Rekor Systems, Inc. (NASDAQ:REKR) Q1 2024 Earnings Call Transcript

Rekor Systems, Inc. (NASDAQ:REKR) Q1 2024 Earnings Call Transcript May 15, 2024

Rekor Systems, Inc. misses on earnings expectations. Reported EPS is $-0.23 EPS, expectations were $-0.11.

Operator: Good afternoon, ladies and gentlemen, and welcome to today’s Rekor Systems, Inc. Conference Call. My name is Paul, and I will be your coordinator for today. [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. Eyal Hen, CFO of Rekor Systems.

Eyal Hen: Hello everyone. Thank you for joining us today. In the first quarter of 2024, our revenue reached $9.8 million marking a 58.1% increase from $6.2 million in the same period last year. Our adjusted gross margin for the first quarter of 2024 was 45.9%, a decline from 53.6% in the first quarter of 2023. This decrease was primarily due to lower margin projects and adverse weather conditions in January. Adjusted EBITDA for the first quarter of 2024 remained steady with the $9.4 million loss consistent with the previous year’s first quarter. Significant developments in January, 2024 included the completion of the acquisition of All Traffic Data or ATD for $19 million in a mix of cash and stock. In February, 2024, we successfully completed a follow-on offering with William Blair raising a net amount of $26.5 million.

We utilized part of this fund to redeem the senior secured notes issued in January, 2023, part of the redemption price paid in common stock at a conversion rate of $2.5 per share. In connection with our review of the ATD acquisition, we did not have adequate internal controls in place with respect to the tax accounting treatment of intangible assets related to this acquisition. As a result of failing to correctly identify the tax impact of the transaction, we determined that a material weakness exists as of March 31, 2024. We are committed to improving our control processes to ensure stakeholders can continue to remain confident in the information provided by management. We have enacted a remediation plan that involves using external tax experts to review all future significant and annual usual transactions.

We anticipate that this initiatives will be implemented within fiscal year 2024. Recurring revenue increased by 18% from $4.2 million in the first quarter of 2023 to approximately $5 million in the same quarter of 2024, mainly driven by additional contracts in our urban mobility and public safety segment. However, the total contract value signed during the quarter decreased by 35.1% to $7.8 million, and the remaining performance obligation as of March 31, 2024, decreased by 13.2% to $22.9 million. Despite some challenges, our financial and operational strategies are positioned to capitalize on future growth opportunities. The acquisition of All Traffic Data and the successful capital raise are pivotal developments that enhance our operations, operational capabilities and financial flexibility.

These steps are instrumental in securing a leadership position in our industry sector. Now, I’ll pass over the mic to David. David?

David Desharnais: Thank you, Eyal. Good afternoon ladies and gentlemen, and thank you for joining us today. First of all, I’d like to start off by saying that I am deeply humbled and honored to step into the role of CEO at Rekor Systems. It’s a privilege to lead this exceptional team as we advance our mission of pioneering state-of-the-art roadway intelligence technology. I also want to extend my gratitude to our former CEO and Founder Robert Berman. Robert’s vision and leadership have been instrumental in shaping Rekor’s growth. I also want to take the opportunity to welcome Viraj Mehta to the Board as an Executive Director. I look forward to collaborating with both Robert and Viraj and our Board on our financial and strategic goals as we move forward.

Let’s discuss our current position. As highlighted in our last investor call there are millions of obsolete sensors and devices scattered across US roadways today. Astonishingly transportation agencies tell us that most of these legacy devices are non-functioning or completely inaccurate, depriving them of necessary and accurate data they need to do their jobs effectively and to gain access to federal funding. There’s clearly an opportunity to use new tools and approaches to gather data and insights, which is where Rekor is well positioned to win. As I assume the role of CEO, I want to first begin with a frank and transparent discussion about what you are buying into as shareholders. We introduced two new products, Discover and Command, which entered the market less than a year ago.

The B2G sales cycle is notoriously long with three distinct phases. First, there is an introductory meeting to explain the technology with a data demonstration. Second, this is followed by a proof of capability where we install devices at a few sites for DoTs to monitor and validate over a period of time and against a grade criteria. And third, assuming a positive outcome of this proof of capability of which we have been 100% successful in achieving, there is then a procurement and deployment phase, typically starting with some installations on roadways that cannot be done any other way, followed by replacements of existing old tech that is failing or coming up for maintenance. Each phase in this cycle can take between three to six months, depending on the response times for each state.

Despite our technology being proven to be significantly cheaper, faster, more accurate, and reliable, and massively safer for roadway workers to deploy, this process is challenging and complex for DoTs as it disrupts longstanding, sometimes 30 to 40 year practices of the way it’s always been done. We have anticipated that the initial slow drip of adoption will ultimately lead to a deluge of widespread acceptance as the superior economics, operational efficiency and data quality of our solutions becomes undeniable. And as our early adopters begin to publicly endorse our technology, we anticipate the hesitation that often accompanies new innovations will diminish significantly. Since our visibility into the decision making process at DoTs is limited, we will refrain from making prognostications about the likelihood and timing of contract announcements going forward.

However, what I can tell you is that we are already operating under contracts in six states where we can deploy thousands of devices simply based on task orders. Just in our current footprint alone, there is the opportunity to deploy 6,000 to 8,000 Discover and Edge units, which would equate to an estimated 200 to 300 million of cash flows to the company. As the old legacy tech continues to fail in these roadways and about 20% of it comes up for repair or replacement every year, we will be able to put in place our own devices without any new contracts. Beyond our existing customers we have engaged in extensive outreach to large state DoTs across the US and have executed on numerous proof of capability studies with constant success, and through this, we have had multiple states commit to adopting our technology, at which point they find themselves navigating through many months of internal bureaucracy and red tape, complex procurement processes and extended funding cycles before being able to put pen to paper.

This reflects the inherent challenges of the business to government model, particularly when it intersects with a once in a generation technology refresh cycle that has not happened for multiple decades. Along this line, I want to highlight some new developments that have occurred in recent months that has further elongated the sales process. This relates to a growing federal focus on cybersecurity, specifically for AI based infrastructure products and roadside devices that are connected to the cloud. Both the federal government as well as state DoTs are now rushing to craft data and AI policies for the first time, and these will govern the cyber and AI protocols for all such technology. Let me cite just one real world example that underscores the reason for government concerns regarding cyber and ai.

On April 25, 2024, just a few weeks ago, there was a cyber attack impacting a Midwestern department of transportation that targeted key elements of their existing legacy traffic management system. This incident is still ongoing as of today, and it’s affecting nearly all critical operational functions and dramatically impairing the ability for them to monitor and respond to public safety incidents. It also is impacting their critical traffic management and emergency communication systems used to provide essential alerts and updates to the public. A joint statement for relevant transportation entities acknowledged the sweeping impact experienced by stakeholders and the public. While efforts are still underway to restore essential services, exact timelines are uncertain, and the experts anticipate that a full service restoration may take several months.

This is a wakeup call for DoTs and state agencies. Incidences like these are growing in number and severity and underscores why states are rushing to implement policies to safeguard their transportation infrastructure. Legacy systems will simply not cut it here. Rekor has invested heavily here and ahead of the curve to support this need. Rekor’s commitment to cutting edge cybersecurity and AI aligns with emerging government policies and sets a new standard for protecting public infrastructure in an increasingly connected world. We employ a unique and comprehensive suite of end-to-end security measures to help our customers proactively protect their transportation infrastructure, including continuous monitoring, real-time detection and incident response plans to counter existing threats and to predict new threats.

Our commitment to compliance, particularly with NIST ISO and SOC 2 standards, as well as aligning to presidential directives, the National Defense Authorization Act and the 2023 Build America and Buy America Act, ensures that Rekor’s products meet the stringent requirements that explicitly prohibits federal entities, states, or municipal recipients of federal grants or loans from using equipment or products banned in the United States. It also ensures our technology meets the utmost technology and security standards, providing peace of mind to our public sector customers to confidently choose Rekor. Given our strengths in this area, Rekor is in a leading position when it comes to being able to work to implement these policies with states. In a lot of ways, we are helping our customers shape and inform the dialogue for such policies that are becoming a precursor to wide system deployments across state roadways.

The need for dots to draft and finalize policies like this has caused a delay in the rollout of our devices across states. For example, one of the largest states in the US where we are engaged has delayed the procurement process by six months to finalize its AI policy. This is impacting our revenue outlook for 2024. Based on their commitment, we had modeled over 1000 Rekor Discover and Edge systems to be purchased by the state, resulting in cash flows of approximately $35 million for the full year. In preparation to meet this significant ramp in demand, we scaled up our operations, especially making sure we were staffed adequately to fulfill a large monthly cadence of deployments. We anticipate that our teams will still be able to meet an aggressive yet condensed second half rollout to get to the 1000 units.

However, the exact cadence has not yet been communicated to us. We expect to be able to provide an update on this deployment on our second quarter call. While this delay materially affected our Q1 results, we think that having such policies in place not only shows how serious the state DoTs are committing to getting this right, but can also be an advantage as it clears the deck for mass adoption of our technology moving forward. This is a significant change in how states think about roadway operations and how they must safeguard their transportation infrastructure, and they’re rising to the task with strong actions. Now, let me address the company’s cash burn rate. The company right sized the organization last year, but it’s had to subsequently scale up its data, product, sales and engineering operations in preparation for near term demand.

We think the timing differential will resolve itself as the deployments proceed in the second half of the year. One last point I want to highlight is why I’m personally excited about Rekor and our opportunity. My background is in technology and data. If software was the new oil over the past two decades, then I believe that data is the new software. The volume, variety, velocity and veracity of data and the ability to extract high quality and unique insights from this data will ultimately determine its value. Let’s take a broader view for a moment. Why is Rekor so committed to deploying its edge AI and IoT devices nationwide and offering a diverse array of solutions to departments of transportation? These solutions are intrinsically valuable in their own rights, generating strong recurring revenue and offering very high internal rates of return, and that’s what we will be focused on for the next 10 years at least.

Looking back to the traffic technology boom from the 1960s to the 1990s, well over 1 million units like piezo sensors, induction loops and side firing radars were installed across the United States over that period. States spent an estimated cumulative of $35 billion on these deployments with billions more in ongoing maintenance and replacement costs to date. Today we are just in the early stages of replacing all of that legacy infrastructure and obsolete devices, and this massive technology refresh cycle will be a two decade growth opportunity for disruptors like Rekor. That’s exciting. But that’s just the rainbow. There’s a pot of gold at the end of that rainbow, which is the data that we collect along the way across the vast majority of roadways in the country.

Exciting as this is, it’s merely the beginning of the story. Rekor is at the early stages of one of the largest edge IoT deployments in the western hemisphere. Our devices are like supercomputers that are plugged into a roadway and purpose built to be secure, connected and modular, making them adaptable and scalable for new technologies without having to replace them in the future. This makes them not only useful for today, but also future-proofed for tomorrow. As a critical byproduct of our device deployments, we gain the ability to also aggregate, connect and index data from other existing roadway infrastructure that is out there. This creates a unique and comprehensive picture of everything in motion on or around roadways in real time historically and predictably for our customers.

This is truly unique. Today we are already aggregating more than 20 trillion data points in our system, and we are just getting started. We believe this approach puts Rekor on a path to create the world’s largest and most comprehensive transportation data exchange and hub that will serve as the foundation of a transcontinental standardized operating system for roadways. We call this roadway intelligence and the insights we derive from this massive volume and variety of data has enormous and durable value. This is core to our strategy. Longer term, we will refine this vision and make it more accessible to investors, but as my first conference call as CEO, I want to highlight that the mobility data and roadway intelligence that we are already collecting and connecting across roadways has multi-billion dollar potential across multiple markets segments and industries over time.

The innovation and uniqueness of our approach is underscored by the 18 technology patents we have filed and there are many more in the works. I look forward to expanding more on our longer term vision at another time, but for now know that we are thoughtfully building for today and for the future. In closing, I would also like to reinforce that we are committed to having an ongoing and transparent dialogue with our shareholders and investors and believe it will be constructive and mutually beneficial. As part of this, we are in the process of appointing a full-time investor relations person. All we ask is that investors be respectful of our inability to speak regarding specific contracts and conversations with DoTs due to the competitive and business reasons.

Thank you for joining us today, and thank you all for your continued support and interest in Rekor. Your trust, support, and belief in our vision and opportunity have been the foundation of our achievements. We’re not just navigating the future, we are shaping it together. At this point, I’ll turn it over to the operator to answer any questions you might have. Thank you.

Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator instructions] . Thank you. Our first question is from Noah Levitz with William Blair. Please proceed with your question.

Noah Levitz: Thanks. Good afternoon, David, Eyal. David, congrats on the promotion. And Robert’s best wishes as chairman. This is Noah. I’m on for Louis de Palmer this afternoon. To start, David, just as CEO, should we expect any particular significant changes in your strategy going forward?

David Desharnais: Hi there, Noah. Hey, thanks for the question. No, at this moment I would say that we’re pretty locked and loaded. We’ve been very thoughtful in developing the strategy up till now. I’ve been very much part of that with the rest of the team and developing and, and executing against it. So the short answer is no. We believe in our path and we believe that we’re making good progress against our objectives.

Noah Levitz: Awesome. And then just to follow up at its America’s in Phoenix, we watched a demo for Rekor command and the technology is very impressive. Rekor command is successfully deployed with at least one major tier one West coast city. What does the pipeline look like for both Rekor command and Rekor Discover?

David Desharnais: So we have a very robust pipeline across both of those platforms, and you’re right. The command platform is a fantastic solution and it’s really well loved by the customers that use it today. From a pipeline perspective, we’re, we’re engaged in, my gosh, probably a third of the states today. And in addition to that, from a discover perspective we’re currently, that’s pretty new for us, but we’re engaged already in over a dozen states as well as a significant pipeline beyond that too. So we feel, feel like the, the path ahead and the adoption of our talk technology there is, is well positioned.

Noah Levitz: Awesome. And then just one last quick one keeping it broad. Can you describe what you’ve been seeing as it relates to the competitive environment? Thanks.

David Desharnais: Yes. In every business and industry, there’s going to be a host of competitors. What we find is that when we engage with a customer, our solutions are quite different. What you might view as a competitive situation, we actually partner with the majority of other players in the ecosystem today. For example, in the context of Command, which you mentioned, which is really targeting transportation and traffic management centers across states, there’s probably 3000, 4000 different connection points of other ecosystem players that must surface through. And then that environment is often an ATMS system or automated traffic management system and or it’s through the command platform. We partner with pretty much every one of the ATMS partners today, or excuse me, providers today.

So from a competitive landscape we are providing something truly unique which is why the ATMS providers like to work with us. So that’s one dimension. On the discover side, Discover’s actually really got a clear path forward. There’s little to no competition in that when it comes to AI based roadside units that do the class count and speed collection that we do with the ability to extend to multiple other types of traffic studies. When you think about the existing roadside devices out there, which is, which really would be the competition, it is really legacy technology from 30, 40, 50 and sometimes 60 years ago that look a lot like a rubber tube or a big construction project. So the competition there is really not direct. I think the competition there is the way that they’ve always done things and this is the modernization of that legacy technology.

Operator: Thank you. Our next question is from Mike Latimore with Northland Capital Markets. Please proceed with your question.

Michael Latimore: Yes. Great. Thanks. And Yes, congrats Dave on the new role here. So I think on that you referenced one deal that where procurement was delayed six months. Did you, do you think you’ll be able to, kind of, did you say you, you think you’ll be able to recognize that revenue this year or what, what’s your thought on kind of how that deal plays out this year?

David Desharnais: Yes, we, we believe so we believe very strongly. So in fact every, every day is we’re, we’re learning more on that, but I think in short, yes can’t predict, exactly the day of the week that’s going to happen. Given my remarks there, but I definitely will look forward to updating you in the next quarter, and I think we’ll, we’ll have some good solid news there.

Michael Latimore: Got it. And then just in terms of the year, should we think about, kind of year revenue being maybe taking the, first quarter as a baseline number and then, adding that deal to it, and that’s kind of a way to think about the full year, or can you give us, a little more perspective on it?

David Desharnais: Yes, so, we, in our model, if you look at that, that one deal in particular that I mentioned, we modeled $35 million in our business plan for 2024. In addition to that, we believe that, that we’ll do an additional $50 million on top of that. So I think the, the path that we set forth for 2024, we still believe that is where we’re going to land again, with the caveats that there’s some timing things that we’re working through with the states on their policy development and such. But yes we’re confident in our approach and the path forward here.

Michael Latimore: Got it. Okay. And then the sequential decline in recurring revenue in the first quarter, is that just tied to kind of the mobile site variability?

David Desharnais: Yeas, that’s, that’s, that’s actually a really good question. So Yes, when we do both portable and fixed studies and in the portable business, this is actively, happening day to day versus a fixed system that would be in the ground and, and there all the time. So the ability to go service a portable study we’re not allowed to do that in states with inclement weather. And that’s just something that’s mandated by state. So weather plays a big role in our portables business and that’s what we saw impacting us in, in Q1.

Robert Berman: So we, we like the summer. We like the summertime.

Michael Latimore: For sure, for sure. And just last the RPO number, that includes ATD now, right?

David Desharnais: Yes, it, so a, ATD actually, a lot of the revenues are on call, so they, they don’t have a long term contract as we discussed in, in previous earnings calls. So they, they’re not part of the RPO per se from an accounting perspective.

Operator: Thank you. Our next question is from Roger Hawkins with RAH Capital. Please proceed with your question.

Roger Hawkins: Yes. Hi guys. David, I want to congratulate you as well as your new roles with the company, excited about your leadership going forward. We know one matrix for success, and this may apply or not, is, is a stock price. I’ve been patient with this company for several years. I come from the days when stock price was about $25 plus a share, and I’ve, a year ago we were about 415 somewhere and, and now we’ve eroded today at a high of 1803 after hours is 1 48. So and, and I see continuing quarter after quarter losses. So I guess the question would be when, let me compliment first. I was glad to hear you David say, you, you’re working on an investor relations person. So it’s not about just being on these calls quarterly that we can, we can call in and ask some questions.

So with continuing losses at some point as we deal with a turnaround address, the matrix I just mentioned as far as the stock price, that’s, that’s not everything, but when are we going to see an up climb at, out of this situation we’re in right now?

David Desharnais: Yes, that’s a, that is the, the $60 million, $600 million question. we see that, we see that every day as well as you can imagine, right? clearly we don’t, we don’t control the stock price, obviously. But I would say that we’re very, very committed to the path forward here. And we, we do believe the opportunity ahead is undeniable. when we look at where we are today in 2024 and, and what we’re, what we’re modeling in our business plan for 2024, we’re confident we’re on track for that. We do have the, Q1 material impact, as I mentioned. So that kind of put us in a, in a, a difficult position there as it, it was committed verbally, but again, putting pen to papers, a little, a different matter there. But that is that is moving along actually quite well, I will say.

So this is really about being able to, to meet and exceed expectations. We got a very strong pipeline. The technology is very solid, so what, I guess what you’d have to believe and, and certainly what I believe is that the opportunity’s large that Rekor technology is well positioned. We do have strong relationships and credibility with our customers today. So it’s really a matter of time. And the time is not that long. This is going to be, I think a solid year ahead. I think that we’ll see that rewarded in the stock price and also moving forward. But again, we don’t control the stock price, but we’re going to be sure to work as diligently and aggressively to make sure that we’re meeting and exceeding those expectations. But I do understand your question.

Thank you. We look, We look forward the next quarter of a very positive uptick report. Thank you.

Operator: [Operator instructions]. There are no further questions at this time. I would like to hand the floor back over to David Desharnais for any closing comments.

David Desharnais: Alright, thank you very much, Paul. Appreciate that. Thanks again, everybody, for joining us today. I’m, I’m thrilled about the opportunity to lead Rekor into the next chapter here. We have lot of tremendous opportunity ahead, and again, thanks for your time today, and I definitely look forward to updating you and everyone on our Q2 call. Until then, we’ll speak to you soon. Thank you.

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