Cemtrex, Inc. (NASDAQ:CETX) Q4 2023 Earnings Call Transcript

Cemtrex, Inc. (NASDAQ:CETX) Q4 2023 Earnings Call Transcript December 21, 2023

Cemtrex, Inc. beats earnings expectations. Reported EPS is $-0.92, expectations were $-3.59. CETX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the Cemtrex Fourth Quarter and Full Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation.

Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Throughout today’s discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. A press release detailing these results was issued on December 21 and is available in the Investor Relations section of our company’s website, cemtrex.com. Your hosts today are, Saagar Govil, Chief Executive Officer; and Paul Wyckoff, Chief Financial Officer, will present unaudited results of operations for the fourth quarter and full fiscal year ended September 30, 2023.

At this time, I will turn the call over to Cemtrex Chief Executive Officer, Saagar Govil.

Saagar Govil: Thank you, Operator. And good afternoon, everyone. I’m pleased to welcome you to today’s fourth quarter and full fiscal year 2023 financial results conference call. The fourth quarter of fiscal year 2023 was highlighted by a third consecutive quarter of operating profit, driven by the company’s realignment and operating performance improvement. For the full-year, Cemtrex had revenue of $59.7 million, an increase of 33%. In combination with operational improvement, the full-year also led to a gross margin improvement of 680 basis points to 44%. We continue to expect increases in our gross margin going forward over time as we make further enhancements in our businesses. Overall, fourth quarter operating income was positive for the third quarter in a row at $0.2 million, compared to an operating loss of $3.1 million a year ago.

We also believe that there is room within our inventory and asset base to draw extra liquidity in order to continue to maintain a healthy cash position. Revenues in our security segment were led by Vicon, with full-year revenues improving 46% to $34.7 million, exceeding our earlier expectations of $28 million for fiscal year ‘23. Revenue was driven by orders from border protection, corrections facilities, and other customers for our award-winning Roughneck cameras and Valerus video management software solutions. Vicon orders included a large correctional facility and current end customer that upgraded its security technology system with the new Valerus software and hardware with a $1.5 million order. Increasing modernization of the current security infrastructure is accelerating the growth of the border security market, driven by the rise of geopolitical instabilities and an increase in border threat assessment.

As customers seek to modernize their current security infrastructure, Vicon continues to stand out with its advanced technologies and products. Recently, Vicon launched a new cloud security platform called Anavio that integrates video, access, and intercom into one easy-to-use system powered by AI and face-based authentication. This new cloud platform allows us to create more value in our business over time by evolving Vicon into a recurring revenue business model. Additionally, with AI at the core of our roadmap in Anavio, we’re excited to layer a new capabilities and benefits for our customers to deliver the most cutting-edge security solutions over the months and years to come. With the launch of Anavio, along with continued improvements to our core software platform Valerus, we expect to drive further growth and see additional opportunity to grow gross margin percent in 2024.

Revenue for our industrial services segment, AIS, increased 18% during the full-year to $25 million, exceeding our original target of $21.8 million for fiscal year 2023, and up from $21.2 million in 2022. The increase was mainly due to increased demand for our services and supported by the close of our highly synergistic acquisition of Heisey mechanical. Based in Columbia, Pennsylvania, Heisey is focused on steel fabrication and contracting, primarily to the commercial and industrial water treatment industry, as well as other service industries. Heisey provides the water treatment industry with a variety of fabricated vessels and equipment, including ASME pressure vessels, heat exchangers, mixed tanks, reactors, and other specialized fabricated equipment.

With the acquisition enabling AIS to expand into new markets, including government and industrial verticals. During the quarter, AIS received a million-dollar order for the Pennsylvania, Stewartstown Borough Authority’s, Stewartstown Wastewater Treatment Sludge Dewatering improvements project. The acquisition brings over approximately $11 million in immediately accretive annual revenue at approximately $775,000 in adjusted EBITDA when averaged over the last four years. With its client list of commercial and industrial facilities, a seasoned team, and extensive manufacturing equipment. The transaction was accretive in the fourth quarter of fiscal year 2023. Along with the business purchase, the company also acquired the real estate, the business occupies in Columbia, Pennsylvania.

The gross profit margin for AIS improved to 34% for the year, compared to 30% for the year prior, driven by increased prices and lower subcontractor cost. I’ll now turn the call over to Paul Wyckoff, CFO to discuss financials. Paul?

Paul Wyckoff: Thank you, Saagar. Revenue for the full-year of 2023 totaled $59.7 million, compared to revenue of $45 million for the full-year of 2022, a 33% increase year-over-year. Revenues for the fourth quarter of 2023 were $16.9 million, compared to the $11.8 million for the fourth quarter of 2022, an increase of 44%. The increase in revenue for the year was due to increased demand for our company’s products and services. The security segment revenues for the years ended September 30, 2023 and 2022 were $34.7 million and $23.8 million respectively, an increase of 46%. The increase was due to an increase in demand for security technology products under the Vicon brand. Industrial services segments revenues for the full-year of 2023 increased by 18% to $25 million, primarily due to the increase in demand for its products and services and the additional revenue from the business related to the acquisition of Heisey Mechanical.

Gross profit for the full-year of 2023 was $26 million or 44% of revenues, compared to gross profit of $16.6 million, or 37% of revenues, for the same period a year ago, mainly attributed to increased demand for products and services along with increased prices and lower subcontractor costs. Fourth quarter gross profits of $7.2 million increased 58% from $4.5 million in the prior year’s fourth quarter. Total operating expenses for 2023 were $27.3 million, of which $6.9 million were incurred in the fourth quarter. Total operating expenses for 2022 were $30.7 million. The decrease in total operating expenses was primarily driven by decreases in depreciation, legal and accounting fees, and research and development expenses related to the security segments development of proprietary technology and next generation solutions associated with security and surveillance system software.

Operating loss for the full-year of 2023 improved to $1.3 million, as compared to an operating loss of $14.1 million for the full-year of 2022 due to increased revenues, increased gross profit, and reduced operating expenses. Operating income for the fourth quarter of 2023 was $0.2 million, as compared to an operating loss of $3.1 million for the fourth quarter of 2022. The increase was primarily due to an increase in gross profit for the period. Operating activities used $2.3 million worth of cash for the year ended September 30, 2023, compared to using $16.1 million for the year ended September 30, 2022. Net loss for the full-year of 2023 was $9.3 million, as compared to a net loss of $13.3 million in 2022. Net loss in the fourth quarter of 2023 totals $1.2 million, compared to a net income of $0.09 million for the fourth quarter of 2022.

Cash and cash equivalents and restricted cash totaled $6.3 million at September 30, 2023, as compared to $11.5 million at September 30, 2022. Inventory has increased to $8.7 million at September 30, 2023, from $8.5 million at September 30, 2022. I will now turn the call back to Saagar for a review of our 2024 outlook.

Saagar Govil: Thank you, Paul. Looking ahead, we are highly focused on delivering larger operating profits by driving top-line growth while maintaining tight cost control measures in our two operating businesses. Vicon has the ability to disrupt the status quo of how the security industry traditionally operates with its Anavio Next Generation version of state-of-the-art surveillance cameras and VMS software. Additionally, we see continued opportunity for organic growth and subsequent built-on acquisitions at AIS that will drive attractive returns going forward for us. After achieving operating profit consecutively for three quarters, we are committed to achieving positive operating income in fiscal year 2024 on a full-year basis.

In 2023, we demonstrated our commitment and focus to delivering attractive operating results, and we are confident that as we stay on this path, we can deliver strong long-term value for our shareholders going forward. Thank you all for attending this call. And now I would like to answer your questions. Operator?

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Larry Holub with Holub Family Office. Please proceed with your questions.

Larry Holub: Congratulations on another great quarter. A couple of questions if you have time. First one is, can you talk more about any traction you’re seeing already with Anavio?

Saagar Govil: Sure, so we just started getting that product out into the field and we’re starting to get some early pilot projects with them. So, it’s a new project, a new product rather, so it’s going to take a little bit of time to really explain it and get some of these systems stood up, but we’re already getting interest in the product and we’re going to start ramping that up into 2024. So, with any new product, it’s just a little bit of a learning curve for folks. And we have to mobilize the whole organization to really ramp up these efforts. But the interest is certainly there. And I think we’re going to certainly start to hit some solid momentum into 2024.

Larry Holub: Great, thanks. And second question is, can you provide any additional updates to the anticipated Vicon growth beyond what you’ve already messaged?

Saagar Govil: Yes, listen, you know, it’s — I think generally speaking the demand for Vicon products is growing. We have great products and services from our cameras to the current Valerus offering as well as with Anavio. So I think in terms of our core offering that’s generating more and more interest in the organization’s products and so and especially many of our core customers are getting more and more interested in improving and updating their security systems and leveraging the latest and greatest technology. So we are seeing demand sort of pull through from that. And I think generally speaking, just globally, the demand for security solutions is just increasing naturally just because of the world that we’re living in today with wars and crime and so forth.

So I think from a macro perspective, we have a tailwind. And then in terms of what we’re doing sort of at the micro level within our own company, we’re able to drive growth, right? And so, and I think, you know, in terms of our product roadmap too, we have a lot of exciting things to look forward to. So, you know, in Anavio in terms of what it exists today is really just the first incarnation and we have more features, you know, as far as AI that we’re looking to do. We have some exciting new hardware that we’re going to be launching next year too. So we’re constantly putting out new products into the market, and we have an exciting product roadmap. And I think everything we’re doing is kind of layering on top of each other. This is not the kind of industry where you come out with some hot, sexy product and you conquer the world.

Basically, Vicon has been around for 55 years and we want to steadily continue to build on the legacy that we’ve established in the market. And that just comes from continuing to serve our customers well, continuing to deliver exciting new products that improve their overall security and environment and so forth. So I think we’re doing that and we’re steadily just gaining more and more momentum each year as we continue to execute.

Larry Holub: Great. And then any new markets that you’re thinking about entering, leveraging and utilizing AI?

Saagar Govil: All right, can you just repeat that question? I got…

Larry Holub: Can you talk about any new markets that you’re considering entering with, you know, leveraging and utilization of artificial intelligence?

Saagar Govil: You mean outside of Vicon core markets or?

Larry Holub: Yes.

Saagar Govil: You mean?

Larry Holub: Or even within right if there’s a new channel or segment, because, I mean, I guess to the point I did see yesterday’s Valerus news right? The integration of VMS into un-alerts AI visual gun detection systems. So, you know, kind of, thinking along that lines and how maybe those kinds of things position you for an expanded reach, for example, into the municipal and government security segment?

Saagar Govil: Yes, so I think in terms of how we think about AI, yes, I mean, this could be a long answered question, but I’ll do my best. So basically, we want to — the way we see our growth in this industry is by focusing on delivering value to customers, who are willing to pay more for better and better security solutions. So what I mean by that is if you think about organizations that require better and better security and they’re willing to pay for it, those are organizations like hospitals, like universities, schools, and so forth, right? So we really focus on sort of that part of the market where they need a professional grade solution or an enterprise grade solution. And so there’s a number of verticals in those markets that we serve already quite well in terms of corrections, border protection, you know, we obviously do a number of schools, healthcare as well.

And really for us, it’s not necessarily about expanding outside of that, but it’s about building better and better solutions so that we can take more and more market share within those areas where there’s a high willingness to play, because we think that ultimately it’s about growing the solution sales and for all the solution sales that we make, we sell more and more software, right? And ultimately, the more software we sell, the more stickiness there is with our customers and the more we can grow our gross margin. And so that’s really the sort of North Star in terms of how we think about success in this market and what drives how we think about it. So we wouldn’t want to use AI to go capture a part of the market where there isn’t a lot of willingness to pay for that incremental innovation.

So if that’s helpful.

Larry Holub: Okay, no, very helpful. Thank you very much for your time. Appreciate it.

Saagar Govil: Sure.

Operator: Our next question comes from the line of [Alan Rosenthal] (ph) with Scarlett Knight Capital. Please proceed with your question.

Unidentified Analyst: Hi. So I’ve got a great quarter. Thank you for taking my questions. I have two, can you discuss the geographic composition really of the Vicon business that’s growing so rapidly right now, how much is domestic here in the United States, how much is foreign? And then a little add on to that, and also, you know, kind of where you see the growth in each, whether it’s outside the USA versus inside?

Saagar Govil: Yes, sure, happy to talk about that. So as we think about this past fiscal year, I would say most of the growth came domestically, you know. So, I would say it’s almost, it’s probably 85%, 90% U.S. or Domestic. I’d say probably 85% and 15% international out of that $34 million. Again, that’s just me off the cuff here. But I think what’s interesting really about this moment in time is that there’s just a — so in the United States, there’s enormous growth in terms of the need for security for organizations that hadn’t been as serious about it before. So schools, for instance, right, religious institutions, churches, synagogues. So they are now all spending more money than they ever had to because of just the nature of the world we live in today.

And so we are seeing growth here, right? And then obviously the innovation is driving the adoption of new technologies, AI and so forth. So I think that’s going to be the growth driver here in the U.S. Internationally it’s a little bit of a different story. And what’s really driving that there is just the growing middle class and the growing economies around the world, whether it’s Saudi Arabia, whether it’s India, Indonesia, Malaysia, and some of these economies that are starting to boom and have extremely high growth. And so in those economies you’re seeing a more a widespread deployment of security solutions, because they’re building so much infrastructure like train stations, like police stations, schools, hospitals. And so as these economies are building all of that, there’s going to be massive, massive opportunity for growth there as well.

And so I’d say we’re excited about both markets. I certainly don’t want to downplay the opportunity for us in the U.S., because I think it’s extremely promising. But I think some of the growth in some of these emerging markets can also be pretty fantastic as well for us. So frankly, we’re focused on both. But as I may have mentioned on prior calls, I mean, I think there’s opportunities to make it maybe a 50-50 split over time in terms of the amount of business we’re doing internationally versus domestically. And [Multiple Speakers] we’re definitely focused on growing long-term in international markets.

Unidentified Analyst: That’s excellent. It just actually made me think of another question here. What’s the average, when you get a new contract here and so on, could you discuss what’s the average, I guess, sale that you make? And if you see that number improving and kind of how that works, you know what I’m saying? So your average selling price on a solution, for example, kind of, describe how that works and if you’ve seen that number increase and what your expectation is? Because obviously, as you said, demand is surging here. So what are you seeing in terms of pricing?

Saagar Govil: Yes. I think giving you some rough math, I can tell you that a couple of years ago, our average order size was probably around 50,000. And I can tell you that this past year, that number was closer to 100,000, maybe even a little bit over.

Unidentified Analyst: Beautiful.

Saagar Govil: So I think there’s just a natural growth in terms of the kinds of projects we’re doing in terms of size. And we’re hopeful and optimistic that, that number will continue to grow, right? But then there’s also, there’s a lot of, like if we sell let’s say 100,000 systems over the next couple of years, we may sell a lot of smaller orders to continue to expand that system and support that customer. Maybe they expand the building or something like that. Maybe they want to add more cameras. So we do certainly benefit from some of that residual revenue. But I think in general, we are a systems solutions company. We sell generally on projects. And so I think the idea is that we want to be increasing the size of the number of orders, the size of the order — the average order that we’re getting in the organization.

Unidentified Analyst: That’s great. One last question, I think the only overhang here is probably the piece of debt that you’ve got hanging out there with Chicago Ventures. I know we’ve discussed it in the past, but you’ve got positive cash flow right now. Can you just kind of give an overview of kind of the way you view how you want to handle that? Because I think once that’s handled, the sky’s your limit. And I’ll just stop. I’m going to hang up right now. So I mean, and listen.

Saagar Govil: Yes, sure. No, I appreciate the question. Yes, listen. I think we do have that debt outstanding. You know, we’ve been fortunate to have a really fantastic relationship with them, and they’ve worked with us to extend that over time. And, you know, they’ve been very supportive of us as we continue to improve our business. So ultimately, I think there’s, you know, ideally we continue to grow the business so that we can, you know, pay that down over time and get to a place. We’ve had three operating, you know, three quarters of operating profit. And, you know, I think as I hope that as we continue to improve, then we’ll be in a position to start to reduce that debt over time and continue to work with them as best as possible to satisfy that debt.

And I think as our business improves, I think we’ll be in a better and better position to deal with that. So, you know, we’ve been, you know, we were able to get that extended and, you know, so we’ll continue to work through that and, you know, I think as the business improves, it’s only going to get easier and easier for us to manage that.

Unidentified Analyst: Great job. Happy holidays to you and wishing you a fabulous 2024. Thank you.

Saagar Govil: Thanks, Alan.

Paul Wyckoff: Thank you.

Operator: And we have reached the end of our question and answer session now. Now I’d like to turn the call back over to Mr. Govil for closing remarks.

Saagar Govil: Thank you, operator. I would like to thank each of you for joining our earnings conference call today and look forward to continuing to update you on our ongoing progress and growth. If we were unable to answer any of your questions, please feel free to reach out to our IR firm MZ Group would be more than happy to assist. Thank you, everyone. Happy holidays.

Operator: And this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.