Decisionpoint Systems, Inc.

Thank you. Good morning, and welcome to the DecisionPoint Systems' Third Quarter 2022 Earnings Call.

Joining me today are Steve Smith, Chief Executive Officer; and Melinda Wohl, Vice President of Finance. For those of you that have not seen today's release, it is available on the Investors section at our website at www.decisionpoint.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 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 for stock-based compensation, any gains on extinguishing debt, M&A and other financial transaction costs and other nonrecurring nonoperating 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 U.S. SEC.

With that, I'll now turn the call over to Steve.

Thank you, Brian. Good morning, everyone, and thank you for joining us today.

I'm excited to say our business remains strong as we reported record third quarter revenues today.

Before I discuss these results, I'm going to start the call by discussing who is DecisionPoint Systems, our market opportunity and our growth strategy to capture and expand this opportunity. I will then briefly review our second quarter and then turn it over to Melinda Wohl to discuss our financial results.

DecisionPoint is a mobility-first enterprise services and solutions company. So what does that mean exactly?

It means that we aim to be at the center of several emerging secular trends, including enterprise mobility, which encompasses work from home and field mobility, cloud and managed services, DAS, 5G and IoT.

Now these markets represent hundreds of billions of TAM. So we've identified a subset of industries within these markets where we either have or can acquire or develop expertise and therefore, the ability to become significant players.

Currently, these industries are retail, logistics, hospitality and health care, where we have established customers, industry-specific solutions, the right technology partners and several under and underpenetrated subsegments for us to go after.

Our value proposition to customers is clear. We enable frontline employees to make better, faster, more accurate business decisions inside and outside the 4 walls and create operational efficiency and effectiveness to drive better customer experiences and better business outcomes.

Traditionally, companies like us have been classified as value-added reseller or VAR of handheld devices such as scanners, printers, point-of-sale and other mobile devices. Our OEM partners include Zebra, HP, Apple, Honeywell, Verifone, Datalogic, Cradlepoint and distributors Blue Star and ScanSource and Ingram.

This business has historically grown at a run rate at mid-single digits with M&A and project orders being incremental to those numbers, the latter of which can also introduce some lumpiness at times. We also have excellent annuity-type business replenishment -- replenishing consumables for these devices that we sell.

So think of the razor and the razor blade model here. That said, over the past 3 years, we've transformed the company to both organically and inorganically increase these growth rates and margins significantly by aggressively moving up market to include various high-margin services, especially ones that generate recurring revenue.

Managed services where companies outsource certain IT functions are a key investment area for our services-led strategy. We offer a comprehensive product portfolio of managed services designed to simplify the complexity of designing, deploying and managing a mobile solution.

These managed services include provisioning, monitoring, help desk to improve on the visibility and status of our customers' device landscape.

In addition to managed services, we offer professional services, including consulting, staging, deployment installation, repair and customer-specific software customization and hardware and software and maintenance support. We are also opportunistically building our higher-margin recurring revenue SaaS solutions portfolio, which today includes both packaged and custom-developed software such as mobile conductor, route manager for direct store delivery and ViziTrace, which helps manage an RFID implementation.

Moving to our 4 pillars of growth strategy. The first pillar is to increase share in our current verticals, specifically, grocery, specialty retail, supply chain, health care warehouse, distribution and transportation.

The second pillar is to leverage our experience in these verticals into adjacencies. Examples would include big box retail, hospitality and supply chain logistics.

The third pillar is to drive growth and margin expansion by increasing services and software attach rates. These include professional services, managed services, ISV and SaaS services, software for partners and repair and maintenance services.

And the fourth pillar is geographic expansion where we could pick up new customers, expand field sales and increase our coverage.

Our M&A strategy supports these 4 pillars and complements our organic growth. Note, we aren't just going to make acquisitions to achieve more scale.

We have specific requirements of companies we target. These include a track record of positive revenue growth, EBITDA growth, integration ready solutions and operations and cultural compatibility.

By focusing on these areas, we have deployed a successful integration strategy that allows us to move quickly to reduce SG&A costs, streamline operations, and drive revenue synergies by expanding their offerings nationwide through our system. Our goal is to acquire 1 to 2 companies per year, adding between $2 million and $5 million or more of EBITDA before synergies at an EBITDA valuation of 4x to 5x.

Moving to the third quarter highlights. We once again had record quarterly revenue growth of 41% to $26 million.

This strength was broad-based across run rate follow-on orders and services, the latter of which grew 22%. While large customer equipment orders can skew gross margin within any quarter, the 22% growth in services validates our strategy of growing our software and services revenue over the time to generate higher gross margins and operating margins.

Adjusted EBITDA increased 74% to $2.3 million in the quarter. We also saw continued evidence that our M&A strategy is working.

The sales and support teams are engaged in cross-selling activities across our expanded customer base by leveraging our services and software portfolio and partnerships. This activity is yielding incremental business for the company.

Additionally, we completed the integration and rebrand of our ExtenData acquisition into DecisionPoint Systems.

As we look to the remainder of the year, we are well positioned to continue our growth trajectory. We now expect to generate between $90 million and $93 million in revenue or approximately 36% to 41% growth.

In terms of mix, we currently expect approximately $19 million of that to come from services. From an adjusted EBITDA perspective, I would expect that we would deliver $6.5 million to $7 million within those revenue ranges.

In closing, we are on track for another great year with strong revenue, profit and adjusted EBITDA growth. I also want to thank our dedicated employees for their continued hard work.

I look forward to speaking with you again on our fourth quarter call.

Now I will turn it over to Melinda to review our financial results in a bit more detail. Melinda?

Thank you, Steve. Details of our third quarter operating performance compared to 2021's third quarter were as follows: we saw continued strong demand in Q3 with total revenue up 41% to $25.7 million.

Excluding M&A, our gross revenue growth rate was still very impressive at 25%.

During the quarter, we worked through a portion of our $21 million backlog from last quarter and rebuilt it back to $29 million, which is still about 4x our historical norms. Backlog was higher than normal due to global supply chain issues that are impacting many companies.

As a result, our clients are putting in orders with longer lead times, and we have fortunately been able to leverage our strong partnerships with OEMs such as Zebra and our distributors to gain access to products to build -- to ship and build inventory.

Moving to gross profit, we saw a 37% increase from the prior year. Product mix was heavy on the hardware side due to the fulfillment of both run rate and follow-on orders, which led to a slightly lower growth rate when compared to revenue.

GAAP operating expenses increased by about $0.9 million or 27.7%, split evenly between G&A and sales and marketing and demonstrated the operating leverage we have. This was a result of increased commissions on higher sales volume, rent costs and the operating expenses from the acquisitions we made in the first quarter.

We expect to continue to realize the benefits of cost synergies and improve operating leverage.

stock-based compensation of $50,000 this year versus $35,000 last year and M&A-related expenses of $66,000 versus $75,000 last year. Adjusted EBITDA was $2.3 million, up 74% compared to $1.3 million last year.

Turning to our balance sheet. We ended the quarter with cash and cash equivalents totaling $9.4 million versus $2.6 million at December 31, 2021.

As I mentioned earlier, we continue to receive orders with long lead times leading to a 34% increase in our deferred revenue.

Total debt at the end of the quarter was about $150,000, flat to year-end, and we had no borrowings on our line of credit. Net cash provided by operating activities increased $13.9 million from $2.2 million last year.

We have had 2 record quarters this year and believe our business is positioned for continued growth for the remainder of 2022.

And with that, operator, we can move to questions.

Congratulations, guys. I'm here pinching in for John today.

So I have a couple of questions on your numbers. Could you describe, I guess, what kind of opportunity you have within your existing customer base to drive recurring revenue growth for the remainder of this year and in the years to come?

Yes, Howard, this is Steve. I'll give you a response that I mean simply stated, with every acquisition we make, our services portfolio is expanding.

And that services portfolio is expanding with some software products. Most all of that software is sold in an as-a-service way, which represents recurring revenue.

So that is 1 element of our reoccurring revenue growth strategy, but there are other elements.

For example, as we expand our customer base, we're expanding the ability to sell consumables that razor blade, razor paradigm that I explained in the call that is every bit as reoccurring as all other elements of our revenue portfolio. So we're encouraged with the growth in consumables which is contract based and represents recurring revenue.

And then last, we do have service customers. And I think any time we sell a seal number device, it represents an opportunity for add-on repair or field service or support services.

And that is typically sold in a 1-, 2- and 3-year contract basis, which represents to us recurring revenue.

Okay. And also, you recently announced the addition to your sales team, what is that going to mean for future growth opportunities for you?

Could you just repeat the first part of that question, Howard? I'm sorry.

You previously announced, I guess, a couple of weeks ago an additional personnel to your sales team, how is that going to impact future growth?

Yes. So we -- I -- we've made some decisions to bring on some industry experts, subject matter experts, that have certain historical track record performing in a particular subset of our market, and that is direct store delivery and RFID.

These are -- these represent intellectual property of DecisionPoint. And given the fact that we own it, we think we can double down and double click on that and drive incremental revenue which should represent and will represent reoccurring revenue on a go-forward basis.

So we have made a higher -- we plan to make another and that will be announced before the end of the year. And both of those individuals will serve in a business development way, driving and assisting the field and driving incremental revenue around those software platforms.

Okay. And I mean, you talked about -- and we know what the environment is with the supply chain challenges that are out there.

But is there also -- I guess maybe for next year, is there like a periodic upgrade cycle for new products that your OEMs are in the process of launching that also might cause a little bit of longer lead times? Or is that not an issue?

It's really not an issue. The OEM has constantly upgraded their portfolio, and we take those options to our customers.

And really, the notion of a refresh cycle is really customer-dependent. And typically, the equipment that they have installed is written off over a 3- and 5-year period.

And so those write-off cycles is what dictates most the refresh cycles that our customers engage us on -- and so that's the primary driver.

The OEMs that we work with Zebra is constantly putting money into research and development, and they're constantly refreshing their product lines, scanners, mobile computers and printers. And we just -- we take those new devices, those new product announcements out to our customers, and they could and should drive upgrade cycles to a degree as well.

Okay. And one final one.

I know you haven't really given anything out for next year, but would you would you say it's fair to assume that based on this year's forecast and growth next year that your adjusted EBITDA should be at least approaching 9% of revenue next year?

Yes. We have not provided any guidance for '23.

We're going to be taking a close look at that here as we wind down on the year. I believe this year, my EBITDA percent is in the 5% to 7% range, and we will continue to drive towards that range.

Naturally, as I mentioned on the call, we have project-related business, we have acquisitions that could potentially drive that to a higher range. But we're certainly comfortable in delivering on the range we're delivering on today.