Rekor Systems, Inc. (NASDAQ:REKR) Q4 2023 Earnings Call Transcript

Rekor Systems, Inc. (NASDAQ:REKR) Q4 2023 Earnings Call Transcript March 25, 2024

Rekor Systems, Inc. misses on earnings expectations. Reported EPS is $-0.16 EPS, expectations were $-0.11. Rekor Systems, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to today's Rekor Systems, Inc. Conference Call. My name is Alicia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. Before we start, I want to read you the company's abbreviated Safe Harbor statement. I want to remind you that statements made in this conference call concerning future revenues, results of operations, financial position, markets, economic conditions, product and product releases, partnerships and any other statements that may be construed as a prediction of future performance or events are forward-looking statements.

Such statements can involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such statements. We ask that you refer to the full disclaimers in our earnings release. You should also review a description of the risk factors contained in our annual and quarterly filings with the SEC. Non-GAAP results will also be discussed on the call. The company believes the presentation of non-GAAP information, provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. I now would like to turn the presentation over to Mr. Robert Berman, CEO and Chair of Rekor Systems Board of Directors.

Robert Berman: Hi, everyone. Thank you for joining us. We really appreciate your interest in us and the support so many of you have given us, over - the past year. Before we begin our discussion, I just want to mention a recent change we made in the scheduled date for our planned Investor Day. Originally, we announced that our investor conference will coincide with the date of our Annual Meeting, because we thought it would be convenient to take advantage of the facilities that we have reserved, for the Annual Meeting at NASDAQ's headquarters in New York. With a number of things that are moving forward at Rekor, we thought the timing for the Investor Day should be moved back a bit. As a result of the day change, we've decided to include some of the narrative on the investment thesis for Rekor in today's presentation.

Before I turn the call over to Eyal, I'd like to take some time to tell you why I believe so strongly in what we're doing and in Rekor itself. For some of you, things may appear as if they aren't happening fast enough. Let me tell you, when you consider all the demands of working with government, progress is happening and at lightning speed. Having spent much of my career in businesses regulated by both state and federal governmental agencies, I can say that we've been well received and making progress at a rate that is much faster than one could expect and certainly nothing like I've ever experienced. I wish I could share all of what we're working towards with you. This just is impossible for many reasons, from disclosure rules, procurement requirements and frankly, our need to be careful to maintain our first mover status, and limit the efforts of our competitors to copy us, or pretend to be us.

But there is a sea change coming, driven by a technology refresh that's needed in a massive global industry, an industry that has had its last tech refresh over 30 years ago. As you'll hear from David today, there have been many technological advances that gave Rekor, the ability to build the platforms we have. Our tech is best-in-breed and adoption is happening. The first wave of this refresh is on the horizon, and we can see it. I can say that we're in serious discussions and negotiations with multiple governmental agencies, and in many cases, we find that we are alone at the table. Our 2023 results are pretty damn good for a young company, judiciously managing its capitalization and accomplishing all that we have in such a short time frame.

The first wave has already hit for sure, but I firmly believe there is tsunami on the horizon. Many of you call and reach out and offer helpful suggestions, or to suggest the company just does not communicate as much as it should. I'm sorry, some of you feel this way - and think that things just haven't happened fast enough. What I'm confident that in 2024 is going to be a year where Rekor breaks out and I hope you all get to enjoy the benefit of what's ahead. So let me now turn the call over to Eyal.

Eyal Hen: Thank you, Robert. Robert will be back shortly with our President and COO, David Desharnais, to give you some insight into the future. But first, I want to discuss Rekor Systems' year-end results for the period ending December 31, 2023. 2023 has been a landmark year for Rekor, marked by outstanding financial performance and strategic growth. We are thrilled to report another significant uplift in our top line, with a 75% increase in annual revenue, and a 21 rise over - and 21% rise over the preceding quarter revenue. The fourth quarter was particularly notable, with revenue reaching $11.1 million. This represents a substantial increase over both the prior year and the preceding quarters. Our total revenue for the year stood at $34.9 million, even though we are also focused on reducing our operational cash usage.

Our adjusted gross margin improved markedly to 59.8%, showcasing the impact of our technological advancements and operational efficiencies, as well as the synergies achieved as we integrated the acquisition of STS. These improvements enabled us to significantly reduce our operating loss from $50.9 million in 2022 without goodwill impairment to $42.1 million in 2023. In addition, we saw a continued reduction of losses in adjusted EBITDA throughout the year, a testament to our sustained growth momentum and operational discipline. The year was highlighted by executing contracts worth of $49.1 million, a substantial increase from the previous year, with our remaining performance obligation at year-end standing at $26.4 million, ensuring a continued revenue stream.

2023 was also characterized by successful equity and debt transactions that enhance our liquidity. In January 2023, we completed a significant transaction involving senior secured notes of $12.5 million, led by our CEO, Robert Berman, alongside other new and existing investors. This notes were fully redeemed in February 2024, with part of the redemption price paid in common stock, at a conversion rate of $2.50 per share. In March 2023, we also completed a registered direct offering for $10 million. In July, a warrant holder exercised warrants, resulting in approximately $11 million of cash proceeds. In December 2023, we also closed on the sale of $15 million of our Series A prime revenue-sharing notes. This unique structure develops a financing mechanism for us that, unlocks the value of the strong revenue stream that our contracts provide, for scaling our business.

We expect to issue additional series of notes under the same structure when required, as we sign more long-term contracts that require capital expenditure investments ahead of the motivation. We used a portion of the cash proceeds from the above, to acquire all traffic data or ATD in January 2024. In February 2024, we also completed a follow-on offering with William Blair, for a net amount of $26.5 million. We used some of the cash from the offering, to redeem the senior secured notes. The strategic financial management contributed to a cash balance of $15.4 million as of December 31, 2023, up from $1.9 million at the end of the previous year. Our working capital position also improved substantially, demonstrating our enhanced financial health and operational efficiency.

In closing, 2023 was a year of dynamic growth, strategic achievements and solid financial health for Rekor, as we've built for the future of digital infrastructure and roadway intelligence. Looking forward, we continue to be confident in the potential of our technology development, strategic acquisitions and the continued support of our investors. Thank you for that. With the overview for 2023, I'm pleased to now give the floor to David for his remarks on our path forward in 2024. David?

David Desharnais: Thank you, Eyal. Good afternoon, and thank you for joining us today. Rekor achieved many critical milestones in 2023, including several new major products and platforms launched to market, multiple new technology patents filed and awarded, a 3x expansion in our production and distribution capacity, and a 30% increase in new customers. As Eyal mentioned, this led to a 75% growth in revenue year-over-year, improved margins and a significant reduction in operating expenses. Also, in terms of customer acquisition costs versus long-term value, our CAC-to-LTV ratio brings in at an incredible 7.7 times, more than twice that of which is considered to be a well-run technology company. Despite aggressive moves from well-funded public and private legacy players in the market, Rekor has continued to stand out as the technology leader in the industry for each of our business lines in 2023.

The fact is we consistently outperform all others in the industry when it comes to system capability, performance and accuracy on any road and in any mode. Now let me tell you why the conditions are excellent for continued and exceptional growth for Rekor in 2024 and beyond. We are at the nexus of two industry-wide transitionings happening right now. The first is a refresh of physical infrastructure, with digital infrastructure that is happening right now. A simple visit to the U.S. Department of Transportation website will confirm that after multiple decades of underinvestment, U.S. Roadways and Infrastructure are in bad shape, rated a C minus on the official U.S. DOT scorecard. This scorecard also calls out that 65% of existing roadways and 45% of bridges, are in a state of serious disrepair and highlights the negative impact that this is having on citizen safety, personal financial losses, and the competitiveness of the U.S. national economy.

The roadway infrastructure isn't just about concrete, asphalt and steel. It also includes all the equipment, and tools that we all depend on to identify and count vehicles, shape and manage traffic, monitor, respond to incidents, and operate and plan roadways and communities. Every year, state DOTs must perform millions of federally mandated traffic studies in order to secure funding for roadway operations, maintenance, planning and projects. These studies are done using a combination of the multiple millions, of rubber tubes you see running across streets, antiquated CCTV cameras, inductive loops, piezoelectric sensors and radar devices that you see embedded in, on and around our roadways. All of this equipment was installed over the past 70 years in successive and massive waves of technology refresh every 15 to 20 years.

The first wave started in the 1950s and '60s, with the advent of pneumatic tubes. This was followed by a second wave in the '70s and '80s with in-ground devices like loops and piezos and more. The most recent and massive refresh of technology for roadways, happened in the mid-90s, approximately 30 years ago now, with the introduction of side-firing radar devices that you can see today hanging from poles on the highway, at approximately every quarter mile or so. Due to being 30-year-old technology, these radar systems are known to have high failure rates and are raising safety concerns for drivers with multiple radar systems that are built into most cars today. And since these devices are yesterday's tech, they're not able to be updated, and can't fully capture and report on the vehicle classes, counts and speeds now required by the U.S. Department of Transportation and Federal Highways Administration.

Like the previous waves of technology, these radar systems are analog and disconnected. They are no longer useful, practical or safe and are far beyond obsolescence. Between all three previous waves of technology refresh, there are literally millions of these obsolete sensors and devices littered across U.S. roadways today, and it's estimated that up to two-thirds of them don't even work at all. As a result, public safety and transportation agencies that are responsible to deliver safer, smarter, greener roadways and communities are being deprived of necessary and accurate data, they need to do their jobs effectively. They're eager for new tools, data and insights, they need to put everything in plain sight and in real time. As the rest of the world modernizes around them, public safety, urban mobility, and transportation management agencies, are struggling to keep up with ever increasing demand and the expectations of their job.

You've likely experienced this yourself. Even with new technologies in our cars and smartphones, we face increasing challenges getting from point A to B predictably. Our news is filled with reports about congested roads, deteriorating road conditions, collapsing bridges, and the concerning fact that vehicles, are the primary sources of greenhouse gas emissions now reaching unprecedented levels, increasing a deepening sustainability crisis. And sadly, roadway collisions continue to be the leading cause of death among children and adults under 30. All of this and more can be faster improved with safer, smarter and greener roadway infrastructure. Roadway infrastructure is the backbone of public safety, transportation and competitive and smooth running economy.

Currently, the U.S. is ranked number 13 in the world for infrastructure resiliency, and following further behind. Addressing this gap with urgency has become a categorical imperative for the federal government, and this has ticked off a whole new investment cycle and wave of technology refresh to build the next $1 trillion of infrastructure. In addition to the approximate $250 billion that is already dedicated to roadway infrastructure every year, and funded by the motor fuel excise taxes, the new bipartisan infrastructure law has authorized an additional $326 billion, for modernizing and digitizing roadways, another $15 billion for the electrification of transportation and tens of billions more for improving public safety and sustainability.

This once-in-a-generation level of additional funding is expected to top $1.2 trillion. We expect approximately $350 billion of that new investment applies to the areas that Rekor technology serves. So as the first major trend, the transition to digital infrastructure is already well underway, and it is industry-wide. This brings me to the second trend. The increasing adoption of AI and other new technologies in what is another industry-wide transition. Simply put, the pace at which our customers are gaining confidence in embracing artificial intelligence, machine learning, computer vision, edge processing, 5G, cloud and even now generative AI is accelerating as they move along the S-curve of technology adoption. These are all areas of strength for Rekor.

Our software, state-of-the-art NVIDIA GPU-based hardware systems, ability to fuse together and process trillions of data points of mobility data, sourced from key partners in the ecosystem, and our multimodal composite AI solution stack, extend seamlessly across edge IoT, cloud and on-premise environments. This means our customers can easily deploy Rekor within their existing workflows, data sets and infrastructure. We've taken a deliberate approach of radical simplification here, making the complex simple so our customers can gain immediate and obvious value. With multiple patents filed and granted already and others in the works, being the leader in digital infrastructure and roadway intelligence, is what we've been pioneering for some time now and it's working.

The combination of these two industry-wide trends is opening up a whole new world of high-value applications that will translate into a very significant business over the time. As our 2023 results demonstrate, we're off to a strong start. Looking ahead in 2024, we expect to more strongly verticalize our go-to-market activities deliver margin improvement and cost leverage, as we drive continuous improvements in productivity and efficiency, and grow our expertise in managing product mix and pricing. All new products we launch this year, will be built on our existing platforms. So our investment curve can be less steep, and the time to profitability should reduce. As our customer base expands, we'll continue to build out our sales, technical support, production and field distribution infrastructure, to ensure that we can meet and exceed customer demand across the U.S. with improvements in technology, automation and roadside experience and expertise.

We're also continuing to build our system capacity, partnering closely with global technology leaders, such as NVIDIA and AWS to prepare capacity for multibillion dollar scale, all while keeping our current customers and systems operating at the highest levels of performance on a 24/7 basis. We'll also continue to enhance the scope of our current product and service offerings. For example, monitoring of greenhouse gas emissions from vehicles, the largest contributor to greenhouse gas of any sort, is the most recent addition to our product and service offerings. We're now working with states and federal government so that the states will be able to prove, through accurate vehicle emission data on the roadways that they can clear the air, along with multiple other studies they must perform.

We believe we stand alone in our ability to deliver this. In summary, we remain confident in our ability to execute on our plan for 2024, and are well positioned for another year of outstanding growth. I look forward to providing you continued updates and further details on our progress throughout the year ahead. At this point, I will turn the call over to Robert Berman, CEO and Chairman of Rekor for final remarks and Q&A. Robert?

Robert Berman: Thank you, David. To sum things up, I want to go back to my opening remarks. This is a once in a lifetime opportunity, to participate in a massive technology refresh. It's impossible to control the timing of this day-by-day or even month-by-month. I'm certain, however, this will be as clear as it can be this year. Patience is rewarded along with hard work. We'll keep doing this hard work, and hope you'll continue your support and find the patience, to help us sail the ship into the harbor. I would like to add that management, has received nearly a dozen requests to have calls, with individual investors after this call. This is just not practical for us to do, and we'd greatly appreciate that you ask your questions here and now, and we'll do our best to answer them for the benefit of all of our shareholders. Thank you. Hello?

David Desharnais: Operator?

Robert Berman: Operator, do we have any questions?

David Desharnais: We have some questions in the queue…

Operator: I apologize. Can you hear me now?

David Desharnais: Yes, we can.

Robert Berman: Yes, we can hear you. This is Robert.

Operator: I apologize. I apologize. I was prompting for Q&A, but I guess my microphone wasn't working. I apologize for the technical difficulties.

Eyal Hen: Let's get to it.

Robert Berman: Let's get to it. And just what questions we have.

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