DecisionPoint Systems - Q4 2023

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It is now my pleasure to introduce Brian Siegel with Hayden IR. Thank you, you may begin.

Brian Siegel (Senior Managing Director)

Good morning and welcome to the DecisionPoint Systems Earnings Call. Joining me today are Steve Smith, Chief Executive Officer, and Melinda Wohl, Chief Financial Officer. For those of you that have not seen today's release, it is available on the investor section of our website at www.decisionpt.com. Before beginning, I would like to remind everyone that except for historical information, the matters discussed in this presentation are forward-looking statements that involve several risks and uncertainties. Words like believe, expect, and anticipate mean that these are our best estimates as of this writing, but that there can be no assurances that expected or anticipated results or events will actually take place. So our actual future results could differ significantly from those statements. Also, during this call, we will discuss non-GAAP measures, including non-GAAP net income, non-GAAP EPS, and adjusted EBITDA.

These non-GAAP financial measures adjust our GAAP net income and EPS for stock-based comp, any gains on extinguishment of debt, M&A, and other financial transaction costs, and other non-recurring, non-operating income and expense items. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the SEC. With that, I'll now turn the call over to Steve.

Steve Smith (CEO)

Good morning, everyone, and thank you for joining us today. In addition to reporting record fourth quarter and full year revenue and record full year adjusted EBITDA, 2023 was a transformational year for DecisionPoint. As we evolved our business model towards a higher margin services strategy to position us for continued long-term growth and margin expansion, adding one more time to increasing our enterprise value for our shareholders. More on this to follow. First, I will update our overview of who DecisionPoint Systems is, what is our market opportunity, and what is our growth strategy to capture and expand this opportunity. I will then turn it over to Melinda to discuss our financial results in more detail. Over the past several years, DecisionPoint transformed itself into the leading mobility-first enterprise services and solutions company.

This means we aim to position ourselves at the center of several emerging secular trends, including enterprise mobility, which encompasses work-from-home and field mobility, cloud and managed services, SaaS, 5G, AI, and IoT. Now, these markets represent hundreds of billions of TAM. So we've identified a subset of those industries within these markets where we either already have, can acquire, or develop expertise, and therefore the ability to become more significant players. During 2023, through acquiring Macro Integration Services, or MIS, we expanded our opportunity to become a leading provider of in-store solutions and services in retail, centered on, but not limited to, point-of-sale systems. Prior to the acquisition, retail was already our largest vertical, where we had established customers, industry-specific solutions, the right technology partners, and several under- or unpenetrated subsegments for us to go after.

Now, with MIS, we have the opportunity to go further in retail industry by adding new services and technologies to our offerings. Our value proposition to customers is clear. We enable our customers to be their best at moments that matter. We enable frontline employees, those task workers who work at the edge of the network, to make better, faster, more accurate business decisions inside and outside the four walls, and create operational efficiency and effectiveness to drive better customer experiences and business outcomes at their moments that matter, or we like to say, the DecisionPoints. Moving to our growth strategy, the first pillar is to drive growth and margin expansion by increasing services and software attach rates.

Over the past four years, we've transformed the company to drive higher growth rates while increasing margins significantly by aggressively moving up market to include various high-margin services, especially ones that generate recurring revenue. For example, we offer professional services, including consulting, staging, deployment, installation, repair, and customer-specific software customization and hardware and software maintenance support. The gross margins for these services tend to be significantly higher than when we resell technology hardware. Part of our strategy is to shift service and software mix over the next few years to 50% of revenue consistently, which will drive more recurring revenue and higher gross margins. Our acquisition of MIS was the next step in our transformation. When combined with the strengths of our existing software and service offerings, this acquisition was key to improving our services and software mix. Now, 40%+ of our business is services.

Strategically, MIS couldn't have been a better fit. They brought us five new top-10 customers, new service offerings, filled the geographic gap with 100,000-square-foot warehouse facility in the southeast, 30,000 of which to support our staging and integration capabilities, and significantly expanded and strengthened our presence in the retail industry, especially in grocery, quick-serve restaurants, C-stores, and hospitality verticals. The last point is critical as it sets us up to become a more complete retail, point-of-sale, and technology solutions company. In 2023, we also reinvested a higher portion of our profits into building our managed services business, including product development and hiring of experienced team of business development professionals who can bring our offerings to market. Our Vision Portal was the first significant product introduction on the enterprise mobility side. Vision offers our customers a customizable solution for monitoring actions on everything in their IT infrastructure.

DecisionPoint can now manage the entire mobility and IT infrastructure lifecycle from one view. Vision provides real-time visibility to manage the health, location, and status of a customer's mission-critical IT assets, regardless of their enterprise location. Vision also enables customers to monitor the progress of major rollouts, which enables our customers to minimize downtime and simplify the overall management of a large distributed enterprise. More recently, we introduced PointCare Services, our suite of managed and deployment services built to address all aspects of selecting, deploying, and managing customers' enterprise technology. PointCare integrates all of our services into one offering, including Vision, and enables customers to address every aspect needed to design, deploy, and manage the entire ecosystem around the technologies we already provide.

This enables us to leverage our existing expertise in mobility and point-of-sale and RFID deployments to create an end-to-end service program that's simple to incorporate into our customers' processes. We are also opportunistically building our higher-margin recurring revenue SaaS solutions portfolio, which today includes both packaged and custom-developed software solutions such as MobileConductor and RouteManager for direct-store delivery or the DSD industry, and ViziTrace, which helps manage an RFID implementation. The second pillar is to take these new products and services deeper into current verticals while expanding into adjacencies. For example, within retail, there are specialty stores, big-box stores, grocery stores, C-stores, quick-serve restaurants, and more areas where our previous presence is now strengthened with a stronger product and services portfolio and new relationships coming from MIS. This provides potential revenue synergies where we are actively pursuing through the opportunity to cross-sell between enterprise mobile and retail point-of-sale solutions.

The third pillar is geographic expansion, where we can pick up new customers, expand field sales, and increase our coverage. Our M&A strategy supports these pillars and complements our organic growth. Note, we aren't going to make acquisitions just to achieve more scale. We have very specific criteria for the companies we target. These include a track record of positive revenue growth and EBITDA, integration-ready solutions and operations, and cultural compatibility. By focusing on these areas, we have developed a successful integration strategy that allows us to quickly reduce SG&A costs, streamline operations, and drive revenue synergies by expanding their offerings nationwide through our system. Macro Integration Services, or MIS, was a perfect example. It hit three of our four strategic growth areas and met our M&A criteria.

It was a little bigger than our previous acquisitions, but we are quickly integrating them into DecisionPoint, paying down the acquisition debt, and looking presently at new targets. Moving to our fourth quarter results, revenue grew 25% to $31 million, driven by a record 47% mix of software and services, mainly from the acquisition of MIS. Full year revenue was a record, $116 million, up 19%, with software and services making up 36% of the mix. This mix improvement drove 25% gross margin for the year and led to adjusted EBITDA of $8.9 million, up 13%, despite the significant incremental SG&A and investments I previously mentioned that we believe will start to show returns in 2024 and beyond.

We also continue to pay down our acquisition-related debt during the quarter, with another $750,000 reduction bringing the total paid down to $6.2 million of the $12 million we borrowed to acquire MIS on April 1, last year. Given this quick paydown and our strong financial position, we are in a position to look for new M&A opportunities with the hopes of executing on one or more during 2024. In closing, we executed on our strategy and delivered a solid quarter. I want to thank each and every member of our dedicated employee team for their continued hard work. I look forward to speaking with you again on our first quarter call. Now, I will turn it over to Melinda to review our financial results in more detail.

Melinda Wohl (CFO)

Thank you, Steve. Details of our fourth quarter operating performance compared to 2022 fourth quarter were as follows. We saw continued strong demand in Q4, with total revenue up 24.8% to $30.5 million. During the quarter, we worked through a portion of our $13 million hardware backlog from last quarter, ending the year at $9 million. Moving to gross profit, we saw an 18.7% increase from the prior year. This mix shift led to a quarterly gross margin of 24.6%. The slight decrease in gross margin from previous year was due to a substantial hardware order from a key customer. GAAP operating expenses were up $1.2 million from last year. This increase was primarily due to the acquisition of MIS and thus no corresponding expenses for the comparable period last year, as well as our strategic investments in building our managed services portfolio and sales and BizDev headcount.

As we continue to integrate MIS, we expect to realize cost synergies and improved efficiencies in operations. GAAP net loss and diluted loss per share were -$0.3 million and -$0.03 versus net income and EPS of $0.4 million and $0.07 last year. Weighted average shares outstanding were roughly flat from last year at 7.8 million. Our non-GAAP net income and diluted EPS were nil for the quarter. The non-GAAP net income and EPS numbers excluded about $256,000 this year, mainly related to the MIS acquisition versus $378,000 last year, which was mostly related to stock comp and uplist fees. Adjusted EBITDA was $1.9 million, an increase of 8.4% compared to last year. Again, our operating leverage was impacted by the sales and BizDev investments we are making this year in our software and managed services to accelerate growth in these higher-margin offerings in 2024 and beyond.

Turning to our balance sheet, we ended the quarter with cash and cash equivalents totaling $4.3 million versus $7.6 million on December 31, 2022. Deferred revenue increased 29% to $13.3 million, of which approximately $8 million is expected to be recognized over the next 12 months. Total debt at the end of the quarter was about $5.9 million. During the quarter, we paid down $750,000 in debt related to the acquisition of MIS. We will continue to pay down $250,000 quarterly for our term loan, and our plans are to continue to pay the remainder down as swiftly as possible. Net cash provided by operating activities was $4.5 million versus $12.3 million last year. The decrease was primarily the result of payments for inventory purchases that were fulfilled this year. With that operator, we can move to questions.

Operator (participant)

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. If you'd like to ask a question, you may press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Howard Halpern with Taglich Brothers. Please proceed with your question.

Howard Halpern (Senior Equity Research Analyst)

Congratulations on the year. A lot accomplished. A lot accomplished. Could you talk, I guess, a little bit about the sales professionals that you hired and what your goal is for them throughout the next couple of years?

Steve Smith (CEO)

Sure, Howard. Good to talk to you again. Yeah, we've invested, as we spoke about here on many of our earnings calls, in infrastructure buildout, right? So the Vision Portal, the ongoing development of it, the functionality of it. So we've been investing heavily in systems and process. And it was time to, now that we have all these extended capabilities, to put the best professionals possible in place to go and start to sell and promote these capabilities. And so we very specifically hired a leader in the space that is a recognized leader. We put out a press release on him. His name is Brian Bukowski. You can look up his LinkedIn profile or even just call down on the press release. Very accomplished individual that has experience both in data capture and outside of data capture in field mobility.

So he had the right pedigree and balance and background that we thought he could add a lot of value. And sure enough, we were right. We brought him in Q4. And we also hired an individual that would work directly alongside Brian and, in fact, had previously worked alongside Brian to really be the solutions architect, if you will. So think about it. You have all these capabilities, and you got to go to a market team. And they need to be fed. What are the new product offerings? How do we simplify the value prop around those offerings, mobile managed service offerings, now I'm talking about, and managed services offerings?

That individual works alongside Brian and has done yeoman work to date on giving shape and specificity to the solution stack that we now have and solutioning it so that the sales team, the go-to-market team, can position it for their customers. He's engaged with end-user activity as well as Brian. That's a little run-on sentence to your question, Howard. Sorry for the lengthiness, but that's who we hired and what they do.

Howard Halpern (Senior Equity Research Analyst)

Okay. Could you describe a little bit about what you're seeing from your customers in terms of willingness to move forward with projects? Are they more willing now than they were maybe six months ago? What is the landscape out there?

Steve Smith (CEO)

Okay. You're now talking more general about the business than you were about mobile managed services, correct?

Howard Halpern (Senior Equity Research Analyst)

Just the whole business in general, new customers. Are those customers willing to spend now, or are they still a little hesitant? What are you seeing?

Steve Smith (CEO)

Yeah. So I mean, know that I'm not an economist, but I think there's some very good tailwinds starting to build behind us and for all in the industry, right? The supply chain issues of 2022 and 2023 are kind of behind us. I think the macroeconomic trends are favorable. Interest rates are coming down. I think that will free up some CapEx spending. So in general terms, I believe there's some the worst of times are behind us, but again, I'm not an economist. But we are seeing customers identify budget for the funding of projects. We're seeing it in select cases, and I think we're going to I anticipate seeing it in more cases on a go-forward basis this year and next.

Howard Halpern (Senior Equity Research Analyst)

Okay. Are you seeing new customers coming are new customers gravitating to you and your offerings?

Steve Smith (CEO)

Yes. Yeah. In fact, in 2023, we added 107 new logos. Now, that didn't amount to a lot of revenue. It was a couple of $3 million. But these are little seeds that get planted that are out there, and now we commercially engage with them, and there'll be more business to follow. So we see it happening there. Of course, the big hitter is if you can get some big logos with some big deals, right? And we're seeing that. We've got active sales campaigns. I mentioned in my introduction that cross-selling campaigns are alive and well and happening real-time between us, macro, and really all customers and salespeople. I had a sales meeting just four weeks ago bringing the team together. We had 97 people in Greensboro, North Carolina, in our new facility.

That's where we had the sales meeting because I wanted everybody to understand our new acquired capabilities. We like the activity that we have in place. We're promoting it in a very aggressive way, and I expect good things to come from it.

Howard Halpern (Senior Equity Research Analyst)

Okay. Just one last one. You anticipate the service margin to maintain that 35%-36% gross margin level going forward, or could there be a little improvement there?

Steve Smith (CEO)

I would set your expectations, maybe leave this to Melinda to comment on, but I would set your expectations to be on or about where they are right now, give or take a point. But Melinda, do you have anything to comment there?

Melinda Wohl (CFO)

I agree too, Howard. It's going to probably be right around that 35%.

Howard Halpern (Senior Equity Research Analyst)

Okay. Okay. Thanks, and keep up the great work, guys.

Steve Smith (CEO)

Thank you, Howard.

Operator (participant)

Our next question comes from the line of Damian Karas with UBS. Please proceed with your question. Damien, your line is live.

Demain Karas (Equity Research Analyst)

Hi. Good morning, everyone. I apologize. I was on mute, and thank you for taking my questions this morning.

Steve Smith (CEO)

You're welcome. Good to meet you.

Demain Karas (Equity Research Analyst)

We have been seeing the retail sales data trending positively year to date, the last several months. I was curious if you might be able to elaborate a little bit on the kind of trends you've been observing in your business so far year to date? I guess if you were to kind of strip out the positive impact from your acquisition, could you maybe give us a sense on where underlying sales are trending through March?

Steve Smith (CEO)

Yeah. So nice to meet you, and thanks for joining the call. Yeah, I would call our activity sort of level, if you will, with Q4, meaning that the activity hasn't exploded. I think I would just call it somewhat consistent and level, the interest level from our retail customers. I too emphasize that retail is in the early stages of comeback. There's less and less articles out there about store closings with some major retail names than there is about store openings at this point. We love the acquisition that we made with macro because it gets us into food. And food and retail is a really good place to be. I just like the chances of everybody continuing to eat. So grocery, quick-serve restaurants, C-stores, and the like, we think are going to bode very well for us on a go-forward basis.

And by the way, by acquiring macro, we didn't just start to get into grocery. Grocery has been a long-standing vertical for DecisionPoint, going back 20 years to our roots. So we have other customers in the grocery and vertical in general, and that augmented and complemented specialty retail and fashion retail, for example, other segments of the retail industry we're in. But I would set your expectations that things are stabilized. I think the second half could be robust. We've got an election coming up, so the macro trends should be favorable.

Demain Karas (Equity Research Analyst)

Okay. That's very helpful. Thank you. I guess a follow-on to that, when you have conversations with your customers, what is it that they tell you it would kind of take to drive that inflection, that resumption of CapEx? Is there anything that kind of stands out that you sense is kind of the limiting factor or what it would take to kind of drive that reacceleration, if you will?

Steve Smith (CEO)

Yeah. The first thing they point to is interest rates, right, which have been favorably coming down in the last 3, 4, 5, 6 months or so. I mean, so with interest rates coming down, spending at the consumer level picks up, right? People get a little bit more bullish. They get less conservative, and they go out and start spending. So in general, I would think the first thing that they point to would be interest rates. And I think that's been favorable. I don't even know what I would put second, but that's a heavyweight one and just really is responsible for the overall sentiment, I believe, of the marketplace and the economy in general, which helps spending.

Demain Karas (Equity Research Analyst)

Fair enough. Well, hopefully, Chairman Powell and the squad can start pushing things in the more favorable direction for you. One final question I have. I don't know to what extent you're participating or view RFID as an opportunity, but if it is relevant, could you let us know how you're viewing RFID? UPS has been out there recently talking about deploying RFID. Would appreciate any of your thoughts on that technology.

Steve Smith (CEO)

Yeah. So I've been in this industry for 29 years and was around during the initial hype around RFID, which might go back 20 years now. But RFID has had a resurgence here in the last couple, three years. First, the application and use case areas. Some retailers are actually using RFID at checkout, but more so, the common application areas and use cases exist in the warehouse, distribution center, and the like, where packages, in the case of UPS, packages can be tracked more efficiently and effectively depending on the use case. Again, there's still a cost for the label with an RFID tag in it. But the application and use cases are showing themselves.

I attended an industry event in Atlanta, MODEX, just a month ago, and I was flabbergasted and floored at, first of all, the exhibitors and their booths, I mean, and their offerings, which included RFID. That was a big-time show that really spoke to what's happening in industrial automation and supply chain in general. And there was a lot of RFID speak, including us. We had featured ViziTrace, which is an offering of ours that enables someone to manage a wide variety of RFID technologies, and we were busy as could be. So we see an individual pickup, but I don't think that's where your question is rooted. I think, in general, at a macro level within this industry, RFID has had a resurgence the last couple, three years, and I would anticipate it's starting to live up to its hype of yesteryear.

Demain Karas (Equity Research Analyst)

Terrific. Glad to hear that. Well, thank you very much for your time, and best of luck.

Steve Smith (CEO)

Thanks very much. Thanks for attending.

Operator (participant)

There are no further questions in the queue. I'd like to hand it back to Steve Smith for closing remarks.

Steve Smith (CEO)

Yes. Thank you, Doug. Listen, we are really pleased with our results. I'm tickled. I really am. I am fortunate to work with an enormous number of what I would call A players. These are industry experts, industry legends in some cases, but industry experts that really know how to satisfy customer needs and fulfill customer requirements. And that team is the largest it's ever been, and I am really bullish on our potential going forward, but more than anything, just want to look back, say thank you to each and every associate out there that had a hand in helping this company get to where it is today.

We never could have done it without you. I want to thank you for that, and I want to just communicate to our shareholders there's more good news to follow.Stay tuned, and we'll see you and speak to you on our next call, which is, I want to say, middle of May.

Operator (participant)

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.