Q4 2023 DecisionPoint Systems Inc Earnings Call

Participants

Brian Siegel; IR; Hayden IR

Steve Smith; Chief Executive Officer, Director; DecisionPoint Systems Inc

Melinda Wohl; Chief Financial Officer; DecisionPoint Systems Inc

Howard Halpern; Analyst; Taglich Brothers

Damian Karas; Analyst; UBS

Presentation

Operator

Greetings and welcome to the DecisionPoint Systems Inc. fourth quarter and full year 2023 results. (Operator Instructions) 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

Good morning and welcome to the DecisionPoint Systems earnings call. Joining me today are Steve Smith, Chief Executive Officer, and Melinda Wohl. Today's release is available on the Investors section of our website at www.decisionpt.com.
Before beginning, I'd 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, anticipate should mean that these are our best estimates as of this writing, but that there could be no assurances and expected or anticipated results or events to 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. Of 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 nonrecurring nonoperating income and expense filings. For 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 call over to Steve.

Steve Smith

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 evolve 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. One is to follow.
First, I will update our overview of who DecisionPoint Systems is, what is our market opportunity, and what does our growth strategy to capture, and it has spanned this opportunity. I will then turn it over 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 mobility, which encompasses work from home and field mobility, cloud and managed service s, SaaS, 5G, AI, and IoT of the 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 and retail centered on but not limited to a 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. Well, we'd like to say the decision points.
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 year s, 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, a customer specific song software, customization and hardware and software maintenance support.
The gross margins for these services tend to be significantly higher than when we sell technology hardware and part of our strategy over the next few years to a 50% of revenue consistently, which will drive more reoccurring revenue and high gross margins. Our acquisition of MIS was the next step in our transformation when combined with the strength of our existing software and service offerings. This acquisition was key to improving our services and software mix.
Now 40%-plus of our business services. Strategically, MIS couldn't have been a better fit. They brought us five new top 10 customers, new service offerings, Phil, 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 becoming 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 size. 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 provide real-time visibility to manage the health location and status of a customer's mission critical IT assets regardless of their enterprise location. It 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 point care services, our suite of men's and deployment services built to address all aspects of selecting deploying a segment point of care, integrate all of our services into one offering, including vision and in 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 enterprise in mobility and point of sale and RFID deployments to create an end to end service program.
That's simply to incorporate into our customers' processes. We are also opportunistically build in our higher-margin recurring revenue SaaS solutions portfolio, which today includes both packaged and custom developed software solutions such as mobile conductor and route manager for direct store delivery, the DSD industry and video Trace, 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 a 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 app 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. No, 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, reduced SG&A costs, streamline operations, and drive revenue synergies by expanding their offerings nationwide through our system.
Macro Integration Systems or MIS was a perfect example 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 decision point, 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 acquired 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 investments I previously mentioned that we believe will start to show returns in '24 and beyond.
We also continue to pay down our acquisition related debt during the quarter with another $750,000 reduction in 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 '24.
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

Thank you, Steve. Details of our fourth quarter operating performance compared to 2023's fourth quarter were as follows. Total revenues of 24.8% or $30.5 million. We saw continued strong demand in Q4 were $10.5 million during the quarter. We work 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 mentally quarterly gross margin at 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 at $1.2 million from last year. This increase was primarily due to the acquisition of NIS. and national corresponding expenses for the comparable period last year, as well as our strategic investments in building our managed services portfolio and sales. And Dave did headcount as well.
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 negative $0.3 million and negative $0.03 versus net income and EPS at $0.4 million and $0.07 last year. Weighted average shares outstanding are roughly flat from last year at $7.8 million are now non-GAAP net income and diluted EPS or now for the quarter.
The non-GAAP net income and EPS number is excluded about $256,000 this year, mainly related to the MIS. acquisition versus $370,000 last year, which was mostly related to stock comp and Atlas. Steve 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 Dave did investments we are making this year and 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, 2023. Deferred revenue increased 29% to $13.3 million, of which approximately $8 million is expected to be recognized 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 and MIS. We will continue to pay down $250,000 quarterly for our term loans and our plans are to continue to pay the remainer down as swiftly as possible. Net cash provided by operating activities was $4.5 million versus 12, primarily the result of payments for inventory purchases that were fulfilled this year.
With that, operator, we can move to questions.

Question and Answer Session

Operator

(Operator Instructions) Howard Halpern, Taglich Brothers.

Howard Halpern

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

Steve Smith

Sure, Howard of good to talk to you again. Yes, we are. We've invested, as we spoke about here on a lot on many of our earnings calls in infrastructure build-out, right? So the vision portal, the ongoing development of the functionality of it.
So we've been investing heavily in systems and process, and it was time to now that we have all of this extended capabilities to put the best professionals possible in place to go and start to sell and promote this 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, because the you can look up is some Linkedin profile or even to scroll down on the press release, very accomplished individual that has experienced both in data capture and outside 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, if we were right, we brought him in in Q4, and we also hired an individual homes 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 you have all these capabilities and you got to go to market team and they need to be fed had amplify the value prop around those offerings, mobile managed service offering.
Now I'm talking about and managed services offerings. And that individual has works alongside Brian and Tom has done yeoman's work to date on them on giving shape and specificity to the solution stack that we now have and solutioning it so that the sales of sales team to go to market team can position it for their customers and he's engaged with end user activity as well as Bryant.
So that's some little run-on sentence to your question, Howard?

Howard Halpern

Sorry for the lateness, but that's who we hired and what they do tend to 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? Okay.

Steve Smith

You're now talking more general about the business that you are about mobile managed services, correct.

Howard Halpern

Just a bit the whole business in general and new customers, you know, are the customers willing to spend now or are they still a little hesitant? What do you see?

Steve Smith

Yes. So I mean, I 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 '22 and '23 are kind of behind us, Tom, I think the macro economic trends are favorable. Interest rates are coming down. I think that will free up some CapEx spending on.
So in general terms, I believe there's some the worst of times it behind us. But again, I'm not an economist, but we are seeing customers, you know, identify a budget for the funding of projects we save in select cases. And I think we're going to I anticipate seeing it more cases on a go-forward basis this year and next.

Howard Halpern

And are you seeing new customers coming in our new customers gravitating to you and your offer brings?

Steve Smith

Yes, yes. In fact, in 2023, we added 107 new logos on now. They didn't they didn't amount to a lot of revenue was a couple of $3 million. But these a little seeds that get planted that are out there and now with where we can 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 those people shall I had a sales meeting just the four weeks ago, bringing the team together with 97 people in Greensboro, North Carolina in our new facility. And that's what we had the sales mix because they wanted everybody to understand our new your acquired capabilities.
So 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

Okay. And 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 improve there?

Steve Smith

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 given take a point, but Melinda, anything to co mment that I agree to Howard, it's going to probably be right around that 35%.

Melinda Wohl

Okay. Okay, thanks. And keep up the great work guys.

Operator

Damian Karas, UBS.

Damian Karas

Hi, good morning, everyone. I apologize. I was on mute and thank you for taking my questions this morning. You're welcome to meet you. So we have been seeing the need 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. And I guess if you were to kind of strip out the positive impact from your acquisition, could you maybe give us a sense on like where underlying sales are trending through March?

Steve Smith

Yes. So nice mixture, and thanks for joining the call. I would call our Q4, meaning that the the activity has an exploded. I think I would just call it some consistent and level the interest level from our retail customers. I too am bullish that retail are is in the early stages of come back is less and less articles out there about store closures, closings with some major retail names.
So there is about the store store openings at this point. We love the acquisition that we made with the macro because it gets us into food and food and retail is a really good place to be on the I'd just like I like the chances that or by continuing need so grocery, quick-serve restaurants for the stores and the like, we think are going to bode very well for us on a go-forward basis.
And by the way we buy purchased by acquiring macro, we didn't just start to get into grocery. Grocery has been a long standing vertical for decision point, go 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 and fashion retail, for example, other segments of the retail industry we're in, but I would dumb set your expectations that I think things are stabilized. I think I think the second half could be robust. We've got an election coming up. So the macro trends should be favorable.

Damian Karas

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 of CapEx? Is there anything that kind of stands out? Is your sense is some kind of the limiting factor or what it would take to kind of now Dr. that reacceleration, if you will?

Steve Smith

Yes. The first thing they point to is the interest rates, right, which have been favorably coming down in the last three, four, five, six months. So I mean, so with interest rates coming down on 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 think the first thing I'd point to would be interest rates, and I think that's been favorable.
I don't know WAN, and I'm just really is responsible for the overall sentiment, I believe, of of the marketplace and the economy in general, which helps which helps spending.

Damian Karas

Fair enough. Hopefully, Chairman Powell and the squad. Can I 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 some if it is relevant, could you let us know how you're viewing our FIDUPS has been out there recently talking about deploying our FID. Would appreciate any of your thoughts on that technology.

Steve Smith

Yes. I have it in this industry for 29 years and were was around during the initial hype around our FID, which might go back 20 years now. But our FID has had a resurgence here in the last couple, three years. First, the application and use case there is some retailers are actually using RFID checkout and but more so the common application areas and use cases exist in the warehouse distribution center and the like out where your package in the case of VPS 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 on it, but the application and use cases are showing themselves.
I attended an industry event in Atlanta Medex just a month ago, and I was flabbergasted and floored at the first of all the exhibitors, they're both women and their offerings, which included our FID, that was a big time show that really spoke to what's happening in industrial automation and supply chain in general. So that there was a lot. There's a lot of our if I speak, RFID speak and including US, we had featured Vizzy trade, which is an offering of ours that enables solid demand as a wide variety of RFID technologies. And we were busy as could be on.
So we see an individual pickup, but I don't think that's where your question is rooted. I think in general as reissuance last couple, three years, and I would anticipate it turning to live up to its type of yesteryear.

Damian Karas

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

Steve Smith

Thanks very much. Thanks for attending.

Operator

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

Steve Smith

Yes. Thank you, Doug. Listen, we are really pleased with our result s. 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 with are you. I want to thank you for that, and I want to just communicate to our shareholders as 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.

Operator

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.