VerifyMe Inc (VRME) 2024 Q1 法說會逐字稿

Good day and welcome to the VerifyMe first-quarter 2024 financial results conference call.

(Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Nancy Meyers, CFO.

Please go ahead.

Thank you, and good morning, everyone.

Thank you for joining us today for our earnings call presentation.

On the call today, I'm joined by Adam Stedham, CEO and President, who will give an operations and strategic update.

Following our management presentation, we'll have a Q&A session.

I would like to bring your attention to the note on forward-looking statements on slide 3.

Today's presentation and the answers to questions include forward-looking statements.

It should be understood that actual results could differ materially from those projected due to a number of factors, including those described under the forward-looking statements caption and on the risk factors of the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

I will now turn the call over to Adam Stedham for some opening remarks.

Thank you, Nancy, and welcome, everyone.

I'm pleased to report that in Q1 2024, we realized an increase in year-over-year revenue and a significant improvement in gross profit, gross margin percentage, and adjusted EBITDA.

It's noteworthy this is now the third consecutive quarter of positive adjusted EBITDA.

And even more meaningful, we're experiencing an increase in our sales pipeline.

We previously announced that we anticipate our H2 2024 growth rate will exceed our H1 growth rate.

We continue to believe this is the trend and the increases in sales pipeline are a key enabler of that growth.

Q1 2024 adjusted EBITDA did not convert efficiently into cash flow from operations in Q1, and that's primarily due to the timing of working capital items.

We continue to anticipate (inaudible) that we'll have positive cash flow for 2024 as the timing of these items balance out, and we continue to experience year-over-year growth.

As a company with no net debt that is generating cash with meaningful growth prospects, I think our current valuation represents a significant opportunity for our shareholders.

At the end of Q1 2024, we had $2.8 million of cash and only $2.4 million in debt.

And this includes the convertible note, which we anticipate will likely get converted into stock rather than being repaid in cash.

At this point, I'll touch on our capital strategy.

We continue to have our announced buyback program in place, and we continue to evaluate our strategy around repurchasing shares.

Thus far, in 2024, the company has repurchased minimal shares.

We continue to monitor all available options to utilize our capital to maximize shareholder value.

So let's shift the conversation to our two operating segments.

The Q1 2024 improvement up and down the income statement is the result of our focus on creating the foundation for the company throughout 2023.

We focused on operational efficiency and our go-to-market strategy for our PeriShip business within the precision logistics segment.

We vertically integrated the Trust Codes technology stack with all of our existing customers in our authentication segment as well as redefining our go-to-market strategy for both our traceability products as well as our ink products.

Now looking at precision logistics, this segment generated $5.6 million of revenue in Q1 of 2024 versus $5.4 million in revenue in Q1 2023.

As we look across the marketplace, parcel shipping volumes with the major shippers are down in 2024 versus 2023.

And we're pleased that due to multiple factors related to our differentiated offering, we continue to experience revenue growth in this environment.

We believe this environment provides a good opportunity to add new customers as well as increase our share of wallet with existing customers.

So as we look at the business, we had almost 3% more customers shipped packages in Q1 2024 versus Q1 2023.

With that said, our same customer shipping volumes were down about 2% in Q1 2024 versus Q1 2023.

So therefore, we're in a market in which our strongest opportunity to grow our revenues is by expanding our customer base.

So we're focusing our efforts to add new customers in the region between Maine and Pennsylvania.

We added a new additional sales representative in May, and we're expected to add two additional sales resources in June.

We believe our plans of expanding our sales force with a targeted geographic approach will create the most value for the company.

Our successes and lessons learned from this year will guide plans related to geographic expansion in 2025.

So we're pleased with the efficiencies and improved gross margin percentages we've achieved in the precision logistics segment, but we still believe that we have the capacity to further increase our revenues without an associated increase in operating costs.

This leverage should enable us to grow revenue and maintain our margin profile, even if softer overall parcel shipping volumes create pricing pressure in the industry this year.

So now let me shift over to our authentication segment.

After spending much of last year on internally focused initiatives, I'm pleased with the pipeline expansion in this segment.

The authentication segment generated $150,000 in revenue in Q1 2024 versus $250,000 in Q1 2023.

We anticipate the quarterly revenue growth for this segment to increase meaningfully each quarter of this year.

We have multiple sales opportunities in the pipeline related to our new integration with Amazon Transparency.

We're refining our sales model and developing a better understanding of the sales cycle associated with this specific service.

So we continue to believe our relationship with Amazon creates a significant opportunity to create value for Amazon, our mutual customers, and consumers of our customers' brands, and most importantly, VerifyMe shareholders.

In addition to the Amazon relationship, we continue to see positive trends for our APAC business, strategic relationships, and in Ink sales.

We generated 5% revenue growth in APAC in Q1, and we anticipate continued growth throughout 2024.

We're currently working with our strategic partners to define marketing plan to highlight how our technology adds value to their equipment.

And then, as for Ink, in Q1, we attended the Dscoop conference in Indianapolis.

Dscoop is the community of 16,000 Hewlett-Packard industrial print in large-format customers and partners.

Participation in this conference is a part of the new go-to-market strategy for our Ink products that we discussed with you at the Analyst Day.

We believe this conference was a good success for us.

I look forward to our future earnings calls and sharing details associated with converting our current pipeline into sales.

We continue to also believe the authentication segment has growth opportunities related to food and agriculture traceability.

This traceability aligns to the GS1 standards.

So in June, the company is participating in the GS1 conference in Orlando.

We believe this conference will create sales opportunities just as the Dscoop conference created Ink sales opportunities.

So at this point, I'll turn the call back over to Nancy Meyers, our CFO, and she'll provide more detailed financial information.

Thank you, Adam.

First-quarter revenue increased by 2% to $5.8 million versus prior year of $5.7 million.

The precision logistics revenue increased by 4% from $5.4 million to $5.6 million.

Authentication revenue decreased from $0.2 million to $0.1 million as a large order from Q1 2023 has slipped into Q2 and Q3 for 2024.

As Adam mentioned, our pipeline is growing in this segment, and we anticipate growth in Q2 and through the remainder of 2024.

Gross profit increased $5.7 million or 49% to $2.3 million in Q1 2024 versus $1.5 million in Q1 2023.

As a percentage of revenue, gross profit increased to 39% in 2024 versus 27% in 2023.

The year-over-year increase in gross profit is mainly due to the shift in customer mix and service offerings in our precision logistics segment as well as process improvements the company has made.

The gross profit from prior year has been adjusted and has been decreased by 4% from $1.8 million to $1.5 million.

This was to better align our variable direct operating costs related to our service center in precision logistics as they are directly related to providing service to the customer that generates revenue.

We have internally reorganized and are able to clearly identify these costs.

While we believe there are economies of scale as we continue to grow, we understand these costs could fluctuate.

For Q2 and Q3 of 2024, we anticipate our gross margin to remain relatively consistent.

When you review our operating cost component of the statement of operations, you will see we have added a new line item for segment management and technology.

We have reclassified our operating costs to provide visibility of those costs that are directly related to our two segments in line with new accounting standards.

These costs are further broken out between the two segments in a footnote of our 10-Q.

This is in line with how the segments are being reviewed for performance and allocation of resources are managed.

General and administrative expenses now include those costs that are shared across both segments as well as public company costs.

Segment, management, and technology expenses increased by $0.2 million to $1.3 million in Q1 2024 versus $1.1 million in Q1 2023, primarily as a result of Trust Codes being included for the full quarter in 2024.

General and administrative expenses decreased by $0.3 million to $1.1 million in Q1 2024 versus $1.4 million in Q1 2023.

The decrease primarily relates to severance expense and one-time professional fees for the Trust Codes acquisition in Q1 2023 that did not recur.

Sales and marketing expenses decreased by $0.1 million to $0.4 million in Q1 2024 versus $0.5 million in Q1 2023.

The decrease is primarily related to reduction in employees and consultants in the authentication segment.

Our net loss for the quarter improved by $1 million to a loss of $0.6 million or $0.05 per diluted share versus $1.6 million in Q1 2023 and a loss of $0.17 per diluted share.

Our adjusted EBITDA increased by $0.6 million to positive $0.1 million for the first quarter of 2024.

On the last slide is our balance sheet as of March 31, 2024.

Our cash as of March 31, 2024, is $2.8 million, a decrease of $0.3 million from $3.1 million on December 31, 2023.

During the first quarter of 2024 our use of cash included $0.2 million in repayment of debt and interest.

Due to the seasonality of our precision logistics segment, our AR unbilled and accounts payable are much higher at year end compared to the other three quarters.

As of March 31, 2024, we have $1.3 million remaining on our loan and $1.1 million on our convertible notes.

There are no borrowings under our line of credit, and we have $1 million available to us.

With that, I would like to turn the call back to Adam.

Thank you, Nancy.

Q1 was my third quarter with the company, and I'm pleased to be at the pivot point from transformation to growth.

Most construction projects, they start by digging a hole, and it's always satisfying to see the structure rise from the ground.

It's also exciting that the process begins to speed up at that point.

I am pleased that due to the hard work of the team, VerifyMe has generated positive adjusted EBITDA each quarter that I've been with the company.

I look forward to the next quarterly call and continuing to share our success and share more about the upcoming revenue growth.

But for now, let's turn the call over for questions.

(Operator Instructions) Michael Petusky, Barrington Research.

Hey, good morning.

I may have missed this.

What was the percentage growth or negative comp in each of the segments, please?

I'm sorry.

Say that again.

The percentage revenue growth or negative comp in each of the segments for the quarter.

Okay, yeah, so, precision logistics increased by 4% and authentication was down.

It went from $0.2 million to $0.1 million.

What's the other percentage by any chance?

I don't have it top of my head.

It's okay.

All right.

So I guess -- let me ask this question around precision logistics.

Adam, are you guys seeing certain industries that are holding up in terms of shipping versus others that maybe are the more

[problematic]?

I understand you're dealing with a difficult macroenvironment.

But I'm just curious if there are parts of your business that are holding up or growing better than maybe some others that may be are being more impacted?

Thanks.

So we have a strong concentration in life sciences as well as products that have -- that are a little bit more on the expensive side.

The end consumer of those products has a tendency to be a little bit more affluent.

And so those two areas and those two markets are a little bit more resilient, little less impacted by economic conditions and slowdowns.

So that's what we think -- that's what's giving us the strength that we're seeing right now.

We do have other products that are aimed at the more general marketplace.

And that's where we're seeing this slowdown is in those and maybe baked goods and some of our less expensive products that we ship.

All right.

And I know with the investor -- I think with the Investor Day and then affirmed fourth quarter conference call, I think you guys have been hoping for double-digit top-line growth in both segments, obviously.

Correct.

This is pretty tough -- great quarter from a sort of margin perspective, but not a great quarter from a top-line growth perspective.

Are you guys -- is that more of an aspirational goal at this point?

Or do you still feel comfortable?

To me, it feels like maybe possibly you're tracking behind that, but maybe not.

And I'm not -- I understand that second half is supposed to be better than the first half, but it does feel this is possibly maybe tracking behind.

But let me know.

No.

So actually, we do feel comfortable with it.

One of the things that we've pointed out is that we're adding two additional salespeople.

And so those two additional salespeople were not initially part of the plan at that time.

So we believe that we will hit the revenue growth targets.

The way we will hit the revenue growth target is by making additional investments in sales resources.

And we've freed up the room in the income statement to make those investments in the sales resources.

So we continue to believe that we will hit the double-digit revenue growth in each segment as well as the company overall, and it will be weighted towards H2 versus H1.

Keep in mind, a very large percentage of our revenue is generated in the fourth quarter for precision logistics.

So naturally, the business cycle for us gives us that opportunity to see a much higher growth rate in H2 than H1.

Can I just ask your internal assumption around the market, does it assume that the macro improves in the second half?

No, I think it assumes that the macro does not significantly erode in the second half.

Status quo is the assumption.

And if there's an improvement, that's positive.

If there's an erosion, that's negative.

All right.

Very good.

Thank you so much.

I appreciate it.

(Operator Instructions) Jack Vander Aarde, Maxim Group.

Okay, great.

Hi, Adam.

Hey, Jack.

I'm doing well.

Looks like you're three for three with positive adjusted EBITDA CEO.

So it's great to see.

Just a couple of questions.

It's good to see the growth in the precision logistics business tracking along.

In terms of authentication, you mentioned the pipeline strengthening and you expect revenue growth going forward.

Just maybe a couple of things.

Recent revenue mix, in your term authentication revenue growth, can you just split this between maybe your expectations of the Trust Codes business versus maybe the Ink business in the two conferences you mentioned.

What do you hope to capture from these conferences walking away?

Will this set you up for some orders to drive back half growth?

Thanks.

Absolutely.

Great question.

So we expect to see growth from both in the Ink segment as well as in the Codes -- or the Ink portion of our authentication segment as well as the Codes.

And when we look at it, what we're finding is that sales cycles are longer than we've expected.

So you have queuing in your pipeline, so our pipeline is building and building.

I would have previously expected that some of that pipeline would have converted already, but what we're experiencing is a longer sales cycle on that pipeline.

Now, importantly, we're not experiencing a lower conversion rate than we expected.

So it's not as if we're losing more deals than we expected to lose.

The sales cycles are just longer.

And when we look at the expansion into the Amazon environment, that's a more complicated sale with a little longer sales cycle that involves more players on the other side as well as within our go-to-market strategy for Ink.

If you look at where we're targeting the Ink sales now, those have a tendency to be longer sales cycle.

So I think that's been the biggest aha for me.

From an authentication business perspective is the fact that the sales cycles do take a little longer than I had previously anticipated they would.

Okay.

That makes sense.

And then maybe if I switch gears again, gross margin was another bright spot.

It sounds like you expect gross margins to be fairly consistent going forward.

Just given what I believe is your expectation for ramping authentication sales in general.

It feels to me like there would be potential upside to that gross margin, just given the margins with that revenue stream.

Can you just speak to that a bit?

Is that a conservative assumption to have gross margins around the current quarter or what are your thoughts there?

Thanks.

So actually, the gross margin could do a few things.

If we start to experience pricing pressure, then we plan on responding to that pricing pressure appropriately in order to continue to hit our revenue target for the year.

As a result of that, we could possibly see some gross margin erosion.

With that said, we believe that we have capacity in the organization below gross margins to add revenue without incremental costs.

So even if we did have to lower our pricing some to hit our sales target, we believe our bottom line margin percentage should hold true because we might see gross margins go down slightly as a percentage of revenue.

But our cost below gross margin as a percentage of revenue would go down, it's offsetting and we will maintain our bottom line margin profile.

So that's the scenario that would play out, if we have to adjust pricing in response to pricing pressures overall in the marketplace.

On the other hand, if the economy does maintain status quo and we don't see an increase in pricing pressure and we're able to establish growth with our sales force and we're able to do that at our current price point.

We could see gross margin improve some in the second half of the year.

Obviously, when I say that within your models, you have to adjust for the fact that Q4 has a different margin mix than the other three quarters.

So that's one thing you need to think about and adjust for in your model.

Secondly, our authentication business has much higher gross margins than our precision logistics business.

So if the authentication grows in the way that we expected to, you could imagine that as the product -- or as the segment mix between authentication and precision logistics starts to be a little more balanced and we start to get a little bit more revenue in authentication compared to precision logistics, that would adjust the overall gross margin profile as well.

That's a much longer answer than you're probably looking at for.

But I just wanted to make sure you had all the factors for your model.

Does that make sense?

No, that makes complete sense.

And I very much appreciate the thorough response.

It's good to see you guys continue to execute and look forward to tracking the story.

Thank you.

Michael Petusky, Barrington Research.

Hey, Michael.

Hey, I didn't catch the first part of the previous question around gross margin.

I want to make sure that I understand your response.

The gross margin -- potential gross margin erosion, you were talking about the authentication business only or

--

No, so if we think of -- as a status quo, our gross margin should maintain.

Yeah, got you.

If we start to experience increased pricing pressure in the marketplace, our strategy will be that we will adjust pricing in accordance with the pressure in the marketplace in order to deliver the revenue growth that we want to deliver.

If that happens, we would see some gross margin erosion.

We do not believe that we would see bottom line profit erosion because of the offsetting pickup below gross margin.

On the other hand, if the economy improves or maintains status quo, we don't expect to see gross margin erosion, accounting for the fact that Q4 has a different product mix and you get a different gross margin in Q4 than you do the other quarters except for that one factor.

Is there a five-year business that you are more concerned about the potential of from pricing pressure as you go through the year?

No, not really.

What the area that I think is critical is -- if we are targeting the broader market to get our revenue growth, then it's an easier sales process.

It's easier to find the customers when the customers grow the customers.

We know which segments of the market we think are desirable and which segments of the markets are not really impacted by the overall macroeconomic environment.

So we have -- so we're targeting those segments, but it's a little less efficient sales process because we're targeting specific segments as opposed to being able to target the broader market.

So I wouldn't say that there are areas that I'm concerned about.

I would just say it's going to be a little bit more laborious to get the revenue growth, than we had previously thought it would be.

Okay, all right.

But all aspect, I mean, my sense is you've essentially affirmed all aspects of prior financial guidance, whether it's top line or cash flow, et cetera.

Correct.

Okay.

All right.

Very good.

Thanks, guys.

Ladies and gentlemen, this concludes our question-and-answer session.

I would like to turn the conference back over to Adam Stedham for any closing remarks.

Thank you.

Well, so we do look forward to the remainder of the year, and it's been an exciting journey so far.

Our next call will mark the one year point for me with the company.

I look forward to that call and look forward to sharing the results with you for the second quarter.

So thank you, everyone.

Thank you.

The conference has now concluded.

Thank you for attending today's presentation.

You may now disconnect.