55% over 2021.
In the past twelve months, the firm's EV/Sales valuation multiple has increased by a net of 61%, as the chart from Seeking Alpha shows below:
A potential upside catalyst to the stock could include additional state-level contract wins and faster implementation capabilities as the firm increases its headcount.
However, these potential contract wins will likely be unpredictable and "lumpy," while the stock may be subject to headline-induced volatility.
Given the uncertainty of future contract wins, financing its implementations, and continued substantial operating losses, I reiterate my previous rating of Neutral [Hold].
For further details see:
Rekor Systems Focuses On Urban Mobility Segment For State Pilots